Building the Bell System

If someone was making a list of the most important American companies today, it’s unlikely AT&T would be anywhere near the top. It’s large, but not notably so: it came in 32nd in the 2024 Fortune 500 ranking, just above Comcast and below Verizon. Its offerings are not unique: it’s just one of many companies providing phone, internet, and other communication services. By market cap, AT&T is less than 10% of the value of Amazon, and around 4% of the value of Apple.

But for most of the 20th century, AT&T was one of the largest and most important companies in the entire world. 40 years after its founding in 1877, it was the second largest company in the U.S. by assets after US Steel, and it continued to grow from there. In his 1939 history of the company, Noobar Danielan describes AT&T’s $5 billion in assets, mostly in the value of its telephone infrastructure, as “the largest aggregation of capital that has ever been controlled by a single company in the history of business.” In 1974, this had grown to $74 billion in assets (roughly $470 billion in 2024 dollars), more than three times the assets of the next largest company, General Motors. The company’s one million employees were more than 1% of the U.S. labor force.

AT&T’s size was a consequence of the seemingly unceasing rising demand for telephone service. As early as 1900, AT&T was handling more than five million telephone calls a day. By 1925, that had reached over 50 million calls a day, and by 1975 it was approaching 500 million.

Meeting this demand required constructing mind-boggling amounts of infrastructure. Year after year, for decades, AT&T manufactured millions of telephones, built thousands of telephone exchanges, and ran millions of miles of wire across the country to provide telephone service. If its manufacturing subsidiary, Western Electric, had been its own company, it would have been the 12th largest in the U.S. in the 1970s. Between 1960 and 1973, NASA spent almost $26 billion on the Apollo Program ($311 billion in 2024 dollars), over 2% of U.S. GDP. Over that same period, AT&T spent almost $70 billion building new telephone infrastructure. Unlike many huge companies from the late 19th and early 20th century, AT&T did not generate the sort of dynastic wealth that gave us the Vanderbilts, the Carnegies, and the Rockefellers. In part this was because the founders of the company sold their stock quite early, but it was also because of the company’s insatiable demand for capital.

Over the 20th century, American life was almost completely transformed, as new technology was developed and huge amounts of infrastructure were built to make it accessible to the masses. Things like electricity, the car, and telephone service went from niche luxuries to nearly ubiquitous. In most cases, this progress was somewhat emergent, the collective effort of dozens or hundreds of different companies, groups, and individuals. But with telephones, progress in the U.S. was almost entirely due to the efforts of AT&T, and its relentless pursuit of cheap, universal telephone service.

Birth of the Bell System

Credit for the invention of the telephone typically goes to professor of elocution Alexander Graham Bell, though, like many inventions, there were parallel efforts with their own claims to being first. When Bell filed his telephone patent on February 14th, 1876, he beat competitor Elisha Gray to the patent office by just a few hours. Patent disputes from Gray and others would continuously dog Bell’s company during its early years. Bell was aided in his efforts by machinist Thomas Watson, and his work was funded by Thomas Sanders and Gardiner Hubbard, men with deaf children instructed by Bell (Sanders alone invested more than $100,000 in Bell’s inventing efforts, almost $3 million in 2024 dollars).¹ The four cofounders incorporated the Bell Telephone Company in 1877, which later became American Telephone and Telegraph, or AT&T, in a 1899 corporate restructuring. By the fall of 1877, the company had 600 telephone customers. By June of 1878 it had more than 10,000 customers, and by 1881 it had reached over 100,000. The first AT&T customers used private lines that directly connected two phones, but very quickly AT&T created exchanges that would allow anyone connected to the exchange to talk to anyone else; by 1881, there were only nine cities larger than 10,000 people in the U.S. without a telephone exchange. By the turn of the century, the Bell system consisted of more than 800,000 telephones and 1,300 exchanges, connected by nearly two million miles of wire. To meet its rising demand for electrical equipment, in 1881 Bell purchased Western Electric, the largest electrical equipment manufacturer in the U.S.

Though the telephone was being adopted around the world, it spread especially fast in the US. At the end of the 19th century, the U.S. had roughly one phone for every 60 citizens, compared to 115 citizens in Sweden, 397 in Germany, and 1,216 in France. New York State alone had as many telephones as all of Europe.

In its early years, AT&T’s telephone patents gave it a monopoly on telephone service, though other companies tried to dispute these patents and enter the telephone business themselves. Telegraph company (and employer of Elisha Gray) Western Union, which had passed on the opportunity to acquire Bell’s telephone patents for $100,000 in 1877, quickly entered the telephone market on the heels of AT&T. By 1879 Western Union had sold 56,000 phones in 55 cities, had its own collection of telephone patents, and was embroiled in a patent lawsuit against AT&T. But facing a takeover attempt by rail magnate Jay Gould, Western Union abandoned its telephone efforts, and ceded its entire telephone network and patent collection to AT&T in 1879 in exchange for a temporary share of Bell’s telephone revenues. In 1883, a telephone company in Tennessee, Pan Electric, failed in an attempt to use political influence to get the federal government to annul AT&T’s patents, and dissolved in 1886.

But AT&T could only use patents to fend off competitors for so long. In 1893, a key AT&T patent expired, and by the late 1890s AT&T began to lose patent lawsuits. As the company lost its monopoly on telephone technology, “independent,” non-AT&T telephone companies sprung up by the thousands. By 1900 there were 600,000 independent phones against AT&T’s 800,000, and by 1907 AT&T and independents had about three million telephones apiece. Because AT&T refused to connect these phones to its network, some cities had two separate telephone networks (one AT&T and one independent), requiring citizens to have two phones and to remember which network whoever they were trying to call was on. Finally, in 1913, to avoid antitrust charges, AT&T agreed to allow independent companies to connect to its network.

As time went on, AT&T grew, and independents provided a smaller and smaller fraction of U.S. phone service. In 1921, the Willis Graham Act established phone service as a “natural monopoly,” and AT&T was allowed to acquire competing phone companies. But the independents never went away completely, and as late as 1975, independent phone companies made up 20% of the U.S. telephone market.

As AT&T expanded its telephone network, it also made technological improvements. Very early telephone service used the same basic system as the telegraph: signals were sent over a single steel wire, using the ground as a return circuit. But while this system worked well for the telegraph, it proved inadequate for telephony. The high-frequency signals used by telephones attenuated much faster than those used by telegraphs, limiting transmission distance. To address this, AT&T switched to copper wire instead of steel (developing its own copper fabrication process to make the wire strong enough), and two-wire circuits instead of ground return. With these and other improvements, like the adoption of the loading coil, telephone signals could be transmitted hundreds of miles, and by 1907 long-distance service existed between many large American cities.

AT&T also made major technical improvements to its wiring system. Early on all wires were pole-mounted, and soon after telephones began to be adopted in large numbers, cities found themselves covered in huge nests of wiring. New York City, which had more phones than any city in the world, had hundreds of 90-foot telephone poles, each one carrying 300 wires.

Telephone wires in 19th century New York

Rising public opposition to this huge mass of wiring forced AT&T to solve this problem by developing cables that could be buried underground and that bundled many wires together. By 1900, AT&T’s cables held 400 pairs of wires, and roughly half of all the wiring it had laid was underground.

AT&T cables over time, via A History of Engineering and Science in the Bell System Volume I

Even with these technical improvements, there were still limits to how far a telephone signal could travel. At most, a signal could cover about 1,300 miles before it became hopelessly garbled, and that achievement required thick, expensive wires. What was needed was an effective way to amplify signals, which came in 1906 in the form of the audion, an early vacuum tube invented by Lee de Forest. AT&T researchers worked out how to turn de Forest’s audion (originally used purely for radio wave detection) into an electronic amplifier in 1913, and in 1914 used it to build the first transcontinental telephone line, connecting New York and San Francisco. By 1930, expansion in long-distance service made it possible for a Bell System telephone to call nearly anywhere in the U.S.

AT&T Long Distance Lines in 1907, via A History of Engineering and Science in the Bell System Volume 1

AT&T Long Distance and interurban toll lines in 1930, via A History of Engineering and Science in the Bell System Volume 1

And not only the U.S. AT&T also built systems to connect its network to foreign telephone networks. Initially, these intercontinental telephone systems were powered by radio (also made possible by de Forest’s vacuum tube), though eventually they would be replaced by submarine cable. The first radiotelephone circuit opened in 1927, and a decade later there were dozens. By 1930 the Bell system was connected to 91% of the telephones on earth.

Radiotelephone links in 1937, via A History of Engineering and Science in the Bell System Volume 1

As demand for telephone service continued to rise, AT&T built infrastructure to meet it. Between 1910 and 1930 the average number of daily telephone calls on AT&T’s network more than tripled to 64 million, and the number of telephones rose from just under 4 million to more than 15 million. By 1930 Bell was spending $585 million per year on construction ($11 billion in 2024 dollars), and the value of its infrastructure was over $4 billion ($75 billion in 2024 dollars). To maintain and operate this infrastructure required hundreds of thousands of people; by 1920 AT&T was the largest employer in the U.S., with a workforce of 230,000, around 1% of the total U.S. labor force.

Expansion of the telephone system slowed during the years of the Depression and WWII. Between 1930 and 1935, the number of phones in the U.S. actually declined, and between 1930 and 1945 the annual growth rate in the number of phones was just 2.6%, compared to 6.4% between 1915 and 1930. But despite stagnating growth, AT&T continued to make system improvements. New technologies like coaxial cable and improved switching systems were introduced. Manual switching, which required operators to make connections, was gradually replaced with automatic switching, allowing customers to dial numbers directly, and by 1940 60% of Bell’s exchanges had been automated. And the price of phone service steadily fell. Between 1930 and the late 1940s, the price of long-distance calls in the U.S. fell by almost 50% in real terms.

Real cost of long distance US calls over time, via FCC

Growth in demand for telephone service picked up again following WWII, and with it the construction of telephone infrastructure. Between 1945 and 1955, AT&T’s call volume and number of telephones roughly doubled. Over that same decade, AT&T laid nearly 100 million miles of wire, and the total value of its telephone infrastructure nearly tripled.

And AT&T continued to improve the technology at work in its infrastructure. The transistor, invented at Bell Labs in 1947, eventually allowed for digital, solid-state switching technology to replace electromechanical switches. Higher capacity coaxial cables were developed and deployed. Submarine telephone cable, after decades of development, began to be used to connect to telephone networks in other countries, and by the 1980s AT&T had laid tens of thousands of miles of submarine cable. To accommodate rising demand for long-distance calling, AT&T developed microwave transmission systems, and built a network of over 100 microwave relay towers across the U.S. By 1960 microwave transmission was handling most of AT&T’s long-distance calls, and between 1950 and 1980 long-distance call capacity increased by nearly a factor of 60.

AT&T Submarine cables circa 1960, via AT&T Annual Reports

AT&T long-distance transmission capacity by technology, via A History of Engineering and Science in the Bell System Volume II

By the late 1970s, to handle continuously rising call volume, AT&T was spending more than $10 billion annually on infrastructure construction (more than $50 billion in 2024 dollars), and it was by far the largest company in the U.S. by both number of employees and the value of its assets.

The fall of AT&T

But the billions AT&T was investing in infrastructure wasn’t enough. In the late 1960s and early 1970s, the company was scaling back needed infrastructure investments in an attempt to maintain profits without raising telephone rates. The result was severe delays in getting new telephones connected, and breakdowns in service so severe that the company felt the need to address them in its annual reports. Though it worked quickly to correct the issue, the breakdowns fomented distrust in the company, in an era that was already becoming increasingly skeptical of big business. The company kept advancing technologically: in 1969 alone At&T unveiled UNIX, the first tunable high-powered infrared laser, superconducting alloys, and one of the first text-to-speech programs. But despite these advances, many felt that AT&T was holding back telecommunications progress by restricting what sort of communications equipment and systems it would allow on its network. 

Throughout its life, AT&T had been the subject of antitrust investigations and lawsuits, but in the 1960s these began to accelerate, and by 1977 there were 50 active antitrust investigations against AT&T.

The most devastating of its opponents proved to be MCI, a company that aimed to offer its own microwave-based long-distance phone services, and needed to connect to AT&T’s network in order to do so. In 1974 MCI filed an antitrust suit after AT&T refused to allow MCI to provide a certain type of phone service known as FX lines; more importantly, MCI was able to use its dispute to convince the Justice Department that it should file an antitrust suit against AT&T, which it did in 1974.

The Justice Department case wound through the courts for several years, and in 1982 AT&T lost and was forced to divest its 22 companies providing local telephone service. Today, AT&T still builds large amounts of infrastructure – its capital spending in 2023 was nearly $18 billion – but it’s no longer the unrivaled juggernaut that it was for most of the 20th century.

Conclusion

American life was completely reshaped over the 20th century. Between 1900 and 1970, inflation-adjusted GDP per capita increased by more than a factor of three. Cars, electricity, and indoor plumbing went from rare luxuries to ubiquitous and affordable basic services.

Telephone service followed this same basic pattern. At the turn of the century, the per-capita telephone penetration was about one phone per 60 Americans. By the 1970s, telephones had reached over 90%. Daily phone conversations had risen from just over 2 million in 1900 to nearly 500 million in 1975.

Most of these technology-based advances in prosperity were the emergent result of dozens or hundreds of companies and organizations. No one company was responsible for the spread of cars, electricity, or indoor plumbing; Ford’s car market share peaked at just over 55% and steadily declined after that, and even at its height it wasn’t responsible for building roads, drilling for oil, or refining it into gasoline. The telephone is notable not only for its high sustained rate of progress, but because in the U.S. this progress was almost entirely due to the efforts of AT&T alone. AT&T designed and built the phones, laid the wire to connect them, operated the phone service, and continuously developed technology to improve the system and make it universally available. And it was enormously successful at this goal. Between 1925 and 1981, phones per 100 population in the U.S. rose from 14 to 84, and over the same period, the real cost of a 3-minute coast-to-coast phone call fell by roughly 98%. Tracing the causes behind many cases of progress is difficult, but with telephones in the U.S., we can trace it to the relentless efforts of one single company.

1. Bell would eventually marry Hubbard’s deaf daughter Mabel.