Modern business enterprises came to operate the railroad and telegraph networks for both technological and organizational reasons. Railroad companies were the first transportation firms to build and to own rights- of-way and at the same time to operate the common carriers using those rights-of-way. Telegraph companies also both built the lines and ran the messages through them. The enterprises, both public and private, that constructed and maintained the canals and turnpikes rarely operated the canal boat companies, stage lines, or mail routes that used them.1 Even when they did, their rights-of-way were used by many other independent transportation companies.
On the railroad, however, the movements of carriers had to be carefully coordinated and controlled if the goods and passengers were to be moved in safety and with a modicum of efficiency. The first railroads—those using horses for motive power—were often able to allow common carriers operated by other individuals and companies to use their rails.2 But as soon as the much faster steam locomotive began to replace the horse- drawn vehicles, operations had to be controlled from a single headquarters if only to prevent‘accidents. Considerations of safety were particularly compelling in the United States, where nearly all railroads relied on a single line of track. For a time railroad managers experimented in hauling cars owned by local merchants and freight forwarders. However, the coordination of the movement of cars and the handling of charges and payment proved exceedingly difficult. By 1840 the railroad managers found it easier to own and control all cars using their roads. Later, express companies and other large shippers operating on a national scale came to own their own cars; but only after the railroads had devised complex organizational arrangements to handle the movement of and charges for such “foreign” cars.
Because they operated common carriers, railroads, unlike the major canal systems, became privately rather than publicly owned enterprises. In the early years of the Republic, American merchants and shippers gave strong support to government construction and operation of costly rights- of-way.3 On the other hand, these businessmen rarely, if ever, proposed that the government operate the common carriers. Only a small number of American railroads were initially operated by the state, and by 1850 with very few exceptions these had been turned over to private business enterprises. These same merchants and shippers who distrusted govern- ment ownership were also fearful of private monopoly. Therefore, the charters of the early roads generally provided for close legislative oversight of these new transportation enterprises.
The railroads did not begin to have a significant impact on American business institutions until the nation’s first railroad boom which began in the late 1840s and 1850s. Before that time railroad construction did not fundamentally alter existing routes or modes of transportation, since the first roads were built in the 183 0 s and 1840s to connect existing commer- cial centers and to supplement existing water transportation. The lines from Boston to nearby towns (Lowell, Newburyport, Providence, and Worcester); from Camden to Amboy in New Jersey (the rail link between New York and Philadelphia); from Philadelphia to Reading, Philadelphia to Baltimore, and Baltimore to Washington, were all short, rarely more than fifty miles.
This was also true of those lines connecting the several towns along the Erie Canal. In the south and west, railroads were longer because distances between towns were greater, but they carried fewer passengers and smaller amounts of freight. Until the 1850s, none of the great lines planned to connect the east with the west were even close to completion. Before 185 0 only one road, the Western, which ran from Worcester to Albany, connected one major regional section of the country with another. Except for the Western, no railroad was long enough or busy enough to create complex operating problems.
During the 1840s the technology of railroad transportation was rapidly perfected. Uniform methods of construction, grading, tunneling, and bridging were developed. The iron T rail came into common use. By the late 1840s the locomotive had its cams, sandbox, driver wheels, swivel or bogie truck, and equalizing beams. Passenger coaches had become “long cars,” carrying sixty passengers on reversible seats. Boxcars, cattle cars, lumber cars, and other freight cars were smaller but otherwise little different from those used on American railroads a century later.4
As technology improved, railroads became the favored means of over- land transportation. They not only quickly captured the passenger and light-weight and high-value freight traffic from the canals and turnpikes but also began soon to compete successfully as carriers of textiles, cotton, grain, coal, and other more bulky products. Indeed, some of the first roads in the north, such as the Boston and Lowell and the Reading, were built by textile manufacturers and anthracite coal mine owners to replace canals they had already constructed to carry their products to market; while railroads in the south and west were constructed specifically to carry cot- ton and grain.5 In the decade of the 1840s, only 400 miles of canals were built to make the nation’s total mileage at the end of the decade just under 4,000. In that same decade, over 6,000 miles of railroads went into opera- tion providing a total of 9,000 miles of track by 1850.6
As the country pulled out of the long economic depression of the late 1830s and early 1840s, railroad building began in earnest. The railroad boom came in the mid-1840s in New England and then in the late 1840s in the south and west. In the decade of the 1850s, when more canals were abandoned than built, over 21,000 more miles of railroad were constructed, laying down the basic overland transportation network east of the Mississippi River. As dramatic was the almost simultaneous completion between 1851 and 1854 of the great intersectional trunk lines connecting east and west (the Erie, the Baltimore and Ohio, the Pennsylvania, and the New York Central) and the building of a whole new transportation network in the old northwest. In 1849 the five states of the old northwest, a region endowed with a superb river and lake system, had only 600 miles of track. By 1860 the 9,000 miles of railroad covering the area had replaced rivers, lakes, and canals as the primary means of transportation for all but bulky, low-value commodities.
The reason for the swift commercial success of the railroads over canals and other inland waterways is obvious enough. The railroad provided more direct communication than did the river, lake, or coastal routes. While construction costs of canals on level ground were somewhat less than for railroads, the railroad was cheaper to build in rugged terrain.7 Moreover, because a railroad route did not, like that of a canal, require a substantial water supply, it could go more directly between two towns. In addition, railroads were less expensive to maintain per ton-mile than canals. They were, of course, faster. For the first time in history, freight and passengers could be carried overland at a speed faster than that of a horse. The maps emphasize how the railroad revolutionized the speed of travel. A traveler who used to spend three weeks going from New York to Chicago, could by 1857 make the trip in three days. The railroad’s fundamental advantage, however, was not in the speed it carried passengers and mail but its ability to provide a shipper with dependable, precisely scheduled, all-weather transportation of goods. Railroads were far less affected by droughts, freshets, and floods than were waterways. They were not shut down by freshets in the spring or dry spells in the summer and fall. Most important of all, they remained open during the winter months.
The steam locomotive not only provided fast, regular, dependable, all- weather transportation but also lowered the unit cost of moving goods by permitting a more intensive use of available transportation facilities. A railroad car could make several trips over a route in the same period of time it took a canal boat to complete one. By 1840, when the new mode of transportation had only begun to be technologically perfected, its speed and regularity permitted a steam railway the potential to carry annually per mile more than fifty times the freight carried by a canal. Even at that early date, Stanley Legerbott writes, “railroads could provide at least three times as much freight service as canals for an equivalent resource cost—and probably more nearly five times as much.”8
The history of competition on specific routes supports these estimates. For twenty years, the trip from Boston to Concord, New Hampshire, by way of the Middlesex Canal, the Merrimack River, and ancillary canals, took five days upstream and four down. When the extension of the Boston and Lowell reached Concord in 1842, the travel time was cut to four hours one way.0 A freight car on the new railroad made four round trips by the time a canal boat had made only one. To handle the same amount of traffic, a canal would have to have had approximately four times the carrying space of the railroad and, because of ice, even this equipment would have had to remain idle four months a year.
With the completion of the railroad to Concord, the historian of the Middlesex Canal points out “the waterway is immediately marked for de- feat; in 1843 the expenses of the canal were greater than its receipts. The end has come.”30 The end came almost as quickly to the great state works of Pennsylvania and Ohio. For example, the net revenues of Ohio canals which were $278,525 in 1849, were only $93,421 in 1855; they dropped to a deficit of $107,761 in i860.11 For a time the Erie and the Chesapeake and Ohio canals continued to carry bulky products—lumber, coal, and grain — primarily from west to east. By the 1870s they had even lost to the railroad on the grain trade. And in the 1850s river boat lines lost much of the rapidly expanding trade of the Mississippi to the railroads.12 Never before had one form of transportation so quickly replaced another.
The swift victory of the railway over the waterway resulted from organizational as well as technological innovation. Technology made possible fast, all-weather transportation; but safe, regular, reliable movement of goods and passengers, as well as the continuing maintenance and repair of locomotives, rolling stock, and track, roadbed, stations, roundhouses, and other equipment, required the creation of a sizable administrative organization. It meant the employment of a set of managers to supervise these functional activities over an extensive geographical area; and the appointment of an administrative command of middle and top executives to monitor, evaluate, and coordinate the work of managers responsible for the day-to-day operations. It meant, too, the formulation of brand new types of internal administrative procedures and accounting and statistical controls. Hence, the operational requirements of the railroads demanded the creation of the first administrative hierarchies in American business.
The men who managed these enterprises became the first group of modern business administrators in the United States. Ownership and management soon separated. The capital required to build a railroad was far more than that required to purchase a plantation, a textile mill, or even a fleet of ships. Therefore, a single enterpreneur, family, or small group of associates was rarely able to own a railroad. Nor could the many stockholders or their representatives manage it. The administrative tasks were too numerous, too varied, and too complex. They required special skills and training which could only be commanded by a full- time salaried manager. Only in the raising and allocating of capital, in the setting of financial policies, and in the selection of top managers did the owners or their representatives have a real say in railroad management. On the other hand, few managers had the financial resources to own even a small percent of the capital stock of the roads they managed.
Because of the special skills and training required and the existence of an administrative hierarchy, the railroad managers came to look on their work as much more of a lifetime career than did the plantation overseer or the textile mill agent. Most railroad managers soon expected to spend their life working up the administrative ladder, if not on the road with which they started, then on another. This career orientation and the specialized nature of tasks gave the railroad managers an increasingly professional outlook on their work. And because they had far greater personal, if not financial, commitment to the continuing health of their enterprise, they came in time to have almost as much say about financial policies and the allocation of resources for future operations as did the owners and their representatives. The members of the administrative bureaucracy essential to the operation of the railroad began to take control of their own destinies.
The construction of the nation’s new transportation network and the evolution of the nation’s first modern business enterprise—as well as the first modern managerial class—fall into two distinct chronological periods. External changes in each period had a significant impact on internal or- ganizational and managerial development. The first period extended from the beginning of the railroad boom in the late 1840s to the coming of the economic depression of the 1870s. It was a period of almost continuous growth of the network (except of course during the Civil War) and a period of impressive organizational innovation. By the start of the depression of the 1870s, the 70,000 miles of track in operation provided the nation with the basic overland transportation network that would serve until the coming of the automobile and airplane in the twentieth century. By the 1870s the large railroads of over 500 miles in length had perfected complex and intricate mechanisms to coordinate and control the work of thousands of employees, the operations of tens of millions of dollars’ worth of roadbed and equipment, and the movement of hundreds of millions of dollars’ worth of goods. By that time, too, the railroad had worked out complicated intercompany arrangements so that a carload of goods or produce could be moved from almost any sizable town in the country to another distant commercial center without a single transshipment. In other words, goods placed in a car did not have to be reloaded until they reached their destination.
The second period of American railroad history, extending from the depression of the 1870s to the prosperous first years of the new century, was one of competition and consolidation, although railroad building con- tinued apace. By 1900 close to 200,000 miles of line were in operation. Except along the disappearing frontier in the west, this new mileage filled in the existing network. Indeed, much of the construction was not needed to meet the existing demand for rail transportation. This overbuilding was one consequence of the creation of the giant consolidated systems, the managers’ response to increasing competition. These managers adopted the strategy of consolidation because they wanted to have their own tracks into all the major commercial centers of the areas they served. They were unwilling to rely on potential competitors to provide outlets for the freight and passenger traffic they carried. By the beginning of the new century not only had the American railroad network been virtually completed but the boundaries of the major railroad systems had also become fixed. The systems would continue to operate in much the same areas and in much the same ways until the second half of the twentieth century, when the automobile, truck, and airplane had reoriented American transportation. For several decades the consolidated railroad systems remained the largest business enterprise in the world.
The early history of the business enterprises created to operate the tele-graph and then the telephone was quite similar to that of the railroads. As the railroads marched across the continent, so too did the telegraph. In- vented in 1844, it began to be used commercially in 1847. Railroad man- agers quickly found the telegraph an invaluable aid in assuring the safe and efficient operation of trains; and telegraph promoters realized that the railroads provided the only convenient rights-of-way. Because the tele- graph was easier and cheaper to build than the railroad, it reached the Pacific first, in 1861. By the beginning of that decade 50,000 miles of wire were in operation. Two decades later, according to the census of 1880, 31,703,000 messages had been sent per year over 291,000 miles of wire.13
The telephone, commercialized in the 1880s, at first only supplemented the telegraph. It was used initially almost wholly for local conversations. Then with the development of the “long lines” in the 1890s the telephone became increasingly employed for long-distance calls. Thus, where the railroad improved communication by speeding the movement of mail, the telegraph and then the telephone permitted even faster—indeed almost instantaneous—communication in nearly every part of the nation.
The enterprises that built, owned, and operated these new instruments of communication soon governed a large number of units scattered over a wide geographical area. The coordination of a large number of messages to all parts of the country called for even tighter internal control than did the movement of railroad transportation traffic. Not surprisingly, the nation’s telegraph network was by 1866 dominated by a single enterprise, Western Union. Nor is it surprising that its administrative and accounting procedures were very similar to those of the railroads. As the telephone network began to expand in the 1890s, the pioneering group—the Bell interests—maintained its control of the industry “through traffic” by means of the American Telephone and Telegraph Company, which built and operated through or long-distance facilities. In modern communication, as in modern transportation, the requirements of high-volume, highspeed operations brought the large-scale managerial enterprise and with it oligopoly or monopoly.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.