The Turnpike Era: 1800-1820
By 1800 there were about 20,000
miles of post roads in the United States. These were federally
subsidized (the subsidy was not very great) roads used to deliver the mail
(in the same sense that the superhighway system "Defense"
highways -- built by General Eisenhower were used to move armies around
the U.S.!). Article I, Section 8, Paragraph 7 gives Congress the power
to establish a Post Office and Post Roads.
These were not high quality roads. Independent local
construction companies built and maintained them and they were largely
financed by labor services.
The British blockade of the U.S. coastline south of New London,
Connecticut during the War of 1812 had the effect of highlighting the need
for a better internal road network.
This helped stimulate the construction of privately financed
turnpikes. By 1830 almost 12,000 miles had been constructed. Some were
very well constructed and were "macadamized".
Most of the turnpikes went bankrupt and even the well-built
and well managed ones only had a return of 3 to 4 percent on invested
capital. The charges to shippers were high running about 12 to 17
cents per ton-mile. Long distance traffic was the chief source of revenue
because rates were too high for short distance traffic.
Transportation costs from Buffalo to New York City in 1817 when
construction began on the Erie Canal were three times the market value of
a bushel of wheat and six times that of a bushel of corn. Small wonder
that upstate New York commodities were not being shipped in large
quantities to New York City!
Canals: 1825 1840
The Erie Canal
The completion of the Erie Canal in 1825
dramatically lowered transportation costs and set off a canal building
The annual net gain on the Erie Canal over its
first decade of
operation, 1826 1835, was about 8 percent of its total construction cost
per year! The Erie Canal helped make New York City such a
large trading center that it accounted for 50 percent of all U.S. foreign
trade and duties collected. Small wonder then that it touched off a canal
building boom in the U.S.
The Canal Building Boom
From 1815 1834 $58.6M was spent on canal construction of which $41.2M
were public funds. From 1834 1844 $72.2M was spent of which $57.3M were
public funds. And from 1844 1860 $57.4M was spent of which $38.0M were
The problem was that the Erie Canal was the only one that
made money! Geography had been kind to New York State. The Mohawk
river valley ran from the flat lands near the Great Lakes to the Hudson
River so that the Erie Canal only required 655 feet of lockage over its
In contrast, the Philadelphia Business and Political leaders
were faced with the horrendous task of building a canal across Pennsylvania
which would require 3,358 feet of lockage and a four mile tunnel to
get canal boats to Pittsburgh. The tunnel was totally impractical so a
portage railroad had to be constructed to get the barges between
Hollidaysburg and Johnstown. By this time, 1825, steam locomotive power
was successfully used on a railroad line in England (27 September 1825,
the Stockton and Darlington Railroad). There was a debate about whether
or not to build a railway but the canal supporters won. Construction
began 4 July 1826.
The Pennsylvania Canal was a huge financial disaster. The
"Main-Line" cost about $33M to build with interest costs of
$43.5M for a total of $76.5M. Revenue was only $8M and the whole system
was eventually sold for $11M making the total loss to Pennsylvania
The Western Canals
Other than the Erie Canal, the eastern canals had little long run impact
upon the economy. What did have a big impact on the economy were the
canals built in the West from 1845 1860. These canals which were built
in Ohio, Indiana, and Illinois diverted freight traffic out of the
north-south river system and into the Great Lakes. The Great Lakes had
been made navigable by a series of canals the connected them. The most
important of these were the Welland Canal from Lake Ontario to Lake Erie
bypassing Niagara falls, built in 1833, and the Sault-Saint Marie or
"Soo" Canal built in 1855 that linked Lake Superior and Lake
Huron. This latter canal allowed Duluth, Minnesota and Thunder Bay,
Ontario to be ports and provided an outlet for the grain of the Dakotas
and abundant minerals in Minnesota and the upper Peninsula of Michigan.
The effect upon New Orleans was dramatic. In 1835 70 percent of Western
exports of flour, 98 percent of corn, and 95 percent of whiskey went
through the port of New Orleans. By 1860 the percentages were 22, 19,
and 40, respectively.
The Early Railroads
Earliest Steam Railroads
The first regularly scheduled public
steam train ran on the Stockton & Darlington Railroad in England on
27 September 1825. The first regularly scheduled public steam train to
run in the U.S. was in Charleston, South Carolina on 25 December 1830.
However, that August, the Tom Thumb made a 13 mile run from
Baltimore to Ellicotts Mills pulling a single car carrying the Directors
of the B&O. Almost a year later, on 9 August 1831 the
DeWitt Clinton pulled a train between Albany and Schenectady, New
York. In another landmark, the John Bull went into service on
the Camden & Amboy on 12 November 1831. A mechanic,
Isaac Dripps, working for the C&A modified the British built
locomotive so that it had a tender (a first) and a play in the leading
axle so that it handled curves better. Later he invented the two-wheeled
"cow catcher" on the front of the locomotive which not only
helped the locomotive navigate curves but also helped with stray cows on
the tracks. (The C&A also pioneered the "T" rail which
became the standard railroad rail.)
The Early Railroad Corporate Charters
Railroads were a unique form of "highway" and no one knew when
they first began as businesses how they were to so sharply diverge from
turnpikes and canals. When the B&O first opened for business anyone
was allowed to use the tracks for a fee. Wagons equipped with the proper
wheels and pulled by horses were used on the tracks. It soon became
obvious to everyone that this model was not going to work. Even with
occasional sidings, wagons met going in opposite directions and there was
nowhere to "pull over" as there was on a canal or on a turnpike.
It quickly became apparent that railroads had to both own the right-of-way
(the highway) and the rolling stock used on the highway.
Railroad corporate charters were granted by the States. In the
beginning, this required special legislation but later on general laws were
enacted that set up a formal administrative procedure to grant articles
of incorporation. The transcontinental "Pacific" railroads
were the only ones to receive charters from the Federal Government.
Recall that a Corporation is a fictitious person created
by law and endowed with many of the functions of a human being. Normally
a corporation is an aggregate of persons and has an existence independent
of its members. It may possess property and a treasury distinct from its
members, and debts due to or by the corporation are not debts
due to or by the individuals composing it. Corporations can sue and be
sued and they can be criminally prosecuted, fined, and dissolved by the
sovereign. In U.S. law the Supreme Court has extended portions of the
Bill of Rights to corporations (e.g., within limits, freedom of
The early railroad charters were very loosely written and gave
the corporation great leeway. The charters usually set the number of
directors, the amount of capital stock (this was oftentimes way out of
line with the size of the railroad), the borrowing authority (usually
very vague and subject to great abuse in the 19th Century),
annual reports, the description of the route along with the required
Most importantly, and the reason why railroads were very
unusual, the State would grant the railroad the power of eminent
domain (that superior dominion of the sovereign power over property
within the State which authorizes it to appropriate it for public use).
Without such power, the railroad could not construct its line over the best
possible route without being blackmailed by property owners. However, it
was a two edged sword as it made the railroads politically vulnerable to
those who lived along its right-of-way.
The Railroads Eclipse the Canals
By 1840 there was about 3000 miles of railroad trackage in the United
States almost the same mileage as the canals. By the Civil War about
$1.2B (1909 $$) had been invested in the railroads of which about 25 to
30 percent was government funds. By 1849 freight receipts exceeded
The Railroad Decade: 1850-1860
Between 1850 and 1860 22,500 miles (36,000 km) of railroad line
were built increasing the total mileage from 7,500 in 1850 to 30,000 in
1860 (in kilometers 12,000 and 52,000 respectively). Of the total built
in this decade, 10,000 miles (16,000 km) were built in the Midwest.
In 1849 Chicago only had one short line. By 1854 Chicago was
the leading rail center in the U.S. In 1856 a railroad bridge is built
across the Mississippi river at Rock Island between Iowa and Illinois
allowing the shipment of Midwestern grains directly to Chicago via
Before 1850 the great majority of the agricultural products
of the Mississippi valley went south through New Orleans (see above). By
1860 the railroads had largely taken over this traffic from the Mississippi
river and the western canals. By 1860 Illinois, Indiana, and Wisconsin
replace Pennsylvania, New York, and Ohio as the leading wheat growing
The railroads quickly become the dominant form of
For the first time in human history man is able to travel faster than a
galloping horse on land.
Open Year Around Railroads
could run in the rain, snow, ice and cold. Consequently, goods could be
shipped year around anywhere in the country so that businesses could now
run year around as well.
Less Transshipment Before the
railroads, getting a shipment of supplies for a dry goods business in
Cleveland, Ohio was a formidable task. The goods first had to be
purchased from wholesalers in New York City. Then transportation to
Cleveland had to be arranged. Typically this meant shipping the goods
up the Hudson River on a steamboat to the entrance of the Erie Canal.
The goods would then be transferred to a canal boat for shipment to
Buffalo. From Buffalo they would be transferred to another steamboat
for the trip across the lake to Cleveland. If the business was inland
from Cleveland, they the goods would have to be unloaded in Cleveland
and transferred to wagons for the journey inland. Arranging these
complicated shipments my example is a simple one was a job for
experts. Both James J. Hill and
John D. Rockefeller were
commission merchants early in their illustrious business
This is just another aspect of the previous point. Shippers could deal
with a single freight agent and arrange to ship their goods over
As the railroads grew ever larger, they captured an increasing
percentage of the freight business and their productivity grows by leaps
and bounds. In the 1830s freight rates were about $.075 per ton mile and
passenger rates were about $.05 per mile. By 1859 these rates had fallen
to $.0258 and $.0244 respectively. During this period the 8-wheel freight
car is introduced, rail weights increase from 13.5 pounds per foot to 59.5
pounds per foot (still iron rails steel rails began to be used
extensively in the 1870s), locomotives got larger, and overall, the
capital/output ration goes form 10:1 to 5:1.
By 1860 on the eve of the Civil War rail passengers could
travel from St. Louis to Boston in 48 hours or from New York to Charleston,
South Carolina, in 62 hours.
The Trunk Lines as Big Business
You cannot point to a specific date and say "that was the
first big business". Like most things, they emerged slowly with much
trial and error but clearly by the early to mid 1850s the great Trunk Line
Railroads the New York Central, the Pennsylvania, the B&O, and the
Erie were big businesses with recognizably "modern" management
In 1851-52 The Erie reached Dunkirk, New York, the Pennsylvania
reached Pittsburgh, PA, and the Baltimore & Ohio reached Wheeling, WV.
In 1856 the Pennsylvania RR acquired working control of the 468 mile long
Pittsburgh, Ft. Wayne, and Chicago Railroad giving the Pennsylvania a
continuous route from Philadelphia to Chicago.
By 1856 telegraph control of railroad operations became
widespread. In the beginning, the telegraph companies were independent
companies that paid for the privilege of putting their poles along the
railroads right-of-way. Some railroads took over the telegraph operations
themselves while others continued to contract the service out. Every
railroad station had a telegraph operator.
The trunk lines that were completed by the mid-1850s were
literally forced to pioneer what became new ways of corporate management.
No railroads before this period had the traffic volume and/or mileage to
raise complex administrative problems.
In 1855 before the Pennsylvania acquired the PFW&C, it
cost about $2M to run the railroad. In comparison, the largest comparable
non-railroad businesses were the huge New England textile mill complexes
and they were only about $.3M to run the largest of these mills. By the
late 1880s the Pennsylvania employed over 50,000 men an order of
magnitude change from businesses before the Civil War.
The trunk line railroads were spread over a vast territory.
Shops, terminals, stations, warehouses, office buildings, telegraph lines,
bridges, roadbeds, all had to be administered and maintained.
Coordination was complex. Every day stations loaded
different amounts of freight and every day there was a variety of
traffic that had to be dealt with. Cargoes were unpredictable it could
come from anywhere and go anywhere.
Consequently, short run decisions had to be made
daily (accepting and directing large quantities of freight daily);
and long run decisions had to be made about what level to set
(see Topic 6).
With such complexities, complex organizational structures
evolved to handle them. Consider the textile mill the works could be
viewed within an hour and decisions could be made slowly. In contrast,
the railroad was spread over a large area and weeks were required to view
all of the physical plant. Decisions had to be made quickly the
condition of the freight and the safety of passengers required it.
Consider a canal it was also spread over a large area but the canal
did not run, maintain, or repair the equipment used upon it! The
locks could run, ceterius paribus, independently, and barge speed
For these reasons, the B&O, the Erie, and the Pennsylvania
all made important contributions to the science of modern management.
Between them they fashioned the earliest large-scale administrative
structure in American business.
Management Innovations of the Trunk Line
The earliest railroads used the same simple form of business
organization that almost all other businesses used at that time
the unified or
entrepreneurial form of
organization. This was the traditional owner-controlled facility in
which the owner made the day-to-day operational decisions and set long
The B&O was the first to separate the management of
financial and accounting activities from those of moving trains and
obtaining traffic. This change was due to the fact that the sheer volume
of transactions grew so large that it became a formidable management
problem conductors, freight agents, station agents, and so on, brought
in a river of coin. No other business had ever seen this massive volume
In the 1850s Daniel McCallum of
the Erie Railroad perfected the operations department (responsible for
moving trains and obtaining freight and traffic business) and devised the
system of information flows using the telegraph. He was the first to
clearly define the duties and responsibilities of the executive and
administrative officers on a large railroad and to spell out the lines of
authority and communication between the various officers of the road. Part
of this scheme was a detailed system of information that flowed upward
through the organization using the telegraph.
Brief summary of McCallums organizational structure for the
transportation department: At the top was the
General Superintendent. Underneath him
Masters of Engine and Car Repairs
Responsible for the condition of locomotives and shops.
General Freight Agent Supervision
of freight charges and the setting of freight rates. He negotiated
contracts with shippers and handled loss and damage claims.
General Ticket Agent Supervised
all passenger ticket matters and negotiated ticket arrangements with other
General Wood Agent Responsible
for supplying the wood for the locomotives and for storing it along the
Superintendent of Telegraph
Responsible for the construction and maintenance of telegraph lines and
for the telegraphers.
Foreman of Bridge Repairs
Inspected and was responsible for the repair of bridges
Division Superintendents These
men were in charge of day to day operations on about 125 miles of road
(determined by natural geographic boundaries). Underneath them would be
the station managers, the division level officers corresponding to those
at the headquarters a) to g) above.
In the 1870s
Albert Fink of the Louisville &
Nashville perfected a detailed cost accounting system that was widely
copied throughout the American railroad industry. Finks system made
control through statistics a
reality. Finks system had
75 specific categories (some of which were totals) divided into 4
Movement Expenses These were largely
variable costs dealing with the movement of trains.
Station Expenses These were partly
variable and partly fixed costs. The stations always had to be manned
regardless of traffic but the greater the traffic the greater the number
of laborers needed to load and unload freight.
Maintenance of Road These were
variable costs but with a floor. That is, because of weather,
regardless the level of traffic, a minimum of maintenance had to
be done. However, as the traffic increased so did the wear and tear of
Interest This was a fixed
Fink devised elaborate formulas to precisely calculate the
ton-mile cost corresponding to these four categories. This allowed him
to at a glance tell which portions of the railroad were costing more to
operate than other portions and the reasons for the costs. This system
was very influential and widely copied by other railroad managers.
By the 1880s the operations department was split into the
transportation department that handled the movement of trains and the
traffic department that was responsible for obtaining business. This
produced the three great functional departments:
These three departments coupled with the line and staff form
of organization invented by
J. Edgar Thomson of the Pennsylvania Railroad,
plus Finks cost accounting system, created the standard railroad
management structure that was to last well into the 20th
This form, known as the U-Form, spread rapidly to
other industries becoming the de facto standard. This form of management
set up functional departments in centralized offices with middle managers
responsible for the specified functions. The line and staff form ensured
that staff managers at the central offices received information flows
from the line officers in charge of running the day to day functions of
the business. This information flow was used to create overviews of the
entire organization that allowed for greater statistical control and
increasing efficiency in the operations as well as provided for efficient
long range planning. All of this was pioneered by the railroads.