Popular Science Monthly/Volume 71/November 1907/Notes on the Development of Telephone Service XII

by Fred de Land

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NOTES ON THE DEVELOPMENT OF TELEPHONE SERVICE

By FRED DELAND

PITTSBURGH, PA.

XVI. The Hard Times of 1885

THE year 1885 will never be forgotten by the "hard times" sufferers—nor by many operating telephone companies. For commercial and industrial conditions rapidly slid down to bedrock, and thousands who were thrown out of employment suffered for the bare necessities of life. Some of the local telephone companies had a fair income, but nearly all had to defend at heavy cost, a series of systematic attacks upon the rates charged for local service. In 1885 the bank clearances were over fifteen billions of dollars less than in 1883, the production of pig iron was lessened by nearly 600,000 tons, while its price fell to $18 a ton from $22 a ton in 1883. So great a commercial and industrial depression naturally affected the financial growth of the parent Bell company; and then, that its bitter cup might be full to overflowing, all the power of the United States government was brought to bear on the fundamental Bell patent, in the hope that it might be invalidated. Referring to this most unjust and discreditable attempt to lend the dignity and the power of the United States to a deliberate scheme to filch honors justly awarded, the editor of The Nation wrote that this

decision to have the validity of the Bell telephone patent tested in the courts... insures the success of one of the worst stock-jobbing schemes now before the public. The stock in trade of the companies on whose motion the suit is brought consists of a paper capital of several millions, and a few patents of insignificant value which they probably never intended to use.

In July commercial conditions in the east experienced a brief boom, brought about by the absorption of the costly West Shore line by the New York Central interests. But the farming community had invested heavily in West Shore, and following the reaction due to heavy losses distributed among a large number of grangers came increased distrust not only in railway, but in all industrial securities, including even those of the best local Bell companies.

However, the farmers were enriched by the greatest crop of corn ever grown up to that year, exceeding by one hundred and forty million bushels the bumper crop of the previous year, while the yield of cotton secured by planters in the south was nearly as large as the summer before. But the farmers harvested one hundred and fifty-five million bushels less of wheat than in 188-i, and a bushel of wheat was worth nearly two bushels of corn, wheat selling at an average export price of 87 cents and corn at 49 cents per bushel. On the Chicago market wheat ranged from 73³⁄₈ cents to 91³⁄₄ cents per bushel. During the fiscal year beginning July 1, 1885, there was exported only 57,759,209 bushels of wheat having an aggregate value of $50,262,715, as against 106,385,828 bushels in 1882 having an aggregate value of $119,879,341.

Each month brought reports of the large number of telephones taken out at the request of subscribers; yet, when the returns for the year were tabulated, the totals for all the Bell companies in the United States showed a net gain in subscribers of 2,903, Owing to the extreme financial depression this was an entirely unexpected increase.

One company, in reporting a gain for the year of nineteen stations, expressed its elation over the fact that it meant a net gain of thirty paying stations through the elimination of a number of deadheads. This company reported having "removed 1,147 instruments and placed 1,179," during 1885, and added:

When we analyze the places in which we gain and lose, we find that of the fourteen exchanges containing over one hundred subscribers, which we are working to-day, all but three are larger than they were a year ago, while of the nineteen exchanges of less than one hundred, all but six are smaller than they were in April, 1884.

This company was operating thirty-three exchanges with an average of 171 subscribers to each exchange, and was in a stronger financial condition than three fourths of the other companies. Yet its treasury stock was unsalable at any reasonable price, even though the purchaser knew that the entire proceeds of the sale would be devoted to new construction. Two and three years previously people went wild over telephone stocks, not only borrowing money from banks to use in purchasing telephone securities, but actually mortgaging homes. But during 1885, it was only possible to dispose of many local telephone stocks by allowing an enormous discount of from 50 to 80 per cent, from par value. So this company told its stockholders that

we are convinced that we are now at the period when we must look to our current earnings to pay for all expenditures of every kind whatsoever. The system, as now established, must not only maintain itself, but must provide for the ordinary extensions and improvements which the growth of population and business and the development of improved apparatus may demand.

Notwithstanding the several concessions granted its licensees by the parent company during the previous year, it perceived early in 1885, that the prevailing industrial conditions coupled with the low financial condition of a majority of the local companies, rendered necessary a further modification in relationship. During 1884 the parent company returned $806,634 to the operating companies in which it held shares of stock, which was its proportion of the net earnings. that this amount might be spent for necessary improvements and extensions on the part of the local companies.

Following many of the numerous consolidations, the parent company granted to the consolidated companies a perpetual license covering the exclusive use of Bell equipment in specified territory, in exchange for the short-term licenses that had expired or were about to expire. In return for these perpetual exclusive rights the local companies issued to the parent company from 20 to 33 per cent, of the capital stock of the new organizations. Thus parent and operating companies became joint partners having every reason to protect each other's interests, even after the expiration of the fundamental patents.

Owing to the stress of financial conditions, early in 1885, the parent company decided to call a conference of the operating companies to ascertain what mutual action was advisable, in order to restore confidence among the shareholders of the consolidated companies, as well as to awaken an interest in telephone securities on the part of prospective purchasers. With that end in view it invited all local companies to send one or more representatives to a meeting to be held in Boston, June 8 to 13.

During the sessions of this conference all phases of relationship were broadly discussed and many perplexing problems thoroughly threshed out, several important concessions were made, and a further reduction in royalties announced. At the closing session the delegates tendered to the parent company a vote of thanks

for the substantial benefits resulting from the conference and its disposition to strengthen our hands in developing the business; (and assured) a continuance of our hearty support and cooperation, with renewed vigor and confidence.

In its annual report for 1885, the parent company referred to the results of this conference as follows:

With longer experience the telephone companies have learned that the cost of maintaining and reconstructing their plant has been generally underestimated, and many of them have in consequence been forced to recognize that the profits upon telephone business are less than they had expected and believed. For this reason they have appealed to us to make certain concessions in their contract relations, and we have given this subject careful consideration. . . . We have met our licensees; first, by agreeing when desired, that our share of net earnings, jointly with theirs, may be used for construction purposes, so that we in these cases are sharing the cost of developing the business; second, we have made a reduction in the royalties on telephones used in small places where the rates are low. This reduction involves a loss of royalty amounting to about $200,000 per annum on our present business.

While comparisons are rarely pleasant to present, yet it is interesting to compare this voluntary action on the part of the Bell company, with the resolutions passed by the licensees of another parent public utility company. This latter parent company was not in the telephone business, but it made arrangements

by which these local companies had the exclusive and absolute right to the sale of apparatus in their respective territories. In return for this they gave to the company a certain percentage of their capital stock, not for one year or two years, or any fixed length of time, but perpetually and upon any increase of capital stock. These licensees, however, were not guaranteed by the parent company against infringers of the patents, or given protection in any way equal at the time to the rights which they sacrificed. The makers of other apparatus which infringed the patent came into their territory unmolested and sold in competition with them. The result is that during the past ten years the licensees have not secured any considerable portion of the profits which justly belong to them. In return for the stock which they surrendered the local companies were to secure a special rate upon apparatus, which would enable them to compete successfully with any rivals. As a matter of fact this privilege was never secured and the apparatus of other manufacturers could be obtained upon the market at a price which was actually less than that which they had to pay to the parent company.

During the year 1885 systematic attacks upon the rates charged by operating Bell companies were started in several states, notably in Massachusetts and in Indiana. In Massachusetts the movement began the previous year, and is said to have been instigated by and supported almost entirely through the efforts of one man who felt that he had not been fairly treated by his associates when the local company in which he was a shareholder had been absorbed in a general consolidation. The method this man adopted was to employ boys in different cities to rapidly circulate petitions in favor of reducing telephone rates in the respective localities. Naturally, not only friends and acquaintances of the boys, but thousands of other persons signed the petitions to help the lads earn the promised pennies. In this manner a total of about 50,000 signatures were secured. When these petitions were presented to the legislature, it was shown that nearly three fourths of the signers were not subscribers to telephone service, that a number of names had been placed on the petitions without authority, and that many of the alleged petitioners could not be located. For instance, ninety signatures were secured in Lynn, and only four of the entire number represented telephone subscribers. Of the eighty-six non-subscribrs, the names of twenty-seven did not appear in the city directory, nor could the individuals be found. Then it was publicly charged that this lot of petitions had been shown to the Bell interests and offered to them for $12,000 in cash. It was further stated that

as no purchaser could be found, the whole batch of petitions finally found their way to the legislature, which, in its final judgment, placed the same value upon them as the directors of the Bell company had previously done.

On April 13, 1885, the Indiana legislature passed a drastic law that later was repealed:

that no individual, company or corporation now or hereafter owning, controlling or operating any telephone line in operation in this State shall be allowed to charge, collect or receive as rental for the use of such telephones a sum exceeding three dollars per month where one telephone only is rented by one individual, company or corporation. Where two or more telephones are rented by the same individual, company or corporation, the rental per month for each telephone so rented shall not exceed two dollars and fifty cents per month.

When this law went into effect, six different companies or individuals were operating telephone exchanges in Indiana under Bell licenses, and as this bill threatened to largely reduce their prospective incomes, it required wise planning to keep the outgo within the estimated income in order to avoid bankruptcy. The first step taken was to suspend night service in some places. In turn the citizens, the great majority of whom had never patronized the telephone company, exhibited an utter disregard for the rights of others by cutting down the telephone poles. A large number of exchanges and over one hundred toll stations in Indiana were closed, and all improvements and extensions ceased.

Fortunately for all concerned, there was a golden lining to the dark cloud that overhung the telephone field in 1885, in this that no less than six important decisions were rendered in favor of Bell interests. Five of these were judicial, being handed down in the United States circuit courts in the respective districts, and one was the important decision rendered by Commissioner Butterworth of the Patent Office.

It may be recalled that on October 23, 1884, the examiners-in-chief in the United States Patent Office, after a very thorough and complete investigation of certain interference claims involving the invention of the telephone, and after each claimant had had his rights fully presented in lengthy arguments, decided that

Bell is the only one of the contestants having patents. Bell is not only a patentee, but it is to him that the world owes the possession of the speaking telephone.

Earlier in 1884 the examiner of interferences had rendered a similar decision, after eighteen months of thorough investigation. This decision was exceedingly elaborate, making a printed volume of over three hundred pages, and reviewing the law and the evidence, including every fact and phase with great care. From this decision the claimants appealed to the examiners-in-chief, as stated, and from their decision to the commissioner of patents. After a seven days hearing the commissioner decided that

Bell discovered, and his patent showed that a certain combination of magnet, diaphragm and armature, when arranged in a specified connection with other specified parts, constituted an apparatus which would transmit articulate speech. Up to this time no one else had done this, or had known it. The combination was the result of his conception and the outgrowth of his theory, and the apparatus, being a materialization of that conception and in conformity to that theory, was his original invention.

In January, 1885, Judge Butler, in the United States Circuit Court, District of Pennsylvania, in granting the motion of the parent Bell company for an injunction, decided that

upon full and patient examination of everything submitted to us, we believe that the alleged new matter is but the refuse and dregs of the former cases—if I might be allowed the use of so homely an illustration, I would say, but the heel taps found in the glasses at the end of the frolic.

In March, 1885, Judge Wallace, in the United States Circuit Court, Northern District of New York, in granting the request for an injunction against an infringing company, stated that

this is a case in which an injunction must issue, beyond any sort of doubt. The questions upon the merits, for the purpose of preliminary injunction, have been already disposed of in the Pennsylvania and New Jersey cases,

In June, 1885, Judge Wallace, in deciding that the Molecular Company had infringed "all the claims" of the Bell patent, stated:

After Bell has pointed out the way, it may now be seen to be a simple thing to introduce his method into the Reis apparatus. Some of the experts have doubtless convinced themselves that these modifications of the Reis apparatus do not involve any difference in the principle of the apparatus. It is too late to accept this theory after the lapse of so many years of fruitless experiment with the method of Reis, as originally suggested by Bourseul, and with the apparatus of Reis, as modified by various experimentalists down to the time of the promulgation of Bell's method. It seems impossible to escape the conviction that had the speaking telephone been left where it was left by Reis, and by those who endeavored to develop and perfect his theory, it would only have realized the speculations of Bourseul.

In July, 1885, Judges McKennan and Acheson, in the Circuit Court of the United States, Western District of Pennsylvania, in allowing an injunction stated

that while this country has been agitated for several years past by litigation about this Bell telephone, and while there were decisions in the courts, at any rate in Massachusetts and in New York, and in this circuit, these defendants, with the knowledge of all these decisions, have entered upon a course of infringement of the rights of these complainants, that have been passed upon by the courts. . . . If these people, believing that they had a right to do it, without any decision of the Court, and without any notice whatever from the party whose rights they sought to appropriate, had commenced this business, it might be said with some sort of claim of equity, that they had been misled, and that therefore, they ought not to be stopped by an injunction where such injunctions would subject them to loss which they did not expect. That is not the case here as I have said several times. They have invited this controversy. They have stood up and said to Bell, "You are not the inventor of this thing, and we are going on in defiance of the patent which has been granted by the Government, and in defiance of the decisions of the Courts sustaining it." Now, that is just the aspect of the case, and I know of no rule by which the Court has heretofore been governed in the disposition of motions of this kind, which would justify us, for one moment, in treating these defendants with special favor, even independent of the decisions of the Circuit Courts. The injunction is allowed.

In December, 1885, Judge Wallace said:

Since the decision of this case in December last, additional proofs have been taken on the part of the defendants (The People's Telephone Co.) and by consent of complainants, have been presented for the further consideration of the Court after argument of counsel. All the new evidence is cumulative merely. Such as consists of the testimony of new witnesses to knowledge of the existence of Drawbaugh's talking machine prior to the date of the Bell patent, is far less persuasive than much which has already been considered and rejected as incredible. . . . The legitimate effect of the evidence is to show that Drawbaugh was very near the realization of the invention, if he had really constructed instruments like the exhibits F, B and C, prior to the date of Bell's patent. It does not, however, alter the fact that he was unable to make such instruments at a period long subsequent to the time when he claims to have made them; and in view of this fact the evidence does not tend to materially fortify the testimony of the witnesses, who think, or profess to think, that they heard, or saw efficient practical instruments in operation at Drawbaugh's shop on the occasions to which they refer. The conclusions which were reached at the former hearing have not been modified and the decree ordered should not be disturbed.