The Wires Go to War: The U.S. Experiment with Government Ownership of the Telephone System during World War I

Article excerpt

One of the most distinctive characteristics of the U.S. telephone system is that it has always been privately owned, in stark contrast to the pattern of government ownership followed by virtually every other nation. What is not widely known is how close the United States came to falling in line with the rest of the world. For the one-year period following July 31, 1918, the exigencies of World War I led the federal government to take over the U.S. telephone system. A close examination of this episode sheds new light into a number of current policy issues. The history confirms that natural monopoly was not solely responsible for AT&T's return to dominance and reveals that the Kingsbury Commitment was more effective in deterring monopoly than generally believed. Instead, a significant force driving the re-monopolization of the telephone system was the U.S. Postmaster General, Albert Burleson-not Theodore Vail, President of AT&T. It also demonstrates that universal service was the result of government-imposed emulation of the postal system, not, as some have claimed, a post hoc rationalization for maintaining monopoly. The most remarkable question is, having once obtained control over the telephone system, why did the federal government ever let it go? The dynamics surrounding this decision reveal the inherent limits of relying on war to justify extraordinary actions. More importantly, it shows the difficulties that governments face in overseeing industries that are undergoing dynamic technological change and that require significant capital investments.

Introduction

One of the characteristics of the U.S. telephone system generally thought to distinguish it from all others is that it has always been privately owned. In all other major countries, telephone systems have generally been owned and operated by the government, most commonly through an organization known as a Post, Telephone, and Telegraph (PTT).1 The United States took a notably different course, having private ownership of telephone and telegraph systems.2 Indeed, the American emphasis on individualism and lack of a legacy of strong sovereign states has led some to regard government ownership of the telephone in the United States as unthinkable.3 The wave of privatizations that began worldwide in the 1980s is widely regarded as an implicit endorsement of the American approach.4

What is not widely known is how close the United States came to falling in line with the rest of the world. For the roughly one-year period following July 31, 1918, the federal government took over the U.S. telephone system.5 This period of history is important for many reasons. It provides a fascinating insight into the dynamics of institutional change, particularly regarding the role of individuals, political processes, and technology.

The episode also sheds light on many central issues of telecommunications policy today. For example, the analysis reveals that the reassertion of the Bell System's monopoly, long blamed on natural monopoly,6 or the Antitrust Division's failure to curb the ambitions of AT&T President Theodore Vail,7 was assisted and encouraged by the deliberate policies of the Postmaster General to consolidate the industry.8 Moreover, the Kingsbury Commitment of 1913 may have been more effective at preventing consolidation than generally realized.9 Further, contrary to the criticism that universal service was a concept that arose during the 1960s to rationalize the Bell monopoly after the fact,10 history reveals that universal service has its roots during the government takeover, much earlier than previously thought.11 The episode marked a nascent revolution in federal- state relations that would ultimately collapse due to the unpopularity of rate increases.12 Perhaps most revealing is the government's surprising decision, after having taken over the telephone system, to once again return it to private control.13 The government's reasons for doing so are quite revealing about the realities of management and ownership in an industry characterized by dynamic technological change. …