Top Management Decision Making in the 1880s

The 1850s were a time of building and of learning to manage the railroads as the nation’s first modern business enterprises; the 1860s and 1870s were a period of coordinating and competing for the flows of through traffic; the 1880s and 1890s were the years of system-building. The perfecting of internal organization and the coordination of flows across and between roads had been largely the job of middle management; system- building was almost completely the task of top management.

The top managers of American railroads made the alliances with con- sulting and connecting lines. They decided when to join and how long to stay in the great cartels. And they established when and where to buy, lease, or build the small feeder lines in the 1860s and 1870s, and where and when to build the giant interterritorial systems in the 1880s and 1890s. In a word, top management determined the long-term objectives of the enterprise and allocated the resources in men, money, and equipment needed to carry out these goals.

The senior executives who made the decisions concerning the road’s basic policies and its strategies of growth included two quite different types of businessmen: the manager who had made a lifetime career in railroad operation and the entrepreneur or financier who had invested capital in the road. The full-time, salaried executives on a large railroad included the president, treasurer, general manager, and heads of the transportation and traffic departments. Of these, the last three were almost always career managers. The president and treasurer, on the other hand, were often major investors or their representatives.1 The policies and strategies decided by these top managers required the approval of the board of directors, particularly its chairman. These board members, successful businessmen in their own right who served the road on a parttime basis, were almost always either large investors or spokesmen for investors.

The goals of these two groups were not always the same. The managers, who rarely owned large blocks of stock, looked to the long-term health and growth of the organization in which they worked and to which they had often devoted their whole careers. They were willing and indeed usually preferred to reduce dividends to assure long-term stability. The representatives  of  the  owners,  on  the  other  hand,  gave  priority  to maintaining dividends that would assure a reasonable continuing rate of return on their investment. Investors were therefore reluctant to spend large amounts of capital for expanding a road’s facilities. Such expenditures could reduce, often for extended periods of time, the dividends the road paid. In the formulation of strategic decisions, the financiers in top management were almost certain to have the support of the investors on the board of directors.

The types of investors whose representatives sat on the boards and be- came presidents and treasurers changed between the 1850s and the end of the century. At first, investors were merchants, farmers, and manufacturers, who initially promoted and financed their roads in order to improve the economic fortunes of their particular city or region. As the roads grew in size and required increasing capital, and as local funds had to be supplemented by those from the nation’s oldest and largest commercial centers, presidents and boards came increasingly to represent general entrepreneurs who had access to pools of capital. In carrying out their territorial strategies of alliances through stock purchases and new con- struction, railroad companies, particularly those in the south and west, began to rely for funds on such eastern capitalists as the Vanderbilts, the Forbeses, Nathaniel Thayer, Erastus Corning, Moses Taylor, John N. A. Griswold, William Osborn, and Henry Villard. These men invested their own funds and those of associates in the expectation that the railroads would continue to be profitable by helping to develop the territory they served. Then as roads began to build their interterritorial systems, they had to rely increasingly on the specialized investment bankers with close ties to British and European sources of capital to supply the massive amounts of money needed. In this latter period the members of the powerful investment banking firms of J. P. Morgan; August Belmont; Kuhn, Loeb; Lee, Higginson; Kidder, Peabody; Speyer; and E. W. Clark came to dominate the boards of the new railroad systems.

There was yet another type of businessman who determined railroad strategy and served on boards or as president or treasurer. This was the speculator. The speculators differed from the managers and the investors; they had no long-term interest in their enterprise. They did not expect to make their livelihood or receive an income by providing transportation services. Their profits came instead from exploiting ancillary operations such as construction and express companies, from obtaining land and mineral rights along the line of the road, and, most often, from making money by manipulating the price of the roads’ securities.

The centralization and institutionalization of the capital market during the 1850s, so essential to the raising of the large sums of money required for railroad building, provided the instruments and procedures that made possible a new style of speculation. The most renowned of the speculators—Drew, Fiske, Russell Sage, Sidney Dillon, George I. Seney, Calvin Brice, and Samuel Thomas—would never have been able to buy and sell large blocks of stock, control roads, and manipulate their securities had not these new institutions and methods for the large-scale transfer of securities been perfected on Wall Street.

The strategies resulting from the interplay of speculators, investors, and managers reveal much about the process of growth in the first modern business enterprises. These strategies involved the allocation of much more capital and personnel and affected the economic lives and activities of many more Americans than did the investment decisions of any other type of nineteenth-century business firm. And they led to the creation of giant enterprises that consolidated and internalized the property, personnel, and activities of a number of already large bureaucratic corporations.

The formulation of the strategies that created these “megacorps”2 indicates much about the motives of the managers, investors, and specu- lators who guided the destinies of American railroads. The systems were not built to reduce costs or increase current profits. The strategies of growth were not undertaken to fill any need for or to exploit the oppor- tunities resulting from improved administrative coordination. By the 1880s such coordination had already been achieved for the American railroad network through interfirm cooperation. Other economies of scale brought some cost reductions, but they were far outweighed by the large expense of building and buying facilities which could not yet be fully used by existing traffic. The basic motive of system-building was, therefore, defensive: to assure a continuing flow of freight and passengers across the roads’ facilities by fully controlling connections with major sources of traffic.

System-building proved costly to individual roads and to some extent to the national economy as well. The great growth of the individual enterprises often led to a redundancy of facilities. During the 1880s more miles of track were built than in any other decade in American history, and in the 1890s more mileage was in bankruptcy than in any decade before or since. The overconstruction resulting from system-building was on a much greater scale than the overbuilding stimulated earlier by the optimism of promoters or the lure of land grants. In time, however, most of the new roads became fully used. Many redundancies were temporary ones.

In the interplay between the three types of businessmen who deter- mined railroad strategy, the investors played a passive role and the man- agers and speculators an active one. Once the investors and managers agreed on a strategy of expansion, the managers planned and carried it out. But it was the speculators who normally convinced the investors to permit the managers to embark on such a strategy. Given the steady pressure of high constant costs and the legal and administrative difficulties involved in maintaining cartel arrangements, the large systems would probably have appeared even if the speculators had not been active. By the 1880s the managers were becoming convinced of the inadequacies of the existing policies of alliances and federations. Investors were beginning to agree, even though they still balked at paying the cost of systembuilding.

It was, however, the speculators who shattered the old strategies. They were the first to disrupt the existing alliances. They undermined the viability of the regional railroad cartels since they often had more to gain from violating than from maintaining rate agreements. Sudden price wars and unexpected peace treaties effectively depressed and raised security prices. The speculators had none of the “good faith” Fink insisted was essential to make the cartels work. It was the speculators, then, who precipitated system-building in American transportation.

The interplay in the top management of railroads between the salaried managers, the investors, and the speculators affected the roads’ organiza- tional structure as well as grand strategy. In designing structures needed to manage these new megacorps, managers, investors, and speculators sought different solutions that reflected their different experiences and aims. After 1900, however, when the systems were completed and strategic planning was no longer of major significance, the American railroads nearly all came to have much the same type of internal structure.

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

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