All good points. Let me wrap this up with a few final comments.
1) We have had [almost] no grumbling about our policy. Indeed, some hard-working employees appreciate that there is recourse when the person at the other cubicle is on the Internet 5 hours every day, when that person has no work-related reason to do so. I do understand, however, that in the future, some employee may object, in which case, that employee is free to find employment elsewhere. Honestly, most communication is never even looked at until a problem arises.
2) Wait till you get that psychotic employee who makes up a bunch of crap and sues your company for millions, alleging everything from sexual to racial discrimination, just because they were fired (I really can't give details). You need every bit of evidence you can muster when court time comes.
3) I can sympathize with your belief that DreamHost should not be responsible for such communication.
4) There are many good ways to run a smaller business. I say whatever works, great. We have struggled with a lot of issues as we have become larger in the last few years, and have had to make hard, impersonal decisions.
5) There are some private sector companies that need high levels of security and monitoring (like ours). We are a service bureau for the retail brokerage industry. A lot of money is always at stake. This industry is perhaps the most cut-throat, yet still legal, corporate environment in the U.S. There are no two-week notices when millions of dollars of accounts are on the line. Suing is a common occurrence. Corporate espionage is common. I wave a big bat about any kind of communication with the outside world, which is why most of our employees have no Internet access to speak of. Our environment is not relaxed, nor will it ever be. Our employees know that there is a huge body of information that they are privy to that they are not allowed to communicate outside in any form.
However, we are still relatively small, and we have just one overstressed IT guy (yours truly), which is why I choose to outsource when possible. Security is a big enough headache for me already, and some corporate hacker wants to get in to our network, well, he won't do it easily, since our site and email are with you, and I won't allow anything really important to be kept at DreamHost (even such outgoing communication as I would like you to archive is really just for internal abuse monitoring, not gravely important info). And I keep our intranet very secure and simple (I hope).
Good discussion. I need to wave farewell, though, before I have to reprimand myself for wasting too much company time on a non-work related matter!