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Lawrence Reed Columnist

Published Thursday, November 01, 2012

Lessons from the telegraph

The Obama Administration thinks it knows what the energy of the future will look like, so it squanders billions on solar and wind companies that go broke. Too bad it never learned about the failures of government in the early 1800s when it thought it knew what the future of communications looked like.

Did you know that the federal government first controlled the telegraph business? Only when it was privatized, however, did it expand beyond the East coast and become profitable.

In 1844, the federal government subsidized and controlled the nation’s first telegraph wire — a Washington to Baltimore line built by Samuel Morse. His system of dots and dashes, run electronically through a magnetic wire, instantly conveyed letters of the alphabet to listeners miles away.

When the effectiveness of Morse Code was proven, some people wanted only the government — through the Post Office — to build and operate lines throughout the country. Cave Johnson, the postmaster general, argued that the use of the telegraph, “So powerful for good or evil, cannot with safety to the people be left in the hands of private individuals uncontrolled.” Only the government, Johnson concluded, could be trusted to operate the telegraph in “the public interest.”

The federal telegraph monopoly didn’t last very long. The Washington to Baltimore line was losing money every month. During 1845, expenditures for the government telegraph exceeded revenue by six to one and sometimes by 10 to one each month. Washington bureaucrats could not figure out how to market the new invention and could not imagine what uses people might have for it. In 1846, Congress officially turned the telegraph business over to private enterprise and allowed an unfettered marketplace to spread its wings.

The telegraph business expanded immediately. Telegraph promoters showed the press how it could instantly report stories occurring hundreds of miles away. Bankers and stock brokers could live in Philadelphia and invest daily in New York. Policemen used the telegraph to catch escaped criminals.

By 1847, many private companies were competing for pieces of the telegraph business. Keeping wires from breaking, sealing them under water, and maintaining the strength of the signal over half the continent stretched the capabilities of even the best entrepreneurs. But they did it.

Washington bureaucrats received no profits from the government’s wire. The cash they lost each month was the taxpayer’s, not their own. They had no incentive to improve service, find new customers or expand it to more cities.

Private entrepreneurs, however, had strong incentives to improve and market the product. Just 15 years after telegraph privatization, the costs of construction and the rates for service linking the major cities were as little as one-tenth of the original rates established by Washington.

Americans of the 1800s thus learned that it was a free market, not government, that really supported the “public interest.” That’s a lesson we need to relearn today.

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(Lawrence W. Reed, a resident of Newnan, is president of the Foundation for Economic Education in Irvington, N.Y., and Atlanta.)

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