Industrial Accounting

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

Industrial Accounting