Steam revolutionized ocean-going transportation and the new lines became a significant part of the modern infrastructure, but of all the new forms of transportation and communication, steamship lines had the least impact on the development of modern business enterprise.
Steam power began to alter ocean-going transportation in the 1850s, at almost exactly the same time the railroads were beginning to transform overland transportation and the telegraph overland communication.1 Be- fore Samuel Cunard moved the terminus of his four ship lines from Boston to New York in 1848, only a tiny number of steamships traveled the North Atlantic routes. In the following decade, Cunard, Edward A. Collins, William Inman, and other entrepreneurs expanded service with improved ships using iron hulls and screw propellers. In the early 1850s scheduled steamship lines were operating from New York, Philadelphia, and New Orleans to France and Germany as well as to Great Britain. At the same time, steamships began to replace sailing vessels in the coastal trade.
The new steam driven ships with their iron hulls carried larger cargoes and were faster and more regular than sailing packets. Whereas the westbound trip of a sailing ship ranged from three weeks to three months, with an average of thirty-five days, the steamship reduced the time to ten days or two weeks. On the eastbound trips, where the prevailing winds meant an average sailing voyage of about twenty-five days, the steamship still far outpaced the fastest clipper. By the coming of the Civil War, the steamship had taken over the best paying routes from the sailing packets. After the war the steamship steadily replaced sailing ships on the less- used routes, where unscheduled tramps moved from port to port picking up and discharging cargo.
The post-Civil War shipping enterprises on the most heavily traveled routes grew to unprecedented size. John B. Hutchins, the historian of the American maritime industries, has pointed out how the volume and cost of operations affected the size and organization of shipping enterprises:
To provide frequent freight sailings, large firms often found it necessary to use a score or more of ships. It became important to reduce the port time of these costly fleets as much as possible in order to increase earnings capacity. Office staffs for the solicitation of passengers and freight, the quoting of rates, and the rapid collection and distribution of mixed cargoes became essential. In order to contact shippers and passengers and to ensure a steady supply of business it became even necessary to establish inland offices and agencies and build up elaborate organizations at all ports touched by the line. Advertising designed to differentiate the service of each line and to build up good will became an important element in the economic arsenal. It also became necessary to create shore staffs to handle the problems of repairing, outfitting, provisioning, and otherwise operating the ships economically, and to rationalize many other activities. Such matters, which were formerly handled by the shipmaster, could no longer be cared for quickly and economically by them.2
To meet these many needs, British, German, Dutch, and French entre- preneurs, usually with subsidies from their governments, formed large enterprises manned by salaried middle and. top managers.
American entrepreneurs and financiers, however, made little effort to compete in the international ocean-going trades. The high costs of Ameri- can ships and labor as well as the lack of subsidies prevented Americans from seriously competing in the transatlantic and other ocean trades.3 Only seven American shipping enterprises operated in international trade at the beginning of the twentieth century. These lines relied primarily on ships flying foreign colors. Of these seven, two were owned by industrial firms— United Fruit and Anglo-American Oil (a subsidiary of Standard Oil of New Jersey)—and a third by a railroad—the Chesapeake and Ohio.4 None was the size of even a small railroad system.
In the American coastal, river, and lake trades that were reserved for American shipping companies by congressional legislation, most lines by 1900 were owned and operated by railroad systems. System-building, as the experience of the Pennsylvania and the Baltimore & Ohio indicated, entailed the acquisition of connecting steamship lines to Europe and South America as well as to other American ports. In most cases the roads dropped their transocean enterprises but did continue to operate the coastal ones.5 Thus in the northeast the New Haven was by 1900 operating much of the shipping along the New England coast. On the west coast the Southern Pacific controlled and operated the Pacific Mail Line established in the 1850s. It also owned a shipping line in the Gulf. The Southern Railroad, the Central of Georgia, and the Atlantic Coast Line all had their own ships operating in the Gulf and along the southeast coast. As a prominent shipowner, Henry Mallory, wrote in 1903: “There are but two independent lines doing business on the coast [south of New York], the Mallory and Clyde lines. All others are owned by railroad companies.” Even those two independent lines were closely allied to major railroad systems.6 In this way American shipping became closely integrated into the national railroad network.
Not surprisingly, the merger movement in shipping was only a pale imitation of that which occurred in railroads and industry. There were only two mergers of any note, one in the coastal trades and the other in international shipping. Both were less than successful. In the coastal trades Charles W. Morse, a Wall Street speculator, formed in 1906 a combination of six independent lines operating on the east coast and in the West Indian trade. These included the Mallory and Clyde lines, two lines serving northern New England and the Maritime provinces, and two lines serving the West Indies.7 The combination, however, lasted only a few months, for Morse was forced into bankruptcy during the panic of 1907. In the resulting reorganization the four lines operating in the coastal trades south of New York to the West Indies were administered by the Mallorys. That enterprise, the Atlantic, Gulf & West Indies Steamship Lines, made little attempt to centralize the administration or to coordinate the activities of these four operating units. Such an enterprise required only a handful of middle and top managers; thus, the Mallorys and their associates who owned the line continued to manage it.
Inspired by his successes in railroad consolidations, J. P. Morgan at- tempted a comparable merger in ocean-going shipping.8 In 1902 his firm formed the International Mercantile Marine Company, capitalized at $130 million. It soon owned 136 ships, or one-third of the dry cargo vessels employed in the North Atlantic carrying trades. Although it became the largest shipping enterprise in the world, at least thirty American railroad systems were larger in terms of assets and employees. Unlike the railroad systems, it never was profitable. The new combination made little attempt to centralize its administration, but remained a federation of autonomous lines. Since it failed to benefit from any gains of administrative coordination, it rarely paid a dividend even on its preferred stock. In 1914 it defaulted on its bonds. Financial reorganization and wartime demands only temporarily revived the enterprise. After World War I it managed to limp along until the depression, and finally ceased to exist as an operating company in 1937.
Thus no successful giant shipping concern appeared in the United States. The gains from administrative coordination were on a much smaller scale in shipping than in railroading, and the services of career middle and top managers were therefore much less needed. On the lines that became parts of larger railroad systems, these functions were carried out by the railroad managers.” The few remaining independent lines, such as the Grace Lines that shipped to South America and the Matson Lines that served Hawaii, continued, like the Mallory Lines, to be operated by their founders and their families. Modern managerial enterprises never fully developed in American shipping. Nor did American shipping enterprise ever play a significant part in worldwide shipping or on the American business scene.
On the other hand, managerial enterprise became the dominant form in the operations of another quite different type of transportation—mass transit in American cities. Here a new technology brought an amazingly swift transformation in the structure of the industry and of the enterprises providing these services. The new technology, in turn, was a response to the almost desperate need to find a substitute for the slow, expensive horse-drawn streetcar.10 The first substitute was the cable car, initially put into operation in San Francisco in 1873. Moved by steam- powered cables, such cars moved faster and cost less per passenger mile to operate than horse-drawn cars. But the cable car system was expensive to install and to run, and difficult to operate except in a straight line between two points. Although at least nine major American cities had cable cars by 1890, such systems still made up only 6 percent of the street railway mileage operated in the United States in that year.11
Electric power provided the solution. The electric streetcar system was cheaper to install than cable car systems and almost as flexible to operate as the horse-drawn car. After the first system installed in Richmond, Virginia, in 1887 had proved itself, electric traction quickly replaced other modes of urban transportation. By 1890, 15 percent of urban transit lines in the United States were already using electric-powered streetcars and by 1902, 94 percent were. By then only 1 percent still employed horses and another 1 percent cable cars. The remaining 4 percent was either steam- driven elevated roads or new electric-powered subways.
The new technology brought an immediate organizational response. Before the invention of the electric streetcar, ten to twenty different transit lines operated horse-drawn cars in major American cities. These enterprises were relatively small and required little in the way of experienced managers. They continued to be operated by their owners. Often these lines competed in the traditional ways, along the same route. Only in larger cities such as New York and Boston were several horse-drawn car lines merged to create a unified transportation network for at least one section of the city.
Electric traction brought consolidation and centralized administration to urban transportation. The new equipment was costly, requiring the installation of new track and repair and maintenance facilities, as well as the purchase of more expensive cars. Operation was technically far more complex. Since the cars moved at greater speed and could carry greater loads, careful scheduling became essential. Faster, cheaper service in turn led to a more rapid increase in passenger traffic and so further intensified the need for careful administrative coordination. Both operational and financial requirements thus caused mass transit in American cities to be operated by a small number of large enterprises. In most cities, urban transit was monopolized by a single enterprise.
The full-time salaried managers hired to administer these enterprises established organizational structures and accounting and statistical con- trols. These they borrowed directly from the railroads. In Boston, for example, the West End Street Railway Company in 1887 merged seven out of the eight street railways in Boston to form a single transportation network connecting the city with Brookline, Cambridge, and other suburbs. In the next year its promoter, Henry Whitney, began to install electric power, and its general manager, Calvin Richards, set up a line and staff type of organization to supervise the eight operating divisions, each headed by a division superintendent.12 Its staff offices included a master mechanic’s department to service the equipment, a roadmaster’s department to build and repair the lines, a purchasing office, and a legal office. One office that differentiated this structure from that of the railroad was the department of inspection. Its function was to assist the general manager and the division superintendents in coordinating operations. This department trained and checked on the work of employees, made studies of local traffic patterns, and adjusted schedules on the basis of changing demands. At rush hours, departmental supervisors were placed in charge of loading, unloading, and moving cars. As the largest New York enterprise, the Metropolitan Street Railway Company, began to shift from cable and horse to electric-powered cars in 1893, its senior managers adopted a similar structure. The dominating systems in Philadelphia, Chicago, and other major cities soon followed suit.
At first the salaried managers of these traction companies had to share top-level decisions with the entrepreneurs who created the consolidated system. In the nation’s largest cities, a small group of men who knew each other personally—Peter A. B. Widener, William I. Elkins, William and Henry Whitney, Thomas Fortune Ryan, and Charles T. Yerkes—became specialists in negotiating mergers, in raising the needed funds, and in making the political arrangements to transfer franchises to the new con- solidations. In Boston, New York, Philadelphia, and Chicago, these entrepreneurs were able to reduce fares so that 5 cents carried a passenger to nearly all parts of the city. At the same time, they made huge fortunes by skimming off the profits resulting from the technological and organi- zational innovations. But as the cost of construction and maintenance increased, and as public pressure prevented the raising of the 5 cent fare, these promoters sold out. They were replaced on the boards of directors by investment bankers whose firms sold the bonds to finance expansion, and by the representatives of the public commissions or municipal gov- ernments which increasingly took the responsibility for financing and constructing the growing systems.13 By World War I, urban transportation was operated by salaried career managers who shared their decisions about capital outlays and pricing with investment bankers and representatives of the public.
By the beginning of the twentieth century, therefore, the small per- sonally owned transportation enterprise had all but disappeared. It con- tinued to exist only in the livery, cab, and wagon businesses that still relied on the horse for motive power. A very small number of steamship lines not owned by the railroads remained entrepreneurial enterprises, that is, their owners employed salaried middle managers, but the owners still made top management decisions. The rest of American transportation had become administratively coordinated by managerial hierarchies. Fewer than forty giant railroad systems operated over 80 percent of domestic rail and water interurban facilities. Within a city one or occasionally two or three managerial enterprises handled the movement of passengers.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.