A communication revolution accompanied the revolution in trans7 portation. The railroad permitted a rapid increase in the speed and decrease in the cost of long-distance, written communication; while the invention of the telegraph created an even greater transformation by making possible almost instantaneous communication at great distances. The railroad and the telegraph marched across the continent in unison. As has been pointed out the telegraph companies used the railroad for their rights-of-way, and the railroad used the services of the telegraph to coordinate the flow of trains and traffic. In fact, many of the first telegraph companies were subsidiaries of railroads, formed to carry out this essential operating service. The second basic innovation in communication technology, the telephone, was used at first only for local calls. However, it too soon began to be used for long-distance communication. When it did, it was administered through a national enterprise similar to that operating the telegraph.
All three of the communications networks—postal, telegraph, and telephone—came to be administered by career salaried managers. The top managers in the postal services had to share their decisions with the representatives of Congress. Those in the telegraph and telephone com- panies did so with the same type of investors, speculators, and investment bankers who served on the boards of railroads. Indeed those names so influential in American railroad history—Vanderbilt, Forbes, Gould, and Morgan—all appeared in the building of the nation’s new communication networks.
The initial growth of railroads had a powerful impact on the United States postal system. As the railroad network expanded, it increasingly carried the long-distance mail. In 1847 railroads carried only 4.2 million (or 10.8 percent) of the 38.9 million miles of mail moved by the federal postal service. Steamboats accounted for another 3.9 million miles (10.0 percent). Stagecoach and horseback riders carried the rest.14 By 1857 mail mileage had almost doubled to 74.9 million miles. Of these the railroad carried 24.3 million (or just under a third). The steamship’s share had only increased to 4.5 million (or 6 percent).
The increase in speed of mail and the improved regularity of its trans- portation helped to bring the sharpest reductions of rates in postal history. In 1851, first-class mail rates of 5 cents an ounce up to 300 miles carried, and 10 cents beyond, were reduced to 3 cents up to 300 miles and 5 cents up to 3,000 miles. Then in 1855 the rate became 3 cents an ounce up to 3,000 miles.15 Three years before that the Post Office made its first general use of postage stamps to facilitate mailing. The drop in rates and the speed and certainty of transportation greatly facilitated long-distance business communication. It also encouraged a much greater use of the mails for personal correspondence as well as business correspondence.
It was this increase in volume and particularly speed that brought a reorganization of the postal service. For the first thirty years of the nine- teenth century, the Post Office Department had been administered as a personal domain of two brothers, Albert and Phineas Bradley. During the Jackson administration, Postmasters William T. Barry and Amos Kendall reshaped the department’s Washington headquarters by setting up three divisions each supervised by an assistant postmaster general.16 One was for finance, a second—a vital political post—handled the appointment and supervision of local postmasters, and a third supervised mail contracts and contract performance. Until the changes in the 1850s, three assistant postmaster generals, assisted by a few clerks, made up the department’s administrative staff. There were no middle level administrators between Washington and the operating units, which by 1849 numbered 16,749 Post offices.17
In that year Selah R. Hobbie, one of the three assistant postmasters appointed by Jackson, proposed reorganization. He pointed to the need to set up new procedures and facilities to handle “the immense and intricate business of intercommunication between 17,000 post offices,” for “ar- rangements of this character our system has never possessed.”18 In the following year’s annual report, Hobbie was more specific. He urged the creation of a number of distribution centers from which mail for specified regions could be collected, sorted, and then sent directly to its ultimate destination.19 Such a reform involved setting up distribution centers at post offices in larger towns and cities and appointing a set of managers to administer them. It also required the formulation of systematic procedures to carry out “the complicated operation of opening the mail [bags], resorting the letters, remailing them, with new post bills and new entries on the accounts, and rewrapping, tying, and bagging it.” Hobbie further urged that such a distribution system be supplemented by having the railroad companies use specialized mail cars where mail could be sorted as it traveled.
The Congress provided funds to carry out Hobbie’s proposals. By 1855 the Post Office had set up some fifty distribution units manned by salaried middle managers and had carefully defined the detailed procedures and controls needed to coordinate the flow throughout the country.20 At the same time, the railroads increased their use of the specialized mail car. As in the case of comparable arrangements devised by the railroad to coordinate the flow of freight, these procedures took time to carry out. By the 1870s, however, they had been perfected. By then, American postal service was the largest and among the most efficient in the world.
It remained efficient even though the postal service provided the lion’s share of federal patronage available to politicians of both parties. The reason was that middle and top managers were less subject to political change than local postmasters in charge of individual operating units. The managers who coordinated the flow of mail across the land became the professional cadre of the federal government’s largest operating organization in terms of employees and number of business transactions handled.
In the same decade that the postal service began to be reorganized along modern lines, the organization as well as the technology of tele- graphic communication was being perfected.21 At its inception the inven- tion had strong government sponsorship. In 1844 Congress appropriated $30,000 to build an experimental line from Washington to Baltimore. In 1845 the Post Office took over the operation of this successful line employ- ing the inventor, Samuel F. B. Morse, as its superintendent. In the next year, however, because of the difficulties of public financing and man- agement, the Post Office turned the telegraph over to private develop- ment. Then, under the guidance of Amos Kendall (who became Morse’s agent), Ezra Cornell (who built the first line to Baltimore), and others, the construction of telegraph networks spread swiftly across the nation. By 1852, 23,000 miles were in operation.
Because of the importance of through traffic, the patterns of competi- tion, cooperation, and consolidation were compressed into a much shorter time period in the history of the telegraph than they were in that of the railroads. By the mid-1850s, the managers of telegraph companies began to work out the cooperative arrangements required to send messages directly from one part of the country to another across the lines of several different companies. In August 1857, the six leading telegraph companies signed a treaty that divided the nation into six regions. Each company was given a specific area of operation. Where their lines still overlapped, the business was pooled. These pools, however, proved ineffective. Soon there were only “the big three.” In 1866 these three merged into a single company, Western Union, thus creating the first nationwide multiunit modern business enterprise in the United States. The men who engineered these consolidations, Amos Kendall, Ezra Cornell, Hiram Sibley, Norwin Green, William Orton, and others, now looked to leading capitalists, particularly the Vanderbilts, to help them finance the continuing expansion of their system.
Their first task, however, was to set up an organizational structure to manage their transcontinental network. By the end of 1866 they had all but completed the organization that continued to operate the system until well into the twentieth century. For administrative purposes they divided the nation into four regional divisions—the Eastern, Southern, Central, and Pacific—each headed by a general superintendent. These four senior executives supervised a total of thirty-three divisions in the United States and Canada, whose division superintendents, in turn, administered the activities of 3,219 stations.22 The company’s annual report for 1869 described the structure:
Each station is in charge of a Manager, who has control of his office, and is accountable to the District Superintendent for the proper performance of his duties and those of his subordinates. The District Superintendents are accountable to the General Superintendents, and the latter to the Executive Committee. On the first of every month each office forwards to the District Superintendent a report, showing the number of messages sent and received, the gross receipts, the amounts received on messages for each office with which business was done; the amounts received at all other offices with which messages were exchanged; the amounts received for or paid to other lines, and all expenditures in detail.
The general and the division superintendents had on their staff repair and maintenance managers, auditors, and purchasing agents. In defining the relationships between the functional and regional units, Western Union relied on the same line and staff distinctions as those used for the railroads. In addition, the company had as part of its corporate headquarters a large legal staff, an “electrician” whose office appears to have had charge of testing and development laboratories, and managers who supervised two factories that produced, according to the company’s 1869 annual report, “every variety of instruments required in the service.”
The managers of the major territorial divisions were, as the report pointed out, responsible not to a president but to an executive committee of the board. This top committee was large, including the president, the treasurer, and the three and later five vice presidents. The vice presidents were, however, not operating executives, as they were on the Pennsylvania, but holders of large blocks of stock. Three—Hiram Sibley, Norwin Green, and William Orton—had built the leading early companies. A fourth, Alonzo Cornell, was the son of another pioneer, and the fifth was a representative of the Vanderbilts, the largest outside investors. As many of the committee members had spent their life in developing the industry, they were able to speak with authority on operational as well as financial matters. And although the company required some outside capital, espe- cially in its initial growth, it was able to rely, much more than had the railroads, on the retained earnings to finance expansion. Therefore the financiers never became as prominent in top management decision making at Western Union as they did on many railroads. Nor in the early years did full-time salaried managers dominate the board of Western Union as they did on the Pennsylvania.
The existence of the national network of offices gave Western Union a powerful competitive advantage. Because the building of telegraph lines required relatively little capital, competitors appeared. They had small chance of success, however, unless they created an operating network comparable to that of Western Union. It required a speculator with the imagination and talent of Jay Gould to mount a serious competitive challenge.
Gould developed such a threat by using the tekgraph subsidiaries of railroad companies under his control—subsidiaries that were operated by Western Union under contracts signed in the 1850s and 1860s.23 After acquiring the Union Pacific, Gould canceled that road’s contract with Western Union. He then began to expand the railroad’s telegraph sub- sidiary, the Atlantic & Pacific Telegraph Company, by making contracts with the telegraph subsidiaries of the Baltimore & Ohio and other rail- roads. He enlarged his system further by obtaining control of the Inter- national Ocean Telegraph Company with cable lines to Latin America. By 1878 these, moves were enough to frighten Western Union into buying the Atlantic & Pacific at Gould’s price. Gould sealed the bargain by offering Vanderbilt, the largest stockholder in Western Union, a controlling share in the Michigan Central if Vanderbilt persuaded the Western Union board to purchase the Atlantic & Pacific.
The speculator’s success only whetted his appetite further. During the next year Gould formed the American Union Telegraph Company and gave it the contracts for the telegraph subsidiaries of the roads he controlled in the southwest. He then renewed his alliance with the Baltimore & Ohio, purchased a Canadian company, Dominion Telegraph, and announced plans for building a new transatlantic cable. As the price of Western Union stock once again plummeted under this new attack, Gould began to buy. Soon he was his competitor’s largest stockholder. In this position he again convinced Western Union to purchase his American Union at a properly inflated price. He then became the controlling member of Western Union’s board.
After obtaining control Gould had little difficulty in successfully staving off competition. The most serious threats came from the Baltimore & Ohio’s subsidiary, which under Garrett began to build a national system, and from Postal Telegraph, an enterprise financed by George F. Baker and John W. Mackay that provided the domestic pick-up and outlet for Mackay’s Commercial Cable Company. Gould obtained Garrett’s system in 1887 when the Baltimore & Ohio suffered a financial crisis. At the same time, he made an agreement with Postal Telegraph, which permitted the two companies to have mutual use of each other’s equipment and allowed his competitor to operate on a limited scale within the United States.
In all these financial manipulations Gould left operations completely to the career managers. When he acquired control of the company in 1881 Gould appointed a general manager, Thomas T. Ecker, with full respon- sibility for all operations.24 Eckert, in turn, enlarged the central offices. His department heads became vice presidents. As these senior executives were able to finance continued expansion from retained earnings, they had relatively little connection with Gould. Gould took part in management decisions only when the possibility of competition appeared.
The history of the telegraph demonstrates even more vividly than that of the railroad how the requirements of maintaining a high-volume, high- velocity flow of business forced the rapid growth of the multiunit man- agerial enterprise. Since the greatest value of the telegraph to its customers lay in long-distance rather than in local communication, cooperation between connecting lines was essential to handle such through traffic efficiently. Because such a large share of the traffic was through messages, competitors often cut rates to get business. The result was rapid consoli- dation. System-building came so quickly that the telegraph companies never looked to government support of cartel arrangements to control competition. On the other hand, Western Union provided rates and services that were sufficient and inexpensive enough to soften demands to break up or even to regulate this powerful monopoly.25 The telegraph company was a natural target for criticism. Businessmen had to use its wires to send confidential information; newspaper reporters depended on it to send their stories; and the notorious Jay Gould controlled it. Yet the managers were careful not to exploit their position. As a result the telegraph business was not placed under federal regulation until 1934.
Telephone communication also was soon dominated by a single national enterprise.26 If it had not been for Gould’s challenges in the late 1870s, Western Union probably would have taken over the new communications instrument shortly after Alexander Graham Bell invented the device in 1876. Aware of its competitive potential, Western Union executives late in 1877 hired Thomas A. Edison to develop an instrument that was different enough to avoid patent infringements and improved enough to get the business away from Bell. Edison did, in fact, contribute even more than Bell to the design of the modern telephone. However, because Gould’s second attack on Western Union came just at this time, and because the executives of the Bell company made it clear they would make a determined fight to uphold their patents, the telegraph company agreed in November 1879 to sell the patent rights to its instrument to the National Bell Company for a fixed royalty and retire from the telephone business. A few months later National Bell was reorganized as the American Bell Company and refinanced to meet the clear demand for the new form of communication.
To continue to grow, the Bell Company required in 1880 a large injec- tion of capital, a long-term strategy, and a rational structure. William H. Forbes, the son of John Murray Forbes, and other Boston capitalists, who had been closely associated in railroad finance, provided the funds. At the same time, Theodore N. Vail, who joined the company in May 1878, defined the strategy and the structure. Vail, a telegraph operator who joined the postal service in 1868, had already had a brilliant career. He was so successful in improving operations and routing that by 1876, at the age of thirty, he had become general superintendent of the United States Rail Mail Service. This career manager then became to American Bell what J. Edgar Thomson had been to the Pennsylvania Railroad.
In planning the company’s strategy and in building its structure, Vail focused on the still-to-be-created long-distance traffic.27 In the battle with Western Union, he persuaded his colleagues to refuse the telegraph companies’ compromise offer to let the Bell interests have the patents if Western Union was allowed to build and operate the long-distance lines. Once the settlement was made, Vail had the company’s technicians begin developing the technology of long-distance voice transmission, while he started to obtain the rights-of-way for the proposed long lines.
Vail always stressed the importance of legally protecting the existing patents and, through research and development, generating new patents. From the start, however, he insisted that an even more certain way to dominate was to control the through traffic between local operating enter- prises. In addition, Vail argued that American Bell must continue to maintain and if possible expand its stock ownership in the major operating companies that licensed its phone and switchboard equipment. When such an operating company expanded its facilities, the parent company’s investment should increase proportionately.
These policies, particularly the last, soon brought Vail into conflict with the investors, their representatives on the board, and above all with William H. Forbes, the president.28 Vail, the professional manager, urged rapid and continuing expansion. He emphasized the advantages of having the Bell-sponsored companies the first to provide telephone service in an area. Forbes and other investors held back. The costs would reduce dividends and threaten loss of control. Since profits on existing business were satisfactory, why pay this price? Frustrated, Vail submitted a letter of resignation in May 1885. After much discussion, Forbes and the board members were able to get him to stay on as head of the new subsidiary, the American Telephone and Telegraph Company, formed to build and operate the long lines. Two years later, after completion of the nation’s first long-distance line from New York to Albany and Boston, Vail left the company.
Vail’s forecast proved correct. Despite the lengthy legal suits and continuing research and development, the number of local, independent companies grew, particularly after the basic Bell patents expired in the 1890s. The number of instruments in the hands of independent companies rose from 30,000 in 1894 to 656,000 in 1899.29 It was only because of its control of through traffic that American Bell was able to keep the new companies from growing large. Finally, in 1902, Forbes and his associates agreed that Bell-sponsored operating subsidiaries and the parent company must expand their activities. In that year they authorized a consortium of J.P.Morgan & Company, George F. Baker’s First National Bank, the Manhattan Trust, and the Old Colony Trust of Boston to market a block of 50,000 shares at $7.7 million. Then in 1906 investment bankers following a proposal of Vail, who had returned to the board in 1902, embarked on a major expansion program by selling $100 million of convertible bonds in the next two years. Finally, early in 1907, Vail was made president once again.
To operate his national enterprise, Vail quickly created an administra- tive structure based on legal changes instituted in 1900. By those changes American Telephone and Telegraph, which had been formed to build and operate the long lines, became the parent company for the system as a whole. It held the company’s patents, the stocks of local operating companies, and those of Western Electric. The last, wholly owned by AT&T, manufactured and installed the equipment used by its subsidiaries. Vail first reshaped the boundaries of the operating subsidiaries, the Asso- ciated Companies as they were called, so that they more rationally met current commercial needs. Then he set up the “central administration” at American Telephone and Telegraph to provide common services and evaluate and appraise operating performance, as well as to define policy and determine long-term plans for the operating companies and the enterprise as a whole.30 Central administration had, in turn, eight and then ten regional divisions which supervised a number of local districts. This structure, perfected by 1910, remained relatively unchanged until the 1970s. In the creation of the nation’s communication network, monopoly rather than oligopoly became the pattern. The postal service, operated by the central government since colonial times, remained a public monopoly. The enterprises operating the telegraph and the telephone became privates ones. The speed and volume of messages made possible by the new electric technology forced the building of a carefully defined administrative organization, operated by salaried managers, to coordinate their flow and to maintain and expand transmitting facilities. The first enterprise to create a national organization to handle through traffic obtained an almost unassailable position. To achieve that position, however, required more careful planning in the building of the telephone system than in the creating of the telegraph system, because through traffic for the telephone was for many years only a technological potential.
Nevertheless, monopoly was not inevitable. Gould’s speculative skills helped to maintain the Western Union control and certainly Vail’s stra- tegic vision and organizational talents were central to obtaining control in the telephone field. In both companies career middle managers remained responsible for administering the work of operating units and coordinating the day-to-day flow of traffic through what were the world’s largest communication networks. Until the basic systems were built, financiers had some say in top management decisions. Once the basic outline of the system was completed, the communication enterprises became even more managerial enterprises than the railroads. Their career managers came to make nearly all long-term investment decisions as well as short-term operating ones.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.