THE CHALLENGE TO THE U.S. POSTAL MONOPOLY, 1839—1851 Kelly B. Olds Over the last decade, government postal systems around the world have been facing Increasing competition largely stemming from the rise of alternative technologies. During the years 1839-1851, the United States Post Office was In a similar situation. Private competition arose that made effective use of railroad and steamship lines. This competition was so sucoess&il that a number of congressmen feared postal service was on theverge ofan Involuntary privatizatlon. Because the monopoly profits garnered by the Post Office were important to politically powerful Interest groups, the federal government did not allow postal service to be prlvatlzecL To eliminate private competition, however, the government was forced to reduce drastically postage rates and adopt many Important reforms. The — system arguably underwent more change In those 12 years than In the rest ofIts history. The Post Office was the largest commercial enterprise In the ante- bellum United States. By mid-century, It employed 20,000 IndIviduals. In 1831, three-fourths of all civilian federal employees worked for the Post Office. By the time ofthe Civil War, that fraction had risen to almost five-sixths (Historical Statistics cf the United States 196th 7, 710). Almost all of the employees were deputy postmasters or clerks. The majority were part-time. An even larger number ofpeople worked under contract or for companies under contract to the Post Office. The contracts were mainly for transportation. The Post Office’s monopoly power allowed It to earn huge profits (or “rents”) on Important mutes because few close substitutes for CatoJounad, vol. 15, No. 1(Sprlng’Summer 1995). Coç~’i1ght 0 Cato Institute. All The author Is visiting Assistant Prokssor of Economics at National Taiwan University. He thanks Stanley Engerman, walter oi, and John waters for their advice. He also thanks those ~o participated In woàshcps at National Tslngjwa University and National Taiwan University for their commel* and Yl-Fen Chang, SM-lang Deng, ware Dunham, and Todd Kunlo&a for their assistance, 1
Transcript
THE CHALLENGE TO THE U.S. POSTALMONOPOLY, 1839—1851
Kelly B. Olds
Overthe lastdecade, government postal systems around the worldhave been facing Increasing competition largely stemming from therise of alternative technologies. During the years 1839-1851, theUnitedStatesPostOfficewas Ina similar situation. Privatecompetitionarose that made effective use of railroad and steamship lines. Thiscompetition was so sucoess&il that a number ofcongressmen fearedpostal servicewason thevergeofan Involuntaryprivatizatlon.Becausethe monopoly profits garneredby the PostOffice were important topolitically powerful Interest groups, the federal government did notallow postal service to be prlvatlzecL To eliminateprivate competition,however, the government was forced to reduce drastically postagerates and adoptmany Important reforms. The — system arguablyunderwentmore changeInthose 12 years than In therest ofIts history.
The Post Office was the largest commercial enterprise In the ante-bellum UnitedStates. By mid-century, It employed 20,000 IndIviduals.In 1831, three-fourths of all civilian federal employees worked forthe Post Office. By the time ofthe Civil War, that fraction had risento almost five-sixths (Historical Statistics cf the United States 196th7, 710). Almost all of the employees were deputy postmasters orclerks. The majoritywere part-time. An even larger numberofpeopleworked under contract or for companies under contract to the PostOffice. The contracts were mainly for transportation.
The Post Office’s monopoly power allowed It to earn huge profits(or “rents”) on Important mutes because few close substitutes for
CatoJounad, vol. 15, No. 1(Sprlng’Summer 1995). Coç~’i1ght0 Cato Institute. All
The author Is visiting Assistant Prokssor of Economics at National Taiwan University.He thanks Stanley Engerman, walteroi, and Johnwaters for theiradvice. He also thanksthose ~o participated In woàshcps at National Tslngjwa Universityand National TaiwanUniversity for their commel* and Yl-Fen Chang, SM-lang Deng, ware Dunham, andTodd Kunlo&a for their assistance,
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mall service existed. In many other countries, the national —service earnedsignificant revenuefor the government’sgeneral fund.In Great BrItain, the expendItures of the postal service durIng the1830s yielded a profit of approxImately 200 percent The U.S. PostOffice returned almost no revenue to the general find. It usuallyreportedlosses. Largeprofits werebeingearned,but theywere distrib-uted internally. GivIngout the postage revenues to groupswIth politi-calpower became thePost Office’s second functIon. Measured mone-tarIly, it was the Post Office’s primary function. Thomas Jefferson,suspicious of the Post Office, had written:
I view [the Post Officel as a source ofboundless patronage to theexecutive, jobbing to members of Congress and theirMends andabottomless abyss ofpublIc money.You wfll beginbyonly appuoprl.ating the surplus of the post-office revenues; but other revenueswill soonbe called In to their aId and It will be a source ofeternalscrambleamongthe members, who can get the most moneywadedIn their states; and they will always get most who are meanest[Jefferson 1892—99: IX, 324—25].
The government resisted subsidizing the Post Office until the 1850s,partly out of fear ofthat which Jefferson prophesied.
The Post Office’s large hidden profits causedvery high postal ratesrelative to the cost of transportatIon. Before the first price reform In1845, the average one-page letter cost 1430 postage (Post OfficeDepartment 1844). It was often noted In the New York press thatone could ship a 200-pound barrel offlour down the Hudson fromTroy to NewYork City for less than one could send a one-page letterover the same mute (New York Tribune, 30 October 1843). The hIghpostage was felt to be oppressive—especially after 1839. In 1839, theBritish reformed their postage system, dropping the postage chargesfrom an average of15c American to a flat rate of20 per letter. Evenmore Important, It was In 1839 that the U.S. Post Office first cameup against significant formal competition.
Privatecompanies deliver mall efficiently and at low rates. To defeatthe prIvate mall and express companIes, Congresswas forced to lowerpostage rates. Rates were lowered to an average of 6.3o per half-ounce letter In 1845. Private competition and — reform agitationwere temporarily checked, but did not cease. In 1851, Congress low-ered postage further, to 3g per half-ounce letter,
Congress managed to avoid the privatlzatlon of— servIces.Private competition, however, permanently changed— servIce InAmerica. Not onlydid It causea drastic reduction In price,but It proved
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the usefulness and profitability of new techniques and services—suchas postagestamps and Intra-cltydellvety—which thePost Office
Operation of the U.S. Post Office
The U.S. Post Office transported consumers’ mall between postoffices. On busy routes, mall was delivered once or twIce a day, butIn smaller towns mail might be delivered as seldom as once evezyother week. Mall service can be considered a special form oftranspor-tation. It was much more expensive than the transport of freIght orpeople. The average cost of transporting a one-page letter In 1843through the Post Office was 14.5o. The average one-page letterweighed .25 ounce and traveled less than 500 miles, so the costexceeded $35 per ton-mile (Post Office Department 1844) or about140 times freight rates on New Engjand stage coaches (Post OfficeMonopoly” 1843: 484). Even the least expensive private mall compa-ides never charged less than 20 on Interelty mall.
The reason for the high cost of— service was two-fold. First,hIgh sorting costs and theobligation to run fixed routes at fixed timescarrying nonoptimal loads raised the cost ofall formal mail seMces.The greatest expense ofregularity came In rural regions where a sulkyor horseman was often dispatched with a handful ofletters. A routethat generated too lIttle revenue compared with Its expenses wassupposed to be cut backordiscontinued but, In practice, the decisionto cut back orabolish a route was often political.
The second and most Important reason for the hIgh cost was thatpostage sewed as a tax. The Post Officemay not have been designedwiththlspuiposelnmlnd,butcollectlngmonopolyrents (I.e., revenuesIn excess of opportunity costs) forpolitically powerful Interest groupssoon became the Post Office’s primary function. SIx groups gainedfinancially from the Post Office: (1) coach contractors, (2) rail andsteamboat companies, (3) postmasters, (4) publishers ofprInted mat-ter, (5) officIals with the frankIng privilege, and (6) rural voters. Therents extracted by those groups accounted for most ofthe mon~— for postage. In what follows, I present rough estimates of themagnitude ofthe rents.
CoachesCoach contractors were a very Influential lobby InWashington. On
the surface, horse, sulky and stagecoach contracts were determinedcompetitively. Routes were auctioned off for fouryears. Allegationswere made,however, that thebIdding oncontracts was rigged. Govern-
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meat treated — contracts as an unofficial means of subsidizingtransportation. Where enough business existed, a coach line couldtransport more cheaply than horse or sulky. In Great Britain, wherecoach transportation was not subsidIzed, the average coach contractcost 50 per mile compared with 5.20 for an average horse or mailcart contract although thecoaches generallycarried more mall (SelectCommittee on Postage 1837-38: XX(2), 251-52). In theUnitedStates~coach contracts cost more than horse and sulky contracts. In 1838the average coach mute cost 9.20 per mile while the average horseor sulky route cost 7.20.
When postage rates were lowered in 1845, the new law also didaway with transportation subsidies. The Post Office was still —discretionary powers In determining the minimum amountof equIp-ment necessary to carry out a given contract, but for the followingtwo years the agency seems to have carried out the spIrit ofthe law.The New England and New York contracts were renogotlated in1845, The new contracts dropped the cost ofhorse, sulky, and coachtransport by 45 percent per mile. The cost of coach transportationfell 49 percent from 7.30 per mile to 3.7~per mile. Lower-gradehors and sulky transportation fell 21 percent from 4.4i~per mile to330. Moreover, coach transportation, which had been used on 76percent ofthe routes, was nowused on only 49 pettent ofthe mutes(Post Office Department 1846). Extrapolatlng. from those results, thePost Office predicted that $1 million could be saved by ending thetransportation subsl4; that Is, nearly half of what was being spentfor horse, sulky, and coach transportation. The saving of $324,000produced In the West the following year—somewhat more than pre-dicted—confirmed the projection. There was some deterioration inservice. The Postmaster General reported that deductions from thepay of contractors for failures and Irregularities In 1846 totaled$26,273, which was significantly more than normal (Post OfficeDepartment 1847).
RailroadsThe federal government had an unstated— of subsidizingrail-
road and steamship companies. Railroads dramatically lowered trans-port costs for the private sector, but the construction of railroadsactually raised the price of mail transportation. In 1838, Congresspasseda law requIring thePost Office to make use ofrailways as longas their charge was no more than 25 percent above the charge ofcoaches offering similar service. Railroad companies further arguedthat coaches couldnot offer“similarservice” becausetheywere slowerthan trains. Some railroad companies, therefore, claImed that they
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were legally entItled to 25 percent more than a coach would chargeif it could travel as quickly as a train (PostOffice Department 1842).In 1843, the Post Office compiled statistics comparing the price —for the firs ar of service on all existing rail lines and the lastyearofcoach service on theline before the railroad took over. On average,railroads cost 87 percent more than the coach service they replaced.The Increase in costs was highest in the South, where the price rose181 percent.
Railroadswere facingaprivate sectorwith elasticdemand.Althoughhauling freightby wagoncost about iSo pertonlmile, railroadschargedthe private sector oüly about 5.50 per tonfmile (North 1913: 108).Thegovernment’s demandwas extremely Inelas&. Officials believedtheyhad a duty to transport mall by railroad or steamboat whereverpossible to— dellveiy. OtherwIse, communications might fell intothe hands of the private sector. The money that was spent simplycame out of other groups’ rents—groups that may have had lesspolitical pull than the railroad and steamboat companies.
To estimate how much this transportation cost, I use figures col-lected by the Post Office In 1843. In 1843, the Post Office spent$800,000 on rail and steam service. Government statistics show thePostOffice transported2 mIllion paying letters and4.3 millionnewspa-pers (IncludIng 160,000 pamphlets) In October of 1843. Lettersweighed approximately .25 ounce and newspapers 2 ounces, so thatthe PostOffice was transporting284.4 tons ofnewspapers and payingletters that month. As explained later In this section, the Post Officealso transported about 15 tons of franked materIal per month, soassuming October was typical, the PostOffice was transporting a totalof almost 300 tons of material each month. If one yen1’ generouslyassumes that the average pound ofmail traveled 500 miles and halfthis distance was covered by railroad or steamboat,’ the Post Officewould have been paying the railroad and steamboat companies anaverage of 880 per ton/mile—16 times the common rate for freightThe postmaster general stated that mail was shipped no differentlythan freight (Post Office Department 1846). Route agents were onsome Important lines by 1837. They sorted mail and thus requiredadditional space (Scheele 1970:43). Even Ifone assumes that trans-porting mall cost 50 percent more than shipping freight, the real costof transportation by rail and steam would have been only $7&500.Private express companies, which competed with the Post Office,— nowhere near as much as the Post Office. For service between
tYewer than 20 percent of payâng letters traveled more than 400 miles. More than ballfraseled fewer than 150 nt (Post Office Depadmesd 1844).
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Washington and Cincinnati or Washington and St Louis in i849,express companies chargedcustomers less than40 per ton/mile (Sen-ate Committee on the Post Office and Post Roads 1849-50: 7).
PattvnageIn the 184th, over 80 percent ofthe nonmilitatypersonnel working
for the federal government were postmasters or postal clerks. Thefact that each newadministration caused heavy turnover in employeesstrongly suggests that service with thePost Office offered more thanmarket wages. Postmasters were offered & proportion of the grossrecelptsatthelrpostofflceandtheabllltytofrankmail. Inthecaseofsmall offices, theabilityto frankwasoftenworthmore than thesalaiy(Congressional Globe 1846-47: Mi). In some cases, a businessmanin town would use his political connections to gain the position ofpostmaster simply for the frank Then he would turn over the workto an assistant who would work for the salary (House Committee onthePost Office and PostRoads i843-44b:9). Some postmasters madeprofits (political, social, or economic) by franldng mail for acquain-tances. Competition for the tents gained through a postmastershipoften wasvigorous.
Whenpostagerateswere lowered, thedeputypostmasters’ commis-Mon was not changed. The amount they received per letter fell bymore than half and they lost their franking privilege. Many of thedeputypostmasterswould not accept this cut and resigned. Thepost-master general adopted temporary measures to raise pay. In 1841,Congress set up the new commission schedule. Under this schedule,payments to postmasters across theboard dropped about 30 percentfrom the pre-1845 level. The PostOffice had no problem finding menwho would work for those rates. Postmasterslnps continued to becountedvaluable spoils. lincoln wasaccusedofbeingmoreconcernedwith fillingpoetmastershipsthanwith prosecutingtheCivil War(Fuller1912: 292).
Printed MatterSubsidizing newspapers was a government policy. It was publicly
argued that thecheaptransmissionofpublic InformatIonwas necessaryto Inform and educate voters. More cynically, the newspapers’ influ-enceonpublicopiniongave greatpoliticalpowerand, thereby, encour-aged the subsl4. Naturally, the public debate, which took place innewspapers, hardly questioned the desirability of low newspaperPOt~:re1845, newspapers — 10 postage for distances under 100
milesand 1.Sc for distancesover that amount. In addition, newspapers
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exchanged between printers went free.t The average newspaper cost1.1~and weIghed 2 ounces. Letters that weighed about one-eighththe average newspaper weight cost up to 16 times as much to mall.In 1843, more than twice as many newspapers were sent through themall as were letters, and these were almost 97 percent of the payingmall byweight(PostOffice Department 1844). Newspapers, however,paId less than 15 percent of the total postage ($536,547 out of$4,249,333). The Postmaster Ceneral informally estimated thatnews-papers had more than half their cost subsidized by letter mail (PostOffice Department 1841). The First Assistant Postmaster Generalestimated In 1848 that the newspapers— two-thirds of their cost(New Yo.*Evening Post, 26 December 1848).Anyestimateofnewspa-per cost must be speculative. In view ofthe above figures, however,theFirst Assistant’s estimate seems reasonably low—1.60. Ifnewspa-pers had been requIred to pay theirproportion by weightofJust thetransportatIon cost (not including the rents), newspaper postagewouldhave averaged more than 2150.
FnznklngThe most constant complaint in the presswas the frankIng privilege
ofthe government and particularly Congress. Because postage couldbe paid by the sender or receiver, mail was franked to and fromWashington. Few could see the need for franldng except membersof government who described franking mail as an onerous duty,Addressingenvelopes took alarge chunkoftime. Asearlyas 1816, JohnRandolph described the House of Representatives as a “bookbinder’sshop” (McMaster 1883—1914: W, 360).
fle frank was blamed for filling the mails with tons of uselessspeeches and other usually unread political material. Furthermore,those possesslngthe frankwereoften accusedofabusingitforpersonalmatters. Supporters back home would sometimes route their privatecorrespondence through their congressionaloffice. Members ofCon-gress would accept and forward letters using the frank as a constituentservice (“Post Office Reform and Uniform Postage” 1844).
Two attempts were made to estimate the amount ofmall frankedIn the early 1840s. In Octoberof 1843, records were kept indicatingthat 130,744 letterswere franked by deputy postmasters, 18,558 werefranked by members ofCongress, and 85,339 were franked by othergovernment officials. Congress was not in session during that month,so congressional franldng was low. While Congress was In session
‘Exchanging newspapen was the pdmaay soince of obtaining nonlocal news before winsat were
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during 1841, a three-week survey ofthe outgoing Washington, D.C.,mail showed that members franked 20,363 letters and 392,268 dccii-ments (mainly speeches). Using the 1841 figure to estimate mailingwithin an average 33-week session, and the 1843 figure to estimateextra-sessional mailing, I estimate that members franked approxi-mately 300,000 letters and 4.3 mIllion documents per year. Deputypostmasters franked 1.5 mIllIon letters, and othergovernment officialsfranked 1 million letters. Persons “well qualified to form an opinionon the subject” believed that half the mall byweight went free (“PostOffice Reform and Uniform Postage” 1844). Ifone includes newspa-pers, that estimate Is untrue, If, however, one Is spealdng solely ofletters and documents, suchestimates were fairly accurate.Assumingthe average single-page letterweighed .25 ounce and October was atypical month for payIng letters, the weight ofthat class ofmail sentIn 1843was 190 tons. Governmentdocumentswere estimatedtowelgh1.25 ounces, so theweight offranked mail sent was approximately 180tons.
Franked mail took as much effort sorting as regular letter mail.Sorting newspaperswas mucheasier, Ifone assumes that a newspapercould be sorted at only a quarterofthe cost ofa letter, then the 7.15million franked Items accounted for $160,000 ofthe total $990,000handling costs. Assumingthe ton/milesoffranksequaled that of lettermail, the cost of transporting hnked mall by rail or steam wouldhavebeen— to thecost oftransportingletter mall—$6,500, ThereIs no good estimate of total transport costs for franked malL Giventhe estimate that 2-ounce newspapers (with little handling cost) cost1.60 each, the transport cost ofthe 1.25-ounce documents probablywould have cost at least .5~each, for a total of$21,500, Total cost offranked material would, thus, be estimated at $188,000. The estimateIs a bit low because there Is no Information on letters received byCongress.
Runjl VotersThe subsidy of rural mutes excited much controversy. Living in
thinly populated areas entaIls higher transportation and communica-tion costs. It Is a common government policy to subsidize the higherrural costs. High-volume mutes between the cities and large townsof the Northeast made sizable profits that were partially spent bypoliticiansin creatingand maintaining unprofitable low-volume mutesfor rural voters. Many, If.not most~postal customers lived in ruralareas, so monopoly rents distributed In this fashion helped othet therents those customers were paying to other rent-seeking groups. Somerural customers mayhave collected more In rents than they paId out
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CHALLENGE TO TIlE U.S. POSTAL MONOPOLY
to other groups, but the real cost of service In even the most ruralstate was but 60 percent the postage raised within that state.
Rural subsidy became an Important regional Issue. In the Norththe relatively Industrial states were profitable, while In the South allstates but Louisiana lost money. In 1843, thePost Office was showingaprofit of$372,892 In therelatively urbanized stateofNewYork ThIsrepresenteda profit ratio of62 percent. Meanwhile gross revenues of$15,503 In North Carolina and $125,862 In Alabama covered only50 percent and 58 percent of total expenditures respectively.3 Thatphenomenon led Northern radicals to count high postage rates asanother oppression perpetrated by the Southern slavocracy (Cincin-staff WeeklyHerald, 6 September 1843, 17 November 1843, 16 August1844; and Rochester Daily Democrat, 16 July 1844).
There Is no accurate way to determIne by how much urban areassubsidized rural areas. The postal statistics collected for Congress dorecordthe amountofsubsIdy themore urbanized statesofthe North-east were providing the rest of the countiy. In 1843, the seaboardstates from Massachusetts to Maryland earned atotal revenueof$1.92million. Expenditure In the region was only $1.28 million. Thus, 33percent of what postal patrons — In postage was a subsidy to theremaining states. The remainingstates earned only $1.19 million, tooffset just 74 percent of their expenditures of $2.42 million (PostOffice Department 1847—48).
Totaling the RentsThe estimates I have made are rough. They suffice to show the
general magnitude of the rents distributed, which Is all that can bedone given existing data. Evidence from thepost-1845 cost reductionsIndicates that horse, sull9’, and coach contractors received prices thatwere at least 90 percent above market prices as a subsidy. Railroadand steamboat companies received much greater subsidies. Even Ifone assumes that something special about mail caused It to cost 50percent more than regular freight to ship, thecompanies would stillhave been exacting rents 1,000 percent over costs.
Finally, politically appointed deputy postmasters were receivingcommissions 30 percent greater than those later found sufficient.Those figures assume that after reform (1) coach contractors andpostmasters were no longer receIving sizable rents and (2) deterIora-tion In service was Insignificant. Table 1 shows that given those
‘These Post Office figures cots the tents extracted by the other rent-seeking greupsas expenditures.
Total $3,751,000 $1,089,000 $2~662,000‘The total received for all mall Is taken from the 1845 report of the Postmaster General.The method for determining how much of the total Is rent Is that used In the teat. Costsandrents for letter mall melgused usingthe following assumptIons (1) the average letterpostage Is 14.50. (2) theaverage newspaper postage Is 1,io, (3) twIceas many newspapersas letters ate mailed, (4) newspapen me be handled for aquarter of the cast of eitherletters or franks, (5) each newspaper Is subsidsd * and(6) there are1.3 mIflion —of franked mat
estImates, almost 59 percent of letter postage — went as rents tothe three groups.
The total effect ofthe subsidy ofprinted matterand franldng wasthat the 25.9 miUlon letters, weighIng 190 tons and paying $3.76millIon, had to support 59 million more Items, weighing3,407 tons andonly paying $569,000. This situation amounted to at leasta $437,000subsidy, whIch was an additIonal 11.7 percent of’ letter postage.
Thus, morethan 71 percentofthe consumers’ letterpostage(includ-ing the rural voters) was being distrIbuted as monopoly tents. Due
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to the subsidypaidrural states,monopolyrents were at least81 percentof the postage — In the seaboard states from New Hampshire toMaxyland. Even Inthe remainingrural states,61 percent ofthepostagepaidwasmonopoly rentbeingdistributedto one ofthefive grot~ps(notIncludingrural voters).4 The rentsthe U.S. PostOfficewasdistributing,relative to Its size, were similar In magnitude to the profit the pre-1839 BrItIsh— service produced more openly. The fact that thePost Office was extracting the rents made It possible for smallercompanies to compete successfully In mall dellveiy.
The Challenge to the Post OfficeThe Post Office had always faced Informal competItIon. As steam-
boats and raIlways spread, the competition Intensified. Vety often,people with letters to send would go to the railroad station or thesteamship dock. They would find a respectable-looldng gentlemangoing the same place as the letters they wished to send and ask himto carry them. He would either drop them at the post office wherethey could be picked up for a penny apiece or else leave them atsome other central locationagreed upon where they couldbe pickedup withoutcost (HouseCommittee on thePostOffice and PostRoads1843-44c: 3; Post Office Reform and Uniform Postage 1844). Inthatway, therewas no tax to pay, the sender bore the sorting cost himself;and there wasno extra cost ofsending a man wIth a non-optImal load.For the convenienceof theircustomers, hotels and tavernswould setout boxes In which letters for various cities could be deposited. Theboxes would thenbe sent alongwith travelers (“New RatesofPostage”1843: 510; Rochester Daily Democrat, 2 AprIl 1844).
Informal mall service was also Important for personal letters travel-ing between theEast and the frontier. Long-distance postagewas250per sheet and MIdwestern farmers were often strapped for cash.Personal letters were kept until an acquaintance happened to betraveling the right direction and then entrusted to hIm (New Yo,*Evening Post, 25 November 1843).
Among businessmen in big cities a semiformal system developedin winch any businessman sendIngan employee toanother city wouldput up a sign notI~rIngothers who would bring over their mall. Largemerchants could send mail almost daily between Boston and NewYork by those mutual agreements. The New Yot* Evening Post (16February 1843) reporte& “Merchants ofstanding declare that ofallthe letters they receive from Boston, Albany and Philadelphia. four-
Th1a assumes that thepropoallon ofcosts to tents was constant aauss states.
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fifths come by prIvate hand, free of expense, and not by malls orexpresses.”
Private mail contractors were legal as long as theydid not competewith Post Office mutes. The Post Office did not service areas thatwere too thinly populated. A writer In the New Yot* Evening Postdescribes how hIs rural neighborhood had hired a contractor topicicup mail In the nearest town and deliver It weekly. In WIsconsin, thePost Office had refused a mute to a stIll thInly populated area so agroup ofIndividuals agreed with the Post Office to manage the mutethemselves In return for the postage the mute earned (New Yo.*Evening Post, 29 January 1844). In the western United States, It wascommon for express companies to open up mail mutes to minIngcamps and Isolated towns In advance of the Post Office (Scheele1970: 30—31).
The U.S. Post Office began facing formal competition In 1839. Aconvenient rail and steamship mute had recently been opened andWIllIam F. Harnden begana New York to Boston express. Harnden’senterprise proved a success and withIn months a number of otherexpress companIes, using prImarIly rail and steam mutes, had openedIn Imitation. Business focused on the densely populated Northeastbut quicldy spread to major cities throughout the United States andCanada. OrIg$nally, the expresses specialized In transportIng moneyand packages. That was legal. Soon, however, letters were being sentpiggyback within packages ofgoods, and boxes of letters were beIngshipped between cities. The express companies themselves began toaccept “packets” that were essentially equivalent to letters. Theirservice was cheaper and reputedly quickerand safer (New Yo.* Eve-ning Post, 18 February 1843 and2 October 1843).In November1843,Adams and Co. were brought to court on the charge of transportingletters outside the mall. The law, being written before the age ofsteam, was aimed specifically at private foot and horse posts. In acontroversial decIsion, theJudge ruled that the law did not apply torail and steamship posts (New Yot* TrIbune, 12 AprIl 1844), ThIsdecision was immediately hailed as a trIumph for free enterprIse andlater heralded asthebegInning of”anewera InourRepublic” (BostonEvening Transcrfpt, 27 July 1844). Private mall companies began tobe formed openly.
The most controversial business was the American Letter MallCompany, organIzed by Lysander Spooner. Spooner was not abusi-nessman but a radIcal political reformer. He set up a mail servicebetween New York Boston, PhiladelphIa. and Baltimore partly tomake money but maInly as a challenge to the constitutionality of thepostal monopoly. The ArtIcles of Confederation of 1778 had vested
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the Congress with the “sole and exclusive rIght [of] ... establishingand regulating post offices” (Art. IX). The Constitution had simplygranted “the power to establish post offices and post roads.” Thislanguage led many, IncludingJustice Joseph Story, to doubt whetherthe power the Constitution gave to set up posts and post reads wasIntended to be exclusive (Spooner 1971: I, 21; Priest 1975: 45—48).Spooner argued the postal monopoly was unconstitutional and in hisnewspaper advertisements he offered to cooperate with the govern-ment in bringIng the Issue In front of the Supreme Court If thegovernment would leave hIs company unmolested until the Issue wassettled (New Yo,* Tribune, 20 January1844),The Postmaster Generalwas unwIllIng to cooperate, and Spooner was driven out ofbusinessafter sIx or sevenmonths due to fines, legal expenses, andtheIrregular-ity ofhIs mall caused by government seIzure (Spooner 1971, I: 14).Spooner also may have lost business to more efficient firms. Whilehe riled the federal government with his “Impudence” (House Com-mittee on the Post Office and Post Roads 1843-44a), other mallcompanIes—more Intent on making a profit than makIng a point—kept a low profile and flourished.
The most successful private mail company was that of James W.Hale. Hale first worked for an express company on the Boston-NewYork mute and formed hIs own post office about the same dine asSpooner formed his. Hale, Spooner, and most other private mallcarriers charged 6.25 cents per stampor 20 stamps for $1.00. UnlIkethe PostOffice,which did not use stamps, private companies requIredpayment of the sender. Hale’s area ofdelivery was New Englandandthe Eastern Seaboathas far south as Baltimore, InJanuary 1845, aftera year In business, his company had grown to 84 post offices and had260 employees (Boston Evening TranscrIpt, 10 January 1845). Thiswas still much smaller than the Post Office, which had 1,100 officesIn New England alone. Many small Imitators of Hale existed In theNew England area. A contemporary visiting Boston In August 1844reporte& “All along Court street on both sides ofState street, andalmost cheekby — with the government post office, you see theseprivate establishments for the transmission of letters and printedIntellIgence betweenthe chiefcities on the sea board, and from themto the principal towns far In the Interior” (New Yot* Ewnlng Post,3 September 1844). Mall companies sometimes cooperated. Smallcompanies would maintain ties with big companies to enlarge thearea of service (Bulkey 1978: 477-81).
Henry Wells, later ofWells Fargo, ran the most extensive serviceIn upstate New York In company with Pomemy and livingston. Inthis area, letters to New York City had generally cost 250 per sheet.
13
(1kmJoutwa
The newpriceofSo generated great enthusiasm. Meetings wereheldIn Lockport and other towns calling for a boycott ofthe Post Officeuntil It quIt harassIng the private carriers and lowered its own ratesto a competitive level (New York Evening Post, 8 August 1844). HenryWells’s company faced charges In the cIrcuit court. The Post Officeobtained convictions against Hale and Spooner In Pennsylvania andMaryland, but no Jury In New York or New England would convIct.Southern andWestern citieswerealreadyserved by express companies(New York Evening Post, 28 July 1843), but Wells’s Letter ExpressCompanywas the first companyspecIalIzIng solely In letters to extendbeyond theNortheast. For100 per letter, It served the cities a~oInIngthe Great Lakes as far as Duluth, Minnesota (Stimson 1851: 62-63;Scott’s 1992 SpecIalizedCatalogueof UnitedStates Stamps 1991: 283).
Rising competitionstirred up calls for postagereform. State legisla-tures had been petitioning for postage reform as — as 1838. Thepostal reform movement became Important after Its first big NewYork CIty meeting In November 1843 (New York Tribune, 25 Novem-ber 1843 and 27 November 1843). The reform movement amongconsumers, prImarIly businessmen, was strongly Influenced byeventsin BrItain.
The British postal servIce had ceased to grow after 1815. Privatepostal service had become widespread. In 1838, Rowland Hill causeda stir by proposing that the government adopt one low postage ratefor all distances based on weight He further proposed that postagebe paId with the purchase ofa stamp. Hill argued that the postalmonopoly was not maximIzing Its profits. He argued that a drop Inpostal rates to a penny (20 American) would Increase volume to suchan extent that wIthin a fewyears, profits wouldrise. Hisplan seemedtooffer greatbenefits to consumers without seriousharm to governmentprofits. In 1839, BrItish postage was cut to 20 for .5 ounce. Thefollowing year thevolume of mail Increased by 122 percent and thencontinued to rise. Costs Increased only 13.5 percent the first year.The postal service remaInedprofitable, but Its gross receiptspercapitadId not regain theIr 1839 level for over a decade.
Post Office officials argued that postage could not be lowered Inthe UnIted States because the population was much more dispersedthan In Britain. The British postal service was cushioned by Its largeprofits, but a fall In revenueIn theUnited States would forceacutbackin rents. The Post Office proclaimedthat the first rent-seeking groupcut would be the rural voters In the South and West. If that did notbalance the budget, the shortfall would be made up by higher tariffrates. Such tactics won the Post Office strong support In many ruralstates. Consumer groups counteredby pointing out that theprolifera-
14
CHALLENGE TO THE U.S. Pos’rAL MONOPOLY
don of private mail services alret4’ was causing a great drop Inrevenue. The government might have the legal power to shut downthose services, but It was unwilling to face the political Ire such anaction would Incur (House Committee on the Post Office and PostRoads 1843-44c: 5). The consumer groups welcomed such servicesbut preferred a cheap universal government service. ReformersInsisted that demand for postal servicewas elastic and promised thatlow postage rates would cause revenues to increase over the long run.Any Immediate shortfall could be met by eliminating patronage andthe frank (New York Tribune, 8 December 1843, 15 January 1844,and 6 December 1844).
In March 1845, Congress passed a law that lowered postage ratesto 50 per .5 ounce under 500 miles and lOc per .5 ounce over 500miles. Those were roughly the rates private companies charged. Thelaw also closed loopholes to more effectively protect the governmentmonopoly and tripled the fine for violations, The new ~‘stemwentinto effect July 1, 1845. The express companies announced theywouldno longerhandle letters (Daily PIcayune, 8 July 1845). Most of theprivate mail companies seem to havegone out ofbusiness. Reports ofcontinuedprivate service included companies that delivered betweenlarge cities and the surrounding towns for 2o (New York EveningPost, 29 November 1845), a fast high-price letter express linkingmarkets In NewYork City and New Orleans (New York Evening Post,29 January 1845; Post Office Department 1846), and private routesIn New Hampshire (House Committee on the Post Office and PostRoads 1847—48: 27).
One type of private mail company remained legal. That was thecity dispatch or penny post Post roads ran betweencities, not wIthinthem, so private malls delivering Intracity mall were legal. An earlierIntracity post had been established In late 1839, but It did not deliverto and from the post office and soon failed (Abt 1949a). The first suchsuccessful American company was the City Despatch Post In NewYorkCity. This companywasopenedby Alexander M. Grieg In Febru-my 1842 and was purchased by the government after a few monthsIn operation. In June 1844,JohnB~,dopenedanotherprivate intracitydelivery servIce. He began with twice-daily door-to-door deliveriesand soon expanded to four. He collected from over 200 drop stations,gradually Increasingthenumber to approxImately2,000. He undercutthe City Despatch Post’s price by a penny and soon drove them outofbusiness. Boyd’s Intracity delivery service, along with that ofD.O.Blood in Philadelphia, became a model for hundreds of similar ser-vices, In thelate 1840s, a dozen serviceswere competing for businessIn New York City alone. At this time, havIng a letter picked up and
15
Cno Jouiu~a
delivered cost only 20. HavIng a letter taken to or delivered from apost office cost a penny (Abt 1949b, Abt 1950).
Sometime during the late 1840s, express companies once agaInbegan delivering letters between major cities In the Northeast (PostOffice Department 1849). They now provided the service for 20 perletter (CongressIonal Globe 1850-1851: 234-36). I found no detailsconcernIng this service. Earlier experience had taught private mallservices to be very discreet. In spIte of the renewed private service,Post Office revenues were Increasing. Patronage, franking, and trans-portation subsidies had been trimmed. Congress was pleasedwith theIncrease in revenues brought about by the 1845 price cut and wasworried private competItion might once more begIn to flourish. In1851, therefore, Congress once more cut postage—thIs time to 30per .5 ounce for any distance (except mall to and from the WestCoast). The PostOffice wasgiven the right to declare city streets postroads. Almost all private Intracity delivery was eliminated 1860.The business established by Boyd in New York Is possibly the onlyexception (Abt 1950: 371—SO).
The Effects of CompetitionThe U.S. Post Office found the express andmail companies aserious
threat. The Committee on Post Office and Post Roads reported InMay of 1844:
Events are In progress of fatal tendency to the Post Office Depart-ment and Its decay has commenced. Unless arrested by vigorouslegislation, It must sooncease toexist as aself-sustaining Institution,and eItherbe cast on the treasury for support, or suffered to declinefrom year to year, till the system hasbecome Impotent and useless[House CommIttee on the Post Office and PostRoads 1844:2].
The pressure ofcompetition from private firms was responsible forbringingaboutlower postage rates. Itwas alsoresponsible forchangingthe nature ofpostal service. Private companies Introduced payment-by-weight, prepayment, postage stamps, and home delivery to theAmerican market. Those reforms were adopted afterward by thePost Office.
Private expressesbit Into Post Office revenues almost Immediately.Post Office revenues per person peaked In 1839 and continued todecrease until after the 1845 reform. Determining how much ofthedecrease was causedbyprivate competition and howmuchwascausedby the 1839-43 recessIon Is not possible. From 1830 to 1839, PostOffice revenue per person grew 7.2 percent per year. By 1839, Itreached 26.9o per capIta. It fell to 21.3g In 1845 when government
16
CHALLENGE T~THE U.S. Posta MONOPOLY
postagewas finally lowered (see FIgure 1). Unfortunat4 there Is nodirect evidence as to the amount of mall delivered privately, so anyestimate of the scale ofprivate mail service must be speculative, Ifone assumes that overall postal services per person did not grow atall from 1839 to 1845, the figures would show that private enterprisehad taken over 20 percent of the market as measured by revenue (atU.S. Post Office prices), Ifone assumes that the lower price ofprivatemall stImulated the market for mall service so that It grew 5 percentper year, forexample, then the figures would show that private enter-prise had gaineda much greater 40 percent market share. From 1839
FIGURE 1REVENUE AND EXPENDITURE OF ThE Posr OnIcE, 1825—1860
I~.4o
I
60
- - - - Expenc*ure
I
I
80I’
20
101825 1830 Ii
17
CA’ro JOURNAL.
to 1844, revenueIn all regIonssuffered. As shown in Table 2, revenuefrom the Gulfstates fell farthest. Until theearly 1840s, the Gulfstatesspent more money on postage per free IndivIdual than any otherregion. A high percentage ofGulfmail was to and from the NortheastBefore the adventof theexpress companies, the Post Office probablyfaced less Informal competition on those long mutes than on theshorter Eastern routes.
Private malls began to flourish toward the end offiscal year 1844and lasted through fiscal 1845. The drop in Post Office revenue percapitaduring thatyearcentered InNewYork and Includedother Mid-Atlantic states and southern New England. Although the economywas strong in that year, New York State postal revenues dropped
rates in 1845 from an average of14.50 toan average of 6.30 caused an Immediate drop In revenue per capitaofonly 21 percent. WIthin three years the Post Office was running asurplus and within five years postal receipts per capita were back atthe 1845 level. From 1846 to 1851, postage revenue per capita grew9.7 percent per year. The short-term fall In revenuesput the squeezeon those who were capturing rents from the postal system. Of them,onlythe newspapersgained. (Newspapers delivered less than 30 milesbecame postage free. That privilege was revoked In 1847.) Publishershad generally supported lower postage and had either convincedlawmakers that what was — policy forletters would also be —policy for printed matter, or else had simply Impressed lawmakerswith theirpolitical Influence. Railroad and steamboat companies alsomanaged to maintaIn their rents, as did rural voters. The groups thatsufferedwere thestagecoach contractors, governmentofficials outsideof Congress, and deputy postmasters. As previously noted, reformmeant an end to the official policy ofsubsidizing transportation. Suchsubsidies were not endedcompletely, but theywere drastically scaledback In the Northeast and West and were trimmed elsewhere, ThepolitIcal power of the coach contractors seems to have beeneclipsedby that ofthe railroads. Congress also ended franldng privileges forall groups except themselves. Deputy postmasters were bit hard bythe reform. They were paidby commission. TheIr earnings per letterdeclined with the cost ofpostage.
The second reform, In 1851, was not as evidently successful. In1845, growth in postal revenues per capita had been in decline withlittle hope for reversal without major reform, In 1851, in spite ofrenewed complaInts against private express companies, Post OfficebusIness was booming.The cut in rateto 30 for all letters again causedonly a 21 percent drop In revenues. Revenue per capita returned to
Its 1851 level by 1860, and the price cut was Sled as a success, Ifthe government’s goal, however, was to nmud,,4nt, revenue or biddenprofits, It Is not evIdent that this price cut succeeded.
The price cut in 1845 showed that demand was least elastic in theSouth. Revenue fell much more sharply here than elsewhere (seeTable 2). Overall, there appear to have been fewer substitutes forPost Office seMce in the South. The industrial states’ subsIdy of themore rural Southern mutes became larger after 1845, but Southernpoliticians were unhappy with the cutback in transportation subsidies.Reformers realized that the quick growth of— revenue madegetting another reform bill through Congress much more difficult.
To sidestep opposition by rent-seekinggroups, the law included asection dIrecting the Postmaster General not to cut back services.My shortfall In revenue was to be met by money from the generalfund (House Committee on the Post Office and Post Roads 1847-48:73).The newlaw broke down the firewall that had restrIcted rents andgave the rent-seeking groups access to the general revenue.Jefferson’sfears proved true. Transportation expenditures, particularly In theSouth, rocketed. In 1845, opponents of postal reform had predictedthat cheaper postage would mean throwing the support of the PostOffice on theTreasuiy. The Charleston Mercunj had prophesied thatthis change would destroy the Post Office’s financial responsibilityand that “In ten years you will have It cost you ten millions ofdollars”(House Committee on the Post Office and Post Roads 1847-48: 26).
The predIction ofthe Mercury was madetrueafterthe 1851 reform,The Post Office’s expense was $9.97 million in 1855. By 1860, postalexpenditures of $19.2 million dwarfed the $8.5 million earned. Eastof the MississIppi. transportation costs per mile had risen from 5.9cIn 1850 to 10.00 in 1860. The 1851 reform fundamentally changedthe nature of thepostal monopoly. Before 1851, the six rent-seekinggroups drew their money from high postal prices that acted as a taxon letter writers. After 1851, the money was distributed through thePost Office but came largely from the general revenue. The greatIncrease in subsidies the change entailed indIcates that the politicalcost ofredistributing money from thegeneral revenuewas significantlyless than taking It directly from letter writers.
Besides driving down Post Office prices, private companies intro-duced a number of reforms that originated in Great Britain. Privatemail companies first introduced to the United States the practice ofcharging mail by weight. This practice was Imposed on thePost OfficeIn 1845, although the Postmaster General remained uncomfortablewith the newprinciple (PostOffice Department 1846). An Importantaspect of the pay-by-weight plan adopted was that the generous
CHALLENGE 10 mE U.S. POsTAL MONOPOLY
.5-ounce allowance for single postage made the widespread use ofenvelopes possIble. Another Innovationwas a simplified scale of -
age. Hill had pointed out that the cost of transporting mail Inover large distances was extremely low so charging by distance wasnot cost effectIve (Coase 1939). Great Britain, therefore, adopted aflat 2o rate. Private mail companies in the United States beganwitha flat rate and moved to a two-tier system. In 1845, the Post Officebegan Imitating that system and In 1851 adopted a flat rate.
The simpler rate ~tem combIned wIth prepayment led directlyto the use of stamps. Prepayment had been optional and little usedIn the United States. Complaints ofletters not reaching theIrdestina-tionwere common andpayment on delivery wasan Incentive to betterservice. Private mail companies Insisted on prepayment They thuslowered handling costs by — stamps and avoided the loss due tounclaimed letters. Customers accepted prepayment in a competitivesystem. If the company failed to deliver, the recourse was to givesomeone else one’s business. After 1847, the Post Office began touse stamps, but stamps did not become standard until 1856—oneyear after prepayment was made obligatory.
Finally, private mall companies began home and office deliveries.In theUnited States, government letter carriers deliveredout-of-townmail in the largest cities for 2o per letter, but the first Intraclty mailservices wereprivate. Privateintercitymail companies made apracticeofdeliveringdoor-to-doorfree within the towns andcities theyserved.Private mail companies could not afford small rural post offices, soto extendtheftcoverage theyoffered to deliver to anyresidence wIthin30 miles of one oftheir post offices for an extra 50 (Rochester DailyDemocrat, 13 August 1844). Between 1851 and 1860, the Post Officegraduallytook overthe Intracitybusiness inthe most populous centers.Door-to-doordelivery waseventually made free and extended to largetowns. The Post Office did not imitate the rural service ofthe privatecompanies. Rural delivery was not attempted until the turn of thecentury, when It was finally offered as a free servIce.
ConclusionIn the first halfof the 19th century, the federal government’s legal
monopolyover themall was a monopolyover all intercltycommunIca-tion. Informal and Illegal channels ofcommunication had alwaysexisted, but their Inconvenience and limited scope allowed the PostOffice to earn huge monopoly profits. The government’s policy ofrunnIng the Post Office on a “nonprofit” basIs sImply channeled therents (profits) to powerful political groups who were In a posItion to
21
CATO JOURNAL.
draw dIrectly from the Post Office coffers. Those profits gatheredfrom the U.S. Post Office were ofthe same magnitude as the profitsearned more openly by the British postal service.
The transportation revolution lowered thecost ofInterclty transpor-tation and communicationIn the 1830s and 1840s. Private companiesmet the change by offering low-cost transportation and communica-tion. The Post Office, facing no formal competition, at first kept Itsprices fixed. As costs dropped, monopolyprofits increased. Theprofitsbecame large enough to drawcompetitors despitethe legal risk. Thatcompetition, and pressure from consumer groups, caused the PostOffice to lower Its rates In 1845 and 1851 by 79 percent.
The effect of private competition went beyend the drop In postagerates. An equally Important effect was the introduction ofnew tech-niques into the U.S. market. The most important Innovations wereprepayment with stamps and Intraclty pickup and delivery. The PostOffice towed no sign ofadopting such Innovations until they weresuccessfully used by private companies.
A private — system was probably not a realistic possibility.Privatization would have led to an 80 percent cut In federal cIvilianemployees and the loss of thousands of lucrative transportation con-tracts. Some rural areas may have frced hIgher postage prices, andpoliticians played that threat to the hilt. If rent-seeldng groups couldhave been bought offwith sIde payments, private companies mightpossibly have made communications in the United States more a-dent; such side payments were never attempted.
ReferencesAk, H.E. (1949a) “The New York Penny Post The Beginning of the Story.”
The Collector’s Club PhilatelIst 28(2): 100-105.Ak, liE. (1949b) “Boyd’s CIty Express Post.” The Collector’s Club P1*41st.-
Ak, H.E. (1950) “Boyd’s CIty Express Post” (cont.). The Collector’s ClubPhIlatelist 29(1-6),
Boston Evening Transcript (1844) 27 Ju~(1845) 10 January.Bulko>’, C. (1978) “Hale and Company: The Independent Mall Post
1844—1845.” The American PhIlatelist92(5): 477—81.Cincinnati Weekly Herald (1843) 6 September, 17 Novemben (1844) 16
AugustCoase, 11.11. (1939) “Roland Hill and The Penny Post” Economica
6(24):423-35.Congressional Globe (1846-47)29th Congress, 2nd SessIon.Congressional Globe (1850-51) 31st Congress, 2nd Session.D4. Picayune (New Orleans) (1845) 8J4Fuller, W. (1972) The American MaIL Enlargerofthe CommonLife. Cbicago
UnIversIty of ChIcago Press.
22
CHALLENGE TO In U.S. Posra MONOPOLY
IfIstot*’al Statistics of the Ikalted States: Colonial Times to 1957 (1960).WashIngton, D.C.: U.S. Government PrInting Office.
Jefferson, T. (1892-99) The WritIngs ofThomas Jefferson. New York C. P.Putham’s Sons.
McMaster,JB. (1883-1914) A Hlstonj ofthe People ofthe Uàlted States.New Tone Appleton and Co.
“New Bates of Postage—The Franldng Privilege and Its A.buse—Swe Sue-cess of the Cheap System—Reasons for Its Adoption? (1843) The NewWodil (177): 510—12.
Priest, G.L (1975) lIre History of the Postal Monopoly In the UnItedStates.” Journal ofLaw and EconomIcs 18(1): 33-80.
RochesterDaily Democrat (1844) 2 AprIl, 16 July, 13 AugustScbeele~C.H. (1970)A Short Hlstonj ofthe Mall Service. WashIngton,D.C.:
Smithsonian Press.
of United States St~ (1991) S,Select Committee on Postage (1837-38) “AppendIx to the Second Report
Select Committee on Postage.” Parliamentary Session Papers,
Spooner,L (1971) The Collected Wos*sofL~jsanderSpooner.Weston, Mass.:M&S Press.
Stlmson, LI. (1851) The History ofthe Express Business. New York A.L.Stimson.
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CAT0 JOURNAL
U.S. Congress, House Committee on the Post Office and Post Roads(1843—44a)“Report on Violation of Post Office Laws.” House Report 228,28th Congress, 1st Sessiot
U.S. Congress, House Committee on the Post Office and Post Roads(1843-44b) “Minority Reporton Postal Service.” Rouse Report477,28thCongress, 1st SessIon.
U.S. Congress, Rouse Committee on the Post Office and Post Roads(1843-44c) “Franking Privileges and Rates of Postage.” House Reporta 28th Congress, 1st Session.
U.S. Congress. House CommIttee on the PostOffice and PostRoads (1844)“Report on PostalService.” Rouse Report477,28th Congress, 1stSesslot
U.S. Congress, House Committee on the Post Office and Post Roads(1847-48) “Report on Postage and Post Routes.” House Report 731,30thCongress. 1st Set
U.S. Congress, Senate Committee on the Post Office and Post Roads(1849-50) “Report on Bill to Reduce Postage.” Senate Report 148, 31stCongress, 1st SessIon.
