Railroads and the Beginnings of MODERN

MANAGEMENT
Professor Mary A. Yeager
Week 7, Lecture 7.2
Railroads

Last Week With Professor Yeager

Railroads, guesstimating Impact on Growth and Development

Changing Technologies: standard track guage by 1870s; bigger
freight cars; brake systems
Passenger miles and ton freight miles increase 500% and
6,000% respectively
From about 30,000 miles of Track in 1850s to 200,000 miles
1900
Employees jump from about 100,000 in 1870s to about 1million
1900; aristocrats of labor, RR engineers like Eugene Debs
High Finance/Big Finance, Investment Bankers JP Morgan,
Railroad Investors Hetty Green: monetary debt of rrs increases
Changing Notions of Time (speed-up),
Impact on Commerce (changes flows of traffic); Agriculture
(Red River Valley, Wheat Exports increase; Industry,
machinery, iron, coal(delayed)
Uneven impact on regions: distinguish Transcontinentals from
pre-CW RRs 1840-1860
Growth: Fishlow,1859, 4% SS; Fogel, 1890, 3% SS
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Railroads and the Coming of Modern Managerial Capitalism

Chandler: Its all about the organization and management of work,

about managers/workers and the interrelationship of markets and
technology

Railroads: The Coming of Big Business, the making of a year-round,

national market

RRs revolutionized agreed upon relationships among people

Ushered in the modern era of MANAGERIAL CAPITALISM: separation of

ownership from control, concentration of power in hands of managers
visible hand of management (as contrasted with a more personal style
of mercantile capitalism, where owners managed, firms tended to be
small, competition atomistic and independent)

Dramatic and simultaneous expansion of numerous rail networks

create new problems

LEARNING HOW TO MANAGE A RAILROAD EFFECTIVELY AND

EFFICIENTLY IS NOT EASY: ORGANIZATION IS NECESSARY

THE MAKING OF A MANAGERIAL CLASS

WHO ARE THE MANAGERS? WHAT DO THEY DO? HOW DO WE
EVALUATE THEIR CONTRIBUTIONS?

Meet a few of the most important railroad men, read some of their
writings, and you decide:

Daniel McCallum (1815-1878), immigrant, elementary

education in Rochester, NY, carpenter, engineer, by the 1850s,
a bridge-builder; CW logistics for the Union, Major General, poet
1851 APPOINTED GENERAL Superintendent of Erie RR, which
was experiencing operational difficulties: high
costs
(operational alone=$2,500,000; $700,000 alone in
salaries, with 4,000 employees; competition from NYC

Daniel McCallum,
Erie RR

McCallums Contributions to RR history and Management

Problems diagnosed: railroads are big businesses, geographically

dispersed enterprises where multiple activities must be managed
sight unseen; problems of power and authority, failure meant
destruction of property as well as lives

McCallums Solutions: (1)ORGANIZATION (2) SYSTEM

which together will channel the right information needed to run
the road to those people responsible to act on it
a) define tasks, separate line from staff (very crudely),
and
give them power to render their position
efficient;
b) evaluate managers objectively on how they performed;
quantitative data used to
measure and motivate

--First Organization Chart (sold for $1 a copy), centralization

--Nevertheless, Erie fell into the hands of speculators (JSG) more
interested in manipulations than operations
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Another Manager, Another RR, C, B&Q

Charles E. Perkins, 1840-1907, New Englander, educated in public

schools in O, and Mass., job with a wholesale fruit concern in
Cincinnati, persuaded by a cousin John Murray Forbes, merchant/rr
investor, to become a clerk with Burlington & Missouri River , rose
quickly within C, B&Q, 1881 President

C, B&Q, rapid growth: 600 miles of track 1870, to 5,000 in 1887;

many details to oversee: amount of expenditure, number of
contracts, negotiations, reports, interviews, new schemes, etc

Perkins innovates: modern, multidivisional organizational form

Key: decentralization, modular structure, if road grows, simply
add section man, more growth, asst superintendent etc; later
this form used to manage product/market diversification
staff deals with things; line with people

-- Were There Other Alternatives? Focus on markets more than

geographic segements; centralized, functionally departmentalized
-- What is Missing: nothing about labor force; nothing about marketing

Charles E. Perkins,
C,B&Q RR

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One More Innovator, Albert Fink: Railroad Economics and

Competition

Albert Fink (1827-1897), born Lauterbach, Germany, educated in engineering and architecture in Darmstadt,
immigrated to US in 1849, employed in drafting office of B&O RR; invented bridge truss; 1857, construction engineer
for Louisville & Nashville RR, Chief engineer, then VP and General Superintendent; produced annual reports praised as
The fullest investigation into the cost of railroad transportation ever published in our country or language.

Developed Modern Cost Accounting : relationship of fixed to variable costs; use of statistics to determine operating
profile of a division; use of statistics to evaluate managements

Cost pressures of RRS: Fixed costs: costs of owning and operating a railroad; variable costs, expenditures which vary
with the amount of work performed

Insisted that management by numbers was impossible; had to know what the numbers numbers
meant; use data to construct profile of divisions; makes it possible for him to evaluate railroad
management

Worked with trade groups to quell rate wars, became commissioner of newly formed Trunk Line
Association 1870s-1880s

New Competitive Patterns

oligopoly:
oligopoly: a situation in which two or more, most commonly a small number of firms each control a large enough
share of the market to influence the price and output behavior of a rival. (A market situation where there are very
few sellers. In it, each seller knows that the other sellers will react to its changes in prices and quantities.)

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New Patterns of Competition: From Atomistic to Oligopolistic

Competition

Oligopoly satisfies the following conditions:

a small number of large firms that dominate the industry;
a competitive fringe of smaller firms; and,
actions of a producer perceptible to rivals, i.e. interdependency of sellers
whereby action of one results in reaction of others.

In perfect competition and monopoly there exists a determinant solution to a firm's

price and output decision-making. When there are only a few sellers, however, each
firm recognizes that its best choice depends on choices made by rivals. There are
dozens of alternative oligopoly pricing theories and some economists claim there is
no determinant solution. In an oligopolistic market there is usually price stability
because of the interdependence of sellers. Interdependence results in 'game
playing' behavior whereby suppliers act like players in a game acting and reacting
to the moves of their competitors. Competition tends to take place on a secondary
level of: product differentiation; technological innovation; and, diversification, i.e.
producing more than one commodity. In theory, oligopoly is considered inefficient
because price is higher and quantity lower than under perfect competition.

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The Strange New World of Oligopolistic Competition

Non-Price Competition
If price is rigid, there is no 'price competition'. Instead,
competition between oligopolists tends to take the form of
what is called 'non-price competition'. This includes product
differentiation, product innovation and game playing.

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SPECULATOR JAY GOULD and THE COMING OF RAILROAD

CONSOLIDATION

Jay Gould

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COMPETITIVE STRATEGY

Competition between railroads is an entirely new business

phenomenon (Chandler)

Never before had a very small number of very large

enterprises competed for the same business. And never
before had competitors been saddled with such high fixed
costs (2/3 of total costs).
System building occurred not because of, but in spite of desires
of roads principal owners. Why?

Nature of RR Business and the Interplay of investors, managers

and speculators
Gould as Catalyst (JSG)

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Who Was Jay Gould?

-- one of the most cordially loathed moguls of his era
--there was a reminiscence of the spider in his nature. He spun huge
webs, in corners and in the dark, which were seldom strong enough
to resist a serious strain at at he critical moment. (Henry Adams)
--partner, Smith, Gould and Martin, Wall Street Brokers
born into poverty, NY, 1836
leaves home at 14, tries tannery work then moves on to
brokerage business
by 1892, the year he died, he had a fortune of $77 million
-- not admired, out for the dollars only!
-- Read JSG to see what he did , when he did it, and how his
competitors responded
--Speculators drove investors into the arms of managers and the
great systems were built

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A TRANSFORMATION IN ATTITUDES ABOUT THE RAILROADS

Changing patterns of Railroad Competition Breed Changing Ideas

about the RR

1840-1870: triumphant machine

1870-1880: ambiguous machine
1890s: soulless corporation

Complaints of RR constituencies:
Farmers
Shippers and merchants
Railroad executives

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Coming of Federal Regulation: Interstate Commerce Act

1887(independent regulatory commission)

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THE RAILROAD PROBLEM AND THE SOLUTION

FEDERAL GOVERNMENT had interfered in private economic affairs

before 1887 (embargo, Homestead, monetary affairs, stimulating
enterprises like Erie and other internal improvements
State regulation:
Granger Laws, Ill. Mid-West, rate setting, long-short haul
discrimination
Munn vs. Illinois (1877): Supreme Court declared public had
right to regulate common carriers, Granger Laws constitutional
Wabash, St. Louis and Pacific RR Co vs. Illinois (1886): rrs
operating in interstate commerce were immune from state
regulation, thereby reversing the previous decision
INTERSTATE COMMERCE ACT -- A NEW IDEA, backed up with a
new institution the interstate commerce commision

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INTERSTATE COMMERCE COMMISSION, 1887

Charges should be reasonable and just

Rebates illegal
No discrimination of people, company, firm, corporation, locality,
traffic
End to long-haul/short-haul discrimination
POOLING MADE ILLEGAL
Notification needed for rate increases
Punishment for violation: fines
Commission: 5 commissioners, sweeping powers, subpoena,
information, long-term effects

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INDEPENDENT REGULATORY COMMISSION

LEGAL MODEL OF PROBLEM-SOLVING

Independent from Politics, disinterested a-political expertise

Other Alternatives:
Do Nothing
Legalize Pooling
Sunshine Commission
Declaratory Act
Government Owned and operated RRs

Explain why US pioneered Independent Regulatory

Commission, which became archetype for other regulatory
efforts

By first decade of 20th Century, ICC s record very controversial

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