The integration of many different railroad enterprises into a single na- tional transportation system required the managers to cooperate on three quite different sets of concerns. They had to arrange the physical connec- tion of the many roads; they had to devise uniform operating, accounting, and other organizational procedures; and they had to agree on the use of a standardized technology. Until the roads were linked, and until procedures and equipment were made uniform, freight could not flow quickly and easily across the lines of several roads. Although managers had begun to cooperate on all three of these requirements in the 1850s, their major effort was concentrated in the 1860s and 1870s. The culmination of this cooperation in the 1880s gave the nation a fully integrated railroad network. Of the three requirements, the physical integration linking the roads was the easiest to accomplish. Bridge building was often merely an internal matter. Where roads terminated at a river’s edge, the two roads often formed a joint enterprise to build and maintain the connecting bridge. Similar joint enterprises were formed to build belt lines and facilities connecting the lines of different roads terminating in the same cities. By 1870 the Hudson, the Delaware, the Potomac, the Ohio, the Mississippi, and the Missouri had been crossed by railroad tracks, often in several places.2 During the 1870s belt lines and other facilities to connect roads had been constructed in Chicago, Cincinnati, Indianapolis, Baltimore, Richmond, and a number of smaller cities.3 In other commercial centers the managers worked out cooperative methods to move cars from the switching and marshaling yards of one road to those of another.
The creation of uniform operating procedures to permit the flow of through freight traffic and passengers across several connecting lines was much more complex than physically linking the roads. The first task was to set uniform classifications and rates for freight and to agree on through ticketing and schedules for passengers. Ways had to be found to allocate the amount to be paid and to make the payment for that share to each of the roads involved in carrying through shipments or through passengers to their destination.
Such initial procedures began to be worked out at the meetings of con- necting and competing roads in the mid-1850s. The executives of the new longer roads began to confer as soon as their lines neared or reached com- pletion. In August 1854, as the Pennsylvania entered Pittsburgh, its president and general superintendent met with those of the Baltimore & Ohio, the Erie, the New York Central, and their western connections.4 That October, other roads in the old northwest had similar meetings. The senior executives of a number of southern roads met the following March. These meetings were called to work out arrangements for handling through traffic on connecting roads and, in the words of J. Edgar Thomson, the Pennsylvania’s president, “with a view of agreeing upon general principles which should govern Railroad Companies competing for the same trade, and preventing ruinous competition.”5 At the first meetings and the many that followed, the railroad managers were concerned almost wholly with through traffic. Rates for local traffic were left entirely to the roads carrying that traffic.
In working out the general principles for determining rates, the railroad managers had almost as few precedents to go on as they had in devising their internal organizational structures and procedures. Merchants and manufacturers of the day had little opportunity to formulate systematic pricing policies. Except in local markets, prices were set by the forces of supply and demand. Only the canals provided a guide. The managers of both state and private canals set their tolls for boats using their rights-of- way on the basis of what the traffic would bear.6 Boats carrying bulky freight paid proportionately lower rates than those moving more valuable, lighter goods. The first railroads had set up similar basic classifications for bulky and light freight.
At the railroad conventions of the 1850s, presidents and general super- intendents accepted the principle of charging on the basis of the value of the product being transported rather than on the actual cost of transporta- tion. Otherwise, they reasoned, as the canal officials had done earlier, the transportation charges for bulk freight would be prohibitive. The freight classifications adopted by the conventions followed those that had been devised by the Pennsylvania. That road placed more than two hundred articles into four overall classifications.7 At one end of the scale were ar-tides in the first class such as books, carpeting, clocks, cutlery, dry goods, fresh eggs and meat, wines, and woolens; at the other end those in the fourth class included coal, lumber, grain, lard, lead, looms, and similar products. Once the convention agreed on the basic classifications, the freight agents of these several roads worked out the official “tariffs” for each of the many different items carried.
If the first principle for setting rates was to charge what the traffic would bear, the second was flexibility. Rates had to be adjusted to meet the demands of large shippers for lower prices on volume shipments, to assure return cargo when a large share of the traffic went only one way (as occurred each fall with the movement of crops), and to fill only partially used cars. As Herman Haupt of the Pennsylvania put it in 1852, when it comes to ratemaking, “one principle … of universal application” exists “and that is, that changes must be made when circumstances require them; on no other, can the operations of the road be conducted with success.”8 At the conferences in the mid-1850s, railroad managers attempted to rationalize and formalize this principle of flexibility for each particular set of schedules. By definition this was an exceedingly difficult task. It led to differentiation in rates which, to many shippers, was arbitrary and discriminatory.
From their early years, therefore, American railroads, like those of all nations, determined the basic regional rate structure cooperatively. During the Civil War, railroad conventions were held only occasionally. The war disrupted traffic and, at the same time, greatly expanded it. After the war, meetings were again held regularly. The “official” rates on through traffic were adjusted and classifications were revised and expanded as new types of traffic appeared and as existing flows changed in volume and direction. At these conventions, the roads agreed to maintain the accepted rate structure. Individual managers, however, were constantly tempted to adjust through rates in order to attract traffic or meet demands of shippers, especially large ones. Rates were often lowered by means of secretly rebating to a shipper the difference between the official rate and the one agreed upon by the manager and his customer. At other times they were reduced openly. Nevertheless, except for a brief period after the panic of 1857, railroad managers adhered quite closely to the official rates. They continued to do so until the long depression (starting in 1873) ushered in the age of railroad competition.
Another task in coordinating the flow of through traffic was to improve arrangements for the movement of freight and passengers across the lines of several companies. Although the roads cooperatively worked out through passenger ticketing and scheduling in the early years, they made few attempts to coordinate the flow of through freight traffic. Until after the Civil War, railroad managers were too preoccupied with completing construction and working out their internal operating struc-tures and procedures to do more than determine the official rates and classifications. In these years a new type of enterprise—the express and fast-freight companies—began to handle the movement of most light, valuable freight.
Express companies had first appeared in the late 1830s and early 1840s to deliver goods locally. In the late 1840s and the 1850s such pioneering firms as those headed by William C. Fargo, William F. Harden, and Alvin Adams saw the opportunity to profit from shipping goods across the nation’s expanding but not yet integrated transportation network. As railroad mileage grew, their companies and other new express and fast-freight lines began to operate on a national scale. They also started to carry more standard goods that were shipped in volume lots.
In the mid-1850s the new large railroads and the fast-freight lines began to make mutually beneficial alliances. A railroad, by giving an exclusive contract to an express or fast-freight line, was able to assure itself of a more certain volume of traffic. Also, since the express lines often provided their own cars, the railroad’s outlay for rolling stock was reduced. Express companies received special rates in return for the contract.
These arrangements began on the east-west trunk lines and were soon repeated in other parts of the country. Kasson’s Dispatch (later the Merchants’ Dispatch) and Wells, Fargo & Company made the first of such exclusive contracts with the New York Central.9 Quickly the Erie signed a similar contract with the United States Express Company and the Great Western Dispatch. The Pennsylvania hesitated for some time before tying itself too closely to one or two express lines. On a more informal basis, it already enjoyed the business of the Adams Company and other leading concerns.
Then in the early 1860s the Pennsylvania followed suit by sponsoring new companies rather than relying on existing ones.10 In 1863 it helped to organize and finance the Union Railroad and Transportation Company for carrying goods over its lines to and from the major commercial centers of the midwest. In 1865 it played a major role in setting up a second fast- freight line, the Empire Transportation Company, to attract traffic from the newly opened oil regions of western Pennsylvania to the Pennsylvania’s recently completed lines from the oil fields to the seaboard.11 Within a few years the Empire line became one of the largest express companies in the country, owning 4,500 cars including box, refrigerated, rack, and tank cars, as well as eighteen lake steamers and a number of elevators, warehouses, and oil yards in Erie, New York, Philadelphia, and other eastern ports. Its agents covered 20,000 miles of railroad in the east and midwest. As a pioneer in oil transportation, it even came to have its own pipelines.
By the late 186os, after nearly all roads had allied themselves with large and increasingly powerful express or fast-freight companies, railroad managers began to feel that their own enterprises were being exploited.12 Directors of their roads often became directors in the allied express com- panies. These men seemed to be using the express lines, as they did con- struction companies, as a device for siphoning off profits from the railroad itself. The express companies skimmed the cream of the high-value freight business; while the roads themselves were having difficulty in making a profit on the bulky less remunerative freight business. In addition, the ex- press lines remained a serious threat to rate stability.
The response of the trunk lines and other major roads was to take over this business themselves by forming “cooperative fast-freight lines.” The first, the Red Line, founded in 1866, ran between New York, Boston, and Chicago. A second, the Blue Line, opened in January 1867 to serve these same cities by using roads to the north of the Lakes. In 1868 the Green Line was established to move freight over most of the roads in the south. Soon there was a White Line that ran to the Pacific coast.
These lines were not legally separate enterprises, but rather freight-car pools, each managed by a separate administrative organization. The con- stituent railroads owned their cars individually. Each furnished the line (or pool) a quota in proportion to the revenue each received from through traffic. Each road was paid a mileage charge (normally cents a mile per car) for cars of other companies passing over its tracks. It also received a fee of cents for moving cars of roads which were not members of the cooperative. The line’s central office kept a record of the movement of cars and drew up balances at the end of each month.
The cooperative schemes worked well. In 1874 a congressional investi- gation noted that “substantially all” traffic in the United States was carried by fast-freight lines. Most of these were cooperatives. By 1877 those that were not, including the Merchant’s Dispatch, Great Western Dispatch, and the Empire had been purchased by the roads to which they had been allied. The few remaining independent express companies— Adams, American, United States, and Wells Fargo—concentrated as they had in their early years on the delivery of high-value freight rather than on handling through shipments of more standard cargoes.
The cooperative arrangements for handling fast, dependable, scheduled shipments of through freight rested on two organizational innovations. One was the through bill of lading; the other was the car accountant office. The through bill of lading or waybill had not existed in the days of the packet lines, stagecoach lines, and other small personally operated shipping enterprises. It had its beginnings in the mid-1850s when the trunk lines and their connecting roads began to work out their procedures for billing shipments that moved across several lines. The through waybill was perfected in the 1860s. It gave the details of the goods shipped, route sent, and charges levied. The shippers, receivers, and carriers responsible for the shipment—at first freight lines and later railroad companies—all retained copies of the waybill. By the 1870s the fast-freight lines were gauranteeing the accuracy of the quantity listed on the waybill. With such guarantees those bills quickly achieved the status of negotiable commercial paper and became used as a regular medium of exchange.15
At the same time that the bill of lading was being developed for through traffic, it was being improved for local trade.16 Shipments for one town were placed in one or more cars and were left on the siding to be unloaded after the train had departed. The local stationmaster, who supervised the unloading, then notified local addresses of the arrival of their goods. Smaller lots were placed in “distributing cars” which were quickly unloaded while the train waited at the different stops. Copies of the bills of lading went to the road’s auditor who credited the shipping agent and billed the receiving agent. These auditors’ accounts were then checked with the daily reports of the station agents and so provided an improved control over shipments and the financial transactions involved.
Even before the railroads moved to cooperative pooling of their equip- ment through the fast-freight lines, the major roads had set up a car ac- countant office to keep track of the location and mileage run by “foreign” cars using its tracks and the location and mileage of its own cars on other roads.17 In the 1870s such foreign cars included tank and coal cars owned by a small number of industrial companies, dining and sleeping cars operated by the Pullman Palace Car Company and its smaller competitors, and cars owned by other railroads and express companies. As the car accountant offices perfected their methods, the roads came to have less need for the joint fast-freight lines. In the 1880s and 1890s the coordination of flow of through traffic came to be handled increasingly by the traffic managers of the railroads themselves rather than through cooperative arrangements.
The growing importance of through traffic and the takeover from out- side express and fast-freight companies of through freight greatly increased the duties of the railroad managers responsible for obtaining, moving, and delivering freight. With the intensified competition brought by the depression of the 1870s, the financial success of a railroad lay increasingly in these managers’ hands. Therefore, during the 1870s, passenger and freight managers no longer reported to the general superintendent in the transportation department but were accorded a separate department of their own. The new traffic departments soon had the same status as the finance and transportation departments.
In this unplanned, ad hoc way American railroads internalized through a variety of organizational devices the activities and transactions that had been handled previously by hundreds of small enterprises. The fast-freight lines, the cooperatives, and finally the traffic departments of the larger roads had completed the transformation from market coordination to ad- ministrative coordination in American overland transportation. A multi- tude of commission agents, freight forwarders, and express companies, as well as stage and wagon companies, and canal, river, lake, and coastal shipping lines disappeared. In their place stood a small number of large multiunit railroad enterprises. As a result one shipment and one transac- tion had taken the place of many. By the 1880s the transformation begun in the 1840s was virtually completed.
The 1880s and early 1890s witnessed the culmination of technological as well as organizational innovation and standardization. In those years the United States railroads acquired a standard gauge and a standard time, moved toward standard basic equipment in the forms of automatic coup- lers, air brakes, and block signal systems, and adopted uniform accounting procedures.18 On the night of May 31-June I, 1886, the remaining railroads using broad-gauge tracks, all in the south, shifted simultaneously to the standard gauge. On Sunday, November 18, 1883, the railroad men (and most of their fellow countrymen) set their watches to the new uniform standard time. The passage of the Railroad Safety Appliance Act of 1893 made it illegal for trains to operate without standardized automatic couplers and air brakes. In 1887 the Interstate Commerce Act provided for uniform railroad accounting procedures that had been developing for a quarter of a century. All four of these events resulted from two decades of constant consultation and cooperation between railroad managers.
The cooperation required by the managers to integrate what had become by far the largest transportation network in the world stimulated a sense of professionalism among them. The middle managers who met regularly to discuss common problems in performing their different functions soon set up permanent quasi-professional associations. While some regional associations were formed before 1861, primarily in New England, nearly all the national societies appeared in the two decades after the Civil War. By the early 1880s, such associations had been formed for nearly every major railroad activity. They included the American Society of Railroad Superintendents, American Railway Master Mechanics Association, Master Car Builders Association (which included more members from railroad shops than from manufacturing companies), Roadmasters Association of America, National Association of General Passenger and Ticket Agents, National Railroad Agents Association, American Ticket Brokers Association, General Baggage Agents Association, Society of Railroad Comptrollers, Accountants and Auditors (soon to be shortened to the Society of Railroad Accounting Officers), Railroad Traveling Auditors Association, Car Accountants Association, American Train Dispatchers Association, and the Association of Railroad Telegraph Superintendents. At the semiannual meetings, ioo to 150 of the railroad managers of each of these associations listened to papers and discussed technical problems of mutual interest. Between meetings of the national associations, the same executives and others often attended sessions with smaller regional affiliates.
In the 1870s and 1880s the papers and committee reports presented at these meetings were listed in the railroad press. Hardly a meeting passed without a discussion of national standardization of procedures and equip- ment. Thus, at the June 1885 meeting of the Master Car Builders Associ- ation, its president, Leander Garvey, opened the session, the Railroad Gazette reported, by pointing to “the many standards… now being acted upon. Out of the twelve committee reports to be acted on five were on proposed new standards. Mr. Garvey also especially dwelt upon the vital necessity of prompt action on the car coupler question.”19 That same month the train dispatchers met in Denver and “on the second day of the convention considered the question of a uniform system of rules and train orders.” In late August, reporting on the Railroad Traveling Auditors meeting, the same journal noted: “An afternoon session was held, which was devoted to the discussion of various systems of railroad accounts, with a view to promoting uniformity in method. Several points in railroad practice concerning the interchange of business were also discussed.” Similar comments on comparable meetings of other railroad specialists appeared in the pages of the Gazette and other railroad papers of this period. These associations had proliferated and become well established before professional academicians began to set up similar societies such as the American Historical Association formed in 1884, the American Eco- nomic Association formed in 1885, and the American Political Science Association formed in 1902.
The men who met together regularly at the meetings of associations de- voted to their particular railroading activity developed a sense of profes- sional expertise that was quite new to American businessmen. This pro- fessionalism was reinforced by reading the same journals and by following the same career lines. In the 1870s and 1880s the leading railroad journals — the Railroad Gazette, the Railway World, and the Railroad and Engineering Journal (a successor to Poor’s American Railroad Journal)— came to concentrate on technical and professional matters. The great majority of the managers who read these papers and attended the meet-ings of their national societies had started at the lowest rung of the mana-gerial ladder, usually serving an apprenticeship as a clerk, agent, messenger, telegraph operator, rodman, chainman, or machinist’s assistant.20 Most knew that, as they moved up the managerial ladder, they would remain in the same specialty and often would continue to be employed by the same company throughout their entire career.
Those who joined the managerial ranks in the construction, mainte- nance-of-way, or mechanical departments had usually taken a college course in civil or mechanical engineering. Indeed, the rise of American engineering education was, in part at least, a response to the needs of American railroads for trained civil and mechanical engineers. In the 1850s and 1860s leading institutions of higher learning such as Harvard, Yale, Columbia, Pennsylvania, and Virginia offered specialized four-year courses in engineering. So too did new schools such as the Massachusetts Institute of Technology and the new land-grant colleges. These trained engineers in 1867 revived the Society of American Civil Engineers which railroad men had attempted to found in the years before the Civil War.21
Thus by the 1880s American railroad managers had taken on the standard appurtenances of a profession. They had their societies and their journals. They moved through life along a well-defined career pattern. By then they saw themselves and were recognized by others as a new and distinct business class—the first professional business managers in America.
The interfirm cooperation that encouraged the professionalizing of the railroad manager increased the productivity of the American transportation system. Repeated discussions by the salaried managers of both or- ganizational and technological innovations permitted their quick develop- ment and rapid adoption by American railroads. Professional exchanges encouraged improvements in locomotives, tracks, and other facilities, as well as standardization of couplers, air brakes, and signals, because these products were designed and improved by the railroad departments and not the manufacturers. The latter merely built to specifications set forth by the former. In addition, the constant consultation and cooperation of many salaried managers achieved for the national network what the pioneers of internal organization had done for the individual lines. Both made possible an administrative coordination of transportation that was much more efficient than prerailroad market coordination.
The productivity of American railroads increased impressively during the second half of the nineteenth century. Albert Fishlow has quantitatively defined and analyzed the great expansion in the volume and the “dramatic relative decline in the price of railroad services.”22 “Over the entire interval 1838 to 1910, railroad services grew at annual rate of 11.6 percent with [national] income and commodity output proceeding at a pace only one- third as rapid. Indeed, no single major sector grew as rapidly. With an 1870 benchmark, these same observations obtain, albeit with a somewhat narrowed margin of superiority.”23 At the same time “real freight rates fell more than 80 percent from their 1849 level, and passenger charges 50 percent.” Fishlow credits this basic improvement to an increase in size and efficiency of locomotives and rolling stock and, most of all, to the adoption of heavy steel rails. He points also to the value of standardization of equipment made possible by “informal industrywide associations and committees,” and the normal economies of scale and specialization that came as the size of the firm increased. Yet all these improvements, he believes, account for only half of the productivity increase between 1870 and 1910. He suggests that the importance of increased educational level and experience of the work force might help to explain the residual.
Certainly the organizational innovations perfected by the railroad man- agers and their increased training and professionalization must also have played a part. Some productivity increases surely came from the adminis- trative arrangements that permitted a more intensive use of rolling stock and a greater velocity of traffic flow across the lines of individual roads and the nation’s transportation system as a whole. Arrangements to permit freight cars to move without reloading across many lines lowered capital outlays needed for equipment and working capital required for fuel and labor. Constant discussions in the managerial associations of all types of technological and organizational innovation helped further to increase productivity and reduce costs. The close cooperation between the managers of the first modern multiunit enterprises in the United States contributed impressively to increasing the speed and regularity of transportation and decreasing its costs. And, as will be analyzed in later chapters, it was the economy and velocity of transportation that provided the basic underpinnings of the institutional changes in American production and distribution that occurred in the later part of the nineteenth century.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.