Infrastructure History Series

CNRI sponsored a series of studies that address historical examples of large-scale infrastructure. Copies are available at $20.00 each, to cover the costs of printing, shipping, and handling. To request copies of these volumes, please send a copy of the order form with your payment of $20.00 per volume to:

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Items in this series:

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Emerging Infrastructure: The Growth of Railroads

Amy Friedlander, 1995

Preface

Dr. Robert E. Kahn, President
Corporation for National Research Initiatives
October 1994

Abstract

This paper examines the historical literature with respect to three related questions about the development of railroads: When and how did take-off occur? What were the public and private roles? And, how did an integrated infrastructure emerge from a web of independently owned lines with frequently incompatible physical attributes?

Railroad construction in the U.S. began in the late 1820s and 1830s and took place over the next 70 years in the context of enormous geographical, demographic, social, and economic growth in the country as a whole. The railroads do not appear to have caused this growth, as has sometimes been alleged. But they did profoundly affect its course, and in so doing, became the dominant element of the national transportation system.

By all accounts, "take-off" for the railroads occurred in the 1850s. Before that time, the lines were mostly local. During and after the 1850s, however, construction accelerated rapidly, and relatively short routes were linked to provide longer distance traffic. Much of this traffic went from eastern urban centers to Chicago, which emerged as a transportation/processing hub between 1850 and 1860. By the Civil War, several companies had begun construction west of the Mississippi River in anticipation of a transcontinental railroad. Between 1860 and 1890, the national rail system became increasingly elaborate and uniform, characterized by standardization of gauge and administrative practices, and increasingly dominated by an emerging, informal group of major companies.

As the first "Big Business," the major railroad companies pioneered modern business practices and organizational structures to cope with their own size, expansive operations, and internal complexities. With increasing size, moreover, they also became more similar and discovered advantages to cooperation in a climate otherwise characterized by fierce competition.

Construction of railroads, like public works projects since the 1780s, was a joint public/private enterprise. The majority of the funding appears to have come from private sources. But public intervention played an important role, both in increasing investors' confidence and ensuring that sufficient funds would be available to complete construction.

Natural Monopoly and Universal Service: Telephones and Telegraphs in the U.S. Communications Infrastructure, 1837-1940

Amy Friedlander, 1995

Preface

Robert E. Kahn, President
Corporation for National Research Initiatives
March 1995

Abstract

This study examines the history of the telegraph and telephone industries in the United States from the perspectives of technology, corporate strategy, politics, and economics. Under the aegis of the Bell Company and its successors, the telephone followed a path similar to that pioneered in the 1860s by the telegraph giant, Western Union. Indeed, the telephone itself was invented in the 1870s as an unanticipated product of efforts to solve technological limitations of telegraphy. Like Western Union, Bell targeted communications among urban, commercial interests (as opposed to private residential and/or rural users). And, like Western Union, Bell was eventually organized as a private sector monopoly. Limitations in telephone transmission capability in the 1870s and early 1880s initially confined the telephone company to local service, while telegraphy remained the only means of long distance communication. After 1885, Bell also began to move toward long distance service by forming a subsidiary, American Telephone and Telegraph (AT&T). However, technology represented a constraint on long distance service until the introduction of the loading coil in 1900-1901.

What drove AT&T's research and development in long distance telephone technology in the late 1880s was the coming expiration of key patents in 1894, when AT&T foresaw intense competition that did, indeed, occur. Between 1894 and 1907, independent telephone companies proliferated to meet consumer demand that AT&T (re-structured in 1899 as the holding company of regional operating companies) had ignored. This partially organized independent movement challenged the Bell companies in key regions, notably the Midwest and the North Central states. To counter it, AT&T through its affiliates similarly expanded its scope of service. AT&T gradually assumed technological and organizational control of an integrated system of local and long distance service through a policy of interconnections with selected independent companies as well as through acquisitions, mergers, and (after 1907) a willing acceptance of state and federal regulation. Although dual service (i.e., access either to the Bell System or to telephone service offered by an independent company) persisted into the 1920s, the independents operated within the technological standard set by AT&T.

The telephone system was not fully extended to provide potential access to the entire population, particularly the dispersed rural poor, until the Rural Electrification Act (REA) and other federal programs provided the incentive after World War II. Thus, state and federal programs, which were designed for other purposes, were also instrumental in the expansion of telephone service to serve national needs.

Power and Light: Electricity in the U.S. Energy Infrastructure, 1870-1940

Amy Friedlander, 1996

Preface

Robert E. Kahn
President, Corporation for National Research Initiatives
January 1996

Abstract

After disparate experiments in the U.S. and abroad, beginning with Michael Faraday's in 1831, electricity owes its origins as an energy infrastructure in the U.S. to Thomas Edison's work in the late 1870s. Edison was not just exploring the properties of electricity. Rather, he and the members of his laboratory were examining the attributes of electricity in the context of solving a particular problem: devising a system of interior illumination that was competitive with gas. The gas companies also provided Edison with his model of organization, distribution, and delivery of services to prospective customers. Thus, he conceptualized a specific product -- lamps -- in terms of a technological and an organizational system that contained generation, transmission, regulation, and delivery of electrical power together with a mass production manufacturing process and a corporate management structure.

Quickly, however, electric illumination split off into separate but related companies that manufactured and sold appliances and equipment or provided services to power users. Eventually, power generation and distribution itself divided into the power producers (whether hydro or coal), the electrical transmission companies, and the local utilities. Separate from these companies were the financiers. Most of these entities formed interlocking relationships that culminated in the organization of holding companies after 1910.

The advantages of the holding companies were that they stabilized financially precarious small utility companies and supplied management and engineering expertise, thus implicitly standardizing operations and equipment. The disadvantages were that they tended to reduce competition and were said to be unresponsive to local needs. Moreover, since the companies were highly leveraged, a tremor in one part of the organizational system could and did have far-reaching repercussions for consumers. Samuel Insull's electric power holding company controlled and generated one-eighth of the nation's power in 1931, and when the company failed, it affected over 1 million stock and bond holders as well as 41 million customers.

Unlike gas, electricity cannot be effectively stored in large quantities. Thus, plant size was a function of maximum or peak demand. Despite decentralized alternatives offered by batteries or self-contained generating plants that served one or two buildings or perhaps an industrial complex, the American model was central station generation and distribution on an increasingly expansive scale. The focus on central station electric power generation and distribution derived partly from Edison's vision and partly from Insull's strategy, which called for encouraging energy use to achieve greater production capacity and increased revenues, while passing off savings to the consumer in the form of lower prices to stimulate even greater consumption.

Edison's system had been based on direct current (DC), which had a practicable transmission range of about one mile. From 1880 to 1920, most of the innovations, including the use of alternating current (AC), were designed to increase the range, scale, and capacity of the central power station concept. Indeed, the Niagara project (1895) demonstrated the possibility of a regional system based on a hydroelectric generating station, high voltage transmission lines, substations, and local distribution. Improvement in coal-fired, steam-powered generators achieved similar increases in capacity. In the 1920s, inter-connection of generating plants and distribution systems together with pooling of energy sources enabled transmission grids to integrate coal- and hydro-powered generating plants into an expansive distribution system that served a diverse range of demands.

Interior electric illumination in the 1880s was initially a luxury for the average consumer. It was introduced first into commercial establishments, like theaters and department stores, as well as into affluent residences. Electricity was first adopted by industry in small, labor-intensive and new industries, which took advantage of its fractional attributes -- meaning that the same system could support small machines, which used motors of less than 1 horsepower, and larger ones, such as motors of 1 to 10 horsepower. Central power station delivery allowed them to pay only for what they consumed and did not have to meet the relatively high threshold cost of installing and maintaining a self-contained power source, like a steam engine or an independent electric power plant nor find a means of exhausting the generated heat. Electricity was subsequently adopted by the large scale, heat-intensive industries, such metallurgy or food processing, in which the thermal properties possessed value for the industrial process. Electrification of industry led to substantial re-engineering of the industrial plant to achieve ancillary benefits in the form of more efficient uses of space as well as unit drive systems (i.e., one energy source per machine).

The 1920s were the era in which electricity permeated the home. By then, occupants of cities and burgeoning suburbs had access to multiple energy technologies. Although electricity continued to be most intensively used by the affluent, the presence of interproduct competition from gas and oil meant that prices for electricity tended to stay low. Falling prices, increased wages, and the decrease in the number of servants willing to staff middle and upper-middle class households fundamentally increased the material standard of living for the working class, while increasing the burden of housework for many women. With improvements in several household energy systems, which brought about gas and electric ranges, hot water heaters, irons, vacuum cleaners and refrigerators, Americans began to enjoy and to expect a cleaner personal and environmental standard. Laundry, which in an earlier time might have been sent out or assigned to a laundress who came in once a week, now became a routine household chore for the lady of the house.

From Edison's lab in New Jersey to John Ryan's copper mines in Montana, electrification was largely a private sector phenomenon. Cities, of course, were among the earlier consumers, and municipal regulation was a constant from the 1880s onward. From experience with both water and gas, which predated the Civil War (1861-1865), it was obvious that municipal franchises, which implied a degree of regulation, would be necessary to obtain access to rights-of-way within which to construct the conduits. State regulation of electric utilities was instituted in 1887 in Massachusetts, and state regulation, exercised through setting rates, has remained the dominant form of public oversight.

For the most part, industry executives pursued a cooperative policy toward state regulatory agencies, with the savings they achieved through improved technology passed along to consumers in the form of lower rates. Interproduct competition from gas and oil for heat (if not for interior illumination) as well as the specter of public regulation or even public acquisition became powerful incentives for cooperation with regulatory agencies as well as for price discipline by the utility companies themselves. Regulation tended to manifest itself primarily through setting rates, and the rate structure itself became a marketing tool, designed to attract large, industrial users who might otherwise have installed self-contained, independent plants which potentially competed with central station power. Although residential consumers paid more per unit of power on average than large industrial consumers did, and, indeed, generated more profitable revenues for the power companies, stable or falling prices relative to higher wages, particularly in the 1920s, muffled consumer discontent.

Federal New Deal programs were aimed toward dismantling holding companies and limiting interstate operation of electric holding companies. Regulation was believed justified in order to protect the public from widely perceived abuses. It is unclear how successful this regulatory function has been, based on studies of consumer prices and the extent to which early regulatory agencies in fact protected power companies from competition. It is, however, evident that federal intervention, in particular, was instrumental in expanding electric power to underserved, predominantly rural populations through the REA and other New Deal and Truman-era programs.

"In God We Trust" All Others Pay Cash

Amy Friedlander, 1996

Preface

Robert E. Kahn, President
Corporation for National Research Initiatives
December 1996

Abstract

This paper is the fourth in a series of historical discussions of large-scale infrastructures in the United States. It is based on three questions: When and how did take-off occur? What were the public and private roles? And, how did an infrastructure -- characterized by access, "shareability," and economic advantage -- emerge? It argues that banking is inherently a system of information transactions rather than a technology-driven infrastructure.

Although its form and function has changed and expanded, banking is basically an information infrastructure, and has been a feature of economic life in the U.S. since the eighteenth century when it provided credit and was a mechanism for transferring the collective savings of the population into large and small-scale investments. Subject to chronic stability, banks runs, and panics, commercial banks gradually evolved systems of cooperation among banks and other financial institutions, which tended to reduce the instability and hence to increase their respective profitability. Over time, federal interventions came to dominate the distinctive American system comprising concurrent state and federal banking systems, brokerages, investment houses, and financial concerns that evolved piecemeal over the nineteenth century. Of these, commercial banks have historically been the most important.

At the national level, Alexander Hamilton's proposal to organize the federally chartered but privately owned First Bank of the United States set fundamental terms of American banking: it would use privately owned banks to serve a public mission, namely, the stabilization of the national debt and the management of currency (or the money supply). The First National Bank of the U.S. also helped fan the controversy in the early 1790s over the extent of federal power, which led to the formation of the first political parties. The bank's charter expired in 1811, and the Second Bank of the United States was granted a federal charter in 1816, but the bank did not become operational until after a panic in 1819. During this period, from the 1790s onward, the states also continued to charter banks. Between the expiration of the charter of the Second Bank of the United States in 1836 and the passage of Civil War-era banking and currency reform legislation in the early 1860s, the country was served only by state banks. This was the period of so-called "free banking" in which banks that met legislated criteria could go into business without obtaining individual charters or licenses.

Although minting money in the form of coin was reserved to the federal government by the Constitution, the circulating medium was largely paper. Prior to the introduction of checking in the 1850s, the ability to issue widely accepted paper money or notes, backed by specie reserves, was critical to banking. The net result was a plethora of paper currencies of varying value. Both the First and Second Banks of the United States attempted to stabilize the monetary system, but the efforts of these institutions do not appear to have been as consistently successful as cooperative structures developed by the banks themselves. Domestic money markets provided a means of winnowing weak bank notes from the strong, and published discount rates provided information on levels of risk, captured in the discount rate, which was associated with various instruments (e.g., promissory notes). Interbank arrangements that were intended to stabilize the value of money, and hence to stabilize banking, included the Suffolk System in New England 1818-1858); state-mandated and voluntary insurance programs in New York, Michigan, Vermont, Indiana, Ohio and Iowa between 1829 and 1860; and the clearinghouse system, which originated in New York in 1853. In all of these enterprises, cooperation was in the immediate self-interest of the participants, because it appears to have increased public confidence in the banking system, and therefore reduced the likelihood of a panic. On the other hand, increased interdependence in the form of the bankers' balances and fractional reserve system also meant that sudden demands on one bank might be easily transmitted to others.

Yet another component in the emerging financial system that directly affected the stability of banking was the call loan market, a mechanism whereby funds deposited in commercial banks were made available for short-term investment in the securities market. Hierarchical, correspondent relationships and bankers' balances deposits by one bank in another resulted in pooling funds in the major cities, with New York at the apex; this emergent set of relationships was, in fact, codified by the Civil War banking legislation. Commercial banks habitually invested the bankers' balances in the call loan market where investors and brokers sought short-term capital for which they were willing to pay high interest rates.

It became evident in 1857 that tremors on Wall Street -- resulting from any one of a number of sources, from international gold prices to bad news from Washington--were transferred to commercial banks. And increased demand on city banks from country banks, which were required to maintain minimum reserves in the face of unexpected demand from their depositors, might force city bankers to call in their loans and/or drive up the cost of money on Wall Street, resulting in sales of bonds and stocks in a weak market, tight money, or both. Thus, reserve requirements, which had been invented to safeguard first notes and then deposits, actually contributed to instability during periods of high demand by compelling country banks to withdraw their deposits from their city correspondents and by setting a threshold on the assets that a bank might liquidate for short-term use. This was to some degree ameliorated by clearinghouse strategies that made short-term loans available to their members so that sudden demands for liquidity might be more easily met.

Over time, public authority over banking increased in part to stabilize periodic dislocations in the system--panics--and in part to help it work more smoothly. Substitution of a national currency, for example, eliminated efficiencies that resulted from intrastate money markets. But many of the features of federal banking legislation were based on the experience of the states, particularly New York, and the federal banking structure did not, therefore, offset inherent weaknesses. For example, hierarchical interdependent relationships, which obligated banks to deposit funds on account with other banks, meant that tremors in a few key markets might be more easily transmitted. More over, banks continued to operate under state banking laws and to make investments in real estate mortgages and other instruments that were legislatively closed to the federally authorized national banks. And indeed, some of the most recent research suggests that the least stable sector of the commercial banking industry in the 1920s were the state-insured state banks, which might choose to remain outside of the Federal Reserve system, and which were most heavily invested rural mortgages at a time when agriculture was slowly collapsing.

Even the Federal Reserve Act (1913), which created a lender of last resort, perpetuated many earlier forms, such as the clearinghouse and hierarchical interdependence. The Federal Reserve also relied on a fairly weak regulatory approach that created incentives for banks to conform rather than mandates to which they must comply. New Deal legislation in the 1930s marked a significant departure from what had proceeded by positing a series of requirements that state and national commercial banks were obligated to meet in order to do business and by separating commercial from investment banking. But although bank reform in the 1930s reflected the New Deal's positive obligation to ensure a minimum threshold of financial stability, banking reform under FDR maintained the long-standing commitment to executing public goals through privately owned banking institutions.

Communications and Content: Radio Technologies in the U.S. Infrastructure, 1865-1976

Amy Friedlander, 2005

Preface

Dr. Robert E. Kahn, President
Corporation for National Research Initiatives
December 2005

Introduction

By coincidence, I filled out a ratings survey as I began to work on this study. As it happens, I listen to commercial FM radio stations more than I had realized—more than I watch television but not more than I read. Why? Because I then drove over an hour back and forth to work, and the traffic and weather reports are frequent on these stations. In form and content, my responses reflect a reality that late-nineteenth century pioneers in early radio could not have begun to envision, requiring a host of technological and social changes from voice quality broadcast communications and internal combustion engines to survey methodologies and professional women working outside the home. This volume in our series on large-scale infrastructure is part of that story.

Like the earlier studies, this one is a discussion of the recent literature in history, economics, communications, and related fields as these studies relate to the evolution of technology-based infrastructure—in this case, as they concern radio technology, which is both an enabling technology and a part of U.S. communications infrastructure. Three questions have motivated all five of these projects:

We, again, look at the notion of infrastructure in terms of the cluster of technologies, practices, and entities that have arisen as a result of understanding, organizing, and managing a technology. Or more specifically, a set of communications technologies designed to utilize frequency bands, or channels, within the electromagnetic spectrum. Thus, the infrastructure of radio is not confined to broadcasting as we routinely experience it; rather, it is the wide application of this technology of transmitting and receiving signals in communications, research, and—yes—entertainment.

The existence of electromagnetic waves were predicted by the Scottish physicist James Clerk Maxwell in the 1860s, and detected by the German physicist Heinrich Hertz in a series of laboratory experiments between 1885 and 1888. Maxwell unified and gave mathematical expression to two experimental fields in science: electricity and magnetism, which had independent origins, but which had begun to converge after about 1790. To these, he added a third, light, when he showed that light was electromagnetic in nature. The scope of Maxwell's equations is science at its most fundamental and informs a universe of modern devices, from power generators to microwave ovens. Thus, the story of radio begins in the history of physics. It does not end there.

The transition from interesting laboratory results to a profitable application of technology took place in the late 1890s and is associated with the organization of the Marconi company in 1897. Early inventors had expected to improve on existing telegraphic and telephonic communications by developing "wireless" technologies that compensated for limitations in the existing physical plant. For consumers, messages on submarine cables were expensive to send, and reception suffered due to attenuation of the signals and latency in transmission. Moreover, the wired plant offered no way to communicate with ships at sea.

Researchers on both sides of the Atlantic, in government service and out, recognized the need to improve ship-to-shore communications. Hence the interest of the U.S. Navy and the navies of England, Italy, and numerous other countries between 1900 and 1920. But there were other considerations. United Fruit invested in one of the key technologies—the Poulsen arc transmitter—because its corporate leadership understood the value of information for maintaining its perishable inventory and deploying its cargo ships efficiently. In short, early motivations arose from a combination of research interests and highly pragmatic political, military and economic concerns that with hindsight, we would now consider problems in information and communications. Gradually, there arose a loosely coupled, three-way partnership among research, government, and industry to support these technology-intensive industries. Its value became evident during World War I (1914-1918). Even after the spectacular rise of commercial broadcast radio between 1920 and 1930 as an information and entertainment industry—the most popular application—radio technologies continued to attract military and corporate interest as a specialized communications technology, the development of radar between 1925 and 1945 being an obvious example.

The government's role was two-fold: (1) as a supporter of the research, either through direct sponsorship or by providing a market; and (2) as a regulator. Federal interest arose, first, because of radio's implications for national security and public safety, and subsequently, for economic stability. The electromagnetic spectrum was perceived as a finite resource, and the role of the government was initially to ensure fair use of that resource and a level playing field for competing interests through a process of allocations and assignments of frequencies. This conception of the role of government was not unlike the role government played in railroad and utility regulation, which took shape in the same decades. The need for regulation became clear after 1900 when international diplomatic, military, and commercial interests competed to use the spectrum. Subsequently, in commercial broadcast radio, a phenomenon of the early 1920s, federal regulators faced the tension between regulating a technological system—already known from prior experience with railroads, telephones, and electricity—and regulating content, a consequence of the public interest criterion for a broadcast license, itself the by-product of notions of the public interest that initially justified regulation in the late nineteenth century.

Diffusion of radio technology into the population after 1908 was partly a function of demand by amateur radio operators (the "hams") and partly a function of supply generated by the electrical equipment manufacturers. It was, in short, both "push" and "pull." Production "push" derived from industry; demand "pull" was created by a buoyant post-World War I middle class, armed with cheap credit and eager to acquire appliances. The same people formed a listening audience for the distinctive, U.S. broadcast model of advertising support for free broadcasts. Integral to this model is the notion of a network, which is both an engineering structure—broadcasting stations interconnected by long distance telephone lines—and a corporate structure, which acquires programming (or content), identifies "sponsors" (or advertisers) to which "air time" is sold, and then makes this programming available to its affiliated stations in return for access to their listeners. A local affiliate's "listening area"—its audience as it is distributed geographically—is a function of the power of its transmitter, which is determined by its license to operate at a given frequency. This three-part overlay of interests among local stations, regulatory authority, and networks was created after a period of trial and error in the 1920s and 1930s.

So radio tells a good story, full of unexpected twists and turns with obvious resonances for the present. In retrospect, many key moments seem to be the result of happenstance and accident: Broadcasting actually originated in the garage of a Westinghouse engineer during his off-hours, and early transmitter/receiver technology was an elaboration of Hertz's laboratory apparatus, which was devised to detect electromagnetic waves as predicted by Maxwell, who was actually interested in the properties of light. The road to my daily traffic and weather reports begins, then, with Maxwell's great papers and the intellectual problems he sought to understand.

May 1, 2014