Industrial Accounting

Information and the Rise of Big Business

Purpose and Approach

• Why and how did America grow from a rural backwater (no banks, no money to speak of, little manufacturing) into an industrial giant capable of leading the world in innovation and manufacturing prowess?

• Approach is primarily chronological and by industry, with a focus on specific individuals and companies.

Overview 1

• Background from colonies to revolution and Constitution.

• America in 1800• Financing, transportation, and property rights• Textiles• Standardized part and the role of armaments• Railroads—the Big Four• Railroad sophistication

Overview 2

• Carnegie and steel• Great merger movement & really big business• Scientific management• Du Pont• General Motors• America in 1950

The Colonies to Constitution

• Jamestown—how to make a buck for investors• Colonial incentives, property rights, politics• Mercantile regulations & enforcement; result:

revolution• Economic problems in the 1780s: depression,

banking, regional differences• Constitution and new government

America in 1800

• The role of the federal government: Washington to Jefferson

• The Hamiltonian model• Agriculture• Banking and finance• Transportation• Manufacturing

Textiles

• Textiles and the industrial revolution• Samuel Slater and Almy, Brown and Slater• Lobbying and tariffs• New England competition• Lyman Mills• Textile accounting

Standardization and Armaments

• Eli Whitney’s rifle contract and standardization—following French models, standardized the firing mechanism

• Springfield Armory—the most complete factory process in early 19th century

• Colonel Russell Lee and improved accounting, the most sophisticated in America before 1840

Railroads—the Big Four

• From steamships to railroads• Funding big infrastructure projects and

financial markets• Baltimore and Ohio (B&O)• Erie Railroad • New York Central• Pennsylvania (Pennsy)• Early financial statements

Railroad Sophistication

• Major George Whistler—lines of responsibility• B&O manual on departmental services• Daniel McCallum, Erie, management system• J. Edgar Thomson, Pennsy—decentralized

management, strategic planning, uniform set of accounts, operating ratio to standardize performance

• Albert Fink, Louisville & Nashville—ton mile as standardized measurement of performance

Railroad Consolidation

• Movement from small railroads to giant consolidations, based on legal changes, economies and efficiencies of moving people and goods long distances, improving accounting and management

• Big 4, including Cornelius Vanderbilt at New York Central and attempt to raid the Erie

• Consolidators, speculators and professional managers

• Wall Street “Money Trust” consolidates most railroads into major lines

Railroad Regulation

• State charters required for most railroads, vast expenditures for infrastructure, critical component for economic growth

• Considerable corruption, speculation and outright fraud (e.g., Credit Mobilier)

• State “experiments” in regulation: Massachusetts, New York, etc.

• Problems of interstate commerce; federal regulation begins with the Interstate Commerce Act of 1887 (with periodic amendments)

Andrew Carnegie and Big Steel

• Trained at Pennsy under Thomas Scott—how to run a business profitably using sophisticated accounting

• Low cost producer based on most recent technology (beginning with Bessemer process), professional managers and accounting expertise

• Focus on cost data detailing labor and materials used per ton of product: voucher system, monthly cost reports, price products based on full capacity production

• Carnegie sold out to J.P. Morgan who formed U.S. Steel—part of the big business merger movement around the start of the 20th century

Scientific Management

• Management accounting innovations came from engineers in the scientific management movement of Frederick Taylor and others

• Standard costs were calculated as efficiency measures, the best way to use materials and labor and minimize waste; actual costs were compared to standard as performance measures

Du Pont

• Pierre Du Pont and cousins reorganized the gunpowder company, developing an organization structure focused on best practices in management and accounting

• Du Pont expanded and became the low-cost producer of explosives.

• Progress was made in cost accounting, especially in evaluating overhead costs, fixed asset accounting, forecasting of future costs and pricing, long-range planning using return on investment (ROI)

General Motors

• William Durant vs. Henry Ford• Du Pont investment and management• Alfred Sloan and Donaldson Brown• “Centralized control with decentralized

responsibility”• ROI, flexible budgeting with standardized price

and volume• GM under Sloan became the model for big

industrials in the mid-20th century

Conclusions

• U.S. manufacturing was the world colossus in the 1950s, based on the coordination of accounting and management

• This success was based on a century-and-a-half process of entrepreneurs and professional managers, despite massive corruption and fraud

• Problems would develop in the second half of the 20th century, before American industry would recover much of its global power