The Railroads in 1870s-1880s: New Patterns of Interfirm Relationships

By the Civil War salaried middle and top railroad managers—the first representatives of this new economic group in this country—had created organizational and accounting methods that permitted their enterprises to coordinate and monitor a high volume of traffic at a speed and regularity hitherto unknown. A small number of large, managerially administered enterprises replaced a large number of the small personally run transportation, shipping, and mercantile firms that had previously carried goods from one transshipment point to another. The number of transac- tions and transshipments involved in the transportation of goods and passengers was sharply reduced. In 1849 freight moving from Philadelphia to Chicago had to pass through at least nine transshipments in the course of as many weeks: ten years later the journey took only three days and required only one shipment.

Nevertheless, by 1861 the American rail network was in no sense inte- grated. Except for the Mississippi at Rock Island, and the Ohio at Pitts- burgh, the major rivers did not yet have bridges. Roads entering the same terminal city had no direct rail connections. Roads used different gauges and different types of equipment. Therefore, cars of one railroad could not be transferred to the track of another. In the early years this differentiation had been made purposely so that freight shipped on a railroad sponsored by the merchants of one city could not be syphoned off by those of another. For these reasons, railroad managers were by 1861 only beginning to develop organizational procedures to permit the movement of freight cars over the tracks of several different railroad companies.

As a result, transshipment costs were still high. In the late 1850s and early 1860s, the average cost of a single transshipment was estimated at from 7 to 25 cents a ton and required at least a day’s delay. In 1865 the Boston Board of Trade stated that the cost of unloading and reloading freight between Boston and Chicago was over $500,000 a year. Reduction of such costs and delays required interfirm cooperation of the highest order.

This type of cooperation between business enterprises was an entirely new phenomenon. The necessary standardization of equipment and op- erating procedures called for detailed and prolonged discussions among the managers of the many roads. They had to work out and then put into operation standardized operating procedures and equipment.

Such cooperation proved highly successful. By the 1880s a rail shipment could move from one part of the country to another without a single transshipment. By then the traffic departments of the major roads had become responsible for moving a large share of the long-distance traffic within the United States. This internalization of the activities and transactions previously carried out by many small units, well under way in the 1850s, was completed by the 1880s.

The very success of interfirm cooperation increased interfirm competi- tion. As the nation’s rail network expanded, as interconnected lines became completed, and as the roads became physically and organizationally integrated, through traffic grew rapidly. With this expansion, the volume of through traffic carried often made the difference between a road’s financial success and failure. The need to assure a steady flow of traffic created a constant pressure for railroad managers to obtain through freight from other roads on parallel routes. They did so by cutting rates and by aggressive advertising and selling.

To control such competition railroad managers turned to cooperation. In order to obtain this constant flow of traffic across their lines, they made informal alliances with competing and connecting roads. When growing pressures to obtain through traffic weakened these alliances, railroad managers set up more formal federations, creating some of the largest and most sophisticated cartels ever attempted in American business. But these cartels rarely worked. If cooperation to expand the flow of through traffic proved to be a great success, cooperation to control competition was a resounding failure.

The new class of middle and top managers had the responsibility for defining the new types of interfirm relationships. The part-time members of the board of directors had neither the time, the training, nor the technical understanding and competence needed to decide complex questions of cooperation and competition. The managers at the lowest level, the di- visional level, concentrated wholly on the functional tasks required to move trains and traffic safely and efficiently. The middle managers were the persons who devised the organizational procedures and worked out the technological standardization necessary to achieve a national railroad system. Constant consultation and cooperation on complex common prob-lems brought these managers a sense of professionalism that had never existed before in American business.

The top level managers defined their relationships with other roads in more strategic terms. They decided when and where to make alliances and form cartels and when to abandon them. These decisions required the approval of the representatives of the owners on the board. Normally the top salaried managers and the members of the board agreed on strategies of alliance and cartels. But when they did not, the managers usually came to have their way.

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

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