Public Utilities and Public Policy

THERE are so many points common to all utilities and service companies that it is difficult to differentiate their relations to the public. The understanding of the relations, or mutual obligations, toward each other, and of the mutual dependence upon each other, of the public and the corporation, has so radically changed within the recent past, that any discussion which did not also take into consideration the causes influencing and underlying these changes would be futile. We shall first try to establish a few fundamental principles common to all.

I

1. There are but few utilities which have no alternative or substitute. The alternative or substitute will generally have been less convenient, comfortable, or efficacious, and, consequently, less desirable to the user or consumer; but, in the absence of a better, it answered the purpose and was cheaper, and at the time was regarded as the ultimate possibility in the way of comfort, convenience, and luxury. An instance is lighting: electric light has gas as an alternative, gas has burning oils, burning oils have candles. While, for a given amount of light, the alternative may be more expensive, yet as it was used there was large economy and it was entirely satisfactory.

2. No utility can sell its service or its commodity at a price greater than its value, in comfort or convenience, if not in actual money, to the purchaser or consumer; and the price and quality of service or commodity must be so regulated that enough can be sold to produce net revenue sufficient to pay a fair return upon the cost of the plant, and of the organization and establishing of the business.

3. Net revenue can be produced in two ways; by a large percentage of profit on a small business, or a small percentage of profit on a large business. Population, potential business, social and business conditions, generally decide which course will be followed; but with a large population with large potentialities, the experience of all industrial and utility enterprises has been that it adds to the permanency and undisturbed enjoyment of a business, as well as to the profits, if the prices are put at such a point as will create a maximum consumption at a small percentage of profit.

4. Uniform rates for public service must lead to a combination covering a large and diversified territory. No utility is so situated that the same unit of service can be delivered at the same cost over all sections, nor are there in the same system of utilities any two sections in which service can be produced or delivered at the same cost, if each section is charged with its proportion of all costs.

Uniform rates are based on average costs and must be as excessive and unreasonable under certain conditions as they are inadequate and ridiculous under other conditions. When both sets of conditions are under one operation or in one combination, the average applies, and it is a benefit in that it gives equal facilities to all at reasonable prices. When, however, one utility or combination has all the favorable conditions while the other has all the unfavorable, — or if a so-called competitor should be allowed to supply under the favorable conditions and avoid the unfavorable ones, — rank injustice is done in the one case, while undue benefits are granted in the other. In the one case there are great profits and large dividends; in the other bankruptcy and receiverships, for which the only remedy would be rates for service varied according to conditions, or a combination of all conditions under one operating combination. As an instance, — a gas company could furnish gas to a limited part of the community it serves at a price which would not pay cost of distribution in other sections.

A trunk line of railroad, if it did not have to support its distributing and collecting branches, could be run at a profit at rates which would not pay the crews of the trains on the branch lines. There are, to-day, railroad systems, through rich, well-settled, highly developed sections, which are enormously profitable, while others in less prosperous, or less fully developed, sections of the same states are in a receiver’s hands because of uniform rates. The average cost of one system is less than the uniform rate, while the average cost of the other system is higher. A uniform rate is an advantage to the community as a whole, in that it gives to all equal facilities, as near as may be, at a uniform cost; it is equitable in that the highly developed centres are dependent on the country as a whole, and, therefore, should contribute toward this policy of equal facilities at uniform cost; but it is inequitable if, without remedy, any utility is obliged to furnish service below cost at uniform rates established on an average cost which includes utilities more favorably located.

The inevitable conclusion is, therefore, that if uniform rates are to prevail in any utility system, that system must tend to combination and to a single system or monopoly, if you please, if a highly developed, highly efficient, and progressive utility is to be maintained.

5. Where competition in any field is carried on at a reasonable profit it may be the result of agreement expressed or implied, or it may be that observation or experience of the cost, and destruction of aggressive competition, lead to the exercise of a reasonable restraint in the method and efforts of all to increase business and maintain profits. So long as business is above normal or is even normal, it is easy for competitors to maintain prices or to observe agreements; but when business is sub-normal and hard to obtain, while at the same time expenses are constant, charges are continuous, and business at or below cost is better than none, no agreement or understanding, expressed or implied, without penalty, will be long observed.

6. Competition, so-called, in any enterprises carried on at unreasonable profits is, without question, always the result of some understanding or agreement implied or expressed. Unreasonable profits are bound sooner or later to introduce new conditions and new competitors in any field, whether stationary or growing. It is this that has given rise to the belief in the great virtues of competition.

Competition is induced by many causes: by a desire to meet and share an increasing demand for, or consumption of, any commodity or service at normal profits; or to obtain a share of a business in which profits are very attractive and tempting; or to share in an increasing business with excessive profits. The object may be to create a permanent, continuing, and profitable business, and to obtain, at reasonable prices, a fair share of the going or growing business; or to create by destructive and aggressive tactics such a situation as will force a settlement by purchase, combination, or an understanding of some kind, with an established business; or to promote a business upon the reputation and success of others and sell it to innocent investors upon misleading statements, either willful or mistaken.

The vicious acts associated with aggressive competition are responsible for much, if not all, of the present antagonism in the public mind to business, particularly to large business. These vices are the necessary accompaniment of the methods of destructive competition. The reason for the public’s encouragement of such competition lies in the belief that from it they will derive some benefit. In the long run, however, the public as a whole has never benefited by destructive competition.

No business can be conducted permanently without some margin over and above the operating expenses, which must include ample maintenance of its plant at the highest ‘ goingconcern’ standard; while any business can be conducted for an indefinite period, at an apparent profit, at the cost of its plant or its capital depreciation, so long as they last, and after that for some time on receivers’ certificates. There may be a temporary benefit to the consumer from unprofitable prices, but in the end prices must necessarily be restored or increased to recoup the losses of the cut prices, and to pay the charges on capital invested in unnecessary duplication, if such capital is not to be absolutely lost to the investor.

It must not be forgotten that, in competition of this kind, whether in the field of industrials or of utilities, the start is with small business and between small businesses; the big combination or the big business is a combination for offensive and defensive purposes, and is to be likened to the survival of the strongest, if not the fittest. Business and production must be on a large scale commensurate with the consumption and the new methods of production, which to produce at all must produce by the thousands. Large business or large production means a large aggregate profit from a small percentage of profit, while small business or small production must mean large percentage of profit or small and unsatisfactory compensation to the producer, or both. There is not one act, good or bad, wrong or right, that is charged to big business, that did not originate with, and does not still exist, in small business; while big business has one weakness inherent in its condition which small business has not, and that is notoriety and publicity. Big business is in the glare of sunlight while the smaller business is more or less in the shade. Big business is more impersonal as to its proprietorship or its ownership, or is centred about a few of those prominently connected with it; while its widespread body of small proprietors or partners — that is, the shareholders — have no association with it in the minds of the public, and, as a rule, are indifferent to all that is going on so long as dividends are maintained.

The settlements of competitive wars always affect the public unfavorably, not only toward the ones engaged, but toward all other industrial or utility enterprises. When prices are restored, even to a normal and reasonable basis, they are in constant contrast with the cut price of competitive war, and the consumer is constantly reminded of the differences and resents them; why, it is hard to say, for there is no reason why the public should suspect that some individuals of the public engage in this aggressive competition for any other than a selfish purpose, or for any other benefit than their own; nor is there any reason why it should be expected that these disastrous competitions would be carried on beyond the point which the competitors believed best for their own interests, or beyond the point where the purpose of the competition has been accomplished.

When those engaged in the competitive warfare end it with profit, that profit is more or less flaunted in the faces of the public and is a constant offense; on the other hand, the losses made in the unsuccessful competitions are soon forgotten. If the losses of the unsuccessful promoters of enterprises, worthy and unworthy, or of competitive wars, or the losses made by speculators and gamblers, were as much talked about and as well known, or as much in evidence, as the occasional gains, the speculator or undesirable promoter would find fewer contributors or followers, and competition would be confined to rational and commendable ends, and governed by a decent self-restraint; or, if those who did benefit temporarily by aggressive competition also felt the resultant losses, there would be less encouragement of that kind of competition, and a better feeling on the part of the public toward those industries or utilities which were trying to operate a business in a legitimate manner and at a reasonable profit.

Another popular belief is that it is due to competition that prices and charges have been permanently reduced. Competition may have been a slight stimulant, but permanently reduced prices are brought about by the protection which encourages the inventor to create and develop labor-and-timesaving machines and new and improved methods and devices; by the desire to gain the profits which reward the study of the wishes, needs, comforts, and luxuries of the world, for the purpose of bettering the existing ones or creating new ones; by the initiative and enterprise which introduced the improved processes and methods; by the introduction of machinery operated by ordinary labor at high wages, to take the place of highly skilled labor at comparatively low wages; by the great increase in the number of purchasers or consumers, and by the increase in the average purchasing power of each individual; by the development of markets of such magnitude that large sums could be devoted to the introduction of machinery, processes, and methods which cut producing-cost and enabled a large aggregate profit to be realized on large production and large scales at low prices and small percentage of profit. Whether the consumers created the producers or the producers the consumers, whether the developing market produced the improvements which increased production or whether the improvements produced the market, is difficult to determine, but one thing is sure — that the business organization of any community is so dependent upon the community that sooner or later any effect, whether for good or for bad, is bound to be felt over the whole.

II

It must be admitted that regulation and control by commission has become a permanent feature of our economic policy, particularly as to utilities. That being so, it is essential for the wellbeing of the community that such regulation and control should be effective, equitable, acceptable to the public, and final. There must be absolute confidence on the part of the public in its constituted commissions, and the utilities must have confidence in their fair intent and equity. To deserve this confidence, the members of the commissions must be of high order, free from prejudice or political favoritism or bias; and not only competent, but determined to render their decisions on the showing of facts without regard to popular clamor on the one side or corporate pressure on the other. To get all this, there must be permanency and lapse of time sufficient to enable an accumulation of practice, experience, and precedent, and a thorough coöperation between the public, the commissions, and the corporations, with confidence, deference, and dependence, and absolute frankness on every side.

Corporations should be allowed freedom from undue restraint or restriction on operations, so long as good service is rendered at reasonable prices — prices which will allow the best wages for the best service, provide for the maintenance, depreciation, and reconstruction of the plant, pay all fixed charges and a fair return on the investment, and a profit commensurate to the risk and chances peculiar to, and the ability required to establish and operate, the undertaking. If discussions of unsupported assertions and biased and misleading statements and distorted facts, no matter where made or by whom, are to prejudice the public or force the commissions to resort to expedients, indirect methods, half-way measures, or to evasions in the performance of their duties, the old conditions of trick and stratagem and ’anything-is-fair-inwar’ methods to gain personal ends will soon be restored in worse shape than before.

It will take time and much self-restraint on the part of all concerned to bring this happy result about; and while it is being accomplished and the readjustment is taking place, the public should not in their impatient desire to get quick results allow the destruction or deterioration of those heretofore thriving enterprises which have done, and are doing, so much for the public development, even if for a time some inequalities or irregularities due to the changing conditions continue. The fact that some corporations have not as yet quite got on to the new order of things, together with the fact that the public, fully realizing its power, has not as yet learned that proper restrictions, regulation, and control, can secure all that is wanted, or all that is to be desired, and all that can be got, or that conservation is better than destruction, is largely the cause of the present unsettled and unsatisfactory conditions. The relations between the public and the corporations have not fully adjusted themselves to that nicety of balance which is possible, and which will give each of them all that either is entitled to, or could get, while at the same time preserving the prosperity and the rights of each.

This desired and happy consummation of the struggle, for it is a struggle, will only come with education, with the realization, on the part of the public, of the fact that economic and natural laws are above all statutory laws and cannot be disregarded if good results are to be obtained; that the prosperity of all results from general individual prosperity; that prosperous and solvent communities can only exist where they are served by prosperous and solvent utilities; and on the part of the corporation, that permanent success not only can be, but can only be obtained through equitable and legitimate efforts and procedure.

If, under these conditions rightfully administered, this country cannot secure and maintain the most sufficient, efficient, and effective service of all utilities, there must be something inherently wrong in government regulation and control; and if government cannot effectively regulate and control through its commissions and its laws, then how much less effectively could it operate through government officials.

Competition—excepting that kind which is rather ‘participation’ than ‘competition,’ and operates under agreement as to prices or territory; that kind which provides for the extension or development of the country, and is conducted on the principle of maintaining high quality and fair prices — can only exist where there are abuses, either in the way of unreasonable profits or of excessive capitalization; and where control and regulation are effective, these abuses cannot exist or continue. Consequently competition and control and regulation do not go together, and if a mistaken public opinion demands competition in established fields of ‘sufficient’ and ‘efficient’ service given under control and regulation, the result will be duplication of plant, for which the general public must sooner or later pay either in the loss of capital invested, or in higher charges necessary to pay returns on the capital invested in the duplicated plant. The losers, as we said above, may not lose to the same individuals, but whatever is lost to individuals is lost to society and sooner or later affects the individual.

III

All utilities are dependent not only upon the public for support, in that they must have customers for their service, but upon the public good-will and favor, in that, from the public or its representatives, they must have franchises or permits under which they can operate. The old and proper idea of franchise put the public on the basis of a partner, in a partnership between the public, the capital, the invention or utility, and the individual. The public furnished consumption and, of course, the license to serve or the franchise to furnish something that it, the public, presumably wanted. The individual furnished the initiative, the energy, and managing ability; the capital employed was essential to development and installation; the invention or utility was something which to be successful must be of some public benefit. The intent or theory was that each should get its fair share of the benefits: the promoters and inventors, upon whose initiative, enterprise, and risk, something of great public benefit was introduced, profits in money; the public, something to their material advantage, in comfort or well-being. If this condition could have been established and maintained in a well-balanced relation to each of the partners, the present state of mind on the part of the public toward utilities would never have existed.

As pertinent to and having a direct bearing on questions of franchise, attention is called to the following facts:

1. At the beginning, every public utility or public service was started as an improvement upon something, some method, or some practice — and was a luxury. The greater the real benefit, or the greater the service, of the utility to the public, the quicker its adoption and the more rapid its assimilation into the daily habits and life of the people. The quickness with which it changed from a luxury or convenience to a necessity was a direct measure of its advantage to the community; while at the same time, and in the same proportion, the chances of competition increased, created, as it were, by the desire of those who always depend on the enterprise of others for their initiative to secure a share of the material advantages, to reap where others have sown.

2. The public have received through utilities as much benefit in money, and in comfort, convenience, and wellbeing— if these could be measured in money — as the inventors and promoters have received in profits; while the enhancement of values, or the unearned increment, caused by the introduction of utilities has far exceeded all the profits from all the utilities, allowing them to be as great as the most liberal estimates of the restrictionists would have them. The money profits from these enterprises are concentrated on one individual or on a group, while the intangible values of comfort and well-being and convenience, and the unearned increment, attach to the general public and are lost in, or mingled with, general conditions; therefore one attracts continued attention and causes envy, while the other is taken as a matter of right.

The increase in population, the wide distribution of wealth, not only created tremendous possibilities in old established but dormant utilities, but created a great demand for new ones. Promoters of new enterprises and speculators in old enterprises became active. Franchises were in demand on any terms and conditions. Promises were made which no one expected to fulfill or was expected to fulfill, and enterprises were launched which the promoters knew, or should have known, would not pay. The partners in these enterprises, other than the public, in their eagerness to realize profits in advance of the actual development, and in their eagerness to capitalize prospects and hopes, and even unwarranted promises, in advance of establishing any public benefits, took advantage of this, and more attention was paid to speculative combinations, promotions, and dealings than to the wants and service of the public. This soon produced a feeling on the part of the public furnishing the permit to serve, on the one hand, and the consumers who afforded the profit, on the other hand, that the other partners were getting more than their share and getting it first, and that in some way they had been giving away or sacrificing something of great value.

The methods employed in these transactions, the acts performed, and the results sought for and obtained, were no different from those employed in all speculative and in many competitive businesses, — no worse, no better, — but there was a difference: the utility must get a permit or franchise, which the industrial does not need; the public as a body politic has also a control over the plant installation and operation of public service and public utilities, which it does not possess over industrials. This association between the public as consumer, and the public which gave the franchise, apparently did not occur to the other partners.

The fact that the same public were masters of the situation, in that they constituted the body politic, did not find any lodgment in the minds of those who controlled utilities; nor did the public, on its part, fully realize this relation and its power until the realization was forced upon it by an aroused and indignant public opinion seeking for redress and protection. Regarding only the existing conditions, forgetting and disregarding what the conditions were before the utilities were introduced, forgetting that there was ever any initial enterprise or risk in the introduction of these utilities or in the operation of these franchises, disregarding the benefits following the introduction of these utilities, the public mind furnished a ready field for biased and selfish opinion. Luxuries were fast becoming necessities; ridiculously low prices, made for services rendered in the heat of competitive war, developed a tendency in the public to demand the impossible in the way of permanent rates and prices; and a desire began to develop to get all possible for as little as possible. In this frame of mind the public awakened to a realization of its great strength, through the right of regulation and control, through the control of franchise without which any utility plant already established was useless and worthless, and through its power as a body politic, a power which, if uncontrolled by sober common sense, or used without discrimination, would destroy every utility, and in the destruction would also involve both the prosperity and well-being of the community.

Public prosperity is largely dependent upon good service of all kinds, not only within but without. The interconnecting interests of individuals within a community, and of communities with one another, is like an endless chain, each link or unit depending on the strength and reliability of the whole, and the effective worth of the whole depending on each link. Good or bad movements in economic matters do not produce immediate effects, but because the effects are not immediate they are none the less certain to come. If the causes which have produced prosperity are ignored, if economic laws are disregarded, and experiments in new ideas are enforced without trial, the resulting trouble will again, as it has in the past, cause unfortunate results, which will in time bring about reform, but the damage and destruction done will never be restored.

Unless the public is reasonable in the use of its new-found power, and exercises it justly and equitably, but rigidly and consistently, all remaining confidence will be destroyed, and prosperity will cease; for, unless utilities can be invested in with certainty and security, investment will cease, and growth and development must surely be checked. These utilities, and those dependent upon them, are by far the largest purchasers and consumers of the products of the earth and the factory; and a very large proportion of this consumption is due to normal or above-normal activity in the improvement, extension, and development of these utilities, and to the greater activity in every line of industry or production which accompanies these activities. Activity of extension and development means full consumption of all products and commodities, good wages, and full employment for all. Sub-normal, normal, or above-normal activity means the difference between shops half filled with work, full of work, or worked over-time.

Production is governed by the demands of consumption; large sums of money are spent annually by producers to obtain new markets, enlarge old ones, and even to obtain the customers of their rivals. A greater market can be made at less cost by a slight change of policy in some directions toward some utilities. A little liberality in treatment, a little let-up in restrictions, when accompanied by demand for increased facilities, will make a tremendous difference in the activity in improvement, extension, and development, and in the accompanying purchasing power, direct and indirect, of the public utility and service corporations and those dependent upon them.

Do not think that, because at the moment we have a spurt in the business conditions, we are out of trouble. This spurt, if one may so call it, is the result of the bad conditions, and is but a symptom which foretells worse conditions unless guarded against.

The present conditions are due to many causes — curtailed production in the past, exhausted stocks of all kinds of manufactured commodities or goods, accumulation of purchasing ability on the part of the primary producer, because of good crops and good prices, and the steady normal development of the country, which has overtaken the over-expansion of a few years ago in all lines of industry.

Unless timely precaution is taken, there will be the same congestion, the same inability on the part of all utilities, particularly transportation, to meet the current demands made upon them, and the same direct and indirect losses because of delay or the extra cost to provide against delay, the same premium for immediate delivery, and the same vexations because conditions are such that what is wanted cannot be got when it is wanted.

Under rational and effective control and regulation there can be no danger to the public.

Governments are established for the conservation of individual and public interest, and the protection of individual and public rights. Wise, equitable, rational regulation and control come well within these duties, and well within the capability of rightly and honestly organized government.

Big crops and abundant money are of no benefit unless there is full consumption of the one and good demand for the other, and it is only through activity that these can come.

IV

The relation of the telephone system to the public is unique in that there is no other public utility or public service which occupies quite the same personal relation to the public that the telephone does; and in this country the relationship has acquired additional importance as a public necessity owing to the development of the service, the use made of it, and the dependence upon it by the public in its business and social relations.

This importance is not only in the local exchange service, but in the dependence upon a quick and reliable service to all points within speaking radius. This dependence is not a mere accident or development, nor is it merely incidental to the service; it is the result of a thoroughly considered endeavor to create a business by first providing dependable facilities.

In the early days of the telephone, one of the sub-officials of a company made a protest against the expenditure of a considerable sum in improving and rebuilding a certain inferior toll-line connecting adjacent towns, on the ground that the business was not sufficient to support the existing line. The answer to his protest was that it could not be expected that business would be developed upon unreliable and inefficient facilities and service; that unless telephone service could be depended upon at all times, it would only be used in an emergency or as a last resort; therefore it was necessary that efficiency and reliability should be established before large business could be expected: that the only question to be considered before establishing service was — whether there was a population with a potential business.

This is the policy which controlled the development of the Bell Telephone system in America, and is the reason for its present development.

The telephone system, however, has not been created without its setbacks, its faults, and its grievous mistakes; and if the experience and knowledge obtained from those mistakes is ingrafted in the present policy of the Bell system, and they are not repeated, too much emphasis should not be laid upon those ancient and abandoned faults, and the memory should not be too much exercised to recall them from oblivion.

As one reason, but no excuse, for those mistakes, it must be remembered that the telephone was born in an era when it was generally thought that corporations were masters of the public. It is not at all likely from the present attitude of the public that that mistake will ever be repeated.

The telephone was born when it was the popular idea that an electrician was the man who put up the electric call-bells, when electrical engineers, as at present understood, did not exist; and, except, in the workshops of a few self-developed working electricians of ingenuity and imagination, working on its practical application to industrial development, the science of electricity was studied only in college laboratories; and there, as a rule, for purely scientific purposes.

Patents were still held in respect by the general public, if not by the speculative promoter and infringer; and the inventor of something new and useful was still regarded as the world’s benefactor, and as entitled to some acknowledgment; and if he did not get it during the life of his patent, it was sometimes extended.

Never in the same period of the history of the world has there been such development of any branch of science as there has been in electricity in the less than four decades in which electrical communication, and the industrial application of electricity, have been brought from a period of almost nothingness to the development of 1912; from a period of conjecture and theory to that of an exact science; from the experimental stage to be one of the great industrial forces in the world, perhaps the greatest.

When the telephone was first introduced, the plant was simple, comparatively inexpensive, and correspondingly inefficient in comparison to what it is now; but wonderful beyond comprehension or comparison to what had been. The apparatus consisted of modifications and adaptations of apparatus designed for other purposes; all the equipment and plant for exchange purposes had to be invented and developed. The first use of the telephone was on private lines connecting two establishments, or generally the office and factory of the same establishment, the idea of the exchange being adapted from the connecting of telegraph lines together at a central office to put different stations into direct communication with each other. The telephone exchange was of slow growth, and difficult to exploit at first; there was nothing known in public service to use as an illustration, and in itself it was difficult of demonstration because the only possible demonstration was by itself, before itself existed; until a number of people were connected with an exchange, there could be no service.

The advantages, though slowly appreciated at first, brought a faster growth than any one anticipated, and both advantages and growth have probably gone far beyond the most optimistic estimates of any, excepting possibly a few, who were regarded as dreamy enthusiasts. When the advantage of the telephone service was once recognized it became surrounded by a halo, and many of those who were engaged in its development were literally carried off their practical business feet, and lost their business heads. Most of the promoters in the field were young men who were working on enthusiasm instead of capital, and with that peculiar energy which only comes to those who dream dreams. This condition existed until decay, depreciation, obsolescence confronted the operating companies, with no provision or reserve to prevent them. Decaying, depreciated plant, central-office equipment and apparatus, and subscribers’ stations of every conceivable pattern and kind were the rule. Conversation was interfered with by the extraneous noises on the single wire which formed the then telephone circuit and which, like the antenna of the wireless telegraph, caught every electrical disturbance in the air, from that caused by the aurora borealis to that caused by the electric car and telegraph currents. Meanwhile, the development of the art had been steadily and rapidly progressing, and in many central-office switchboards there was ‘junk’ at one end, and at the other the latest improvement known. Can it be wondered at that the service left much to be desired, and that the public was anything but satisfied?

Just about the time when many of the local companies found themselves in a position where reconstruction of plant, or destruction of business, was facing them, and no provision made for it, came that unprecedented period of almost unheralded cumulative prosperity throughout the country. The Western farmer who had been struggling with the low prices of over-production and undeveloped consumption, found that consumption had overtaken production, and that favorable seasons and large demands made good markets for his produce and filled his pockets with money. Industrial workers found full employment at full wages and still indulged in some of the reasonable economies of life. Those people who in the not far-past days of overdue interest and notes and mortgages looked upon banks as places to avoid, or upon rapidly diminishing deposits in savings-banks with dread of the future, found themselves with abundant and ready money. What a field for the promoter, and what an advantage was taken of it! Thousands, millions, even hundreds of millions, of these accumulations and savings went into all sorts of industrial and public-service and utility schemes. Competing gas-companies, water-works, interurban railroads, local tramways, telephone enterprises, were inaugurated in great numbers.

The old Bell telephone companies, or those of them with capital all issued and no reserves, and with an antiquated plant which required all the earnings for current expenses and everincreasing maintenance and current repairs, found themselves opposed by new up-to-date plants giving a service which could not be given by the old plants, and at prices which only a new plant paying no attention to depreciation or depreciation reserves could give even temporarily; prices which were not intended to be the basis of a permanent and continuing business, but were made on any basis that would get franchises and subscribers and thus enable the promoters to sell securities.

What wonder if, in some localities, the Bell service and the Bell companies became a by-word and an offense.

It would have been a bad day for the Bell interests but for the courage and optimism of the then head of the system, who came in at about the time when everything was at its worst. Recognizing the conditions, and also the cure for, and the necessities of, the conditions, he procured and poured millions upon millions of money into these local companies, rehabilitating and reorganizing them, creating a new system by rebuilding and newly building exchanges and connecting them by thousands of miles of toll and long-distance lines. The result was that the Bell system was once more in a position not only to give as good service as could be given, but to give a universal service such as could not be given by any other system and was not attempted by the independents. While this was being done the opposition plants were beginning to learn that maintenance, reconstruction, obsolescence were not negligible quantities, and the investing public that the promises and prophecies upon which their money had been obtained were wrong and misleading; and also it was demonstrated that while isolated exchanges, operated and controlled independently, could give good local service, they could not satisfy the public as against a system which made each exchange, in fact each telephone station, the centre of a system over which conversation could be had in every direction to the utmost talking distance. Had the opposition or independent telephone movement taken a lesson from the mistakes of the Bell and profited by its experience and adopted its policy of intercommunication, the story might be different from what it is, but the opportunity has passed, never to return. Yet the lessons to be learned from this experience have as yet not been thoroughly assimilated or appreciated by the public, and this history is given to show what underlies whatever dilferences there are between the public and the operating telephone companies.

The telephone service may still be called an undeveloped service. Because the instruments at the subscribers’ stations are not materially or noticeably changed from time to time, is no indication that the art is at a standstill. Probably the actual transmitter and receiver are about as highly developed as they ever will be; but the mechanism of the central office, the appliances to get rid of extraneous troubles — in these days of high potentials in electric currents in transmission, transportation, and the industrial arts, to say nothing of the wireless! — are continually changing, so much so that one familiar with the art five years ago would find a field almost unknown to him and newly developed to-day. Hundreds of the brightest minds devoted to research, development, and improvement, are steadily and constantly eliminating some fault, improving some method or process, overcoming some obstacle to good service. There is a continuous evolution in a field with a limitless horizon, but the evolution is so steady and constant as to be almost unnoticed. To realize it, one has only to compare the actual service and the radius of communication with what actually existed ten years ago, and that is impossible to the most impartial.

The public, however, has begun to appreciate and believe that the telephone service is a ‘natural monopoly’; that any telephone exchange must give universal service — from every exchange and every subscriber as a centre in every direction to the farthest talking limits; that one telephone system is sufficient, and more than one a nuisance; that a telephone conversation cannot be transferred from one system to another and therefore that every one desiring service must be connected with the same system; that the telephone service as carried on by the Bell system is one of that class which has no alternative and no substitute. The vital interest of the public in the service must also be recognized, and whatever is necessary to insure to the public full and complete service must be done, and done in such a way as will bring ‘efficient’ and ‘sufficient’ service within the reach of the whole public having any possible use for it.

The telephone service as now understood and demanded, in this country, depends on uniform development of all sections, and close and sufficient connection, with uniform operation, under common control, between them. The question of the profitableness of each separate unit of the system, whether exchange or connecting lines, cannot be considered. The system must be considered as a whole, administered and developed as a whole, and as a whole it must yield proper return, regardless of the returns of this or that locality so long as the development of the locality is of advantage to the system as a whole.

This is a source of both weakness and strength to the Bell system. The weakness lies in the fact that an opposition exchange can locate itself in the congested centre of business and, at a low rate, give a purely local service, within that section, at a price which the system giving universal service over extended areas, profitable and unprofitable, cannot meet. To those who want a purely limited service in some sections, this appeals. There are but few in such sections who do not want more than a limited local service, and consequently if they have the purely local service they must also have the service of the more extended system. This is the source of strength to the Bell system, which carried it through those days of reconstruction in the face of the vigorous independent movement.

The practice of the Bell system is founded on the following statement of policy: To develop the possibilities of the service and to give the best possible service: to anticipate all the reasonable demands of the public as to service, either as to quality, quantity or extent; to distribute the charges for such service in such a manner as will make it possible for every one to be connected who will add to the value of the service to others; to collect gross revenue only sufficient to pay a fair dividend on the capital invested, after paying the fairest possible wages for the best service, after providing sufficiently for the maintenance and reconstruction of the plant, whether from decay or depreciation or from obsolescence. This is best shown by the distribution of the gross earnings of the Bell system.

The average gross earnings in 1911, per exchange station, for exchange service, toll, and long-distance service, was $39.83, just under $40; of this 50 per cent, or $20, was paid for salary and wages; 5 per cent, or $2, was paid for taxes; 20 per cent, or $8, for maintenance and miscellaneous; 6 percent, or $2.40, was set aside for depreciation and obsolescence reserves; 19 per cent, or $7.60, for dividends, interest, etc. The average cost of the plant per exchange station for 1911 was $141, that is, the average returns upon plant cost were 5.4 per cent; or about the return which can be secured from first-class investments with ample security.

In conclusion, in this short discussion an attempt has been made to give what appears to be the proper solution of the telephone service, and to show what a telephone system should be. The question is, how best can the ideal be obtained? There seems to be no question, judging from experience, that the present way — private management and ownership, subordinated to public interests and under rational control and regulation by national, state, or municipal bodies — is the best.