The visible hand of invisible giants: The rise of a railroad empire and its impact on accounting, business, and regulation: 1916-1929

From their beginnings in the early 1800s, railroads in the U.S. were a catalyst for transportation, commerce, and population growth. They have become identified as ‘the first modern business’ (Chandler, 1965).  Railroads were perceived as natural monopolies because large amounts of capital investment, land grants, and physical property were required, which provided an innate barrier to entry or competition once a route was established. The New York, Chicago & St. Louis Railroad Company, which became known as the Nickel Plate Road (NKP), was an anomaly.  The NKP was contrived by entrepreneurial investors, being built for the sole purpose of forcing the New York Central Railroad (NYC) to acquire it to secure that road’s anti-competitive trunk line route (Foltin et. al., 2022)Late 19th-century railroad leaders like Albert Fink espoused Adam Smith’s competitive market-invisible hand doctrine and a government policy of laissez-faire. Corporate trusts and monopolies were targets for populist and progressive stigma, where ‘big was bad’ and leaders’ opulent lifestyles didn’t sit well with the average citizen.  Aware of these sentiments and the high costs of maintaining the NKP for the sake of route protection alone, Alfred Smith, the President of the NYC, sought to discontinue the NYC’s direct ownership of the NKP, seeking owners who might be perceived as competitors when tiers of anti-trust regulation evolved in the early years of the 20th century. In 1916, Smith sold the NKP to a pair of Clevelanders who developed real estate – the Van Sweringen brothers [henceforth the ‘Vans’ when used in the plural].  The Vans engaged professional managers who brought increasing efficient innovation and profit to the line. They also introduced highly leveraged financing practices and covert corporate structures, tolerated as useful during periods of business expansion, but which eventually brought unrest and fueled regulation. This study examines three major phenomena.  The first is that developed by Chandler (1965) in which he outlines a shift from Adam Smith’s (1776) invisible hand of self-regulated business markets to that of the visible hand characterized by a multi-layered business management system.  This critical research has not previously been studied similarly in the accounting history literature in a case study approach, which is provided herein.  The data in this study support Chandler’s seminal work. The second matter examined in this study is innovation.  This study reveals factors that drove innovation and the specific advances that the NKP brought to the business world.The third phenomena centers around regulation.  The methods that the Vans used to finance and structure their empire brought attention from the public and federal legislators.