Carnegie

by Peter Krass

  Harry Phipps, Andrew Carnegie, and John Vandevort toured the European continent for five months in 1865–1866, leaving Andrew’s brother, Tom, to handle business in Pittsburgh. (Courtesy of the Carnegie Library of Pittsburgh)

  The brothers’ relationship had not evolved. The twenty-nine-year-old Andy still played the bullying big brother to twenty-one-year old Tom, and with an eight-year spread in age their relationship would never be on equal ground. While emotionally insensitive to his brother’s needs, Carnegie did view himself as protector of the family and their assets. As for Tom, he appeared content with being subservient; but, in fact, he was often outraged by his brother’s behavior, only to internalize his feelings. To assuage his anger and sadness, he took to drink.

  Thomas Carnegie would forever be smoothing over the feathers his elder brother, Andrew, ruffled. (Courtesy of the Carnegie Library of Pittsburgh)

  By November 1865, Tom mustered up the courage to question his brother’s prolonged absence in a letter of rebuke. Carnegie attempted a conciliatory response that came across as patronizing; he noted that the more he drank in the enjoyment of being in Europe, the more he appreciated Tom’s “devoted self-denial.” He continued: “It is a heavy load for a youngster to carry, but if you succeed, it will be a lasting benefit to you. Talk to Mother freely; I always found her ideas pretty near the right thing. She’s a safe counselor, safer than I, probably, who have made money too easily and gained distance by carrying full sail, to be much of an adviser when storms are about, or sail should be taken in.”9 His admission of making money too easily was true, discounting his days in the cotton factory and bobbin mill, as prizes from Tom Scott had simply fallen into his lap. And while he didn’t know when to take in sail, instead always pushing ahead, extending himself, it was this unwillingness to allow economic and social forces to determine his business course—a classic trait of the gambling entrepreneur—that defined Carnegie’s early business career.

  Even while vacationing, Carnegie sought moneymaking opportunities. During the war, Edgar Thomson had experimented with all-steel rails imported from Europe, and Carnegie had overseen their installation at Pittsburgh. The rails proved too brittle for the mainline where trains moved at higher speeds, but they did last over a year on the sidings, easily justifying the high price the British firms exacted. The idea of steel replacing iron gnawed at Carnegie, so while he was in London in 1865, he, along with Dod, investigated iron rails capped with steel, manufactured with a new process invented by Englishman Thomas Dodds. The product was called doddized rails. If the reports proved true, these rails were stronger and cheaper than the rails with which Thomson had experimented. Carnegie realized doddized rails could be a major windfall for him, but in reporting the extremely intriguing find to his more conservative brother he promised to make no hasty investment.10 The initial interest quickly escalated, however, and while Carnegie’s friends traveled through Switzerland, he returned to London to open negotiations in earnest with Dodds to secure the exclusive American rights for the use of the Englishman’s patents.

  While in London, he developed an attachment to the city, writing his mother, “I wish I knew the ropes and points in business affairs in London, as well as I do in the Iron City. I would certainly try to persuade the family to come there and try it for a while at least. . . . How would you like to try a residence near Hyde Park, eh? Or if Tom will insist on getting married (a very proper thing to do), he might run the machines in America and I do the foreign business. Seriously, however, I am quite taken with London and would like to spend a year or two there.”11 London not only offered the first underground railway, opened in 1863, but was far more cosmopolitan than smoky Pittsburgh. The city was teeming with intellectual power, fueling debate on scientific, social, and theological issues. Stirring the kettle was Karl Marx and his comrade Friedrich Engels; philosopher John Stuart Mill, author of On Liberty (1859) and Utilitarianism (1863), who was serving his first year in Parliament; Charles Darwin, who was updating his seminal On the Origin of Species by Means of Natural Selection; and Herbert Spencer, a sociologist and philosopher, who believed in the preeminence of the individual over society and science over religion. Spencer took the idea of evolution and adapted it to sociological theories—comparing society to an animal organism—creating the theory known as social Darwinism. In his Principles of Biology (1864), he coined the phrase “survival of the fittest,” a term embodying a philosophy Carnegie would later adopt with great enthusiasm.

  For the moment, Carnegie was concerned with ingratiating himself with Dodds and his partners. His magnetic personality and power of persuasion were difficult to fend off, and Dodds succumbed to giving him the American rights to his patents without a shilling changing hands. “Have had to exercise every whit of my business ability to convince these gentlemen that it was far better to give our party their patents without any cash down than to get 5,000 pounds gold from others,” Carnegie crowed in a letter home, “but I have succeeded, and feel repaid for the three weeks I have lost in Switzerland.”12 Aligning his own triumph with America’s prosperity, Carnegie added, “I may reasonably expect to be able to ‘do the States some service,’ as it will be a great gain for America if we can do what I think we can. I have made a number of valuable and pleasant acquaintances in London during the time.”13 Carnegie, whose interest in manufacturing processes for iron and steel first emerged on this trip, subsequently visited ironworks in Prussia, at Ruhwort on the Rhine, and at Magdeburg.

  On returning to the United States in the spring of 1866, Carnegie worked diligently to bring Dodds’s steel-faced rails to his adopted country. Before the patents were even validated, he organized the American Steeled Rail Company to manufacture doddized rails. In early 1867, samples were shipped to Thomson at the Pennsylvania Railroad for testing. Thomson’s report in March was anything but sanguine, as initial tests suggested the rails were unsafe for heavy loads; and in a second letter that month, he reinforced his position: “Private—a word to the wise . . . The experiments made in relation to the strength of the Doddized Rails has so much impaired my confidence in this process that I didn’t feel at liberty to increase our order for these rails. . . . the process is not a success.”14 Carnegie’s blind optimism and tendency to plunge into affairs got the better of him, and so, still dreaming of a windfall, he failed to heed Thomson’s advice.

  Carnegie continued to write enthusiastically to potential customers that “all looks favorable” and offered to send specimens that will speak for themselves.15 Not until a number of irate customers returned the rails did he abandon the project, whereupon—quite adept at shifting culpability—he placed the blame on Dodds.16 The failure stung, and he was so disenchanted that when Tom Scott approached him about investing in a chrome steel process, Carnegie demurred: “My advice (which don’t cost anything if of no value) would be to have nothing to do with this or any other great change in the manufacture of Steel or Iron. I know at least six inventors who have the secret, all are so anxiously awaiting. . . . That there is to be a great change in the manufr. of iron & steel some of these years is probable, but exactly what form it is to take no one knows. I would advise you to steer clear of the whole thing. One will win, but many lose & you & I not being practical men would wager at very long odds. There are many enterprises where we can go in even.”17

  The one positive take-away from Dodds’s experience was that Carnegie recognized his own power of persuasion, his skill as a salesman. With his storytelling skill, his ability to fall in and out of a Scottish brogue, and his earnestness, he was downright charming. As he sought to further expand his investments and garner more personal power, he would need that charisma in confronting two men who offered formidable obstacles. One was William Orton, the calculating president of Western Union; the other was George Pullman, the supremely arrogant founder of the Pullman Palace Car Company.

  In 1867, Carnegie refocused on what he knew best, telegraphy and railroads, in divining treasure to be had. These
were enterprises where he could “go in even,” in the words he had used with Scott. In the telegraph industry, a little game was being played with telegraph bully Western Union, the game exemplifying the age’s cult of opportunity, and Carnegie decided to have a go. Western Union’s own greed perpetuated the game, which was modeled after the David and Goliath fable. Instead of trying to kill Goliath, the idea was to become a nuisance in Western Union’s path by starting a rival concern and exacting a toll in the form of a payoff or buyout, before stepping aside. Organized in 1856 and determined to consolidate the industry, Western Union immediately began absorbing competitive firms entrenched in key cities, such as Carnegie’s old firm, the Atlantic and Ohio Telegraph Company. After the Civil War, which proved how indispensable the new technology was by aiding the two armed forces, expansion accelerated. At times, the shopping spree appeared almost indiscriminate, and it was now that enterprising businessmen realized an opportunity to profit by starting rival firms that were invariably purchased by Western Union at a premium.

  Carnegie, who owned Western Union stock, was well aware of how profitable the business was, so it was a logical step for him and sundry associates to join the game in 1867 by organizing the Keystone Telegraph Company. Chartered on April 9, Keystone telegraph’s initial capital was set at $50,000 with one thousand shares issued. Again playing the role of venture capitalist, Carnegie, along with Thomson and Scott, invested in the company but did not take an official management position. He did, however, secure a key advantage for the company from his friends at the Pennsylvania Railroad: the right to string two wires along the railroad’s poles running from Pittsburgh to Philadelphia for a nominal fee per mile. Before Keystone ever strung a wire or sank a pole, the company was approached not by Western Union, but by another large player, the Pacific and Atlantic Telegraph Company (P&A). Impressed with Carnegie’s connections with the railroads and hoping that he could arrange similar deals as he had with the Pennsylvania, the Pacific and Atlantic offered a swap of six thousand of their shares, valued at $150,000, for Keystone’s one thousand, tripling the value of Carnegie’s company without a pole being planted.18

  Fast becoming a wily business veteran, Carnegie aided the negotiations, consummated in September 1867, and was able to arrange for his friend David McCargo to be made the P&A’s general superintendent, which gave him a strong ally in the company’s upper ranks. For himself, Carnegie arranged a deal whereby he would manage the installation of the wires along the Pennsylvania’s line, but he didn’t want to be paid in cash. Instead, the ravenous accumulator of stock was paid $3 of stock for every $1 of construction cost.19 Not only was he willing to sacrifice a short-term gain for a long-term windfall, but he comprehended that stock equated to power, the power to control a company and men, which thrilled him more than the jingle of money. Sacrificing short-term monetary gains for power and riches down the road was a technique he would use repeatedly.

  The P&A’s president, George H. Thurston, happened to be playing the game with Western Union. Determined to challenge the Goliath, he was anxious to have agreements in place for stringing lines to Chicago, St. Louis, and other major cities by the end of the year. To achieve these goals, he turned to Carnegie in hopes the energetic Scotsman could secure agreements similar to those he had with the Pennsylvania with other railroads. “Aware of the great assistance you rendered the officers of the Corporation in bringing to a successful conclusion the negotiations with the Keystone Tel. Company,” Thurston wrote with lavish flattery, “I am anxious to secure your services in negotiations with other rail road Co. . . . You can open and conclude for us many advantageous negotiations, in less time and, upon perhaps more favourable terms, then the immediate officers of this corporation.”20

  Knowing he would be well compensated with additional shares in the company, Carnegie accepted the task with bravado: “The end you aim at is a great one & it will require much time and attention to accomplish it; I know if once arrived at, you will have one of the most prosperous enterprises of the day.”21

  Now was the time to provoke Western Union, a battle relished by Carnegie, who always rooted for the underdog. However, he quickly discovered not all arrangements with the railroads for stringing lines were easily negotiated. For those railroads fully or partly owned by the Pennsylvania, he merely had to write to his friend Scott, as he did concerning the placement of two wires on poles owned by the Terre Haute & Vandalia Railroad Co.22 (The P&A awarded Carnegie 2,913 shares for his work on this negotiation.) Other railroad executives, fearing reprisals from Western Union, were not so easily convinced. Chicago & Great Eastern Railroad president W. D. Judson, for one, was hesitant, forcing Carnegie to argue his case vigorously as he demanded the same privileges offered Western Union, which was to string wires along the railroad lines for a moderate fee. “Our list of Stockholders embraces many of the prominent business men in the various cities with which we connect . . .,” Carnegie wrote with a hint of intimidation, and even alluded to possible legal action “to place us upon equal footing & let us fight it out.”23 The veiled threats worked and Judson relented; however, he unequivocally stated that his company would not be liable for any damages if Western Union were to sue the P&A. That was exactly what Carnegie hoped for—to attract Western Union’s attention—and he thrived on invading the larger company’s turf, setting up his bid for the big payoff. In the interim, he pocketed a good profit as the P&A paid 37.5 percent dividends in its first three years. But those high dividends didn’t last because Carnegie’s incursion into Western Union territory stalled.24

  Little did Carnegie know that he was up against a tough competitor in the former commissioner of the U.S. Internal Revenue Service, Mr. William Orton. Described by Carnegie’s former superior at the Atlantic and Ohio Telegraph Company, James Reid, as having “an intellect unusually alert and keen, and of an industry which was earnest almost to ferocity,” the native New Yorker had risen in three years from collector of internal revenue in New York City to the federal post.25 While in that position, Orton befriended some very powerful businessmen; after less than a year in Washington, Orton was offered the presidency of the United States Telegraph Company. He took the job, engineered a merger with Western Union in April 1866, and then a year later was handed the presidency of the Goliath. As for the competition, gnats like Carnegie’s Pacific and Atlantic were to be dealt with accordingly.

  Although Carnegie had proved adept at using a mix of charm and veiled threats to convince railroad officials to allow the company to string telegraph lines along existing poles, management issues at the Pacific & Atlantic threatened the plan to force Western Union to buy the company. Growth had stalled and earnings were erratic, fluctuating wildly between $3,700 and $10,000 a month, issues Carnegie was oblivious to until his well-placed ally David McCargo sounded the warning. The two old friends began to mull over the possibility of Carnegie seizing control of the company. Convinced that Thurston, the company’s president (and shyster, according to McCargo), was trying to force him out, a vulnerable McCargo appealed to Carnegie: “You must come to my rescue. Don’t address me at my office as my letters might be opened through surveillance I am under by my Asst. who is ready to do any dirty work for the parties named. If they could get a catch on me. Be very careful with these figures. Don’t show to anyone. I write this at my house.”26

  It was Carnegie, now a powerful shareholder in the company by taking payment in stock, who forced out Thurston in early 1873. In his place, W. G. Johnston was made president. With the change, some of the Pacific and Atlantic executives wanted to rekindle the battle against Western Union, but Carnegie understood the game was over. Supremely confident in his salesmanship, he covertly approached Orton and his representatives to gauge their interest in absorbing the Pacific and Atlantic. The two parties reached an agreement in which Pacific and Atlantic shareholders could exchange six of their shares, then trading at $12, for one of Western Union, then at $85.06, or a profit of $13.06 for every six shares.2
7 For Carnegie, who had taken stock for payment of services, this was indeed a windfall, but it wasn’t enough for the avaricious gamesman. Now, with McCargo’s and Johnston’s help, he engaged in insider trading by quietly buying Pacific and Atlantic stock before news of the profitable exchange was made public. Insider trading was not yet illegal, and during this period in history businessmen wrote the rules as they went. It was a free-wheeling time during which the clever predator enjoyed excessive successes that were never to be enjoyed again. It was a dangerous gamble on Carnegie’s part, however, because an overcapitalized and overextended Western Union could renege on the deal at any moment and leave him with a pile of worthless stock certificates.

  In early May, Carnegie halted his purchases, and before the month was out, the news of the exchange was made public. By the third week of May, dozens of requests from stockholders were pouring in, all wanting to capitalize on Western Union’s deep pockets. Thomson, owner of 450 shares, submitted his request on May 23 and expected no delays.28 Other close business associates and friends also demanded immediate attention. Carnegie, who had hoped for an orderly process, was spooked by the sudden avalanche, and on June 3 he wrote to Orton, alluding to trouble with Pennsylvania Railroad executives and making his own request for expedience.29 He could only wonder if Orton detected a hint of desperation in his words; and he could only hope that invoking the powerful Pennsylvania Railroad would help. If he and McCargo were stuck with sizable amounts of stock—or other important parties, for that matter—it wouldn’t just be a major embarrassment: it would be a financial disaster.

  In the first few weeks of the exchange, chaos reigned, but Western Union pulled through, with Thomson for one receiving his Western Union shares and promptly selling them at a profit.30 Then, as the days progressed, the process bogged down. Pacific and Atlantic president Johnston warned Carnegie that he’d better take care of friends first, but “others who have no claim on friendship should be informed that you cannot do anything for them.”31 Johnston and McCargo were also still pushing to buy more Pacific and Atlantic stock, as long as “we can have a speedy exchange effected.”32 As much as Carnegie would have liked to profit more from the exchange, the avalanche of requests continued through June, and he had a number of brokers riding his back who had to be satisfied first.