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
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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
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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
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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
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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