Lessons from the Nickel Plate Road,1881 to 1916: A railroad built to be sold

Introduction

In the late 1800's, industries such as oil, steel and railroads began defining accounting, management, and business as they are known today. The corporations in these areas had managers, departments, logistics, and organizational structures that shaped the way the world still conducts business over a century later.

Management and accounting theory have viewed business during this period through the lens of various concepts such as laissez-faire versus government regulation, disclosure as a social remedy, management structure and returns, and the impact of the management revolution during this time. There may be no greater industry than railroads that has impacted accounting, management practice and business operations. Chandler (1965) called railroads the first modern business enterprise. This study examines a unique entity from the railroad industry that illustrates and provides new evidence concerning these existing theories – that of the New York, Chicago & St Louis Railroad Company, better known as the Nickel Plate Road (NKP).

Some of the significant discoveries and messages this research uncovers surround key drivers of management and accounting practice, the effectiveness of laissez-faire policy, the extent and importance of disclosure of accounting policies and information, how rampant monopoly protection was, and the need for regulation.

This article contributes to the literature by providing an examination of a complete set of financial reports of the NKP for 35 years (1881–1916), as well as the Investor's Supplement of the Commercial and Financial Chronicle and Poor's Railroad Manual. Previously unexamined, NKP financial data suggest that the NKP was used to maintain power to set rates for the New York Central system. The NKP was an innovative business created for speculative purposes to support a monopoly. This was unprecedented and counter to the natural monopoly formations of the time. Being a consort enterprise, it aided monopoly, which made the NKP unique as to its origins. It distinctively affects an understanding of accounting history and business theory.

Theoretical background

The push westward – federal land grants stimulate transportation advancements through canals and railroads

From the very beginning of the United States, a transportation revolution helped form national policy. The strong influence of the Federal Government played a profound role in the development of railroads and canals. George Washington was among the first to bring awareness of the need for transportation networks to move the nation westward (Previts and Samson, 2000). The Federal government saw the west as a way to expand the power and resources of a fledgling nation and thus promoted settlement of the frontier lands.

In 1787, Congress determined the population necessary for statehood at 60,000 (U.S., 1787). By the early 1800's, people were moving toward the west in large numbers and by 1821, nine western states achieved sufficient population to reach statehood. Those states were Kentucky in 1792, Tennessee in 1796, Ohio in 1803, Louisiana in 1812, Indiana in 1816, Mississippi in 1817, Illinois in 1818, Alabama in 1819, and Missouri in 1821. With the population growth, it became increasingly important and necessary to create new and better methods of passage of people and goods to and from the west. First canals and natural waterways, then railroads, became that method of transport.

To promote the growth of transportation systems, the primary method that the federal government used for support was land grants. Canals received 4.5 million acres of land grants, while the railroads received approximately 130 million acres (Rae, 1944). That is more land than the entire state of California. The canal land grants were not only important for the creation of canals, but it provided the mechanism for the birth of a rail system nationwide. By the mid-1800's, new technological advances with steam engines created a means for the unfettered growth of the railroads.

A primary case that illustrates the government / private sector relationship in the development of a major railroad is that of the Illinois Central in 1850. The Federal Government granted 2.5 million acres of land from Chicago to the Ohio River in Cairo, Illinois to an investment group of 13 eastern financiers. These backers only needed to put up $200,000, which was used for organization costs and surveying of the route. The remaining $17 million of construction costs ($600 million in 2020 dollars), was borrowed using federal land grant acres as collateral for the loans (Flesher et al., 2003). Although the Illinois Central was beset with cost overruns, fraud, and funding shortages, it eventually ran its first train from Chicago to Cairo in 1856 opening up the prairies of Illinois for development. With Cairo at the confluence of the Ohio and Mississippi Rivers, the Illinois Central provided an efficient transportation route from Chicago to New Orleans and all points in between.

The Federal Government's 130 million acres of land grants to railroad investment groups was the primary way that helped build the railroad system that in large part is still used today. The Federal Government's quest to open up the west and provide transportation systems to and from the east made many investors very rich and paradoxically fashioned a structure for the creation of monopolies that grew organically. The NKP however, was a significant departure from the conventional creation of railroads in the 1800's.

Setting the stage – protection of a coveted route

Cornelius Vanderbilt became the richest man on the continent (Stiles, 2009) by building the nation's largest transportation network. He took full advantage of steam technology, operating almost every kind of water transportation from ferries to ocean liners. His biggest business segment, however, became railroads and the central piece of his rail empire was the New York Central Railroad, which eventually had over 42,000 miles of track. Vanderbilt, the NY Central, and its subsidiaries were the dominant force in rail traffic in the northeast until effective anti-trust regulation of the early 1900s. A key piece of the NY Central empire was a line named the Lake Shore and Michigan Southern Railway (LS&MS), with its main track running from Buffalo to Chicago through Cleveland. Vanderbilt also owned the Canada Southern Railway connecting the NY Central lines in western New York to Detroit and on to Chicago. All goods and passengers going from the east coast to Chicago and points beyond would have ridden on a Vanderbilt railroad. Figure 1 shows the Vanderbilt system after the NKP purchase (note the parallel routes of the LS&MS and NKP running below Lake Erie and on to Chicago).

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Figure 1.

NY central railroad system highlighting the LS & MS railway 1894.

In 1869, the eldest son of Cornelius Vanderbilt, William Henry Vanderbilt, became vice president of the NY Central. Upon his father's death in 1877, he became the President of the NY Central. The Vanderbilt rail empire could only be rivaled somewhat by that of Jay Gould, who reigned over the railways west of the Mississippi River. Gould owned 15,000 miles of railway and had a foothold into the east with the Wabash Railroad, which ran from Kansas City to Toledo. Gould also owned several other smaller routes on the east coast. However, he had to deliver much of his cargo to Vanderbilt's LS&MS line in Toledo to get it east. These two men both had a tremendous drive to conquer and control, which created a bitter rivalry. This also made the route between Buffalo, Toledo, and Chicago even more significant. A group of keen speculators in New York quickly realized this and planned a strategy to capitalize on it.

NKP is created - an anomaly from the beginning

From the onset, the establishment of the NKP was unconventional. The creation of the NKP was a departure from the land grant standard that helped form and fund the majority of railroads in the United States. The creation of the NKP used private capital exclusively and utilized no land grants (Rehor, 1965). Moreover, much of the land was purchased at a premium. There was a great push for expediency.

In 1879, an investment faction led by a New York banker named George Seney began planning an east-west rail route in the north. Seney gathered successful speculators from the east and mid-west and formed what became known as the ‘Syndicate’. This group began buying several small railroads in Ohio and Indiana and formed the Lake Erie and Western Railway. The syndicate was of little consequence to the railroad world until it began planning to create a system that would eventually connect Buffalo, Cleveland, Chicago, and St Louis. This railroad would be in direct competition with the NY Central system, particularly Vanderbilt's LS&MS railroad, which was the only line connecting Buffalo, Cleveland, Toledo, and Chicago (Rehor, 1965). It would essentially run parallel to the LS&MS in close physical proximity.

In February of 1881, the Syndicate members pledged their own money and formed the New York, Chicago, and St Louis Railway. It became known as the Nickel Plate Railway through a reference by an Ohio Newspaper lauding its construction of fine rails as nickel-plated. All the track was acquired or built within 500 days. The speed to market by the Syndicate would prove to be very beneficial to them.

Vanderbilt monopoly secured

While the Syndicate was swiftly building its new railway, Vanderbilt was denouncing the construction of the NKP as poor quality. During this time, however, Gould extended his Wabash line to Detroit with a connection to Buffalo through Canada. Although this route moved cargo from point A to point B, Gould could increase its delivery speed with the Nickel Plate by going directly from Toledo to Buffalo by acquiring the new NKP line, or moving the Wabash freight to the Nickel Plate that was previously being delivered to the LS&MS. The NKP route was also superior because it provided better access to the major Cleveland connection and all its networks. The Syndicate knew it would be essential for Vanderbilt to acquire the NKP to maintain control of shipping rates. For unspecified reasons, Gould pulled out of negotiations likely due to a lack of funding and issues with his western railroads. Even if the NKP operated as a standalone rail company, separate from Gould, Vanderbilt didn't have an appetite for competition. In October of 1882, two days after the road had been open for business, the Syndicate succeeded in selling to Vanderbilt controlling interest of the NKP. The controlling interest of Vanderbilt's stock was owned under the LS&MS name (Poor, 1884), therefore the competing NKP parallel line was now under the power of its former rival. The purchase of the remaining stock owned by the Syndicate was finalized in the upcoming year. The total selling price was over $14 million. In today's dollars, this purchase equates to $360 million (U.S. Bureau of Labor Statistics, 2020). This was an amount that was double what the Syndicate had invested. Wall Street accounts concluded that the entire project was designed purposely to sell to the highest bidder (Rehor, 1965). With this purchase by Vanderbilt, it solidified his monopoly of east-west rail traffic through the northern part of the country over the next three decades. William H. Vanderbilt and his eventual successors were in a position to maintain dominance and high rates. Figure 2 details a timeline of the NKP's operations.

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Figure 2.

NKP timeline - through to 1916.

Sources of data

The primary source of data for this study is a complete set of financial reports from 1881 to 1916. These reports are very detailed and include information such as: income statements and balance sheets with detailed information on capital expenditures, maintenance, various revenue sources (i.e., freight, passenger, mail), dividends, debt, types of freight hauled, and significant events. For industry data, we used The Investors’ Supplement from the Federal Reserve Archives. Poor's Manual of Railroads and Moody's reports were used to confirm annual report data.

NKP strategic subordinate in NY central monopoly

Shortly after the purchase of the NKP, William H. Vanderbilt gave control to his son William K Vanderbilt in 1883. Unlike other railroad pioneers of this time like Henry Plant (1819–1899), who has been recognized to use entrepreneurship and building a strong management team to achieve success in railway progress, the development of central Florida and entire cities like Tampa (Ford and Petersen, 2011), William K. Vanderbilt did not apply similarly to the NKP. Where the traditional ideology of entrepreneurship may have led to the railroad successes of Plant and William K. Vanderbilt's grandfather, the NKP operations were run quite differently. Jenks (1944) noted that the early railroad entrepreneur was not only a political-economic agent, but someone who embodied the dream of developing communities, regions and the continent (Flesher and Previts, 1999). Those were never the dreams of creators or owners of the NKP. This railroad appears to be an afterthought in the New York Central System operations.

The disregard after the initial purchase of the NKP led to early problems. Once the deal was consummated, the competitive threat was gone, which was the primary objective in the purchase of the NKP. The 1884 financial report of the NKP shows that it quickly fell to neglect with virtually no dividends, little capital improvements, losses, and falling into receivership (see Appendix A). Also, the NKP's income could even be worse than reported due to the ‘nineteenth-century accounting error’ (Brief, 1965), which included the overstatement of income due to the omission of depreciation. The data for the next 33 years is not much better as the return on assets, return on equity and capital expenditures remained static. This supports the premise of the NKP being run as a subordinate railroad to the LS&MS. The NKP was used for more specialized transport, for example, the NKP route was referred to as the meat express because it ran direct trains of beef and pork from the Chicago Stock Yards to Cleveland and Buffalo.

Investors gravitated to big business and advanced tens of millions of dollars into corporations with the expectation of receiving a healthy return on their investment. This era was considered the gilded age because of the economic boom, business growth, the accumulation of wealth and social status. By 1892, over 4000 Americans had achieved millionaire status (Klein, 1995), which is equivalent to $30 million in 2020 dollars. Much capital was being invested into railroad stocks in particular in anticipation of generous returns. Also, this was in a time in which no inflation existed (U.S. Bureau of Labor Statistics, 2020). Deflationary trends made returns on investment even more lucrative than today's standards.

Findings and analysis of data - operations

The NKP, in contrast to other railroads and businesses during this time, was not sharing in the riches of the gilded age. Common dividend payments were virtually non-existent, and preferred dividends only started paying out modestly after 15 years. Figure 3 details dividend payments of the NKP during this era. Not until 1909, did the NKP pay out its first dividend on common stock – 26 years after its establishment. In addition, very little was being invested back into the NKP. In only two years were there any significant capital investments. In 1884, 1300 boxcars were purchased and not for another 25 years, in 1910, was there another major purchase or improvement. That year, 20 locomotives and 1800 boxcars and gondolas were bought and with the advent of the automobile, the NKP obtained 200 automobile boxcars. Also, the NKP's return on assets and return on equity were meager at best hovering near zero for over 30 years. Figure 4 lists these ratio trends.

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Figure 3.

Dividend payouts of the NKP 1883–1916.

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Figure 4.

NKP ratio trends 1883–1916.

The intent of operation of the NKP becomes even more evident when comparing dividends of the NKP to that of the industry and in particular, the LS&MS and NY Central. Even when the NKP did start paying dividends, they were de minimis compared to other Railroads. Figure 5 evaluates total dividends of the NKP to the industry average of 166 listed railroad companies for seven years from 1890 to 1897 using data from the Investors Supplement (Federal Reserve, 1897). The data show significant differences (p < 0.001) for six out of the seven years. The only year the NKP paid more than the industry average was 1895, however, the NKP had paid no dividends for the previous year and the following year. The dividend data also shows that the NKP was paying much lower dividends than its parallel LS&MS railroad (p < 0.003) and parent NY Central (p < 0.022) (Figure 6). Similar to the industry comparison, 1895 was the only year in which dividends were analogous. It is also important to note that this comparison only takes place after the majority of previous years that the NKP was paying virtually no dividends. This would indicate that most of the return on investment was being funneled to the parent LS&MS.

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Figure 5.

NKP dividend comparison to railroad industry 1890–1896.

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Figure 6.

NKP dividend comparison New York central and LS&MS 1890–1896.

Also, the comparative income statement data shows that the bulk of the freight traffic was routed on the parent company LS&MS instead of the NKP. Similarly, the higher-priced items were routed on the LS&MS even though the express goods were transported on the NKP. For years 1883 to 1887, the LS&MS was earning on average $10 million in freight revenue at an average rate per ton of 58¢ (Federal Reserve, 1888), while the NKP was earning on average $2.6 million in freight revenue at an average rate per ton of 54¢. For those same years, the LS&MS was spending $3 million a year in maintenance of track and equipment while the NKP was only spending on average $380,000 a year.

When comparing the total net income of the NY Central, LS&MS, and NKP, for years 1883 to 1887, the NY Central averaged $4.7 million in net income, the LS&MS averaged $5.74 million in net income while the NKP averaged a net loss of $40,000. See Figure 7 for comparative financial data.

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Figure 7.

NKP, NY central, and LS&MS comparative data 1883–1887.

This data provides evidence that the NKP was operated as an ancillary line to keep the NY Central's LS&MS dominant. The accounting numbers support that the NKP had been shrewdly constrained throughout this time through financial methods. NKP rates per ton were kept lower than that of the LS&MS along with less traffic and correlating profit. Also, the NKP was limited through lack of capital, maintenance, and the use of obsolete facilities and standards. While the parent LS&MS grew a great deal, the NKP was inhibited and waned. Rehor (1965: 59) states:

The capacity of the LS&MS had been greatly expanded over the years and was as fine a railroad as existed anywhere. The industrial growth of the territory that the two roads served continued unabated, but this benefit had accrued almost entirely to the LS&MS. Little or no attempt had been made to locate new industries on the Nickel Plate and prime industrial sites were allowed to become residential neighbourhoods. As a result, the road was almost totally dependent on traffic received from its connections.

The data show that through 1916, the New York Central System had all but disregarded the NKP as a forgotten railroad to maintain the dominance, growth, and rates of the LS&MS. From the very beginning, the NKP was created and designed by a syndicate to be sold knowing that the Vanderbilt's NY Central would need the NKP to keep its monopoly on rail traffic between New York, Chicago, and points in-between and to the west. The NKP was not permitted to achieve its potential because it was being used as a control firm from the very beginning. This structure inflated profits for the NY Central Railroad and catered to the monopolistic drive of the Vanderbilt's and other business tycoons of the era. Specifically, the NKP paid much lower dividends compared to the industry, had poor returns on income and equity, and invested little in itself.

Findings and analysis of data - NKP's management

Despite the poor operating results, the management in the early years of the NKP was competent, respected, and organized. The NKP's first Chief Operating Officer (COO), Darius Caldwell, had nearly 30 years of experience and had been a general manager for the Pennsylvania system. The Vanderbilt's kept him on as COO and although William K. Vanderbilt held the title as President until 1887, Caldwell was in charge and remained so until he retired in 1895. He took over the title of President after the receivership reorganization and early anti-trust laws of the Interstate Commerce Act of 1887. Also, the Sherman Act of 1890 opened the door for some minor autonomy for the NKP. By 1890, Caldwell had the NKP netting a modest surplus of $133,000 and paid its first dividends on preferred stock (3.5%).

Although dividends were well below its corresponding railroad the LS&MS, NY Central, and the industry, the NKP was keeping its head above water. Samuel Calloway succeeded Caldwell as President and served for three years. He, too, was an experienced railroad leader and ended up becoming the President of the entire NY Central system.

The NKP experienced high operating ratios ¹ throughout the NY Central's ownership, which would indicate that efficiency was not a primary focus. Figure 8 details the operating ratios for the NKP. Altman (1971) studied railroad bankruptcies from the 1930s through the 1960s and found that the operating ratios for the bankrupt railroads were significantly higher (0.85) than the average of the industry (0.75). Extrapolating from that study and applying to the NKP, it would appear that the NKP's operating ratio was an indication that it was functioning on the verge of bankruptcy for most of its early years. However, one NKP President made a conscious effort to improve efficiency and had some freedom to do so thanks to the progressive movement and advocacy for regulation. From 1898 until its sale, William Canniff served as NKP's President. He was a career railroad employe who worked his way up to leadership positions. He focused on employe loyalty and efficiencies and embodied Frederick Taylor's principles of scientific management. Financial reports show that he was astute in controlling expenses and that the operating ratio was significantly lower (p < 0.05) under his tenure than in the previous 15 years of operation. This indicates that when the NKP was allotted some limited freedoms it was able to improve efficiencies, even though it was part of the monopoly.

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Figure 8.

NKP operating expense ratio 1898–1916.

After review of the backgrounds and work of the NKP's Presidents, evidence shows that overall financial performance issues and low investment returns of the NKP were more driven by the structure, unique business circumstances, and economies of the parent NY Central rather than by the poor performance of managers. Chandler (1977) heralded railroads as a prototypical example of the management revolution with the private sector driving tiered management, which promoted success. Contrary to Chandler, the data of this study support the view of Bowden (2017), who studied railroads of Australia and the American West from 1880–1900. He found that private sector management did not lead to better financial outcomes than public sector run companies. Bowden provides evidence that ownership and organization composition does not necessarily drive financial results, but that structural changes or economic occurrences impact operations and performance. This study offers support for Bowden's findings, but from a different viewpoint - that of the drive for monopolies and business supremacy was the economic phenomena and business structure transformation that led to sub-par performance and manipulation of the NKP, not management organization. The competent management and traditional organizational structure of the NKP did not result in the same financial successes of its parent railway, or the industry as a whole.

It could be considered that the real entrepreneurs in a maladjusted way were the members of the Syndicate. Jenks (1944: 19) goes beyond the traditional definition of entrepreneurship and a ‘great man’ or ‘better mousetrap,’ by stating:

The innovator is a person whose traits are in some part a function of his sociocultural environment. His innovation is a new combination of factors and elements already accessible. It relates in every phase to previously developed business and monetary habits, technological skills, and variable tastes, none of which can be regarded as functions of economic activity alone.

The Syndicate displayed this sociocultural innovation and unique entrepreneurship, albeit not in the most principled manner, by capitalizing on the quest for power and complete control by the Vanderbilt's, which was part of the big business culture of the elite businessmen of the time.

Regulation and railroads

While the gilded age brought great riches to thousands of individuals, it also created large class differences, social upheavals, and a demand for government intervention against big business. The NKP was created at the dawn of what historians call the regulatory phase of railroad operations. It was a period of controversy in which railroads encountered sunshine regulation, the reporting of information that cast light on the financial and operational concerns of railroads (Flesher and Previts, 2019). Although big business and monopolies dominated commerce in the late 1800's, merchants and farmers still exerted a great deal of political influence with their local public officials. They did not like the high rates being charged on their goods being transported by the railroads. Furthermore, the lavish lifestyles and excessive behaviours of the rich were well known and written about. This did not sit well with the working men and women who represented the other ninety-nine percent of the population. Government officials were under pressure from their constituents to act.

In the late 1860's Charles Francis Adams Jr. began publishing numerous papers on railroad management, operations, and their function in America. McCraw (1984) summarises three themes that Adams espoused:

Industrialization in America had acquired a momentum of its own, a thrust and direction essentially independent of human will. Technology was shaping society as it had never done before.

In response to the public and government outcry, an industry-driven solution to the ‘railroad problem’ from the railroad perspective was advocated by a long-time railroad engineer and leader, Albert Fink. He believed in a laissez-faire approach and proposed cartelization as the solution. He envisioned different competing railways banding together to control rates and divide up traffic. Fink put his theories to work and in 1875 to keep rates at high levels for railroads in the south, he formed a cartel of 32 railway lines called the Southern Railway and Steamship Association (Hudson, 1890). In 1877, he helped create and headed a cartel called the Trunk Line Association. It consisted of the four major eastern railways: The Erie, NY Central, Pennsylvania, and B&O. Charles Francis Adams Jr. even accepted a position on the Trunk Line Association and was a Board member.

Fink continued to fight for cartelization. In his testimony before Congress (Fink, 1880), he attested in detail about the perils of government intervention. He thought a government commission would only be good if conducted in an advisory capacity. He argued that the leaders in the railroad industry itself were the only ones that could tackle the ‘railroad problem’ and that ‘legislative enactment would simply have the effect of obstructing, not of regulating commerce, and the public would be the sufferers’ (Fink, 1880). Though Fink made the effort, his participants in the cartels didn't live up to their end of the agreements. Railroads within the cartels still engaged in rate-cutting by hiding it through rebates and fictitious billings. Despite Fink's efforts to blacklist those engaging in these practices and attempts to implement an inspection system, he couldn't stem the deceptive practices. By 1884, the cartel experiment was a failure. Chandler concluded that even the most carefully devised cartels couldn't control competition and Charles Francis Adams Jr. compared the cartels to a boat in the swift water above Niagara Falls (Rothbard, 2017). However effective Fink's pooling method could have been, non- participators, competitive aspects and monopolies embodying structural flaws like the operation of the NKP caused the ‘railroad problem’ to persist. Laissez-faire was not working and the public outcry grew stronger.

The government, however, acted hastily trying to respond to the deep-rooted mistrust, hatred, and fear of the large railroads rather than stabilize rates and commerce through meaningful regulation. (Martin, 1974). Martin (1974: 370) states,

Americans were not going to allow great concentrations of economic power to continue. No matter how much sense it made, no matter how desirable the material results would have been, government-sponsored cartelization of American railroads was ultimately repugnant to the most basic of American ideals.

The demand for action by the public prompted the railroads to be the first industry subject to public regulation through the Interstate Commerce Act (1887). The law created a five-member commission to oversee the regulation – the Interstate Commerce Commission. It also prohibited special rates and Fink's cartelization method. Although the law lacked the strength to be truly effective and did not dramatically change practice, it did establish federal government authority over laissez-faire operations of the railroads and opened the door for further discussion and additional legislation. It also provided a foundation of federal authority over the railroads when they were nationalized during World War I. Fink's efforts however became critical for the ICC in later years. Through his development of cost management strategies and efforts to measure profitability and efficiency, Fink became known as a pioneer in the development of accounting information. He advanced concepts such as fixed and variable costs, revenue, and expense per ton, and numerous other operating statistics. The ICC embraced Fink's costing methodology and used control through disclosure of data and statistics to guide regulation (Heier, 2000).

In an ironic manifestation, despite the industry's inability to successfully pool rail systems and notwithstanding the ICC Act specifically prohibiting consolidation, railroads did eventually consolidate into a few major lines with not only the blessing of the federal government, but with its urging.

Large horizontally integrated companies like the railroads and Standard Oil operated several different companies like the NKP, LS&MS, and New York Central under one system of the parent company. Shares of these individual companies were held under a business methodology called trusts. The term trust became synonymous with monopolies and the term became part of normal business and public vernacular. This name and business operation methodology prompted the next piece of legislation, the Sherman Anti-Trust Act (1890), which makes illegal ‘every contract, combination, or conspiracy in restraint of trade, and any monopolization, attempted monopolization, or conspiracy or combination to monopolize.’ Once again, enforcement of the legislation did not occur and it couldn't stand the test of court challenges. It was business as usual for the NKP and other railroads. However, it did provide another opportunity to build upon and use in the future.

The use of trusts as a vehicle for monopolies continued to grow and public sentiment intensified. Newspaper stories and magazine articles fueled the discontent of the American people. Upon the assassination of President William McKinley in 1901, Theodore Roosevelt made addressing the monopolies a top priority. He took a position of not dismantling monopolies, but of the government more staunchly regulating interstate commerce. He quickly gained a reputation as a trustbuster by taking on railroads in court cases and pushing forth new legislation. The first piece of legislation was the Elkins Act (1903). This law amended the ICC Act of 1887 and provided the force to that regulation. It targeted price-fixing by eliminating rebates and made officers of the railroads liable for discriminatory practices. The Hepburn Act (1906) further empowered the ICC. It allowed shippers to challenge rates before the ICC and permitted the ICC to set fair and reasonable rates. Through this act, the ICC began moving forward with accounting rules such as the implementation of depreciation, much to the chagrin of the railroad industry (Heier, 2006). This finally gave the ICC some power to begin addressing monopolies and truly guiding accounting practice. It also provided Roosevelt the opportunity to investigate Standard Oil. Nevertheless, the public was still not satisfied and large trusts continued to operate. The NKP did experience some autonomy due to many of these regulations and the dividend pay-out and revenues did improve with the first-ever common stock dividend being paid out in 1909.

Trust busting continued to be a major issue in the 1912 Presidential election. Woodrow Wilson won on a platform against what he called the triple wall of privilege – the tariff, the banks, and the trusts. Unlike his predecessors who used the courts to go after monopolies, he created new laws and strengthened existing acts. In 1914, two major pieces of legislation came forward. One was the Clayton Antitrust Act, (United States of America, 1914a), which unambiguously detailed illegal business practices such as price-fixing, purchasing of and operating of competitive firms, joint membership on boards of competing companies, and business dealings contingent upon not using competitors. The other major piece of legislation was the Federal Trade Commission Act (United States of America, 1914b). With this regulation, the government finally had the tools necessary to fight the monopolies. It created the Federal Trade Commission (FTC) and empowered the FTC to enforce previous anti-trust laws with special attention to the Sherman Act of 1890 and the Clayton Antitrust Act of 1914. Unlike previous legislation, the FTC Act allowed the FTC to investigate organizations, negotiate with companies to never participate in questionable behavior again, fine companies, and issue cease-and-desist orders. Non-cooperation with the FTC could result in criminal action. The FTC’s purpose was and is to prevent unfair competition, stop deceptive business conduct, and promote just commerce. Frances Adams’ vision finally came to fruition fifty years after he began writing about such a commission as the FTC. These acts marked the official beginning of the end of laissez-faire customs for the railroad industry and throughout big business. The will of the people had triumphed over big business. These outcomes support McCraw’s theory. It would have been better for the railroads to use their private property in a way that would have been beneficial to the public rather than take advantage of society. Wren and Bedeian (1972) commented on the unscrupulous behavior and social irresponsibility that was characterized by the big railroad operators but also highlight that the general public gained greater control of their lives and pursued it to the fullest while the industrial revolution was occurring. This friction between the big businessmen and the populace was experienced by the railroad industry significantly during the late 1800’s. The NKP operations were at the forefront of why this discord was occurring and is a leading illustration of the robber baron mentality, reasons behind social upheaval, the inability of the railroad industry to manage itself, and why the government had such difficulties in realizing a solution to the railroad problem and monopolies in general.

The new 1914 regulatory acts had an immediate impact on the NKP's autonomy. In 1914, the NKP experienced a deficit of $283,000, but in 1915, a profit of $560,574 was realized and in 1916, income climbed sharply to $1,032,530. Despite any newfound sovereignty of the NKP, due to regulation, ownership of the NKP by the NY Central was still in question. The New York Central's leadership clearly understood what was foreshadowing and sold the NKP in 1916 to a pair of brothers from Cleveland, the Van Sweringen's, who although were friendly allies and worked well with the NY Central, eventually operated and grew the railroad in the true spirit of entrepreneurship as espoused by Jenks (1944) and Ford and Petersen (2011).

Opportunities for future research

Despite the NKP being left to obscurity in 1916, anti-trust laws created an urgency for the President of the NY Central, Alfred Smith, to address the NKP's nearly parallel route of the LS&MS. This created an opportunity for two brothers from Cleveland, Otis and Mantis Van Sweringen who ended up purchasing the NKP in 1916.

Just as Bowden (2017) found that in both the U.S. and Australia, management structures were of such strength that they enabled the railroads to survive. The same premise can be applied to the NKP. It survived and provided an opportunity for future growth through the Van Sweringens. This premise can be used for researching the NKP, its innovations, and major developments along its routes compared to other railroads for years 1916 and beyond. Another area for future exploration lies in the consolidation of the railroads. Despite the strong public sentiment against and specific language prohibiting pooling in the ICC Act of 1887, market forces resulted in the consolidation of the railways backed by the government. This, therefore, provides credence to revisit Fink's proposition, which failed in the 1880's. The NKP is an excellent subject for this research.

Also, the advent of the U.S. entering WWI and the dysfunction of the railroads in 1917 led to the railway systems being nationalized and overall management taken over by the Federal government. The NKP and Van Sweringens played a major role in the organization and operation of railways during the war and also were heavily involved in the return to private ownership and reorganization of railroads in 1920 and thereafter.

Finally, lessons learned from this case can be applied to today's modern businesses that enjoy large market share such as those in the technology field. Just as railroads were the new technology of the 1800's, Alphabet (Google), Apple, Amazon, Meta (Facebook), Microsoft and Tesla are now posing challenges to standard setters and regulators. FASB and the Federal Government are having great difficulty in dealing with issues these modern companies bring forth such as non-GAAP reporting, intangibles, integrated reporting, big data, cybersecurity, and data privacy. Also, the sheer size, value, and market share rival that of Standard Oil and the railroads of the late 1800's. Just as the NKP was sold to the Vanderbilt's for market dominance, we can find similarities today in examples like Facebook's purchase of WhatsApp for $20 billion, T-Mobile buying Sprint for $26 billion, or Microsoft purchasing LinkedIn for $26 billion.

Conclusion

Accounting data show that the NKP was employed to achieve the New York Central's high volume throughput operations, which were instrumental to its market power, aiding its service monopoly. Eventually a public policy response developed that considered such operation not to be in the public interest.

This study provides an example of big business disclosure practice over several decades. Specifically, new data documented and analysed in this article, contributes to the literature and demonstrates that:

The NKP, as a strategic subordinate, showed laissez-faire policy to be ineffective as to societal issues regarding ‘natural monopolies’ and the ‘railroad problem.’