Back to top

Chapter 2 - Background

2.6 Alexander Graham Bell and Bell Telephone Co. -- 1873-1878

Alexander Graham Bell (1847-1922) grew up under three strong influences. First there was Edinburgh, a city alive with a renaissance of scientific and technological progress.225 Graham226 would forever be the mechanic, the tinkerer, the believer in man’s ability to understand and shape nature. Next was the Scottish-Calvinist moral philosophy that taught hard work brought its own reward. Graham was intense at work, not for money, but because it was in him. Third was his family, especially the consequences of its tradition of service for deaf-mutes. Graham too would became an elocutionist as had his father and his father’s father. All this was in the character of Graham when, at the age of eighteen, he left for England to study and teach elocution.

In London, Graham met Alexander J. Ellis, president of the London Philological Society, and translator of Hermann von Helmholtz’s On the Sensations of Tone. Ellis repeated Helmholtz’s experiment of vibrating tuning forks with electro-magnets and electrified wires. To Graham, it was like magic and inspired images of a musical telegraph. His ignorance of telegraphy, rather than discourage him, motivated his self-education. In 1869, he met Sir Charles Wheatstone, England’s Samuel Morse. Sir Wheatstone, fifty years his elder and an expert in telegraphy, inspired in Graham the nobleness of invention, an attitude he maintained, even in his darkest days, of which there would be many before discovering how to propagate human voice through a metal wire.

Graham moved with his family to Brantford, Ontario, Canada, after the death of his second brother from tuberculosis. Also of weak constitution, after resting and regaining his strength, Graham and his father began giving lectures throughout eastern Canada and the United States on a technique developed by his father known as Visible Speech – a technique for visualizing and replicating any speech or language. Hearing of Graham’s success with deaf-mutes, the Boston Board of Education offered him five hundred dollars to practice in Boston, and in April 1871227 , Graham left for the country that would in a year become his new home.228 Boston, as had been his childhood Edinburgh, was alive with entrepreneurial and inventive energy, an ideal environment for a motivated young inventor. But first came serving as Professor of vocal physiology at the Boston School of Oratory.229

Before long Graham began experimenting to invent a musical telegraph – also known as a harmonic telegraph. The objective was not to propagate music, but to send and receive Morse codes on multiple tones at the same time.230 If made to work, it was a sure sale to Western Union Telegraph Company (WU), as it would significantly increase the message traffic a telegraph wire could support231 He knew others had the same idea, especially the famed inventor Elisha Gray. In 1873, Graham had to begin tutoring private students to supplement his meager income.

Over the summer of 1874, Graham experimented with skeletal bones from a human ear. He marveled at the ability of the small membrane to transmit sound through the much larger bones. It seeded the seminal idea of a membrane, with a small piece of metal inducing sounds in much larger piece of metal, such as a long wire. Both essential insights to his yet defined objective of a telegraph that could transmit human speech. That Fall, Graham began his long and productive association with Thomas Watson, at the time an employee of Charles William Jr.’s Telegraphic instrument manufacturing company. (Even Thomas Edison once worked there.)

Two of Graham’s students then proved catalytic. Their fathers, on learning of Bell’s efforts to invent telegraph patents, provided him capital in exchange for a share in the rewards of patent successes. Thomas Sanders232 would become the shallow-pocket venture capitalist; for two years he also provided room and board and the use of his basement as a laboratory. Gardiner G. Hubbard, the very same who had lobbied Congress for a national charter to compete with WU, came a few months later. Hubbard, a lawyer, became the business leader. He was also the essential link to Washington, just as Fog Smith had been for Samuel Morse.233 A collective of three now existed – one inventing, and two standing ready to commercialize successful patents – presumably by selling them to WU. On February 27, 1875, the collective signed an agreement that has become known as the Bell Patent Association – it really had no name existing only as a contract. Graham, Hubbard and Sanders each held third interests. (In September 1876, Watson would be granted ten percent.)

It was at this same time that Graham confided to Watson:

Watson, I have another idea I haven’t told you about that I think will surprise you. If I can get a mechanism which will make a current of electricity vary in its intensity as the air varies in density when a sound is passing through it, I can telegraph any sound, even the sound of speech.234

Graham, as a consequence of his father’s Visible Speech, literally saw speech moving through wire – undulations – as it would through the air. This perspective was unique among the inventors of the time, and proved crucial. When Graham told Hubbard and Sanders his idea of transmitting speech, they responded in the strongest terms against wasting time on what they thought was but a toy. Telegraphic inventions were where the money was to be made.

In March, looking for moral support as much as technical guidance, Graham called on Joesph Henry, America’s leading scientist, inventor of the electro-magnetic telegraph and secretary of the Smithsonian Institution in Washington D. C.235 On telling Henry of his ideas for transmitting human voice and demonstrating an early prototype, Henry told him he had the germ of a great invention. When Graham confided he lacked the needed understanding of electricity, Henry’s long remembered, and inspiring, response was GET IT.236 (Just as Morse had to.)

Graham began working ever longer hours, neglecting his tutoring and teaching. On June 2 and 3, 1875, he and Watson transmitted speech sounds – not intelligible words, just sounds – and without using a battery.237 They burst into joy and their celebrated war dance, certain they were on the right path. Graham in a letter to Hubbard of June 2 wrote:

Dear Mr. Hubbard, – I have accidentally made a discovery of the very greatest importance in regard to the Transmitting Instruments……..I have succeeded to-day in transmitting signals without any battery whatever!238

That September Graham began writing what would become the patent for the telephone, or, as it was known at the time, the “speaking telegraph.”239 Not until February 14, 1876, however, did Hubbard file Graham’s patent for reasons of money and the strategy to file for foreign patents at the same time. The critical last phrase reads:

The method of, and apparatus for, transmitting vocal or other sounds telegraphically….by causing electrical undulation, similar in form to the vibrations of the air accompanying the said vocal or other sounds.240

No where is there the mention of speech. Two hours later, Elisha Gray filed a caveat241 – a declaration of having invented but not yet having a working prototype. It read:

I..have invented a new art of transmitting vocal sounds telegraphically of which the following is a specification. It is the object of my invention to transmit the tones of the human voice through a telegraphic circuit, and reproduce them at the receiving end of the line, so that actual conversations can be carried on by persons at long distances apart.242

On Graham’s twenty-ninth birthday, March 3, 1876, his invention was allowed as U. S. Patent No. 174,465 – arguably the most important patent ever recorded. On March 7th, it was issued. On March 10, late at night, testing a new transmitter design – the liquid transmitter243 – Graham, spilled some of the liquid acid on himself and shouted – “Mr. Watson, come here; I want you”244 – and Watson, down the hall in another room, heard him over yet another of their strange telegraphs”. The telephone had been invented.245 Graham’s patent would make for a generation of patent lawyers, for from 1878 to 1888, when the Supreme Court ruled on five appealed cases Graham’s patent legal, Bell had to file over six hundred lawsuits. In every one, Graham’s right to the patent was affirmed.

The first working telephone – the gallows246 after its wooden casing – was crude compared to a modern telephone. For example, the transmitter and receiver were the same, with users having to shout against a metal membrane to speak, and then press their ear against the same metal disk to hear – only pressing just right for it even to work. It was one way, taking awkward and mutually coordinated gymnastics to carry on a conversation. The first two-way communication would not occur until October 9.247 The gallows was also strictly local. Not until November 26 would conversation be sustained at the distance of sixteen miles.248 And then there was the quality, or more accurately, the lack of quality.

Nonetheless, what a marvel – voice traveling through metal. Graham and his friends began to spread their news, hoping to create excitement for their invention. On May 10, 1876, Graham lectured and demonstrated his speaking telegraph to the American Academy of the Arts and Sciences in Boston.249 Two weeks later he did so for the Society of Arts at the Massachusetts Institute of Technology. Hubbard, a Commissioner of the upcoming grand Centennial Exposition in Philadelphia, then arranged for Graham’s toy to be displayed on a small table of the Department of Education. There it sat, unnoticed and ignored for weeks, until Sunday June 25,250 when, at the end of a long hot day, the fifty or so judges approached to inspect yet another entry.

The Centennial Exposition was staged deliberately in Philadelphia – the birthplace of the proud country’s founding documents: the Declaration of Independence and the Constitution.251 In the Machinery Hall were displayed the most innovative applications of steam power and electricity252 – to highlight the state, and future, of science and industry. But to the judges standing before the speaking telegraph, thoughts of dinner and the evening ahead were more important than understanding yet another mystifying object. Having already seen the stars of the show – Edison’s first electric light, Gray’s musical telegraph, the first grain-binder, and an impressive exhibit of printing telegraphs from WU253 – the judges were more than prepared to give brief look at Graham’s toy. And then in a drama only history could stage, the Emperor of Brazil, Dom Pedro de Alcantara, stepped forward: Professor Bell, I am delighted to see you again.254 The Emperor, a fellow advocate for the deaf-mute, had visited a class of Graham’s in Boston, and was now ready to experience the speaking telegraph. On demonstration, he exclaimed: My God – it talks! Next came Henry, who had encouraged Graham with his brief Get It: This comes nearer to overthrowing the doctrine of the conservation of energy than anything I ever saw. Then Sir William Thomson, the future Lord Kelvin, the foremost electrical scientist of the day: It does speak. It is the most wonderful thing I have seen in America.255 The next day it was moved to the head table and became the great Yankee invention.256

But not until the “apparatus” – the sender/receiver – was perfected would more than a suggestive prototype exist. So back to the laboratory attic went Graham and Watson. On January 15, 1877, Bell filed his apparatus patent. On January 30, 1877, U.S. Patent No. 186,787 was issued. By yelling loudly into it, one could be heard as far as twenty miles away.257 (For a brief non-technical discussion see Appendix 2.3 How the Telephone Works.)

Having in hand the necessary patents for a telephone, Hubbard tried to sell them to WU – the price: $100,000; roughly $2.8 million in 1988 dollars.258 The telephone was neither new, nor uninteresting, to WU executives having tracked telephony developments from as early as July 1875.259 Even so, they placed little, if any, value in what they saw or learned from Hubbard, believing as was custom that businessmen would want a written record of any communications, and its customers were businesses. More than likely Hubbard’s involvement was a negative, because he had caused WU so much grief in 1873 when he tried to garner Congressional support to start a competitor. For whatever reasons, WU turned Hubbard down. They then signed an invention agreement with Thomas Alva Edison, the foremost inventor of the time, to invent a better transmitter.260

The cold reality of rejection then hit them. If they – Graham, Hubbard, Sanders and Watson – did not develop the market for telephones, it was unlikely anyone else would, and their patents would lapse into worthlessness. Graham’s vision that one day “a telephone in every house would be considered indispensable”261 painted too attractive an economic opportunity to abandon. So they decided to launch the business on their own – to become entrepreneurs.

Bell and Watson started giving lectures with demonstrations262 to promote the telephone, and, hopefully, to find investors to finance the large company thought necessary. Press they got – iron circuits were described as one day connecting the nation together.263 Dollars they did not. Sanders continued to contribute cash as he could, but his resources were already stretched thin.

Among their earliest decisions was: How were they going to sell and price telephones? The telephone posed a fundamental problem – it was trivial to make. Anyone could make one; that is once they had seen a working model. How then were they going to prevent others from simply ignoring their patent rights and make and use telephones? Hubbard then made a seminal contribution. Still practicing law, Hubbard had a client that made shoe-making equipment. What had impressed Hubbard was that they did not sell their equipment, but put it out on lease, with the lease payments determined by the number of shoes made.264 Applying this same technique – leasing telephones, not selling them – Hubbard saw how to have absolute control over the distribution and use of the telephone. Leasing gave reason to keep track of who had legal telephones, and who did not, for every rightful lessee had to make regular payments, not simply a one time purchase. Leasing also carried the responsibility of service, and the right to replace telephones, presumably with better ones, as needed or competitively motivated. The telephone remained the property of the lessor, of the Bell interests. In May 1877, they began leasing two telephones to individuals for $20 a year and to businesses for $40 a year. Customers were responsible for stringing their own connecting wires.

The telephone business started out then as leasing pairs of telephones to individuals or businesses needing to communicate frequently between two locations. These point-to-point connections, or circuits, consisted simply of two telephones and connecting wire. No concept of a network existed. The paradigm was circuits.265

Hubbard’s clever solution of leasing phones still required more money to execute than they had. For instance: How were they going to find customers? Hubbard then contributed another critical idea – licensing, or franchising, independent agents to lease the telephones, and even construct the needed connecting circuits.266 The agents would bear the expenses of selling and installing telephones, with their profits coming from a share of the telephone lease payments – 40 percent the first year, 20 percent thereafter267 – and from constructing the connecting lines. The Bell Patent Association had only to identify and contract with agents, and then supply the telephones to be leased. Hubbard, who had made it his business to know anyone and everyone interested in telegraphy – a group certain to have interest in the telephone – proved a natural when it came to signing up agents, his personal network becoming the prime source of early agents.

In that same month, May 1877, a propitious experiment was conducted in Boston by an entrepreneur from within the same small, community known to Graham. Edwin T. Holmes, the enterprising son of the inventor of the burglar alarm, strung wires from his office to several other locations. His phone could then be switched to any outgoing circuit. Regarded as the first working example of a telephone switch, Holmes next began offering messaging and delivery services to those with connections. It became known as a “district system.”268 The next logical innovation was to make a switch that could connect any two remote locations with each other. If possible, the economics and utility of having a telephone would improve dramatically. Sanders immediately began promoting the economic potential of switches as a means to raise needed investment capital.

No longer would the simple contractual relationship of the Bell Patent Association suffice, they needed to create an organization. On July 9, 1877, Hubbard formed a Massachusetts unincorporated association – the Bell Telephone Association, Gardiner G. Hubbard Trustee; capitalization: $300,000.269 (How much cash was made available is uncertain, but it wasn’t much.) Hubbard became the dominant executive both by dint of personality and because Graham, in assigning all his rights over to Mabel Hubbard, his speech student and new wife as of two days later, July 11, gave Hubbard de facto control.270 Further reflection of Graham’s desire to withdraw from the building of the business, in early August, he and his bride Mabel left for Europe where they spent the next year.

Hubbard began signing agents as fast as he could, and by November, 3,000 phones had been leased.271 The growth in activity and expenses left the Bell Telephone Association drained for cash. The financially-pressed Sanders had found investors – but only if Hubbard conceded his absolute power and authority. Hubbard stubbornly refused, despite the rumored entry of WU.

That Fall, in London, Graham wrote of the future of telephones for a prospectus meant to stimulate entrepreneurial action in the U. K. to commercialize the telephone. After first stressing the telephone’s uniqueness as being simple to use and usable by anyone, in contrast to the telegraph which required mastering Morse code and the operation of the telegraphic instrument, he wrote of its future:

I believe, in the future, wires will unite the head offices of the Telephone Company in different cities, and a man in one part of the country many communicate by word of mouth with another in a distant place.

Believing as I do…that such a scheme will be the ultimate result of introducing the telephone to the public, I will impress upon you all the advisability of keeping this end in view, that all present arrangements of the telephone may be eventually realized in this grand system….272

The grand system seemed an impossible dream given the existing circuit paradigm of telephony.

In December, WU, with its Gold and Stock Company subsidiary273 losing private telegraph lines to the telephone, concluded that it had to enter the telephone business. It formed the American Speaking Telephone Company (WU-AST),274 as a subsidiary of Gold and Stock. WU-AST then exchanged its common stock for the telephone patents of a number of inventors, including Elisha Gray and A. E. Dolbear. It also extended its agreement with Edison. WU-AST, the $40 million giant, brashly announced that it had the “original” telephone and was ready to serve everyone. WU-AST was not going to let Graham’s patent, referred to derisively as scrap of paper,275 stand in the way of its success. As the news of WU’s entry spread, agents that had just months earlier scrambled to invest their moneys in Bell Telephone Association licenses began having second thoughts. Did the Bell Telephone Association have either the original patent, or the money, to withstand the assault of WU-AST?

In January 1878, the first commercial telephone switch – or “exchange service” – was established by George Coy, a telegraph manager in New Haven, Connecticut.276 It was an immediate success. Even though he had known of Holmes’ experiment since May, Watson only then began developing a switch for the Bell Telephone Association – eight months later. It proved to be a much more challenging product to develop than Watson had assumed. He needed time, so Hubbard began urging agents to establish district systems as an interim strategy until they could provide a switch. Many of the more entrepreneurial agents began using switches innovated by independent inventors – creating a problem for the future.

The switch changed the telephone business forever. It no longer sold private line circuits, but connection to switches. Switches, however, entailed a significant up-front capital investment by the agents – the “fixed” cost of a switch being required to establish even one circuit. These new costs had to be passed on to the users and initially averaged $5 to $6 per month – making the total annual costs to a business per telephone roughly $100. Even so, it still took years to recover the switch investment. The agents who bore these new, and unexpected, capital costs and risks, demanded protection from competition in the form of a local monopoly – which the Bell Telephone Association could grant by contract since they owned the property rights. The utility to the user came from the ability to connect to every one else; ideally, everyone would have a telephone and be connected to the same switch. Competition – multiple switches serving the same population – resulted in lower utility to the telephone user, since to connect to everyone required multiple telephones. (In the future this same utility argument will be invoked to justify the telephone monopoly as in the public’s best interest.)

The introduction of the switch also resulted in a “race to occupy the field.”277 Given the argued logic for local monopoly, the successful telephone company would be the one offering service, i.e. having the monopoly, in all major cities. The pace of introducing telephone service became dictated by the need to have market coverage, not by Hubbard’s ability to find and sign agents.

In February 1878, Hubbard relented to the demands of the existing New England agents and new investors. In a compromise, a new company was formed that would have the exclusive rights to use or dispose of the Bell patented telephone in the New England states.278 The New England Telephone Company (NETC) was capitalized at $200,000, but only $50,000 of cash, telephones, and necessary tools remained in NETC. (Half of the stock went to the new investors and half went to the original patentees for certain exclusive rights.279 The stock had to be distributed because the Bell Telephone Association could not hold stock in other corporations.) The model of local companies financed and managed by local investors and entrepreneurs who offered exchange services with geographical rights to the Bell patents had been innovated. Hubbard was president of NETC, but the real operating authority shifted to George L. Bradley, who had led the financing and became the new general manager.

The importance of interconnecting the switches of the operating companies was already understood, as Hubbard inserted in the license agreement:

Insomuch as said parties and their successors and assigns have a common interest in the working of continuous and connecting lines extending outside of New England, the said parties agree that they will endeavor to cooperate in the establishment of connecting lines and in the joint working of the same, and the division of the expense and the profits thereof pro rata upon some equally fair and equitable basis.280

Another rule only experience could give meaning. Implied as well was another effort at cooperative behavior among like-kind organizations.

The cash crisis of the Bell Telephone Association proved merely deferred, for in March, Sanders was again sounding the alarm for money. Hubbard had added to his financialcrises by agreeing to help fund the expenses of the Chicago agent – a one Anson Stager, President of Western Electric Manufacturing Company281 , now the manufacturer of product for WU-AST.282 Changing agents did not help – the financial drain persisted. The pressure on Hubbard to concede even more power and authority in order to secure new financing continued to grow.

  • [225]

    Robert V. Bruce, in Pursell, p. 106

  • [226]

    My convention will be to refer to Bell the man as Graham, and leave the use of Bell to reference always an organization – and there were hundreds of them. The best biography of Graham is: Robert V. Bruce, Bell: Alexander Graham Bell and the Conquest of Solitude, Little, Brown and Company 1973

  • [227]

    Some sources have this date as 1870. See: A History of Engineering and Science in the Bell System, p.2

  • [228]

    Herbert N. Casson, “The History of the Telephone,” A. C. McClurg & Co., Chicago, 1910, p. 21

  • [229]


  • [230]

    Coon, p. 20. J.B. Stearns of Boston would receive $250,000 from WU for a duplex telegraph patent.

  • [231]

    The amount of traffic a communication channel can support is known as bandwidth. A multiple channel telegraph increased the telegraph’s bandwidth. The means of sub-dividing the available bandwidth into multiple bandwidths is also known as multiplexing: a technique that will become important in computer communications.

  • [232]

    Coon uses the spelling Saunders.

  • [233]

    When the institutions of capitalism are in flux, as was beginning to happen in 1873, strong connections to Congress where the new rules of competition were created was an essential organizational competence.

  • [234]

    M. D. Fagen, A History of Engineering and Science in the Bell System: The Early Years ,” Bell Telephone Laboratories, Inc., 1975, p. 6

  • [235]

    Brooks, p. 44

  • [236]

    J.E. Kingsbury, The Telephone and Telephone Exchanges, Longmans, Green, and Co., London, 1915, p. 40 The bold quote is as Graham wrote it in a letter to his parents of March 18, 1875.

  • [237]

    My reading of history is that this was not the first instance of speech sounds having been propagating over telegraphic wire. That honor belongs to Philip Reis in 1860. See Aitken p. 21

  • [238]

    Rhodes, pp. 38-39

  • [239]

    Reich 130

  • [240]

    EB 2:827

  • [241]

    TBD Gray was not a citizen??

  • [242]

    William Aitken, Who Invented the Telephone?, Blackie and Son Limited, London, 1939, p. 89

  • [243]

    Fagan, p. 11 Many instantiations were being made to find a working model. It was largely trial and error, for the theory was yet to be understood. The liquid was the acid.

  • [244]

    Stone 35

  • [245]

    Interestingly, three days after the patent for having done it had been issued.

  • [246]

    Fagan, p. 9

  • [247]

    Fagan, p. 15

  • [248]


  • [249]

    Ibid., p. 13

  • [250]

    Ibid. The same day as General George Armstrong Custer’s famous stand. Brooks, p. 51

  • [251]

    Over 8 million people visited the Centennial.

  • [252]

    Garnett, p. 1

  • [253]


  • [254]

    Herbert N. Casson, The History of the Telephone, A.C. McClurg & Co., 1910, p. 38

  • [255]

    Ibid, p. 40

  • [256]

    Garnett. p. 2

  • [257]

    REICH 132

  • [258]

    Reich, p.132. Price calculated using the Composite Commodity Price Index. The timing of the overture to WU is disputed in historical works.

  • [259]


  • [260]

    Oslin, p.221

  • [261]

    Robert Garnet, “The Telephone Enterprise,” The John Hopkins University Press, 1985, p. 12

  • [262]

    The first was February 12, 1877. Graham would receive a $1,000 for ten lectures. Casson, p. 49

  • [263]


  • [264]

    The practice of charging customers by the number of phone calls made is not far in the future.

  • [265]

    The study of this book is in part how this paradigm was replaced.

  • [266]

    The use of intermediaries to promote telegraphy as well as construct telegraph circuits was well established – a practice also used in railroad development.

  • [267]

    Gartner, p. 14

  • [268]

    Garnet, p.21

  • [269]

    Stone, p. 40-41 Other eminent writers have this date as August 1, Coon, and August 4, Oslin.

  • [270]

    When the 5,000 shares of stock were issued, they were held as follows: Thomas Sanders and Mabel Hubbard Bell, 1,487 shares; Gardiner Hubbard, 1,387 shares; Thomas A. Watson, 499 shares; Gertrude Hubbard, 100 shares; Charles Hubbard , 10 shares; and Alexander Graham Bell, 10 shares.

  • [271]

    Gartner, pp. 16-17 Authors note: An economy emerging from the longest depression in history was undoubtedly aiding Hubbard’s efforts.

  • [272]

    Fagan, pp. 21-23

  • [273]

    The Gold and Stock Company, or Gold and Stock Telegraph Company,provided financial prices, i.e. stock ticker prices.

  • [274]

    Reich, p.133

  • [275]

    Paine, p. 102

  • [276]

    Gartner, p. 22

  • [277]

    Gartner, p. 32-33

  • [278]

    Stehman, p. 8 It should be remembered that 1877-78 was the end of a perilous economy with many losing money on their railroad investments and unwilling to consider another risky investment.

  • [279]

    Garnett, pp. 19-20

  • [280]

    Horace Coon,American Tel & Tel:The Story of a Great Monopoly 34-5.

  • [281]

    Western Electric was the successor to Gray and Barton, an electrical appliance manufacturer founded by Elisha Gray in 1872.

  • [282]

    Gartner, p. 24