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Up to this point, our discussion of the twinned origins if you will,
the dual origin of modern capitalism in the Industrial Revolution
has focused on the cotton textile factory
and on the plantations and the financial innovation
and consumer marketing strategies that enable that cotton
textile complex to have such a dynamic effect.
But now we're going to talk about new kinds of industries.
And in particular in this section, we'll talk
about the development of the railroad.
Because for many, many years now, historians and economists and others
have looked at the development of the railroad
as this crucial, crucial factor in the further expansion of capitalism
and of the Industrial Revolution.
So let's look at the railroad and see whether that's true.
And if so, how it's true.
The biggest operations in the American economy in the 1830s
are things like cotton textile factories which
have a few hundred employees at the most or, on the other hand,
cotton plantations which have several hundred enslaved people at the most.
The railroads, which emerge by the 1850s, were much, much bigger,
both in terms of the number of people involved
and the size of the operations.
In fact, between 1830, when there are no railroads in the US,
and it takes three weeks to get from New York City
to Chicago, to 1850, just in that stretch, 9,000 miles of railroads
are created.
But by the 1870s, there would be dozens of railroad systems, many
which had over 9,000 miles themselves.
And in fact as early as 1850, you could use the railroads
to get from New York City to Chicago, not in three weeks but in three days.
These are big massive capital intensive operations.
But their effect on the economy isn't driven
by for instance, how much iron or coal they consume.
They consume a lot.
They're the biggest users of those products.
But rather on their ability to take iron and coal from their sites of production
to other consumers and to do it much more rapidly.
As they increase the efficiency of transportation,
they make all kinds of other economic developments possible.
All kinds of entrepreneurial activities, all kinds of new factories,
all kinds of new markets can open up.
But that is only part of what they do to shape the modern capitalist economy.
Let's turn to a couple of other issues specifically
issues of management and finance.
And we'll see some of the really revolutionary effects of railroads.
Now think about what it means to manage a really, really large railroad
network with hundreds or even thousands of miles of track.
Some of these networks, by the late 1840s, early 1850s, in fact,
have 200 locomotives operating on their tracks.
There are very complicated problems starting with the problem
making sure those locomotives do not run into each other.
That is something the companies definitely want to avoid.
Complicating that issue is the fact that in the 1840s
every single town in the United States had its own time zone as it were.
Noon in Chicago was a few minutes later than noon in Gary.
And noon in Gary was maybe half an hour later than noon in Detroit.
It is the railroads that push the United States to adopt uniform time zones,
as they ultimately become.
Railroad time becomes a kind of metaphor, in fact, for the ways
that railroads organize the schedules of Americans in a consistent way.
It convinced people to use watches because the watches, if you set them
to the right time and they're accurate watches,
will tell you when the train is coming through town.
And if you want to get your products to the station
so they can be shipped out of town, you'd
better have been there at 2:47 in the afternoon.
So that's one way in which railroads reorganize economic life in the United
States, around new standards of time.
But there are other problems of management that railroads face,
some of which are in some ways even more complicated to solve.
For instance, think about the problems of accounting and billing.
A large railroad network has thousands of customers.
And it owes money to thousands of people.
Keeping track of that demands an army of accountants.
And that army of accountants is only part
of the even larger army of employees that a railroad network has.
It has engineers.
It has laborers to repair the track.
It has mechanics to repair the cars.
Another set of mechanics works on the locomotives.
Brakemen, conductors, all of these people work for the railroad.
They work in different kinds of jobs.
They get different kinds of pay.
They have different expectations.
The labor management problems are very complicated.
In addition, the railroad has problems of finance.
It has to get a continuous flow of money in order to pay all these employees,
to expand the track, to keep new locomotives in the shop,
and repair old ones.
The problems of accounting are part of the problems of finance.
They need a continuous cash flow to pay all of those bills,
but they don't necessarily have a continuous cash flow.
And there's one more problem which is the problem of liability.
This isn't just a problem that Farmer Jones might be mad
because his cow was on the track when the 2:47 train came through,
and his cow was killed.
There's also the problem that as economic ups and downs started
to happen more frequently in the economy--
remember those panics-- the railroad potentially could go bankrupt.
And then the partners, the owners, the main investors
in the railroad might potentially be liable for all
of the debts the railroad owes.
And this would make them personally bankrupt as well.
Railroad companies, like the Pennsylvania Railroad,
come up with a set of innovations to solve these problems.
One of them is what essentially becomes the modern corporation.
The modern corporation solves the problem of liability.
The corporation, as a legal entity, operates as a kind of person
that's ultimately responsible for all of the debts of the company.
The stockholders aren't responsible.
The managers of the company are not responsible.
The employees are not responsible.
It is the corporation itself and its assets that are responsible.
So the debts exceed the assets of the corporation,
and the corporation has to go bankrupt.
All of those individuals are able to keep their own personal wealth.
Now corporations had existed at least as legal entities
before the 1830s and '40s.
But each corporation had to be created by special act
of a state or national legislature.
That's just the way it operated legally.
Starting in that era individual states, especially in the North,
start to create new laws that allow almost anyone to start a corporation
without a special act of the legislature.
And this means that corporations, particularly railroad corporations,
begin to pop up pretty rapidly in the 1840s and '50s
as investors and organizers of railroad lines
take advantage of this way of shielding themselves from liability.
Now of course, this introduces other problems like the problem
that economists call moral hazard in which economic actors and decision
makers are not ultimately responsible for the consequences of their actions.
And so you start to see complaints that railroad corporation presidents are
simply not taking account of the stockholders interest
as they spend the money of the corporation.
That will be a continuing problem in American capitalism.
And it, too, arises in the 1840s and '50s.
The way that railroad corporations develop and grow--
and you can see this by the 1850s-- is also
going to have a tremendous long term impact, creating
the standard shape of large American businesses, in fact.
Because what you see happening in the railroad corporations,
is that they move from a pattern in which one individual essentially
manages everything, and often that individual
is a technically skilled person, an engineer
typically-- Most of them in fact were educated at West Point.
You move from that into a situation in which responsibility
is divided between a corporate management structure which
has somebody who today we would call a CEO, Tom Scott who
runs the Pennsylvania Railroad in the 1850s for instance.
And then on the other hand, you have a set of technical branches.
Each of which report to the board of directors and its chief executives.
Engineers, track management, scheduling, accounting, et cetera, all of them
are under that central board of directors who don't necessarily
have technical expertise.
So then you say, what do those directors actually do?
Well one thing, obviously, is that they coordinate and manage
all the other branches.
And the idea that management is a technique that people can learn
or a set of ideas of people learn starts to become
more and more prominent in American business in the late 19th Century.
But also what happens is that those directors take
the responsibility of negotiating either directly or indirectly with investors
to keep money flowing into the corporation.
And in particular, what you see those railroad companies increasingly
doing in the 1850s is going to Wall Street.
They go the New York Stock Exchange which
is a relatively small affair in the 1840s.
And they start to continually sell stock in the railroads.
As they sell more stock, more investors come to the market.
As more investors come and participate in the market,
the New York Stock Exchange starts to grow
into what it is today which is a place where corporations can continually
raise money.
They can continually finance themselves.
And that, too, starts with the railroad corporations.