The Railroads in 1850s-1860s: Organizational Innovation Evaluated

The railroads were, then, the first modern business enterprises. They were the first to require a large number of salaried managers; the first to have a central office operated by middle managers and commanded by top managers who reported to a board of directors. They were the first American business enterprise to build a large internal organizational structure with carefully defined lines of responsibility, authority, and communication between the central office, departmental headquarters, and field units; and they were the first to develop financial and statistical flows to control and evaluate the work of the many managers.

In all this they were the first because they had to be. No other business enterprise up to that time had had to govern a large number of men and offices scattered over wide geographical areas. Management of such enter- prises had to have many salaried managers and had to be organized into functional departments and had to have a continuing flow of internal information if it was to operate at all.

Nevertheless, the innovations made by the early large intersectional roads in organization, accounting, and control went beyond mere neces- sity. The railroads could have operated well enough with only rudimentary organizational structures, without the line and staff distinction, without an internal auditing staff, and without the development of the more sophisticated financial, capital, and cost accounting procedures devised by McCallum, Thomson, and Fink. Indeed, many roads continued to operate for many years in an ad hoc informal way. Lines of authority and communication remained unclear, and operational and accounting infor- mation imprecise and unsystematically collated and analyzed. This was particularly true on the shorter roads, on those with relatively light traffic, and even on the larger and more traveled ones where senior managers paid little explicit attention to organizational matters. In fact, on some roads the quality of the management and the attention paid to internal organization regressed. A dramatic example was the Erie, when speculators, whose interests were to manipulate securities rather than to provide transportation, took control of the road.

By the 1880s, however, the innovations of the 1850s and 1860s had become standard operating procedures on all large American railroads. Expanding traffic and the growth and size of the roads forced the senior railroad managers to pay attention to their administrative and informa- tional procedures. Moreover, as railroad managers became more profes- sional, information about these methods became disseminated more systematically. By the 1870s organization and accounting were topics for discussion at formal meetings of railroad managers. They were reviewed in such periodicals as the Railroad Gazette, and the Railroad Journal and such books as Marshall Kirkman’s Railroad Revenue: A Treatise on the Organization of Railroads and the Collection of Railroad Receipts.™

The innovations of the 1850s and 1860s, which became standard practice in the 1870s and 1880s, increased the efficiency and productivity of transportation provided by the individual routes. Improved organization and statistical accounting procedures permitted a more intensive use of available equipment and more speedy delivery of goods by providing a more effective continuous control over all the operations of the road. These innovations also made possible the fuller exploitation of a steadily improving technology which included larger and heavier engines, larger cars, heavier rails, more effective signals, automatic couplers, air brakes, and the like. These improvements permitted the roads to carry a much heavier volume of traffic at higher speeds.

The organizational innovations described in this chapter, however, affected only the productivity and performance of the individual railroads and not necessarily the railroad system as a whole. The creation of an efficient national overland transportation network required close co- operation between railroad companies so that traffic might move easily from one road to another. As the railroad network grew, as it became more interconnected, through traffic passing from one dine to the next was increasingly important to the profits of the individual railroad companies. In the years after the Civil War, external relations were becoming as critical to the successful operation of the new large railroads as were the development of internal organization and controls before the war.

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

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