Antitrust Enforcement Led to the Creation of the Telephone

By: Aaron Honsowetz (Bethany College/ProMarket)

Senator John Sherman is widely recognized in antitrust history for the 1890 Sherman Antitrust Act, but his earlier work was also significant. More than two decades prior, he played a key role in passing the 1866 Post Roads Act. This Act disrupted state and local franchise regulations that had granted established telegraph companies protection from competition. By reducing the incentives for telegraph companies to lobby for entry barriers at the municipal and state levels, the Act shifted their focus toward research and development. The increased investment in technological innovation to expand telegraph wire capacity eventually led Elisha Gray and Alexander Graham Bell to experiment with the multiplex harmonic telegraph, laying the foundation for the invention of the telephone.

The 1866 Post Roads Act was specifically designed to challenge Western Union’s dominance, which in 1869 controlled 80% of the telegraph wires in the U.S. and Canada. Western Union had solidified its market power during the 1860s by merging with the United States Telegraph Company and the American Telegraph Company.

Sherman aimed to strengthen the National Telegraph Company, a new competitor where his brother Charles T. Sherman served on the board, by granting it federal privileges to compete with Western Union. He introduced a bill allowing the National Telegraph Company to “construct, maintain, and operate” telegraph lines along any post road in the U.S. in exchange for offering discounted rates to the federal government and agreeing to a pricing framework if the government decided to nationalize the telegraph system. Senator Sherman initially argued that limiting these privileges to a single company would better position the National Telegraph Company against Western Union. However, vocal opposition from senators like James Grimes of Iowa and John Conness of California, who resisted the idea of exclusive privileges for one company, led Sherman to revise his bill to extend these benefits to any telegraph company willing to comply with the Act’s terms…

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