Tomas Nonnenmacher, Allegheny College
The electric telegraph was one of the first telecommunications technologies of the industrial age. Its immediate predecessors were homing pigeons, visual networks, the Pony Express, and railroads. By transmitting information quickly over long distances, the telegraph facilitated the growth in the railroads, consolidated financial and commodity markets, and reduced information costs within and between firms. This entry focuses on the industrial organization of the telegraph industry from its inception through its demise and the industry’s impact on the American economy.
The Development of the Telegraph
The telegraph was similar to many other inventions of the nineteenth century. It replaced an existing technology, dramatically reduced costs, was monopolized by a single firm, and ultimately was displaced by a newer technology. Like most radical new technologies, the telecommunications revolution of the mid-1800s was not a revolution at all, but rather consisted of many inventions and innovations in both technology and industrial organization. This section is broken into four parts, each reviewing an era of telegraphy: precursors to the electric telegraph, early industrial organization of the industry, Western Union’s dominance, and the decline of the industry.
Precursors to the Electric Telegraph
Webster’s definition of a telegraph is “an apparatus for communicating at a distance by coded signals.” The earliest telegraph systems consisted of smoke signals, drums, and mirrors used to reflect sunlight. In order for these systems to work, both parties (the sender and the receiver) needed a method of interpreting the signals. Henry Wadsworth Longfellow’s poem recounting Paul Revere’s ride (“One if by land, two if by sea, and I on the opposite shore will be”) gives an example of a simple system. The first extensive telegraph network was the visual telegraph. In 1791 the Frenchman Claude Chappe used a visual network (which consisted of a telescope, a clock, a codebook, and black and white panels) to send a message ten miles. He called his invention the télégraphe, or far writer. Chappe refined and expanded his network, and by 1799 his telegraph consisted of a network of towers with mechanical arms spread across France. The position of the arms was interpreted using a codebook with over 8,000 entries.
Due to technological difficulties, the electric telegraph could not at first compete with the visual telegraph. The basic science of the electric telegraph is to send an electric current through a wire. Breaking the current in a particular pattern denotes letters or phrases. The Morse code, named after Samuel Morse, is still used today. For instance, the code for SOS (… — …) is a well-known call for help. Two elements had to be perfected before an electric telegraph could work: a means of sending the signal (generating and storing electricity) and receiving the signal (recording the breaks in the current).
The science behind the telegraph dates back at least as far as Roger Bacon’s (1220-1292) experiments in magnetism. Numerous small steps in the science of electricity and magnetism followed. Important inventions include those of Giambattista della Porta (1558), William Gilbert (1603), Stephen Gray (1729), William Watson (1747), Pieter van Musschenbroek (1754), Luigi Galvani (1786), Alessandro Giuseppe Antonio Anastasio Volta (1800), André-Marie Ampere (1820), William Sturgeon (1825), and Joseph Henry (1829). A much longer list could be made, but the point is that no single person can be credited with developing the necessary technology of the telegraph.
1830-1866: Development and Consolidation of the Electric Telegraph Industry
In 1832, Samuel Morse returned to the United States from his artistic studies in Europe. While discussing electricity with fellow passengers, Morse conceived of the idea of a single-wire electric telegraph. No one until this time had Morse’s zeal for the applicability of electromagnetism to telecommunications or his conviction of its eventual profitability. Morse obtained a patent in the United States in 1838 but split his patent right to gain the support of influential partners. He obtained a $30,000 grant from Congress in 1843 to build an experimental line between Baltimore and Washington. The first public message over Morse’s line (“What hath God wrought?”) echoed the first message over Chappe’s system (“If you succeed, you will bask in glory”). Both indicated the inventors’ convictions about the importance of their systems.
Morse and His Partners
Morse realized early on that he was incapable of handling the business end of the telegraph and hired Amos Kendall, a former Postmaster General and a member of Andrew Jackson’s “Kitchen Cabinet,” to manage his business affairs. By 1848 Morse had consolidated the partnership to four members. Kendall managed the three-quarters of the patent belonging to Morse, Leonard Gale, and Alfred Vail. Gale and Vail had helped Morse develop the telegraph’s technology. F.O.J. Smith, a former Maine Representative whose help was instrumental in obtaining the government grant, decided to retain direct control of his portion of the patent right. The partnership agreement was vague, and led to discord between Kendall and Smith. Eventually the partners split the patent right geographically. Smith controlled New England, New York, and the upper-Midwest, and Morse controlled the rest of the country.
The availability of financing influenced the early industrial organization of the telegraph. Initially, Morse tried to sell his patent to the government, Kendall, Smith, and several groups of businessmen, but all attempts were unsuccessful. Kendall then attempted to generate interest in building a unified system across the country. This too failed, leaving Kendall to sell the patent right piecemeal to regional interests. These lines covered the most potentially profitable routes, emanating from New York and reaching Washington, Buffalo, Boston and New Orleans. Morse also licensed feeder lines to supply main lines with business.
Royal House and Alexander Bain introduced rival patents in 1846 and 1849. Entrepreneurs constructed competing lines on the major eastern routes using the new patents. The House device needed a higher quality wire and more insulation as it was a more precise instrument. It had a keyboard at one end and printed out letters at the other. At its peak, it could send messages considerably faster than Morse’s technique. The Bain device was similar to Morse’s, except that instead of creating dots and dashes, it discolored a piece of chemically treated paper by sending an electric current through it. Neither competitor had success initially, leading Kendall to underestimate their eventual impact on the market.
By 1851, ten separate firms ran lines into New York City. There were three competing lines between New York and Philadelphia, three between New York and Boston, and four between New York and Buffalo. In addition, two lines operated between Philadelphia to Pittsburgh, two between Buffalo and Chicago, three between points in the Midwest and New Orleans, and entrepreneurs erected lines between many Midwestern cities. In all, in 1851 the Bureau of the Census reported 75 companies with 21,147 miles of wire.
The telegraph markets in 1850 were multilateral oligopolies. The term “multilateral” means that the production process extended in several directions. Oligopolies are markets in which a small number of firms strategically interact. Telegraph firms competed against rivals on the same route, but sought alliances with firms with which they connected. For example, four firms (New York, Albany & Buffalo; New York State Printing; Merchants’ State; and New York and Erie) competed on the route between New York City and Buffalo. Rates fell dramatically (by more than 50%) as new firms entered, so this market was quite competitive for a while. But each of these firms sought to create an alliance with connecting firms, such as those with lines from New York City to Boston or Washington. Increased business from exchanging messages meant increased profitability.
Quality competition was also fierce, with the line that erected the best infrastructure and supplied the fastest service usually dominating other, less capable firms. Messages could easily be garbled, and given the predominately business-related use of the telegraph, a garbled message was often worse than no message at all. A message sent from Boston to St. Louis could have traveled over the lines of five firms. Due to the complexity of the production process, messages were also often lost, with no firm taking responsibility for the mistransmission. This lack of responsibility gave firms an incentive to provide a lower quality service compared to an integrated network. These issues ultimately contributed to the consolidation of the industry.
Horizontal and System Integration
Horizontal integration-integration between two competing firms-and system integration-integration between two connecting firms-occurred in the telegraph industry during different periods. System integration occurred between 1846 and 1852, as main lines acquired most of the feeder lines in the country. In 1852 the Supreme Court declared the Bain telegraph an infringement on Morse’s patent, and Bain lines merged with Morse lines across the country. Between 1853 and 1857 regional monopolies formed and signed the “Treaty of Six Nations,” a pooling agreement between the six largest regional firms. During this phase the industry experienced both horizontal and system integration. By the end of the period, most remaining firms were regional monopolists, controlled several large cities and owned both the House and the Morse patents. Figure 1 shows the locations of these firms.
Figure 1: Treaty of Six Nations
Source: Thompson, p. 315
The final phase of integration occurred between 1857 and 1866. In this period the pool members consolidated into a national monopoly. By 1864 only Western Union and the American Telegraph Company remained of the “Six Nations.” The United States Telegraph Company entered the field by consolidating smaller, independent firms in the early 1860s, and operated in the territory of both the American Telegraph Company and Western Union. By 1866 Western Union absorbed its last two competitors and reached its position of market dominance.
Efficiency versus Market Power
Horizontal and system integration had two causes: efficiency and market power. Horizontal integration created economies of scale that could be realized from placing all of the wires between two cities on the same route or all the offices in a city in the same location. This consolidation reduced the cost of maintaining multiple lines. The reduction in competition due to horizontal integration also allowed firms to charge a higher price and earn monopoly profits. The efficiency gain from system integration was better control of messages travelling long distances. With responsibility for the message placed clearly in the hands of one firm, messages were transmitted with more care. System integration also created monopoly power, since to compete with a large incumbent system, a new entrant would have to also create a large infrastructure.
1866-1900: Western Union’s Dominance
The period from 1866 through the turn of the century was the apex of Western Union’s power. Yearly messages sent over its lines increased from 5.8 million in 1867 to 63.2 million in 1900. Over the same period, transmission rates fell from an average of $1.09 to 30 cents per message. Even with these lower prices, roughly 30 to 40 cents of every dollar of revenue were net profit for the company. Western Union faced three threats during this period: increased government regulation, new entrants into the field of telegraphy, and new competition from the telephone. The last two were the most important to the company’s future profitability.
Western Union Fends off Regulation
Western Union was the first nationwide industrial monopoly, with over 90% of the market share and dominance in every state. The states and the federal government responded to this market power. State regulation was largely futile given the interstate character of the industry. On the federal level, bills were introduced in almost every session of Congress calling for either regulation of or government entry into the industry. Western Union’s lobby was able to block almost any legislation. The few regulations that were passed either helped Western Union maintain its control over the market or were never enforced.
Western Union’s Smaller Rivals
Western Union’s first rival was the Atlantic and Pacific Telegraph Company, a conglomeration of new and merged lines created by Jay Gould in 1874. Gould sought to wrest control of Western Union from the Vanderbilts, and he succeeded in 1881 when the two firms merged. A more permanent rival appeared in the 1880s in the form of the Postal Telegraph Company. John Mackay, who had already made a fortune at the Comstock Lode, headed this firm. Mackay did what many of his telegraph predecessors did in the 1850s: create a network by buying out existing bankrupt firms and merging them into a network with large enough economies of scale to compete with Western Union. Postal never challenged Western Union’s market dominance, but did control over 10-20% of the market at various times.
The Threat from the Telephone
Western Union’s greatest threat came from a new technology, the telephone. Alexander Graham Bell patented the telephone in 1876, initially referring to it as a “talking telegraph.” Bell offered Western Union the patent for the telephone for $100,000, but the company declined to purchase it. Western Union could have easily gained control of AT&T in the 1890s, but management decided that higher dividends were more important than expansion. The telephone was used in the 1880s only for local calling, but with the development in the 1890s of “long lines,” the telephone offered increased competition to the telegraph. In 1900, local calls accounted for 97% of the telephone’s business, and it was not until the twentieth century that the telephone fully displaced the telegraph.
1900-1988: Increased Competition and Decline
The twentieth century saw the continued rise of the telephone and decline of the telegraph. Telegraphy continued to have a niche in inexpensive long-distance and international communication, including teletypewriters, Telex, and stock ticker. As shown in Table 1, after 1900, the rise in telegraph traffic slowed, and after 1930, the number of messages sent began to decline.
Table 1: Messages Handled by the Telegraph Network: 1870-1970
|Date||Messages Handled||Date||Messages Handled|
Source: Historical Statistics.
Notes: Western Union messages 1870-1910; all telegraph companies, 1920-1970.
AT&T Obtains Western Union, Then Gives It Up
In 1909, AT&T gained control of Western Union by purchasing 30% of its stock. In many ways, the companies were heading in opposite directions. AT&T was expanding rapidly, while Western Union was content to reap handsome profits and issue large dividends but not reinvest in itself. Under AT&T’s ownership, Western Union was revitalized, but the two companies separated in 1913, succumbing to pressure from the Department of Justice. In 1911, the Department of Justice successfully used the Sherman Antitrust Act to force a breakup of Standard Oil. This success made the threat of antitrust action against AT&T very credible. Both Postal Telegraph and the independent telephone companies wishing to interconnect with AT&T lobbied for government regulation. In order to forestall any such government action, AT&T issued the “Kingsbury Commitment,” a unilateral commitment to divest itself of Western Union and allow independent telephone firms to interconnect.
Decline of the Telegraph
The telegraph flourished in the 1920s, but the Great Depression hit the industry hard, and it never recovered to its previous position. AT&T introduced the teletypewriter exchange service in 1931. The teletypewriter and the Telex allowed customers to install a machine on their premises that would send and receive messages directly. In 1938, AT&T had 18%, Postal 15% and Western Union 64% of telegraph traffic. In 1945, 236 million domestic messages were sent, generating $182 million in revenues. This was the most messages sent in a year over the telegraph network in the United States. By that time, Western Union had incorporated over 540 telegraph and cable companies into its system. The last important merger was between Western Union and Postal, which occurred in 1945. This final merger was not enough to stop the continuing rise of the telephone or the telegraph’s decline. Already in 1945, AT&T’s revenues and transmission dwarfed those of Western Union. AT&T made $1.9 billion in yearly revenues by transmitting 89.4 million local phone calls and 4.9 million toll calls daily. Table 2 shows the increasing competitiveness of telephone rates with telegraph rates.
Table 2: Telegraph and Telephone Rates from New York City to Chicago: 1850-1970
Source: Historical Statistics.
Notes: * Beginning 1960, for 15 word message. Prior to 1960 for 10 word message. ** Rates for station-to station, daytime, 3-minute call
The Effects of the Telegraph
The travel time from New York City to Cleveland in 1800 was two weeks, with another four weeks necessary to reach Chicago. By 1830, those travel times had fallen in half, and by 1860 it took only two days to reach Chicago from New York City. However, by use of the telegraph, news could travel between those two cities almost instantaneously. This section examines three instances where the telegraph affected economic growth: railroads, high throughput firms, and financial markets.
Telegraphs and Railroads
The telegraph and the railroad were natural partners in commerce. The telegraph needed the right of way that the railroads provided and the railroads needed the telegraph to coordinate the arrival and departure of trains. These synergies were not immediately recognized. Only in 1851 did railways start to use telegraphy. Prior to that, telegraph wires strung along the tracks were seen as a nuisance, occasionally sagging and causing accidents and even fatalities.
The greatest savings of the telegraph were from the continued use of single-tracked railroad lines. Prior to 1851, the U.S. system was single-tracked, and trains ran on a time-interval system. Two types of accidents could occur. Trains running in opposite directions could run into one another, as could trains running in the same direction. The potential for accidents required that railroad managers be very careful in dispatching trains. One way to reduce the number of accidents would have been to double-track the system. A second, better, way was to use the telegraph.
Double-tracking was a good alternative, but not perfect. Double-tracked lines would eliminate head-on collisions, but not same direction ones. This would still need to be done using a timing system, i.e. requiring a time interval between departing trains. Accidents were still possible using this system. By using the telegraph, station managers knew exactly what trains were on the tracks under their supervision. Double-tracking the U.S. rail system in 1893 has been estimated to cost $957 million. Western Union’s book capitalization was $123 million in 1893, making this seem like a good investment. Of course, the railroads could have used a system like Chappe’s visual telegraph to coordinate traffic, but such a system would have been less reliable and would not have been able to handle the same volume of traffic.
Telegraph and Perishable Products Industries
Other industries that had a high inventory turnover also benefited from the telegraph. Of particular importance were industries in which the product was perishable. These industries included meatpacking and the distribution of fruits and vegetables. The growth of both of these industries was facilitated by the introduction of the refrigerated car in 1874. The telegraph was required for the exact control of shipments. For instance, refrigeration and the telegraph allowed for the slaughter and disassembly of livestock in the giant stockyards of Chicago, Kansas City, St. Louis and Omaha. Beef would then be shipped east at a cost of 50% that of shipping the live cattle. The centralization of the stockyards also created tremendous amounts of by-products that could be processed into glue, tallow, dye, fertilizer, feed, brushes, false teeth, gelatin, oleomargarine, and many other useful products.
Telegraph and Financial Markets
The telegraph undoubtedly had a major impact on the structure of financial markets in the United States. New York became the financial center of the country, setting prices for a variety of commodities and financial instruments. Among these were beef, corn, wheat, stocks and bonds. As the telegraph spread, so too did the centralization of prices. For instance, in 1846, wheat and corn prices in Buffalo lagged four days behind those in New York City. In 1848, the two markets were linked telegraphically and prices were set simultaneously.
The centralization of stock prices helped make New York the financial capital of the United States. Over the course of the nineteenth century, hundreds of exchanges appeared and then disappeared across the country. Few of them remained, with only those in New York, Philadelphia, Boston, Chicago and San Francisco achieving any permanence. By 1910, 90 percent of all bond and two-thirds of all stock trades occurred on the New York Stock Exchange.
Centralization of the market created much more liquidity for stockholders. As the number of potential traders increased, so too did the ability to find a buyer or seller of a financial instrument. This increase in liquidity may have led to an increase in the total amount invested in the market, therefore leading to higher levels of investment and economic growth. Centralization may also have led to the development of certain financial institutions that could not have been developed otherwise. Although difficult to quantify, these aspects of centralization certainly had a positive effect on economic growth.
In some respects, we may tend to overestimate the telegraph’s influence on the economy. The rapid distribution of information may have had a collective action problem associated with it. If no one else in Buffalo has a piece of information, such as the change in the price of wheat in New York City, then there is a large private incentive to discover that piece of information quickly. But once everyone has the information, no one made better off. A great deal of effort may have been spent on an endeavor that, from society’s perspective, did not increase overall efficiency. The centralization in New York also increased the gains from other wealth-neutral or wealth-reducing activities, such as speculation and market manipulation. Higher volumes of trading increased the payoff from the successful manipulation of a market, yet did not increase society’s wealth.
The telegraph accelerated the speed of business transactions during the late nineteenth century and contributed to the industrialization of the United States. Like most industries, it faced new competition that ultimately proved its downfall. The telephone was easier and faster to use, and the telegraph ultimately lost its cost-advantages. In 1988, Western Union divested itself of its telegraph infrastructure and focused on financial services, such as money orders. A Western Union telegram is still available, currently costing $9.95 for 250 words.
|1837||Cooke and Wheatstone patent telegraph in England.|
|1838||Morse’s Electro-Magnetic Telegraph patent approved.|
|1843||First message sent between Washington and Baltimore.|
|1846||First commercial telegraph line completed. The Magnetic Telegraph Company’s lines ran from New York to Washington.|
|House’s Printing Telegraph patent approved.|
|1848||Associated Press formed to pool telegraph traffic.|
|1849||Bain’s Electro-Chemical patent approved.|
|1851||Hiram Sibley and associates incorporate New York and Mississippi Valley Printing Telegraph Company. Later became Western Union.|
|1851||Telegraph first used to coordinate train departures.|
|1857||Treaty of Six Nations is signed, creating a national cartel|
|1859||First transatlantic cable is laid from Newfoundland to Valentia, Ireland. Fails after 23 days, having been used to send a total of 4,359 words. Total cost of laying the line was $1.2 million.|
|1861||First Transcontinental telegraph completed.|
|1866||First successful transatlantic telegraph laid|
|Western Union merges with major remaining rivals.|
|1867||Stock ticker service inaugurated.|
|1870||Western Union introduces the money order service.|
|1876||Alexander Graham Bell patents the telephone.|
|1908||AT&T gains control of Western Union. Divests itself of Western Union in 1913.|
|1924||AT&T offers Teletype system.|
|1926||Inauguration of the direct stock ticker circuit from New York to San Francisco.|
|1930||High-speed tickers can print 500 words per minute.|
|1945||Western Union and Postal Telegraph Company merge.|
|1962||Western Union offers Telex for international teleprinting.|
|1974||Western Union places Westar satellite in operation.|
|1988||Western Union Telegraph Company reorganized as Western Union Corporation. The telecommunications assets were divested and Western Union focuses on money transfers and loan services.|
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