Telephone Collectors International
When Western Electric Secretly Controlled Kellogg
|First Posted Aug 4, 2001|
Last update May 14, 2015
From the July 2001 issue of Singing Wires
In 1901 Milo G. Kellogg, the founder of Kellogg Switchboard and Supply Company, became seriously ill. He boarded the train and headed for the milder climate of California where it was supposed he had only a short time to live. He executed a power of attorney giving full authority to run KS&S to his trusted brother-in-law, Wallace L. DeWolf. DeWolf then secretly sold Mr. Kellogg's stock to representatives of AT&T with neither the knowledge nor consent of Mr. Kellogg. Unfortunately, for Mr. DeWolf, Mr. Kellogg got better....
by Roger Conklin
Milo G. Kellogg was one of the true telephone pioneers. He began his career in 1872 as a design engineer with Gray & Barton, a Chicago manufacturer of telegraph equipment whose primary customer was Western Union Telegraph Company. Western Union also had its own shop in Ottawa, Illinois. In this same year, Western Union sold its Ottawa shop to Gray & Barton. The consolidation of Western Union's Ottawa shop into Gray & Barton resulted in its re-incorporation into a new company known as Western Electric. Western Union became a minority stockholder in Western Electric. Western Union branched out from its traditional role as the principal US telegraph company and established American Speaking Telephone Company to compete against American Bell Telephone Company. Western Electric became the manufacturer of telephone equipment for Western Union. Mr. Kellogg became one of the principal telephone design engineers at Western Electric and was awarded a number of important patents. By 1880 Mr. Kellogg had moved up through the ranks to become superintendent of Western Electric's Chicago shop. In 1881 Western Union gave up competing with Bell to concentrate its efforts in the business it knew best, that of being a Telegraph Company. Western Union sold its 1/3 interest in Western Electric to American Bell Telephone Company. As part of that deal Western Electric agreed to sell its products only to American Bell (which in 1899 was renamed American Telephone and Telegraph Co.) and thereby became its primary source of telephone equipment.
In 1893 Bell's basic telephone patent expired. Literally dozens of companies were "waiting in the wings," some to launch their competing telephone products and others to start Independent telephone companies. Some had launched their products earlier, but were generally ham strung with patent lawsuits by Bell that limited their ability to continue. Milo G. Kellogg resigned his position as superintendent of Western Electric's Chicago shop and in 1897 founded Kellogg Switchboard & Supply Company to supply telephones and switchboards to the new Independent telephone companies which, with the expiration of the Bell patent, were springing up all across the country.
A brilliant engineer, Mr. Kellogg continued to develop new concepts and transform them into successful products to be made by his own company. He was responsible for developing the divided multiple switchboard which made it possible for a single switchboard to handle as many as 24,000 lines. Prior to this, the maximum any switchboard could handle was 10,000 lines. Kellogg's high-capacity switchboard attracted the immediate attention of several new independent telephone companies being organized to compete against Bell in large cities where large-capacity switchboards were fundamental for success. Joining Kellogg in his endeavors were several prominent telephony experts, including Kempster B. Miller, who became Kellogg's Chief Engineer. In 1904 Miller authored "American Telephone Practice," the most comprehensive text book on telephony written up until that time and still considered one of the classics of all time. This book became the "Bible" for everyone in the telephone business, both Bell and Independent. I first discovered Miller's book when, as a student of engineering at the University of Michigan in 1952, I found a well-worn copy in a used book bookstore and bought it for the princely price of 50 cents. From the name written on the inside cover, I learned that my copy had once been the property of an engineering professor by the name of R. D. Parker.
Just 2 years after Kellogg Switchboard & Supply Co. opened its doors; its switchboards were supplied to Kinloch Telephone Company just getting started to compete against Bell in St. Louis, Mo. Within its first year, Kinloch had surpassed Bell by over 1000 subscribers to become #1 in that city. Its Kellogg switchboard was capable of terminating and switching more lines and connecting many more calls than Bell's switchboard. Bell, with good reason, was terrified at the almost instant success of this new competitor.
In the 10 years between 1893 (the year Bell's patent expired) and 1903, Independent phone companies experienced phenomenal growth. Starting from zero, they had grown to two million subscribers. By that year Bell had 1.27 million subscribers. Independent telephone companies served six out of every 10 telephones in the US. Bell's market share dropped from 100% to 40% in just 10 years. The owners and operators of Independent companies competing with Bell, or planning to launch competition in large cities all over the country, flocked to St. Louis to see first hand the "miracle" switchboard supplied by Kellogg. Kellogg had patented its innovative designs. Orders began rolling in from everywhere, including overseas. Almost overnight Kellogg had skyrocketed from nothing to become an extremely successful manufacturer of telephones and switchboards.
The elation of Independent telephone companies in having access to modern equipment that allowed them to excel over Bell in providing high quality telephone service became a matter of deep concern back at the headquarters of American Telephone and Telegraph Co. Kellogg was clearly a leader among many new entrants in the business, capable of supplying the advanced higher-capacity switchboards to give these Independents a clear and distinct advantage over the Bell companies in their primary markets: the big cities of the United States. As in the days of the infamous Babylonian King Belshazzar, the handwriting was on the wall for all to read, Kellogg's switchboards posed a grim threat to Bell's ability to survive against its Independent competitors in the large cities of the United States.
In 1901, Milo G. Kellogg became seriously ill. He boarded the train and headed for the milder climate of California where it was supposed he had only a short time to live. He executed a power of attorney giving full authority to run Kellogg Switchboard & Supply Company to his trusted brother-in-law, Wallace L. DeWolf.
What happened during the ensuing months is one of the most sinister stories of intrigue in the annals of telephone history. Although Western Electric and the Bell System were deeply involved in this intrigue, not one word of this was ever publicly acknowledged, let alone mentioned, in any Bell publication or book on the history of AT&T. As far as AT&T was concerned, it is as if it never happened. But happen it did.
In June 1903, the startling news broke that Mr. Kellogg's controlling interest in the company he founded and which bore his name was now owned by AT&T. Mr. DeWolf had secretly sold Mr. Kellogg's stock to representatives of AT&T, with neither the knowledge nor consent of Mr. Kellogg. Kellogg knew nothing about nor had any part in the deal. In fact he lay helpless on what was thought to be his deathbed in California while his brother-in-law hatched the plot with those who had the most to gain by destroying Kellogg Switchboard & Supply Co. The facts only became public knowledge as a result of a suit instituted by several of Kellogg's minority stockholders who, when they found out, sought to have the sale set aside.
One of the conditions of the sale of Mr. Kellogg's stock was that the transaction was to be kept secret. Mr. DeWolf would continue to be the president of Kellogg, just as if nothing had changed. Quoting from Harry B. MacMeal's 1934 book "The Story of Independent Telephony," the plan, more accurately described as "the plot," was as follows:
"The object was simple. It was desired to load the Independent operating companies with Kellogg Equipment. Some of the most vital parts of this apparatus were at that time in suit under claims of patent infringement brought by the Bell company and Western Electric Company, the manufacturing branch of Bell. "Unless the suits were properly defended, the Bell and Western Electric companies would be in a position to shut down every company using the apparatus. With Bell secretly in control of Kellogg, there would be only a mock defense of these patent suits, judgement would enter for the plaintiff, the infringing apparatus would be seized and scores of Independent operating companies with millions invested in plants would be forced out of business..."
The objective was, in one fell swoop, the literal destruction of Bell's principal Independent telephone company competitors. Kellogg was to be the sacrificial lamb. Nobody outside of Bell's top executives and Mr. DeWolf would ever know. Everything was moving in strict accordance with the plan. There were untraceable rumors that somehow Bell had become involved in Kellogg, even though the deal had been consummated with the utmost secrecy. Kellogg's sales managers, executives and other company officials denied these rumors, truly believing them to be totally false. A major switchboard contract opportunity came up for supplying equipment to Kinloch Telephone Company to launch a second major challenge against Bell by building a new telephone system in Los Angeles. A second opportunity was to supply equipment for the new Frontier Telephone Company, which was preparing to launch competing telephone service in Buffalo, New York. Both companies came to Kellogg. They clearly needed the very best switchboards and cutting edge designs if their new operations were to compete successfully against Bell. Kellogg was in a unique position to supply the equipment they needed. Both of these companies had strong financial backing and represented serious potential threats to the Bell companies already operating in these cities.
The owners of these Independent telephone companies had heard "the rumors." Under no circumstances could they risk signing contracts for Kellogg equipment if Kellogg had become a dummy corporation controlled by Bell. Kellogg's sales personnel laid the cards on the table with Mr. DeWolf. He denied that Bell controlled Kellogg. DeWolf prepared and signed a written statement assuring these potential customers and the whole world that the Bell company was not in control of Kellogg. Based on this document and with the personal assurances of Kellogg executives Kempster B. Miller and F. J Dommerque, both of these telephone companies awarded their switchboard contracts to Kellogg. Cuyahoga Telephone Company also contracted with Kellogg for a similar large-capacity switchboard for its new Cleveland, Ohio exchange.
It was later revealed that DeWolf's statement was technically true, because Mr. Kellogg's stock had been sold, not to AT&T, but to its agents. It was also revealed later that the money with which these agents had purchased Mr. Kellogg's stock came directly from AT&T's treasury.
Enos Barton, president of Western Electric, was a man Mr. Kellogg had known since the two of them had grown up together in Adams, New York. They had also been classmates in college. Earlier in his career, Kellogg had worked for Barton, first at Gray & Barton and then at Western Electric. Mr. Kellogg had always regarded Barton to be a personal friend and a man of impeccable integrity. It was later revealed that it was Barton who had represented the Bell interests in the secret negotiations with Mr. DeWolf for the purchase of Mr. Kellogg's controlling stock in Kellogg Switchboard & Supply Co.
Eighteen months after the secret deal had been consummated, a patent infringement suit was brought by Western Electric against Kinloch Telephone Company in St. Louis. Kinloch was the first major competitive challenge launched against a Bell monopoly in any large city, so the outcome of this lawsuit was extremely important to Bell. Kinloch's successful launch was like a steam roller in taking subscribers away from Bell and signing up new subscribers in that city. Within just 2 years Kinloch had over 1,000 more subscribers than Bell in St. Louis. The lawsuit by Western Electric was, in reality, a "trial balloon" involving certain minor patents that had been infringed by Kellogg in the supply of the switchboard to Kinloch. The lawsuit was against Kinloch, but it was Kellogg, although unnamed in the lawsuit, that was the real defendant under its guarantee to Kinloch. Representing AT&T in the lawsuit was Frederick P. Fish, president of AT&T. Representing Kinloch in the lawsuit was the eminent jurist Judge R. S. Taylor and Francis Dunbar, Kellogg's patent expert, both under a retainer from the Kellogg Company. The preemptory judgement was denied, but the presiding judge granted some measure of relief to the plaintiff by ordering Kinloch and Kellogg "to alter the switchboard equipment forthwith so as to avoid infringing on the Bell patents." Kinloch and Kellogg complied with this ruling. Some years later, it was Mr. Kellogg who personally informed the judge who had rendered the final verdict on this case that, at the time of the trial, Bell, as the plaintiff, was actually the owner of Kellogg, the implied defendant. This judge was the first person outside of the immediate circle of those involved or otherwise concerned to learn that Bell controlled Kellogg when this suit had been brought.
One completely unanticipated and unexpected event occurred to cause the collapse of this carefully contrived and highly secret plot. Mr. DeWolf received a telegram from California. There is no evidence that there had been any contact at all between Mr. Kellogg and Mr. DeWolf since Mr. Kellogg had fallen ill, turned over responsibility for running Kellogg to Mr. DeWolf and headed to California. Transcontinental telephone service did not yet exist. (It was not until January 25, 1915 that Alexander Graham Bell, in New York inaugurated transcontinental service by calling his old associate, Thomas Watson, at the other end of the line in San Francisco.) So there was no way for Mr. Kellogg to contact Mr. DeWolf except by mail or telegram. One can only suppose, given the circumstances, that Mr. DeWolf could have thought that a telegram from California might have been to inform him of the awaited and expected death of Mr. Kellogg. But this was not the message of the telegram he received. When he opened the envelope, the telegram inside was from none other than Milo G. Kellogg. He had not died. Much to DeWolf's shock and surprise, the essence of the telegram from Mr. Kellogg was that his health was much improved and that he was preparing to leave for the station to board the train for the long journey back home to take over where he had left off. He requested that Mr. DeWolf take the train from Chicago and meet him in Denver, about the half-way point, so that Mr. Kellogg could be brought up to date on how his business was doing.
Both DeWolf and Kellogg traveled to Denver, Kellogg from the west and DeWolf from the east. When they met, DeWolf broke the news: Not only did Mr. Kellogg no longer control Kellogg Switchboard & Supply Co., but he no longer was the owner of even one single share of Kellogg Stock. DeWolf had sold everything to a trust controlled by executives of Western Electric Company and its parent, AT&T. One can only imagine how shocking this news must have been to Mr. Kellogg. Nowhere is it revealed in anything that I have been able to find what happened to Wallace L. DeWolf subsequent to this Denver meeting.
Mr. Kellogg did not acquiesce in these circumstances. Back in Chicago, Kellogg privately entered into personal contact with the principals of the trust that now controlled Kellogg. Mr. Kellogg pleaded with these individuals to return his stock, offering to pay a sum that exceeded the purchase price. Enos Barton, president of Western Electric and the former Adams, New York childhood friend of Kellogg, remained unmoved by his plea. The answer was simply and firmly "no." Finally, Kempster Miller and F. J. Dommerque, as minority stockholders representing only themselves, wrote a letter to F. J. Fish, president of AT&T, pleading for reasons of common decency, that the stock be sold back to Mr. Kellogg. (See their letter on the next page.) Mr. Fish did not delay in answering this letter. He was unmoved by their pleas. He denied there were any ethical issues. He also stated that the minority stockholders had no business trying to interfere in this, a done deal. He, in effect, told them to keep out of it and mind their own business.
Charles A. Pleasance, in chapter 6 of his 1989 book "The Spirit of Independent Telephony," describes in great detail the events as they unfolded and those which followed. For those interested in greater details, I highly recommend this book. Other sources of information are Harry B. MacMeal's 1934 book "The Story of Independent Telephony," and Paul Laskey's book "A Fight with an Octopus," published in 1906.
In the face of the totally negative response from Mr. Fish, Miller, Dommerque and other Kellogg minority stockholders instituted a suit filed in June 1903 against AT&T. It is interesting that Milo G. Kellogg, the person who had been so grievously wronged, was not a party to this suit. The basis of the suit was the claim that the purchase of Mr. Kellogg's shares by a trust controlled by AT&T tended to suppress competition, and should therefore be declared illegal and void.
The judge of the Cook County Court rejected the suit. His decision was appealed to the Branch Appellate Court of Cook County, which upheld the judgement of the Cook County Court. The case was then appealed to the Supreme Court of the State of Illinois. In its opinion handed down on October 23, 1906 by Judge Windes, it reversed the findings of the two lower courts, stating that reason for the purchase of Mr. Kellogg's stock was for the purpose of controlling a rival company and was indeed to stifle competition. The purchase was therefore illegal and declared null and void. AT&T was ordered to return the stock illegally acquired to its rightful owner at the same price AT&T had paid for it. The judgement stated that if the certificates were not surrendered, they were to be canceled and replaced by new certificates. AT&T appealed this decision to the Appellate Court where there was disagreement with part of the findings of the Supreme Court. The minority stockholders then carried the case back to the Illinois Supreme Court, which, on Friday, February 19, 1909 sustained the prior decision of Judge Windes and affirmed his decree in its entirety. AT&T chose not to appeal this decision to the US Supreme Court.
Mr. Kellogg returned the purchase price paid for his stock and once again resumed control of Kellogg Switchboard and Supply Company. After 8 years of belonging to the AT&T - Western Electric trust, Kellogg was again an Independent company controlled by its rightful owners. Bell had controlled Kellogg for 8 of its first 12 years of existence.
Perhaps, having read this story, it will be easier for those of this generation to understand the reasons why, in the early days of telephony, there existed such strong feelings of animosity between the Bell organization and the Independent telephone companies and their manufacturers. It was a fight for survival by both sides.
But over the years relations between Kellogg and Bell improved. Kellogg even became a sub-contractor manufacturing magneto telephones for Western Electric and continued to supply additional switchboard positions for the expansion of hundreds of Bell exchanges that had been acquired from their original Independent owners.
"Last week we were informed by Mr. F. W. Dunbar that since January, 1902, the control of Kellogg Switchboard & Supply Company has been in the hands of the Bell telephone interests, of which you are the head. We have since had opportunity of reading much of the correspondence that has passed between yourself and Mr. E. M. Barton, representing the Bell interests, and Mr. M. G. Kellogg and his advisor, Judge R. S. Taylor. We therefore feel fairly well posted on the situation.
"We learn from this correspondence, three facts of special significance - First: The sale was made during Mr. Kellogg's prolonged severe illness, without his knowledge or consent, and against his wishes and interest.
"Second: A condition of the sale, imposed by your interest, was that the matter should be kept a secret, and that ostensibly the Kellogg company should be Independent, although its policy was to be directed entirely by you and your associates. Even Mr. Kellogg himself, who had owned far more than a controlling interest in the stock, did not know of the sale or its contemplation until 6 months after its consummation.
"Third: Mr. Kellogg has exhausted every means to get back his stock, or a control of the company, even at a price that would have netted your interests a large profit on the transaction.
"All of the above information came as an unqualified surprise to us last week, and revealed a condition of affairs we had never conceived as existing, or as being possible. We write you of the matter, not in a spirit of anger, but as fair-minded men, deeply interested, believing that you will be no less fair-minded. If in this letter we `call a spade a spade,' it is done advisedly and simply because we believe the conditions warrant such a use of English terms.
"During the time elapsed since the passing of stock into Bell hands, we two have, more than any others, come into contact with the public, particularly in negotiating for large contracts for the Kellogg company. In such negotiations we have been continually met with rumors and statements, assiduously circulated by our competitors, to the effect that the Kellogg company was in reality a Bell concern. Both of us have endeavored to learn the truth. Mr. DeWolf, our president, has given repeated assurance as to the entire falsity of such statements. Due to our convictions thus obtained, we have strenuously denied these statements, and on the strength of our personal assurances, in many cases given to our personal friends, we have succeeded in closing many hundred thousand dollars worth of contracts for the Kellogg company, which would have gone to our competitors but for our personal assurances.
"Three instances of this may suffice: Early in 1902, the undersigned, F. J. Dommerque, closed contracts with the Frontier Telephone Company of Buffalo, New York, for the entire telephone and switchboard equipment of their then proposed exchange. He only obtained this contract under the understanding that there was no truth in the statement that the Kellogg company was sold out. The business, as a result of these contracts, has amounted to about two hundred and fifty thousand dollars.
"Only recently he was also enabled, by the same assurances, most positively given to the engineers, officers and certain directors of the Kinloch Telephone Company of St. Louis, Missouri, to close four contracts with that company for telephone equipment, aggregating in the value of approximately one hundred and fifty thousand dollars.
"In may, 1902, the undersigned, Kempster B. Miller, negotiated with the Empire Construction Company for furnishing the telephones and switchboards for the exchange they were about to build in Los Angeles, California. He was met with the same statements made by a competitor, which statements were given considerable credence. It was on the strength of his personal assurance, (to his personal friends) that the rumors were discredited and the contract closed. This contract has resulted in the purchase of nearly a quarter of a million dollars worth of apparatus and materials from the Kellogg company.
"About eight months after the closing of this contract, one of the officers of the Empire Construction Company told Mr. Miller that the principal thing that saved the contract from going to a competitor was his personal ability to convince the gentlemen making the purchase of the entire independence of the Kellogg company. It will be seen, therefore, that we have been duped by lies and deceit into leading the people with whom we have been dealing, (frequently our personal friends) into making contracts which they would not have made, had they known the truth.
"That we have unwittingly done these people a great wrong, you can have no honest doubt. Aside from the injury to our customers, consider that to ourselves. Our greatest asset is our good name, and we are both widely known in this country and abroad. People have accepted our word for that which we have had every reason to believe to be true, and have been led into making a serious mistake as a result.
"These customers were given assurances not only as to being able to purchase in the future apparatus of like quality, delivered when required, at prices not greater than originally paid, and that they would be given the benefits on future purchases of any improvements made by the engineers of the Kellogg company, but that they would also always receive competent protection against patent litigation. They were thus made to feel that they would be enabled to keep abreast of the development of the art, and at all times be honestly protected.
"Even though your interests might give positive assurance to the Kellogg company's customers as to future treatment, the feeling will naturally be that they have been delivered into the hands of their enemies, i.e., into the hands of those whose interests are diametrically opposed to their own. Such a condition of affairs as now exists, will, when known, cause a feeling of unrest and uneasiness among the customers and those financially interested whom we have unwilling and unwittingly duped, and this will necessarily result in a serious depreciation of their securities and holdings.
"You will, therefore, see that the injury done to our customers, our friends and ourselves, is real. The instrument in accomplishing this injury was Mr. DeWolf, but it appears to us from what we have learned, that the responsibilities rest with you and your associates, who inaugurated and dictated the policy of secrecy with its consequent lies and deceit.
"We cannot believe that you, for whom we have always the highest respect, or your associates, can have been fully alive to the real wrong that such a course as has been followed, will entail. We cannot believe that the Bell interests would wish, or can afford, to live under the odium of such a long continuing piece of treachery as this, even though the results to be gained were of great value otherwise.
"If we, as young men, be allowed to make suggestions to you, who have had far greater business experience than we have, we ask you to seriously consider whether there can be any real advantage to the interests which you and Mr. Barton represent, to have it appear that your company and its business interests are conducted, even in this one case, along the lines which this affair has now assumed. There is but one remedy, and you owe it to the customers of the Kellogg company, as well as every employee of this company who has innocently been made to sail under false colors during the past eighteen months, to adopt that remedy and to restore the control of the Kellogg company by the return or resale of the stock which you purchases or caused to be purchased, to those parties who held such control prior to January, 1902.
"In this world, people are sometimes called upon to sacrifice something, in order to stand true to principle; and the amount of sacrifice which they are willing to make indicates somewhat the extent to which they are actuated by this principle.
"We hope that we may hear from you at once on this subject, as the situation has become intolerable, now that we understand what it is."
1 MacMeal, The Story of Independent Telephony, pp. 142-146