How Did Railroads Influence Modern Business Practice?

The emergence of the railroads revolutionized the transport of goods and people. They lowered the cost of transport and reduced the time it took to move from one place to another. And as the rail network expanded, there was a significant boom in production which sparked economic growth. Railroads led to the growth of new towns and the creation of new markets and eventually helped to stimulate the growth of business activity on a national scale. In addition to all this, railroads have also influenced modern business practice in the following ways;


  • Consolidation and Mergers


When people realized the huge potential of railroad transport, hundreds of railroad networks were put in place. Many businessmen and companies jumped into this new venture and the number of railway systems grew rapidly. This rapid expansion, however, had unintended consequences. 

There was a lot of redundancy as different companies built tracks that ran parallel to each other between the same destinations. As the competition was heating up, the railroad business started becoming expensive and wasteful. Railroad companies were being forced to reduce their rates to remain in business.  

Because of this, hundreds of railroad companies struggled to stay afloat and many of them had to shut down and while others declared bankruptcy. This necessitated a change in the way businesses were structured. A consolidation frenzy kicked off where some companies came together and decided to cooperate as a way of reducing operational costs and maximizing profits. Hundreds of railroad companies merged to form fewer corporate firms. 

These consolidations and mergers helped to create a more stable operating environment and this influenced other industries to start doing the same. This practice continues to this day. 


  • Monopolistic Business Practices


The consolidation of railroad companies to form fewer corporations gave them a lot of power. Because only a few of them controlled the entire rail system, they had the liberty to do as they wished. They pooled business in certain areas and started setting common rates. This led to the establishment of monopolies

With this newfound control, railroads teamed up with companies from other industries which gave them even more power to control many aspects of the economy. Eventually, they started abusing this power by setting very high rates, forcing down the cost of materials and labor, and squeezing competitors out. They even went as far as applying pressure on the government to get special favors and treatment. 

The entire nation was now at the mercy of the monopolistic control of railroad companies. Because they did not have any real competitors, they became more focused on their bottom line at the expense of everyone and everything else. They could even decide economic winners and losers which threatened many businesses and the economy. 

This mirrors what is happening today where some companies have become so big in their sectors and have too much control. Companies such as Microsoft have been accused of bullying their competitors, setting arbitrary prices, and exerting undue influence. This practice is not unique to them as railroad companies seem to have set the precedent many decades ago.


  • Rise of Business Regulation 


As railroads used their monopoly power to exert undue influence over business activity, the economy, and the wider society, it became apparent that regulation was necessary. As a result, the government decided to take action to tame these powerful companies and protect public interest. Several agencies were set up to regulate commerce. 

In 1887, the US government established the Interstate Commerce Commission to arbitrate between individuals or individual businesses and railroad companies and to ensure that the rates set by railroads were just and reasonable. These agencies became the prototype of the regulatory bodies we have today. 

Anti-trust legislation such as the Sherman Act was also introduced to protect consumers from exploitation and competitors from monopolistic practices. This gave birth to the modern business legal architecture that safeguards against harmful business practices like monopoly. 


  • Issuance of Bonds and Stocks


Building and operating railroads was an expensive venture that could not be adequately financed by a single proprietor. This created the need to seek additional funding from external investors. As a result, the financial industry had to be innovative to come up with a way of handling the huge capital needs of the railroad industry. 

This led to the emergence of railroad bonds. There were many forms of railroad bonds but the most common were long-term mortgage bonds. Most of these bonds attracted an 8 percent interest rate. These companies borrowed this money against their land and property. There was also the option of converting the bonds into stock. This was a new business practice. 

To meet their enormous capital needs, railroad companies also came up with other innovative bonds such as land income bonds and participating bonds. With time, this practice was copied by other industries, and the new business financial system was built around bonds. This became the basis of the modern trend where many businesses seek financing by issuing bonds and stocks. 


  • Modern Corporate Management


With the massive growth of railroads, they started facing challenges that had not been experienced by other companies or industries in the past. They could not be run using existing business practices. 

Some of the challenges included managing a big labor force, dealing with supply chain issues, handling big and complex financial transactions, and coordination of schedules and other complicated matters. All these things needed to be managed effectively. 

As a result, a new management system was developed. At the top sat the board of directors who ran the company. The board was assisted by senior executives who had overall responsibility for the company. Initially, most top-level executives were civil engineers because of their deep knowledge of the railroad industry. Below the top executives was a team of specialized managers who were in charge of specific departments within the company. As the companies grew, more complex systems were set up to streamline operations and enhance efficiency. 

Later other industries copied what railroad companies were doing. This greatly influenced the modern corporate management framework that exists today.