The Nation’s First Internet

In The Victorian Internet (New York: Walker & Co., 1998), Tom Standage makes the point that the telegraph was the nation's first internet. Regarding this, Standage is correct. The telegraph did, as the mail had not been able to do, tie the nation together. The telegraph not only increased the speed of communication, and lowered its cost, but it inter-connected the people of the country via a web, or internet, that linked people with each other not only along predetermined routes, but along any route that might spontaneously arise.

Standage's book tells a nice but superficial story. It touches on some of the inventions that were involved in the wiring of the continent, and a few tidbits, here and there, in the implementation of these technological breakthroughs. But, for an economist such as myself, his book is disappointing in its handling of the business of the telegraph. For Standage, the implementation of the telegraph is simply described as "impressive," i.e., "The growth of the telegraph network was, in fact, nothing short of impressive, it grew so fast that it was almost impossible to keep track of its size" (p. 57). That's just about it. There is no discussion of the entrepreneurs, the business rivalry, the politics, the fortunes made and lost, or any of the real history of the telegraph.

Long before the telegraph, the post office was a means for people to communicate with each other, albeit at a very slow and costly rate. In 1692, the King of England granted a monopoly franchise on postal communications in North America (this being the way such things were done back then). A service was thereupon initiated from Philadelphia to Boston, with intermittent service from North America to the mother country. The cost of sending a letter from New York to Boston was one shilling. Since, at the time, the colonial legislature of New York rated the Spanish Dollar at about six shillings, and a Spanish Dollar had the purchasing power of about 24 of today's U.S. Dollars, this meant that sending a letter to Boston cost about $4 in today's money. Plus, it would take about four weeks for the letter to be delivered.

Rates

Speed

Over time, the service provided by the colonial post office improved in terms of speed, reach, and the regularity of service. By the time Benjamin Franklin was appointed deputy postmaster general for British North America, in 1753, the colonial post office provided regular service to Charleston, South Carolina (see Figure 1), and had greatly increased the speed of delivery. The cost, however, remained very high. By the late 18th century, partly motivated by the high cost of the colonial postal service, and partly by the desire for even faster speed of delivery, private carriers started to (illegally) carry the mail. Among these private carriers were the stage coach operators and the inter-colonial shippers that started to develop in the country. Then, when the King of England prohibited William Goddard of Baltimore from sending his newspaper through the colonial mails, and he had to retain riders to deliver his newspaper, he began the first full-fledged private post office in America, with service from Williamsburg to Boston. But, as revolutionary as were the Founders of this country, they did not think that the future of our telecommunications industry rested with the private sector, and immediately upon forming a new government they organized the post office as a department of the federal government, with good old Ben Franklin restored to the position of postmaster general. Today, it is at least somewhat ironic that the British Post Office is privatized, and the U.S. Postal Service is still a part of the government.

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As the 19th century got underway, the U.S. Post Office extended service to the Mississippi along two great east-west routes, one connecting the mid-Atlantic region with St. Louis and the other connecting the south-Atlantic region with New Orleans (this route traversed Spanish Florida, but Andrew Jackson took care of that little problem). However, cost was still very high, and speed and regularity of service remained problematic. In the northeast, private mail carriers and express companies offered much better service. And, along the coast lines and up and down the major rivers of the country, steam boats delivered vital information as well as goods with ever increasing speed and regularity of service. Through the 1830s, ships took seven or eight days to sail from Philadelphia or New York to Charleston. By the 1840s, with the introduction of steam ships by entrepreneurs such as Commodore Vanderbilt, this journey was reduced to only three or four days.

The increasing pace of the news is illustrated in the reports of the Charleston Courier leading up to the Panic of 1837. In December 5, 1836, before anxiety about the banks of the country had set in, the Courier reported, "The new and elegant steam packet Georgia, Captain Collen, arrived at this port early yesterday morning, in the unprecedented short-run of thirty-six hours from Norfolk, having left the wharf at 4 o'clock on Friday last, and come into port at 4 o'clock yesterday morning." This ship brought "intelligence," such as market quotations, from New York only four days old, and from Philadelphia, Washington and Baltimore only three days old.

A bit later, as markets became nervous about the condition of the banks of the country, the people of Charleston waited upon the delivery of news from the northeast. On April 8th, the Courier reported that "The line ship La Fayette, Capt. Blair, arrived at this port last evening, in 4 days from New York," with information concerning the issue of "post notes" (something like post-dated checks) by the Bank of the United States and the Morris Canal and Banking Company. On April 22nd, the Courier reported that "The week [in New York] on the whole has closed better than was expected." On May 5th, "The aspect of affairs in the city, generally, is rather more favorable today. . . " And, then, on May 15th, "The steam packet Columbia, Capt. Wright, arrived at this post yesterday afternoon, from New York, bringing…the announcement of the suspension of specie payments of the banks of New York … "

Upon the news of the suspension of specie payments of the banks of New York, the banks of Charlestown themselves suspended specie payments, silver rose to a premium, and trading on New Orleans (which would not receive the news from New York for several days) was suspended. Those having first access to the news from New York were able to unload their suddenly devalued bank notes onto others. Often, "the little guy" was left holding the bag. Thus, having immediate access to information relevant to the valuation of such things as bank notes, foreign and domestic exchange, and stocks and bonds was enormously valuable. And, I should also mention that there was great interest in the news of winning lottery numbers.

By the 1840s, the clamor for intelligence by brokers and other investors had already resulted in a telegraph operating between New York and Philadelphia. To be sure, this was not an electronic telegraph, but a telegraph consisting of a series of signaling posts on high places. The technology of this telegraph involved flashes of light, and—provided the weather conditions were conducive—market quotations and lottery numbers were communicated across New Jersey in about eight minutes. Prior to this telegraph, the brokers of Philadelphia feared the arrival of overland stage coaches from New York, thinking they might be bringing agents informed by ships that had arrived in New York that had not yet made their way around the New Jersey peninsula to their City of Brotherly Suspicion.

With the obsession of financial markets for intelligence, it was very good news that Samuel F.B. Morse was unable to sell his patent in the electronic telegraph to the U.S. government. At the time, Morse was running a demonstration project, funded by the U.S. government, consisting of a thirty mile line from Baltimore to Washington. Over an 18 month period, his service generated revenue of $2,312.28, as against operating expenses of $7,904.10 (and no allowance for the cost of construction). During this period, the Morse invention was little more than a gadget, having been used to send about the same number of words as are in this article. Little wonder, then, that the U.S. Congress turned down his offer of his patent for $100,000. "Morse," says Standage, "disheartened by the government's lack of interest, turned to private interest."

Fortunately for Morse, it was at this point that the multi-talented Amos Kendall entered the scene. Kendall, a lawyer, journalist and politician, was a member of Andrew Jackson's kitchen cabinet, and—as Murray Rothbard points out (Classical Economics, p. 130)—a brilliant economist. He was also a businessman of the first caliber. Kendall proposed that other businesses be franchised to use the Morse patent in return for the patent-holders (by this time Morse had taken-in several partners) being given shares of their businesses. Thus, several companies started stringing wire, beginning with lines from Baltimore to Boston, and then from Philadelphia to Pittsburgh, and from New York via Albany to Buffalo (see Figure 3). Not only that, but these telegraph companies started to make money. What was a money-losing proposition in the hands of the government became worth millions of dollars in the private sector. In February 1847, the first dividend was paid by a telegraph company, 8 percent, by the Manhattan & Buffalo Telegraph Company. From this dividend, the patent holders received $2,700. Morse would eventually become very rich, and Kendall, very, very rich.

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At this point, an enormous race got underway, with franchisees of the Morse patent stringing wire along with rivals employing other telegraph technologies (so they claimed). As one of the Morse companies, headed by Kendall, strove to tie Washington, D.C. to New Orleans via Charleston, a rival, headed by a businessman named John O'Reilly, and operating under a different telegraph patent, strove to connect Cincinnati to New Orleans via Louisville and Lexington, Kentucky. Kendall, a shrewd politician and lawyer as well as businessman, made deals with others, such as the New Orleans Chamber of Commerce, to expand his capital base as well as to smooth the way. And, where opposition might arise, as in the state legislature of Virginia, which initially refused him permission to string wire along the railroad tracks going through that state, Kendall sought and gained permission from the state courts to use other rights-of-way, and then parlayed this into permission to use the preferred route.

O'Reilly, on the other hand, sought to go it alone. You have to admire his willingness to gamble everything on his ambitious effort, mortgaging all of his assets to raise the capital, and cutting costs wherever he could to stretch the capital he was able to raise. In many places, his telegraph line was simply tacked onto trees instead of being tacked onto poles. And for insulation, he used glazed pottery instead of glass, which over time was eroded by the weather and degraded the performance of his line. Still (as is shown in Figure 4), he got his line up and running. Then, the problems of operating his ticky-tacky line and of keeping his creditors at bay were compounded when Kendall sued him for patent infringement. O'Reilly was forced to sell his line to a better-capitalized concern, and leave the scene. While we certainly admire those who are the great successes of business, we also admire those, like O'Reilly who are the great failures.

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The swift completion, more or less, of the wire network did not mark the end of the story of the telegraph industry. With a multiplicity of companies and with rival telegraph technologies, there ensued a period of rationalization within the industry. Eventually, all the companies would consolidate into one dominant company, Western Union (today known for money transfers). In the process, speed and regularity of service was ever increased, and cost ever decreased. Under pressure from the private mail carriers, express companies and the new telegraph industry, even the post office had to lower its charges.

I should conclude my story of the development of the telegraph industry in the United States with the recommendation of the U.S. Postmaster General, in his Annual Report of 1846:

In my last communication, I brought to your notice the extraordinary invention of Professor Morse for the transmission of intelligence; its importance in all commercial transactions to those having control of it, and to the government itself, particular in a period of war. I then expressed the opinion that an instrument so powerful for good or for evil could not with safety to the citizens, be permitted to remain in the hands of individuals uncontrolled by law.

Fortunately for us, a money-losing, government-run, monopoly telegraph company is not what God hath wrought.