System-Building in 1880s-1900s: The Bureaucratization of Railroad Administration

Top management of American railroads remained truncated. The Pennsylvania had created a structure that permitted top managers working as a group to evaluate, coordinate, and allocate resources for the system as a whole. In the centralized form, however, no place existed in which such executives, relieved of day-to-day functional operating activities, could carry out these critically important activities. Top level evaluation as well as coordination of middle management and the units they administered became the task of one man, the president.

The third top management function—the allocation of capital and personnel—continued to be divided between the president, who by the end of the century was almost always a career manager, and the financiers on the board. Although Morgan and the other bankers hired an independent certified public accountant to provide an outside check on their companies’ financial and capital accounts, they made no comparable audit of costs and operating statistics. Nor did the bankers allocate resources systematically. There is some evidence that they asked for operating budgets from their managers, but there is little indication that they used capital budgets in planning and allocating funds.114 Morgan and the others often set broad limits on the amounts the managers could spend over an extended time, but they did not develop careful capital appropriation procedures, nor did they use financial forecasts in order to coordinate capital needs and capital supply.115 Until well into the twentieth century capital allocations on these large railroad systems continued to be carried out on an ad hoc, piecemeal way with the managers proposing and the financiers disposing.

One reason that the railroads could afford such a truncated top manage- ment was that, by the first years of the twentieth century, they had achieved control over competition. With the rounding out of these large systems and development of a community of interest, strategic planning no longer required close attention. At the same time, the process of rate- making was being shared with the Interstate Commerce Commission, which handled the negotiations between sets of shippers and the railroad. Without competitive pressure there was less need for long-term planning of future activities and careful evaluation and coordination of existing ones. As both pricing and investment decisions became relatively routinized, railroad administration became increasingly bureaucratized. The tasks of management at all levels concentrated almost wholly on the coordination of traffic and trains. One result was that promotion in the managerial hierarchy became based more on seniority than on talent.116 Nearly all managers remained functional specialists during their entire career. Few reached the top of their departments before they were almost ready to retire.

Such growing bureaucratization of railroad enterprises had little impact on the ability of the roads to move a massive volume of traffic with speed and regularity, since required techniques for such movement had become well systematized and routinized. It may, however, have made railroad top management less flexible in meeting nonroutine situations such as the unexpected and novel transportation demands created by the nation’s entry into World War I. It may, too, have made the roads ill-prepared to respond to post-World War I competition when new forms of transporta- tion based on the internal combustion engine challenged the railroads.

In this way, then, the basic structure of the large railroad enterprise reflected the process of its growth. From the start, the technical needs of providing fast, reliable, high-volume transportation required the services of trained career managers who held at most only a small portion of the stock in the companies in which they served. From the start, too, the investors who provided the funds to build and expand the roads had neither the training nor the information to participate in management decisions, except those involving the allocation of funds generated by the roads’ operations and those requiring new capital. As the importance of through traffic increased, and after the cartels failed to control competition for this traffic, the managers were able to convince investors of the need to build self-sustaining systems. In nearly all cases the career managers became responsible for the strategy of growth; but in order to finance this growth they had to make alliances with specialized investment bankers who had access to large amounts of capital. In return for their support these bankers continued to have a say or at least a veto on managers’ plans involving the obtaining and allocation of capital.

The railroad systems thus became and remained the private business enterprises that most closely exemplified financial capitalism in the United States. No other enterprises required such large sums of outside capital. On a few—the Pennsylvania is the best example—the managers were able to control the board. On most, however, financiers outnumbered managers at the board meetings. In few other types of American business enterprise did investment bankers and other financiers have such influence.

Yet even on the railroads the power of finance was a negative one. Except in the promoting of communities of interest, bankers rarely defined strategic plans and were even less involved in operating matters. Financiers may have had some say in the organization and management of American railroads, but full-time, salaried, career managers had a great deal more. The American railroad enterprise might more properly be considered a variation of managerial capitalism than an unalloyed expression of financial capitalism.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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