The Traditional Enterprise in Commerce: Managing the Specialized Enterprise in Finance and Transportation

In managing the specialized enterprise in transportation and finance, American businessmen were somewhat more innovative, although their practices did not differ greatly from those of their British and Dutch predecessors. In the operation of private banking firms and shipping lines, they continued to use the partnership form and the same types of internal record keeping used in mercantile firms. Even more than the British, how- ever, they made use of incorporated joint-stock companies to organize and operate enterprises calling for a pooling of capital. In these firms one or two full-time salaried managers, rather than the owners, came to administer the enterprise.

In incorporated banks, the cashier and sometimes the president was a full-time executive. From the start he was responsible for the routine activities involved—handling withdrawals, paying and receiving interest, and redeeming notes and loans. At first the board of directors, consisting of local merchants and manufacturers, made decisions, in consultation with the cashier, on those matters which required business judgment and discretion. These included making loans on mortgages and other securities or even discounting bills of exchange based on goods in transit.66 Because board members were busy with their own affairs, these decisions were soon turned over to committees of the board which met weekly or often only once a month. Normally such committees were established to review discounts, exchange, and dividends. It was not long before the full-time cashier or president took over the making of loans, dividends, and the like, with the committees becoming little more than ratifying bodies.

Because bank cashiers and presidents were responsible for other peoples’ money, they had to have a more accurate and continuing current view of their enterprise’s financial situation than did the merchants themselves. Traditional double-entry bookkeeping, however, proved quite satisfactory in recording their banking transactions.67 The journal provided a chronological record of all daily transactions. The ledger listed the separate accounts of individuals dealing with the bank and, in addition, had separate accounts for deposits, withdrawals, discounts, loans, bills in circulation, bills of other banks held, amounts deposited in other banks, capital stock paid in, specie and other reserves, cash on hand, profit and loss, and dividends. Instead of annual balances the banks made monthly ones. By the first years of the nineteenth century, monthly balances were already being summarized in tabular form. The systematic tabulation and review of the accounts of banks were further encouraged by state legislation. Massachusetts, for example, as early as 1792, required its banks to make semiannual reports to its governor and Council of the Commonwealth. In 1806, the legislature called for monthly reports.68 Yet, while the banks kept a close watch on their general accounts, they did not seem to use this information in making policy decisions such as increasing or decreasing specie or other reserves, expanding or contracting notes, or even changing the mix between mortgage and commercial paper. These decisions appeared to have been made almost entirely on evaluation of current business conditions and the personal knowledge of the borrowers and markets.

Much of what has been said about the management of banks before 1840 applies to insurance companies as well. They too, found double-entry bookkeeping quite adequate for their needs.09 The day books, journals, and ledgers listed the individuals who paid premiums and received payments. In addition, they listed amounts invested or loaned out to firms, and the “disaster books” enumerated the details of each major casualty. Since a month-to-month knowledge of the company’s financial situation was less important, and since states did not require monthly reports, these accounts were not summarized as regularly as those of banks.

As in the case of banks, insurance companies also were administered by salaried managers, usually a president, secretary, and inspector.70 These men came to make important decisions even earlier than did bank cashiers, for the setting of insurance rates required specialized knowledge. To help provide such information, New York insurance firms in 1820 organized the first Board of Underwriters in the United States, which set rates for ships, cargoes, and even prospective freight earnings between New York and other ports throughout the world. Insurers in other cities soon had their Boards of Underwriters. In determining rates, these boards concentrated on obtaining, in Robert G. Albion’s words, “the freshest information possible, since that was highly essential to the business.” With such information, insurance executives were able to consider the age and condition of the ship, the reputation of the masters, and other factors in setting rates. Success in insurance depended even more than it did in banking on outside information rather than on accurate and detailed internal accounting.

Of all the financial institutions operating in the first half of the nine- teenth century, the Second Bank of the United States was the most complex to administer. It involved the management of not one but many units. Its numerous branches made it the first prototype of modern business enterprise in American commerce. During the brief period when it played a dominant role in the financing of American long-distance trade, it carried on a huge volume of business for its day. In January 1832 the bank had loans outstanding on real estate and other personal securities at 149.7 million.71 Its domestic exchange accounts amounted that month to 116.7million. In addition, it held S2.1 million worth of real estate acquired from foreclosed mortgages. In January 1833 its monthly profit on loan and domestic exchange reached |i.8 million. It did more business in a month than leading mercantile houses did in a year. For example, the consolidated profits of the five senior partners in the several interlocking units of the house of Brown, the largest American mercantile house, were for 1831 and 1832, $391,465 and $393,541.

Nevertheless, a very small number of men had little difficulty in man- aging this high volume of business. The Second Bank’s president, Nicholas Biddle, had only two assistants.72 One reviewed and coordinated the bank’s exchange business, the other was responsible for suspended and other unpaid debts, and for the bank’s real estate holdings of foreclosed mort- gages. Biddle and these two salaried managers supervised the work of the cashiers of the twenty-two branches. These cashiers were salaried managers who were selected by and were subject to dismissal by Biddle. The tiny headquarters staff reviewed the detailed weekly statements sent in by the cashiers, made regular inspection trips, and took action on the evaluation of the information they received. Biddle, after consulting with his assistants, met with his board of directors to set up general policies for the bank as a whole. He did not, however, have comparable contact with local boards of directors who worked with the local cashiers in managing their branches. These autonomous local boards could and often did act on their own. The volume of business carried on by the biggest and most powerful financial institution of the day was not yet large enough to require the creation of a managerial hierarchy.

Nor was this the case in transportation. As has been emphasized, two types of transportation enterprises appeared in the early nineteenth cen- tury: common carriers that moved goods and packages, and turnpike and canal companies that built and maintained rights-of-way. The first were operated by partnerships; the second by a corporation or by the state. Until the 1840s, the investment in sailing ships, steamboats, canal boats, stagecoaches, and wagons remained small enough to be easily funded by a small number of partners. On the Mississippi and on other western waters, Louis Hunter has pointed out, “the construction costs of a single mile of a well-built railroad was enough to pay for a new and fully equipped steamboat of average size.”73 By 1840 the normal Mississippi steamboat cost about $30,000 and the largest, most elaborate ones ran as high as $60,000. The initial cost of steamboats on the Hudson River and Long Island Sound was about the same. The largest and best appointed vessels in Commodore Cornelius Vanderbilt’s fleet ran about $6o,ooo.74 Crews on the river and sound steamboats included a captain and a mate (the only two supervisory personnel) and averaged just over twenty hands. Occasionally crews ran as high as fifty. Half of these were involved in serving passengers. The annual operating expenses of a Mississippi steamboat, Hunter estimates, were one and one-quarter to two times initial cost.75 The initial costs of the fast and rugged packets, the most expensive of the sailing ships on the transatlantic run, were somewhat more than the river and sound steamboats. Robert Albion estimates that the packet boats were built in the 1820s at about $30,000 apiece. In the 18 30s they costover $40,000 and approached $ 100,000 by the. end of the 1840s.76 The crews on the Atlantic sailing ships were larger and operating expenses were somewhat higher than those on the steamboats plying river and sound. The expenses of manning and operating freight barges and packet boats on the canals were, of course, much less. The most elaborate canal packet, fully furnished, cost $1,500. It was manned by a crew of seven and pulled by two horses.77 Stagecoaches and wagons were even less expensive to build and operate.

Normally steamboats on rivers, lakes, bays, and sounds, the oceangoing sailing ships, and even the horse-drawn canal boats were owned by more than one individual. On the Mississippi in 1830 the majority of steamboats were owned by two to four businessmen (56.8 percent, while 18.9 percent were owned by single individuals and 24.3 percent had five or more owners).78 The pattern was much the same in the coastal and transatlantic trades. The owners on river or ocean were normally merchants in river ports and seaports who benefited by having their carriers available. The ship’s captain was usually one of the owners, so too was the line’s business manager, and, in the case of tramps, the ship’s husband.

Before the 1840s these transportation enterprises operated a relatively small number of ships or vehicles. Most freight-carrying sailing ships, steamboats, and even canal boats were tramps moving only when they had a load, but following fairly regular routes. The scheduled packet lines on all waterways were loosely organized affairs. On the Mississippi, boats participating in a shipping line were owned separately and, except for maintaining a schedule, were operated independently.79 Even these schedules were subject to repeated changes. In the east, the Hudson River Steamboat Association, which Vanderbilt effectively challenged in the 1830s, was a similar organization. Few of these lines ever operated more than three or four ships on one route. Vanderbilt himself, who became one of the largest and most successful steamship operators in the country, rarely ran more than four ships at one time.80 The transatlantic packet lines normally operated four ships, but some occasionally had as many as eight.81

On the canals, some freight forwarders owned fleets of a dozen or more boats. Rarely, however, were the total expenses of obtaining and operating such fleets as much as those of a single steamship or a mile of railroad.82 Very few lines remained permanent enterprises, since partners changed and ships serviced different routes and trades. Traditional double-entry bookkeeping was adequate for their operating needs. Throughout the first half of the nineteenth century common carriers were operated by small personal enterprises whose management was similar to that of other commercial firms.

On the other hand, a great deal more money and many more men were required to build and operate the overland rights-of-way—the turnpikes and the canals. Also, much more capital, professional skill, and specialized management were needed for the canals than for the turnpikes. On a canal a professional engineer had to lay out the route of a canal, estimate its cost, supervise construction, and, once built, repair and maintain the right-of- way. The engineer in charge of construction usually reported to a board of directors or a state canal commission. After he had located the route and estimated the cost, he normally continued to advise the board or the commission on the writing of contracts. He then kept his eye on the construction done by contractors who were hired by the corporation or the state.83

Before the 1840s turnpikes and canals, even the largest of them, were built by small contractors, who at first were local farmers, merchants, and even professional men. They built one or two short stretches of a project, using local labor.84 Only on the Chesapeake and Ohio was imported labor used to any significant degree. By the mid-18 30s some small contractors had become specialists, moving from place to place as new projects were undertaken. They ran their businesses much as did the merchants and shippers of the day. “Contractors often formed partnerships,” the historian of the Ohio canal system has noted, “and one man might have different partners for each of several bids on various jobs.”85

The operations of a turnpike or canal required a far smaller work force and far less working capital than did the construction. Toll keepers, lock tenders, and other operating employees were usually supervised directly by the corporate board or state commission; maintenance crews reported to a salaried manager, often a trained engineer, who was in turn responsible to the board or commission.86

The management of the nation’s largest and one of the earliest canals, the Erie, set the pattern for others. A board of five canal commissioners appointed by and responsible to the New York state legislature admin- istered the canal. Of these five, three were “acting commissioners” each with special responsibility for one of the canal’s three geographical divi- sions. A fourth was the state comptroller, traditionally a leading politician who controlled and allocated state patronage. The fifth had no specific duties. The commissioners set tolls and regulations for boats and cargoes, hired employees, and were responsible for allocating funds for construction and repair. However, they left the financing of new construction and the handling of profits made by the enterprise to still another board, the commissioners of the canal fund, headed by the state comptroller. Until 1840, all employees, except those involved in maintenance and construc-tion, reported to the comptroller. These toll collectors, inspectors of boats,

weigh masters, and lock tenders were expected to keep the comptroller, in the words of the canal’s most recent historian, Ronald E. Shaw, “informed of breaks in the canal, the progress of repairs, the balances of canal deposits in local banks, conflicts with local authorities, and infractions of the rules and penalties imposed.”87

Employees must have reported to the comptroller on monies received and spent. The canal commissioners apparently did not develop any systematic reporting or auditing of accounts kept by the toll keepers and other employees. One commissioner angrily complained in 1833 to the comptroller that: “In the history of public expenditures I do not believe there is such an instance of want of system and accountability.”88 Nor were the relations between the operating employees and the repair crews clearly defined. One or two repair crews of from five to ten men working from a “State skow” reported to the acting commissioner responsible for their division. At the same time, the canal engineer and his subordinate resident engineers (there was one for each division) were responsible for major construction and repair.

The only significant administrative change on the Erie Canal came in 1841 when the comptroller—a post held by such eminent politicians as William L. Marcy, Silas Wright, and Azariah C. Flagg—was relieved of his supervisory duties. These were handed over to a Canal Department which consisted of a chief clerk and four assistants.89 Even the members of this tiny group and the canal engineer and his three division engineers, who together formed the total managerial force of the canal, had little permanency. All jobs on the canal continued to be patronage at the disposal of the party in power. “Every shift in political power in the state,” Shaw emphasizes, “brought new engineers, collectors, weigh masters, boat inspectors, superintendents, and lock tenders to the entire line of the canal.”90

The management of the Pennsylvania and Ohio Canal systems, as well as Maryland’s Chesapeake and Ohio, was similar to that of the Erie.91 The commissioners in Pennsylvania were elected, those in Ohio and Maryland were appointed. On the Pennsylvania and the Ohio systems the operating employees (toll collectors, lock tenders, and so forth) and the maintenance staff were supervised by the acting commissioner in charge of one of the canal’s three or four major geographical divisions. On the Chesapeake and Ohio all but the heads of the maintenance crews reported to the “superintendent” in charge of each geographical division. The maintenance crews reported directly to the commissioner. There appears to have been as little systematic reporting and auditing of accounts on these canals as there were on the Erie. No large canal adopted a formal internal organizational structure, for the commissioners had little difficulty in maintaining personal contact with the very small number of managers involved in operating and maintaining the canal. And since all jobs on these canals were looked on, as they were on the Erie, as political patronage, no major state canal system developed a set of experienced workers, to say nothing of a cadre of career managers.

Yet neither a more efficient work force nor a larger and more effectively organized managerial staff would have increased the speed or enlarged the volume of goods transported through these canal systems. More systematic accounting and controls might have reduced operating and maintenance costs and, therefore, lowered tolls by a small amount. Such controls might have prevented some delays in the movement of goods. But the speed and size of canal boats were limited by the amount a team of draft animals could pull. Sustained speeds of four miles an hour were rare. Such low speeds required little careful scheduling and control. Moreover, the weather, droughts, freshets, and ice shut down parts or all of the canals far more often and for longer periods of time than any management error or dilatory work force. Careful internal organization, so absolutely essential for safety and efficiency in moving railroad traffic, was far less necessary in canal or water transportation.

Except in the financing of long-distance trade there was as little need and as few opportunities in banking as in transportation to depart from traditional methods. In funding those trades, the use of branches did provide for the internalizing of activities of several business units and the transactions between them. Only the Bank of the United States, however, with its unique federal charter and its special relationships with the federal government, had the facilities to coordinate administratively the high- volume flow of funds used to finance the movement of commodities and finished goods through the economy. Because this coordination involved accounting transactions on notes payable within two or four months, it was not affected by the slow and uncertain movement of mail that in the 1830 s still required, at the very least, two weeks to go from Washington to New Orleans.92 Even so such coordination was only possible by a national institution with massive financial resources. The largest of the newly specialized merchant banks did not yet find it necessary or profitable to set up branches manned by salaried employees. They continued to rely, as had mercantile enterprises for centuries, on interlocking partnerships and other merchants acting as their agents to handle their distant financial transactions. In these specialized ancillary transportation and financial enterprises, as well as in the increasingly specialized primary mercantile enterprises which distributed goods in America, there was still no call to create anything comparable to the modern business enterprise with its many units and its hierarchy of managers.

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

Leave a Reply

Your email address will not be published. Required fields are marked *