SIGNIFICANT STEPS in the DEVELOPMENT of the TELEPHONE An Address hy HARRY B. THAYER June 14, 1925 before the Vermont Historical Society lEx ICtbrtfi SEYMOUR DURST When you leave, please leave this hook Because it has heen said "Sver'thing comes t' him who waits Except a loaned book." \\ 1 r.y Arc hitectural and Fine Arts Library Gift of Sfymour B. Durst Old York Library Digitized by the Internet Archive in 2014 https://archive.org/details/significantstepsOOthay STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 3 ADDRESS, SOME SIGNIFICANT STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE By Harry B. Thayer The first person to hear the human voice by telephone is still living. The first name to appear on the payroll of any organization giv r ing telephone service is still on our payroll. A member of the first Board of Directors of the first telephone company still sits on our Board. It is still less than half a century since the invention of the telephone so that what I have to say must be considered only a part of the first chapter of the history of telephone service. The story of how Alexander Graham Bell, a teacher of deaf mutes, a student and teacher of the laws of speech, as had been his father and grandfather before him, studied and experimented in the belief that the human voice could be carried to a distance by the electric current over a wire, has been often told. The story has all of the thrills of a romance. Picture this young teacher with a great idea but with none of the financial resources necessary for experiment; then, after he had succeeded in communicating his enthusiasm in some measure to the fathers of two of his pupils, with financial help from them, working persistently, sometimes in a cellar, sometimes in a shop attic and sometimes in his boarding house — often with discouragement and only occasionally obtaining results which renewed his hopes, but always with faith that the thing could be done. In June 1875—50 years ago — he first heard a sound which had been electrically carried over a wire. It was not the sound of the human voice but it was a sound. In the following March, his voice was carried over the wire from one room to another in his boarding house and was heard by his assistant, Thomas A. Watson. The theory was demonstrated: The invention, crude though the apparatus was, had been made. 4 VERMONT HISTORICAL SOCIETY His financial backers were Thomas Sanders and Gardi- ner G. Hubbard; and Mabel Hubbard, at first his pupil, had become the rival in his heart and mind of the telephone and it was her encouragement which led him to go to the Cen- tennial Exhibition in Philadelphia where the telephone was on exhibition (but had received scant attention), so that he was in attendance when Dom Pedro, Emperor of Brazil, who was being escorted through the exhibition, in company with some distinguished scientists, recognized in him the young teacher of deaf mutes whom he had previously met in his class-room in Boston and listened at the telephone receiver while Bell talked at the other end. "My God — it talks" — the Em- peror exclaimed; then Joseph Henry, the venerable head of the Smithsonian Institution listened. He recognized in Bell, the young inventor who had told him what he was trying to do over a year before. Henry had then en- couraged him to go on with his work. "But I have not got the electrical knowledge that is necessary," Bell replied. "Get it" was Henry's answer. He was followed by Sir William Thomson, afterwards known as Lord Kelvin, and at that time the foremost scientist in the world. "It does speak, " Sir William said. "It is the most wonderful thing I have seen in America." Bell's fame and the fame of the telephone was made and heralded over the world. In the following year Alexander Graham Bell and this pupil, Mabel Hubbard, who had helped him with inspiration and encouragement, were married and after forty-five years of happ; married life, her death followed his by less than half a year. That is the romance of the invention of the telephone. The history of the development of nation-wide telephone service is the story, first, of a small group of men who foresaw possibilities and laid sound foundations for a great public service and who devised and constructed its plan of opera- tions. These were achievements characterized by far more than ordinary foresight, sagacity and constructive ability STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 5 and as such deserve and will receive our principal attention. Professor Bell was a man of vision. As early as 1878, when the telephone had barely emerged from the laboratory, when speech by telephone was possible, but barely practic- able, he wrote this : "It is conceivable that cables of telephone wires could be laid underground or suspended overhead, communicating by branch wires with private dwellings, country houses, shops, manufactories, etc., etc. — uniting them through the main cable with a central office where the wire could be connected as desired, establishing direct communication between any two places in the city. Such a plan as this, though impracticable at the present moment, will, I firmly believe, be the outcome of the introduction of the telephone to the public. Not only so, but I believe in the future wires will unite the head offices in different cities and a man in one part of the country may commun- icate by word of mouth with another in a distant part. "Believing, as I do, that such a scheme will be the ultimate result of the telephone to the public, I will impress upon you all the advisability of keeping this end in view, that all present arrangements of the telephone may be eventually realized in this grand system. " The original patent on the telephone was owned in part- nership by Thomas Sanders, Gardiner Hubbard and Pro- fessor Bell, Sanders and Hubbard being the financiers and business managers. They also were men of vision thoroughly imbued with the plan of building up a national service. I have often wondered whether they would not have received greater material reward for their efforts if they had been content to manufacture and sell telephones and leave to some 6 VERMONT HISTORICAL SOCIETY one else the future of telephone service, but judging from their correspondence, that thought did not enter their minds. With great personal sacrifice they put money into the business but there is no suggestion in their correspondence that they thought of taking any out. Apparently their whole purpose was to build up a business to give telephone service. Probably they were not entirely altruistic but were disposed to build and wait. A real discoverer or a real inventor usually starts up a flock of claimants and pretenders, ranging from those who have almost accomplished the result, to those who on no real foundation of fact, fabricate a case for the purpose of robbing the rightful winner of his reward. Professor Bell's experience was no exception. The announcement of his invention was followed by claims involving the greatest patent litigation up to that time, lasting about twenty years; that is, through the whole seventeen years' life of the original patent and three years after it had expired. Some of these claims were taken up by the Western Union Telegraph Company, and for the first two or three years, the infant industry found itself in competition with one of the most powerful corporations of that time. The effect of this during the first two or three years was largely increased difficulty in inducing men to put their time and money into the promotion of an entirely new enterprise. Both Mr. Hubbard and Mr. Saunders had other interests and other work, and they put into the business more money than they could really spare. They formed a corporation, but had difficulty in distributing the stock. They needed a business organization, but did not have the money to support it, but they needed most some one of force and ability to take the business management of the enterprise. Mr. Hubbard, as a member of a Congressional Com- mission on Postal Affairs, had met Mr. Theodore N. Vail, who was then Superintendent of the Railway Mail Service and had become impressed with his ability, and he and Mr. Sanders rather reluctantly came to the conclusion that STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 7 they could pay him $3,000 a year salary, although Mr. Sanders impressed it upon Mr. Vail that he did not personally guarantee its payment. The enterprise was having what we in Vermont call "pretty hard sledding." At about this time (in 1878) William H. Forbes of Boston became financially interested in the enterprise. Colonel Forbes was one of the old Boston merchant families — owning its own ships and trading with China and the Far East. Perhaps he inherited a spirit of adventure which moved him to embark in this enterprise. It needed such a spirit. The Company was poverty stricken and the resources of the Western Union Telegraph Company were concentrated against it. These two men, Forbes and Vail, brought to the strug- gling business what was needed to put it on a firm foun- dation, — business sagacity, generalship and the confidence of financiers. They settled the contentions with the Western Union Telegraph Company and soon the public began to realize the possibilities in what had previously had little more than the attraction of a novelty. Their Company, the National Bell Telephone Company, had issued capital to the amount of $850,000. Within the year, from November 1878 to October 1879, the market price of the shares went from about $50. to $800. per share. That was the period in which the tradition that there was an enormous profit in the tele- phone business took root. In the spring of 1880, the American Bell Telephone Company was organized under a special Act of the Massa- chusetts Legislature and it is significant that one of the prominent features of the charter was the right to hold stock in other companies. Significant because, as I shall attempt to show, stock ownership in subsidiary companies was one of the essential parts of the plan in their minds for the develop- ment and operation of a nation-wide telephone service. Mr. Forbes became President and Mr. Vail, General cS VERMONT HISTORICAL SOCIETY Manager, of the new corporation. At that time there were less than 30,000 telephones in service in the United States, and they were in 138 cities and towns, unconnected with each other by telephone lines. In Mr. Forbes' first report, with reference to this period, he said: "After two years passed in a struggle for existence and a third largely devoted to the settlement of dis- putes inherited from the contest, the owners of the telephone patents, at the beginning of their fourth year, for the first time find themselves free from all serious complications, with nothing to prevent the Company from directing its whole working force to the development of the business, and with a defined policy for its future operations." There was a defined policy. During the following five years, the fabric of corporations and contracts defining their relations, departments and all that went toward making a working system to carry out that policy, was constructed. The policy was to carry out the dream of Professor Bell — to construct and operate a nation-wide telephone service, so that within the boundaries of this country, all that is possible in telephone service should be possible to all. The system as then constructed is substantially as now operated; a parent or headquarters company, sectional operating companies, a manufacturing organization and an organization to furnish service connecting telephone users in different operating districts — the system which we call the Bell Telephone System. How much of this constructive planning was the work of Forbes and how much of Vail, I cannot tell. I doubt whether they could have told, because they worked in such co-operation that much of it was un- doubtedly joint work. They planned as though they were standing on the threshold of the future and could see then what would be needed now and in our future, for this National Service, and what must be provided and what must be guarded against to insure it. STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 9 Their plan provided district operation companies in touch with the growth and the requirements of the com- munities they served, with stock ownership by the parent company in order to insure uniform policies and uniform standards of service. At first there were many of these operating organizations but as economy of operation has dictated, they have been consolidated into fifteen operating organizations covering in their operations the whole country. They recognized the importance of a uniform standard of excellence in the apparatus to be used in transmitting and receiving the voice current, and retained in the parent com- pany the obligation to furnish to all of the operating com- panies the transmitter and the receiver. They realized that in addition to the transmitter and receiver an almost endless variety of other apparatus must be provided, and their costly experience in patent litigation warned them that the operating companies must be spared a similar experience. They foresaw that they must have a free field of develop- ment, unhampered by patents controlled outside of the system. Furthermore, they realized the desirability, on the grounds of economy and efficiency, of standardization of material. They, therefore, organized in January 1882, a manu- facturing corporation, in which the parent company was a large stockholder, under obligation to provide whatever de- vices might be required by the operating companies at reasonable prices. This involved an obligation on the manufacturing corporation to acquire licenses under the patents of others, if necessary. But, in order that this relationship should always be an advantage which the operating companies could use, and never a burden that they must carry, they left the operating companies free from any obligation to buy of their manu- facturing company. This studious care to protect the opera- 10 VERMONT HISTORICAL SOCIETY ting companies in untrammelled development — to help and not to hinder — is characteristic of the whole plan. It was planned and always has been the part of the parent company to perform for the whole system the func- tions of a general staff of the System. It has employed scientific investigators and maintained laboratories and ex- perimental shops where the aim is to develop the most economical and efficient apparatus and construction and maintenance material, looking as far as possible into the future requirements of the public. All of the methods of work in the various departments of work are studied and standardized. It has co-ordinated the financing of the system and in general has done all of the things which could be done more efficiently by one agency for all of the com- panies, than by each for itself. By 1885, the operating companies had made such de- velopment that it seemed possible to extend the range of con- versations, and the American Telephone and Telegraph Company, entirely owned by the parent company, was organized to inter-connect the telephone users in the dis- tricts of the operating companies. When that was done, the plan for a national service, developed before 1882 and provided for in inter-company contracts, came into com- plete operation. Counting from the invention of the telephone, the end of five years saw the plan completed, which has been followed, practically without change, in establishing the nation-wide telephone service as it exists today. The vision and the wisdom of the founders of the business, as exhibited in the work of that period, makes it stand out as the most note- worthy in the history of the telephone. The history of the telephone has been the fruition of the plans made then. What they did was to create an organization which was tri- butary to no outside interest, which had within itself the elements of progress and which depended upon nothing but itself and the good- will of the American Public. That is STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 11 what they did, and the evidence is strong that that is what they tried to do. That they realized their dependence upon the Public's good-will is evidenced by a letter from the General Manager, Mr. Vail, to at least one of the operating companies written in 1883. Note the significance of the questions he asks: "Is the telephone service, as it is now being fur- nished, satisfactory to the public? " "Are the prices satisfactory to the public, considering the facilities and service that is given?" "Is it possible, in view of the contingencies of storm, underground legisla- tion, etc., to make any lower rate to the public for same classes of service? " " What has been the tend- ency of the relationship between the public and the local companies for the past year, i. e., are the re- lations between the public and the companies im- proving?" Such solicitude as to quality of service, prices and public relations, unfortunately, was not as general among public utility corporations at that time as it is coining to be now. So the founders of the service left to their successors not only a complete operating organization which has sur- vived, but they left in the organization the right spirit of public service. Leaving this constructive period, I shall lay stress only upon such events as had an important influence upon the final result. It must be remembered that in the early eighties, not only was the art of telephony new, but that was true of all of the applications of electricity to the service of mankind, except the telegraph, and those years were marked by the development of apparatus and materials, methods and men, and a healthy expansion of the business, hampered somewhat by the constant patent litigation. In the annual report for 1892, the President says: "It is now possible from this room (in Boston) or from any properly appointed station on this system, 12 VERMONT HISTORICAL SOCIETY to talk north and east to Augusta, north to Concord, N. H., to Buffalo, New York, west to Chicago and south to Washington, and, of course, to the principal cities intermediate. " "It may be interesting to note that within that territory live and do business, some- thing more than one half of the whole population of the United States. " "That this constitutes an ad- dition to the social and business facilities of the country of far reaching consequence, needs, of course, not to be added." At that time, after about fifteen years growth, there were about 230,000 telephone stations in the United States (about as many as the present growth of three or four months) . In 1893 the original Bell patent expired, although the litigation over it still continued. The Company owned or controlled many other patents convering important improvements in the telephone or sub- sidiary apparatus, but never again made any serious attempts to enforce patent protection. Patent protection had served its purpose by furnishing the measure of control or influence necessary to direct the introduction of the telephone in accordance with the purpose of a national service by a closely knit organization. It should be borne in mind that the purpose of the major part of this litigation was not to determine whether or not there should be a patent monopoly of the telephone, but whether it should rest with the Bell Group, or go to some other group. As the necessity of protecting its patent situation be- came less important, it was able to, and did, liberalize some of its methods. It began to permit connection between its licensed companies and other companies without raising the question as to whether or not they infringed its patents. That was the beginning of the connecting company as distinguished from the so-called competing company. STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 13 The Company was prosperous and the business profit- able, but not extravagantly so. There was a popular opinion that it was something like a gold mine. I remember at times meeting men who claimed to have had the opportunity in the beginning to buy the Bell patent for trivial sums, and who were fond of calculating the millions they lost by not taking advantage of the opportunity. It was frequently stated that the patent was the most valuable one ever issued. The fact is, so far as I have been able to find, that no one ever had the opportunity to buy the Bell patent from the original owners, and while I think it was the most valuable one ever issued, the value was principally to the public. The profits in excess of moderate dividends were left in the business. No large fortunes were made out of it even by the pioneers. But this popular opinion that it was a very profitable business led people all over the country to es- tablish co-called competing companies after the expiration of the original patent. Before long there was hardly a com- munity in the country which was not served by two com- panies, each having a separate list of patrons and a few in common. Perhaps this competitive movement was fostered to some extent by the general public feeling of revolt against large corporations which was at its height during this period. There was the feeling that with size went power and that there could not be power without abuse of power. This feeling manifested itself in onerous restrictions which were placed upon this Company by the legislature with reference to increases in its capital, so that at the same time it stimu- lated public favor in the small corporation and hampered the operations of the large corporation. In 1900 it became necessary to change the legal domicile of the parent company, which could be more properly called the headquarters company, and it was accomplished by transfer of t lie property to its subsidiary, the American Telephone and Telegraph Company, a New York corporation, 14 VERMONT HISTORICAL SOCIETY and the exchange of the shares of that company for its own shares. As a part of this legal reorganization, a part of the surplus which had accumulated in the preceding twenty-five years through undivided profits and the receipt of premiums on stock issues was capitalized, with a proportional ad- justment in the dividend rate. The ownership and operation of the Long Distance Lines, which had been in a separate corporation, thereby came into the parent organization. Otherwise it was virtually a change in name and in legal residence of the corporation with no change in management or policies or methods. The release of restrictions on the issue of new capital, however, made possible extensions which otherwise would have been impossible and at this time began the great growth in telephone service. The telephone companies not licensed by, or operating as a part of the Bell organization, were called competing or independent companies, and between 1900 and 1905 they reached the summit of their strength. There are not ac- curate figures as to the number of stations they operated, but I have the impression that it did not at its height differ widely from the number operated by the Bell organization. They did not have a central organization and a cen- tralized financial strength. They did not have a complete scheme of inter-connection between communities and in many cases they were not soundly financed. The principle of two agencies rendering telephone ser- vice in the same community or communities is economically unsound and could not survive. It has, however, taken a long time for the public to fully realize that this so-called competition is not real competition ; that the public does not have the choice between two complete services but it either pays to one company for a partial service or to both com- panies in order to get a complete service in the community served. It is now rapidly disappearing. In some cases the Bell plant has been sold to the independents, and in some cases the independent plant has been sold to the Bell com- STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 15 panies and in all of those cases the surviving company's plant has been connected with the Bell National System and so the ideal of a nation-wide service has been maintained. By the time of the entry of this country into the Great war, the Bell Telephone System had become really the National Telephone System. Its wires reached from coast to coast and from Canada to the Gulf. It had the only laboratories equipped to design telephone apparatus for military purposes — the only manufacturing plants capable of producing it in adequate quantities, and the only large body of employees trained to do certain necessary kinds of ser- vice, and all of these facilities were promptly made available to Government use. Camps and cantonments and all of the various activities of the Army and Navy were promptly equipped and connected. Units were organized for service abroad in the various departments of telephone work. Special apparatus was designed and supplied. Both the intentions and performance of the Bell organizations re- ceived the hearty approval of the military authorities. It came, therefore, as a surprise and somewhat of a shock when, under authority of Congress, the Federal Au- thority took over the operation of the telephone service. It did not appear to be justified and did not appear to result in any advantage. It necessarily meant Government approval of rate changes and wage changes during a period when prompt action was vital to maintenance of good service. Govern- ments do not act promptly and to that extent the service suffered. After the armistice the operation of the properties was returned to their owners. The unanimity of the action possible in the Bell organization made all of the details of the transaction comparatively simple, and within six months of the return of the property to the companies, the whole transaction was closed. The restrictions on the use of capital and material during the war, loss of morale and of skilled people due to slow wage 16 VERMONT HISTORICAL SOCIETY adjustments during the period of Federal Control, all had their effects on the service to the Public after the war, and from those effects the service has only recently completely recovered. A history of the commercial development of the tele- phone in this country becomes in the main a history of the Bell Telephone System. It is very rare that those engaged in the management of an enterprise can look back after the lapse of half a century and find that its progress during that period has been in accordance with a preconceived pro- gramme, and that no fundamental mistakes were made in the conception of its future or in the preparation for its future. We can even go beyond that and say that we cannot see any other way in which a nation-wide service can be efficiently and economically operated. Foresight has been characteristic of the management and in other ways than I have attempted to describe. The story of the work of the scientists and inventors employed in the Bell System preparing for the growth of telephone service and its extension into new fields makes a wonderful record. I have already called your attention to the early appreciation of the fact that approval by the Public of the policies and practices was essential to the continued success of the en- terprise. The American Telephone and Telegraph Company was at least among the first of the great corporations to give full publicity to its aims and its operations. The financial management has been sound and conser- vative. The stockholders, through premiums and conversion of bonds, have paid into the treasury over $40,000,000 more than the capital of the company. Reasonable dividends have been paid. If figured not upon the issued capital but upon what the stockholders have paid into the Company, plus their earnings undistributed, the rate in 1924 was 7.3%. It has not exceeded 7.5% in the past thirty years and has ex- ceeded it only for two years in the past forty years. It has not been at the rate of less than 6% in twenty years and STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 17 only for two years in the past forty years. The aim has been that the stock should be an investment and not a speculation. Fair and considerate treatment of those giving their services to the enterprise has been a cardinal principle. In 1913 there was inaugurated throughout the Bell Telephone System what is called the Benefit Fund, providing payments to employees during sickness and in old age. In 1915 plans were put in operation encouraging employees to invest in stock and securities of the Bell System and other plans for the encouragement of thrift are in operation. A separate department — well organized and equipped — is devoted to the study and inauguration of plans for improvement of working conditions, and in working conditions is included something more than physical conditions. The effort is made to give all of those employed in giving telephone service that knowledge of the aims and purposes of the organization, and of the results of operation which will give them an in- terest in their work, and a share in the joys of accomplish- ment. I have only touched upon the later and incidental developments because I want to leave in your minds the picture of the work of the founders of the service in develop- ing a plan which, after a half -century's use, must be admitted to be the best plan for conducting a nation-wide service. Now let us see what in less than half a century has come to this country out of the dreams of Bell and Sanders and Hubbard and the plans of Vail and Forbes. The Bell Telephone System with its investment of be- tween two and a half and three billions of dollars, contri- buted directly by 360,000 stockholders, and unknown thousands of holders of other securities, and indirectly through savings banks and insurance companies, and other similar institutions, by perhaps millions more, giving em- ployment directly to about 300,000 people, and indirectly to thousands more. With sixteen millions of stations in the cities, towns and villages and on the farms all over the country connected to- 18 VERMONT HISTORICAL SOCIETY gether in one great net-work for intercommunication, and used to the extent of over sixty million conversations a day, some of them between points thousands of miles apart. And the end is not yet. Aside from the probability that there are more Ver- monters financially interested in this than in any other single business enterprise and more Vermont communities using this than other public utility, there is another reason why the development of the Bell Telephone System should have a particular and personal interest to Vermonters. It is a monument to the foresight and constructive genius of Theodore N. Vail, and Mr. Vail was a Vermonter. A Vermonter by adoption, it is true, but as he often said, the glory of being a Vermonter was greater to him who gained it by deliberate choice than to him to whom it came as an accident by birth. He maintained a residence here during the greater part of his business life. It was the home to which he turned for rest and mental refreshment. He was truly a great man — one of the giants of his generation — and he loved Vermont. The head of the operating company which is responsible for giving telephone service to New Hampshire, Maine, Massachusetts, Rhode Island, as well as Vermont, is Matt B. Jones, from Waitsfield. The head of the great manufacturing organization which is a part of the Bell Telephone System, and which supplies telephone apparatus not only to this country but to most of the other countries of the earth, with annual sales to the amount of approximately $350,000,000 and 65,000 employ- ees, is Charles G. DuBois of Randolph. There is a Vice President of the American Telephone and Telegraph Company, Edward K. Hall, the son of a Vermont schoolmaster, and a Vermont school-boy himself, who has done, and is doing more than any other man I know in the Bell Telephone System and out of it, to give to the working STEPS IN THE DEVELOPMENT OF A NATIONAL SERVICE 19 man and the working woman joy in working and pride in working well. And there are many others doing their work in this ser- vice as they find it to do, and doing it with the spirit of fidelity to Vermont traditions which has made the sons of Vermont successful in their fields of labor wherever they have gone.