If a central theme can be found in the operation of American railroads during the 1860s and 1870s, it is cooperation. Interfirm cooperation was essential for the creation of an integrated national transportation network. Without such cooperation the standardization of equipment and operating procedures required to move through passengers and freight quickly and efficiently from one line to another would have been much slower in coming. This cooperation was also necessary, in the opinion of railroad men, to control competition. It was necessary to prevent a struggle for the growing through traffic from becoming, in their terms, ruinous. In carrying out both types of cooperation the middle managers played a critical role.
The middle managers provided the administrative coordination that replaced market coordination during these years. Their decisions coordi- nated the flow of goods not only across their own lines but also across the national network. They met in their professional associations to work out uniform operating procedures and to install standardized equipment. They were the men responsible for devising and perfecting a number of basic organizational and technological innovations so central to the efficient operation of the railroads. Albert Fishlow’s statistics suggest how well they performed these tasks.
The middle managers were less successful in cooperating to control competition. Again, the top executives—the president, the treasurer, the general manager, and the heads of the transportation and traffic depart- ments—decided on the basic strategies of alliances and federations. But it was the middle managers at the regional railroad conventions who determined the actual official rate schedules. They had the responsibility for maintaining these rates. Yet they were often the ones, particularly those in the traffic departments, who cut the rates in order to get or keep traffic. Or they looked aside when a subordinate received secret rebates from the shippers. And when traffic dropped off, they were also the ones who recommended to top management that the official rate structure be abandoned. Their willingness to subvert this structure resulted in part at least from the demands of their day-to-day tasks. Their success as managers depended on obtaining and holding customers. The surest way to do this was to shave a bit on the rates.
Yet such cooperation might have worked. The middle managers might have been more aggressive in maintaining rates and might have worked more closely with Fink’s minions in searching out the violators of existing agreements. If the cartel agreements had been enforceable in courts of law—that is, if they had been drawn up in the form of a legal contract— the costs of breaking agreements would have been much higher. Given the basic nature of railroad competition—competition between a small number of large enterprises with high constant costs—legalization of the cartel arrangements was probably the only effective method to control competition and so remove the incentive for system-building. But the hopes of Fink and others for legalized pooling had little political support in the United States of the 1880s.
When the United States Congress finally defined public policy toward railroad competition in the Interstate Commerce Act of 1887, it failed to sanction pooling. Indeed, the Congress forbade it. For many years railroad men agreed that if pooling were legalized an impartial commission, even one appointed by the government, should oversee ratemaking.51 Despite this proviso, shippers strongly opposed the proposal. As railroad rates were such a critical part of their profit calculus, these businessmen hesitated to give the railroads such economic power, even if a government- appointed commission did have the final say on rates. To Americans less involved in transportation, legalized pooling was merely legalized monopoly. Its approval by a majority of the voters would have called for a basic shift in American attitudes and values.
The railroad managers were sensitive to the growing political debate. Many were uncertain of the remedies. Some doubted that even legalized pooling could stablize the rates. Others were distrustful of government regulation. In any case, the political controversy helped to convince them further of the futility of relying on cartels to prevent ruinous competition. For most, the building of the large, self-sustaining systems was the only practical answer to interfirm competition. And in the 1880s, well before the passage of the Interstate Commerce Act, railroad managers turned with vigor to system-building. They turned from a territorial strategy to an interterritorial one. They moved beyond the area their roads were originally built to serve and began to connect the commercial centers and sources of natural resources of one of the nation’s basic geographical regions.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.