The railway engine may be the iconic image of the Industrial Revolution, but the real engine of industrialization was knowledge applied to the production process, manifested in specialization and the division of labour.
Specialization increased productivity, but at the cost of increasing complexity and demands on management.
The management challenges were particularly acute for railway entrepreneurs, who had to master steam technology and ironworks, negotiate the politics of obtaining permits and laying tracks through various jurisdictions, manage the logistics of moving people and goods on schedule, and understand how to finance very large capital expenditures.
Economies of scale were essential if a railway were to make business sense.
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Who could supply the necessary capital?
The burgeoning British middle class was a potential source of funds.
As potential investors, they would need information about a company: its financial condition, ownership structure, recent performance, and plans for the future.
They had to analyze and evaluate risk and return, consider alternatives, and choose from among them.
The British public, however, had other ideas.
With railway stock mania in full bloom in Britain in the 1840’s, speculation, not investment, ruled the day.
People rushed to sink their savings into fly-by-night operators, hoping to make their fortune.
Many lost their shirts.
The speculative mania threatened to destroy all confidence in the stock market, in which case investment capital would dry up.
The Parliament had to act.
The Joint Stock Companies Act of 1844 instructed directors of companies to demonstrate that the company books were balanced and the company was insolvent before issuing shares to the public.
They also had to appoint an auditor to verify the accuracy of the information on the company balance sheet, and to detect any fraud and error on the part of management.
The auditors were to serve the interests of the investing public, not owners.
The investing public were not the only consumers of financial and operational information.
As the Industrial Revolution rolled on, and machines took over more tasks, those who came to work increasingly focused on making decisions.
And the greater the start-up capital requirements and economies of scale, the more impact those decisions had.
Nowhere more than in the railway industry were the barriers to entry that led to natural monopolies, increasing the first-mover advantage.
Railway managers pored over cost reports, fare schedules, expansion estimates, operating ratios, and company accounts.
Company transactions, assets and liabilities, were not just matters of record: they were data to be analyzed by managers to answer pressing operational and strategic questions.
How fast was the company burning through capital? What resources did they need? How much risk were they taking?
The answers informed fateful decisions about the routes to build, and the fares to charge.
More information led to more division of labor. Those who gathered data and analyzed it to make decisions became “managerial accountants"; those who gathered data and reported it to investors and regulators became “financial accountants."
By dividing information into two streams, one to record the past, and one to inform decisions and shape the future, the nineteenth century railways foreshadowed the data-driven organizations of the 20th century.
They were harbingers of the modern world.
The railways integrated the economies of the industrializing world, and consolidated the westward expansion of the United States.
The economic transformation had inevitable political consequences: increasing conflict between economic classes, between regions, between exporters and importers.
The situation was further complicated by the increasing political and economic clout of the monopolistic industries, such as oil, banking, and steel, as well as railways.
Industrializing economies were outgrowing the minimalist state.
To intervene in the economy, however, government bureaucrats, no less than industrialists, needed to raise funds.
Taxes were the obvious source, and the income tax, hitherto levied intermittently during times of war, became permanent in one industrializing country after another, with Britain leading the way, in 1840.
The United States got on board in 1909, after the US Constitution was amended.
The income tax made the government an interested party with respect to company financial information, but since few businesses proved to be eligible to pay the tax, at least in the early decades, it had minimal impact on corporate information disclosure.
A stock market crash and global economic depression, on the other hand, was a different matter.
The author is a writer and researcher in Dhaka, who previously worked as an investment banker in London and New York
