Aaron M. Honsowetz recounts how Senator John Sherman’s lesser-known antitrust bill, the 1866 Post Roads Act, uprooted local barriers to entry for telegraphy companies, which led them to invest more in R&D and ultimately helped produce the telephone.
Senator John Sherman is mostly known in the antitrust literature for the 1890 Sherman Antitrust Act. However, over two decades earlier he helped pass the 1866 Post Roads Act. The Act upended state and municipal franchise regulations that provided established telegraph companies partial to outright protection from new competitors. The Act realigned incentives for telegraph companies away from lobbying municipal and state governments for rent-seeking entry barriers, which now had lower rates of return, toward pursuing research and development. The boost in technological research to increase telegraph wire bandwidth eventually led Elisha Gray and Alexander Bell to work on the multiplex harmonic telegraph, wherein they stumbled upon the key innovations for the development of the telephone.
By design, the 1866 Post Roads Act was meant to disrupt the edge held by Western Union, the incumbent telegraph company that owned 80% of the telegraph wires in the United States and Canada in 1869. Western Union had drastically increased its overall market share in the 1860s by merging with the United States Telegraph Company and the American Telegraph Company.
Sherman sought to empower the National Telegraph Company, a new competitor where his older brother Charles T. Sherman was a board member, with federal privileges to challenge Western Union’s dominance. He pushed for a bill to let the National Telegraph Company “construct, maintain, and operate” a telegraph line along any post road in the U.S. in exchange for providing discounted telegrams to the U.S. federal government and agreeing on how to set a price for the federal government to purchase the company if the government elected to nationalize the telegraph system. Senator Sherman pleaded in the Senate to only bestow these privileges on the single telegraph company, arguing that would enable the National Telegraph Company to better compete with Western Union. Despite his pleas, verbal opposition from senators like James Grimes of Iowa and John Conness of California against an act that only bestowed privileges to a single telegraph company led Senator Sherman to amend his bill to grant the privileges to any telegraph company who accepted the act’s terms.
Implications of the 1866 Post Roads Act on Telegraph Competition
The 1866 Post Roads Act freed new entrants from local entry barriers created by state and municipal government franchise requirements. Prior to the implementation of the 1866 Post Roads Act, many states and municipalities required the telegraph companies to acquire a local government franchise to build and operate within their jurisdictions. Motives for the decisions to issue and attach conditions to utility franchises were varied, including outright political corruption, generating government revenue, and efforts at consumer protection.
State and municipal government franchises could block entry with exclusive grants. The state of California granted a 15-year exclusive right to the California Telegraph Company in 1852 “to operate a line between San Francisco, San Jose, Stockton, Sacramento, and Marysville.” Applications to receive a franchise might also run into costly delays. For example, the Franklin Telegraph Company had trouble securing a franchise to New York City in 1865, so they elected to merge with The Insulated Lines Telegraph Company, who already had a telegraph franchise in the city.
Additionally, government franchises could include regulations and financial payments to the jurisdiction that was not the same for each company serving the same political jurisdictions. Legally, the regulations and payments did not have to be the same because courts viewed them as a negotiated compensation by the telegraph company to the state or municipality for receiving the franchise.
Once courts interpreted the 1866 Post Roads Act as a de facto federal franchise, telegraph companies were spared the entry barriers created by the costly process and conditions of acquiring local government franchises. By accepting the terms of the 1866 Post Roads Act, telegraph companies no longer had to have a municipal or state franchise from each jurisdiction they operated. The telegraph companies could use the de facto federal franchise regardless if they had local political permission, or if there was a local monopoly grant. By using the de facto federal franchise, telegraph companies did not have to consent to regulations or financial compensation structures that differed from their competitors operating in the same state or municipal jurisdiction.
Innovation Becomes a Better Investment for Competitive Edge in Telegraph
With local entry barriers no longer that effective at protecting telegraph companies from competition, the relative rate of return increased for companies to invest into technological development. One priority was to expand the bandwidth of a telegraph wire by increasing the number of messages a single telegraph wire could handle at a time. At the onset of the telegraph age, a single wire could only transmit one telegram at a time. Increasing the carrying capacity of a telegraph wire by a factor of two or four represented an opportunity to dramatically increase the number of messages a company could handle without having to systematically string new wires.
Both William Orton, President of Western Union, and Jay Gould, financier backing the Atlantic & Pacific Telegraph Company, were willing to acquire telegraph technology to increase the bandwidth of their systems. Orton’s Western Union purchased Joseph B. Stearn’s duplex technology in 1872, which enabled two messages to be sent at the same time on a single telegraph wire. Later, Orton’s Western Union locked into a bidding war with Gould’s Atlantic & Pacific Telegraph Company for Thomas Edison’s quadplex technology that could transmit four telegraph messages at a time on a single telegraph wire.
Telegraph Innovation Leads to Telephone
Elisha Gray and Alexander Bell accidentally developed the technology for the telephone separately while seeking to cash in on the financial awards offered by further increasing telegraph bandwidth. Both Gray and Bell believed they could expand telegraph bandwidth by transmitting harmonic tones on telegraph wires. Each tone generated on a telegraph wire enabled a new channel to transmit additional telegrams on a single wire.
Gray developed a harmonic telegraph receiver designed to emit multiple tones after watching his nephew create a constant tone using a zinc-lined bathtub with “an induction coil connected to an electromagnetic device.” His observations of his nephew enabled him to create receivers and transmitters that converted musical tones into telegraph signals, which became the basis for his telephone design.
Meanwhile, Bell worked to create harmonic channels for telegram messages by experimenting with vibrating reeds. One of the failed experiments with the reeds for his harmonic telegraph convinced Bell “that magno-electric currents generated by vibration of an armature in front of an electro-magnet,” would produce enough sound to transmit speech. Bell’s realization launched a chain of experiments resulting in his initial patent and later his first working telephone.
Antitrust Changes the World
The telephone changed the world. Hence, antitrust via the 1866 Post Roads Act changed the world when it spurred innovation in the telegraph industry. It did so by demolishing the ways the government, local and state, were rewarding entrepreneurs for fighting for political favors rather than investing in the improvement of the products and services the people used.
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