by Peter Krass
Some harmony was briefly restored with Illinois Steel and the other steelmakers when the rail pool was reestablished in February 1898, but any mood of cooperation was subsequently poisoned when just ten days later Schwab notified Carnegie that John Gates’s company was not “conscientiously” keeping to the agreement. And then he added ominously that there were rumors about the possible organization of a steel wire monopoly capable of dictating what it would pay for steel—including Carnegie’s steel.1
Behind the rumors was Bet-a-Million Gates, who was fed up with Carnegie’s bullying. It was time to strike back. As for Gates’s undercutting their rail pool agreement to garner some additional orders, that was akin to sending out a company of soldiers to test his enemy’s picket line. When there was no immediate retaliation from the Carnegie troops, it signaled weakness, and Gates decided now was the time to forge his steel wire monopoly. It was the first in a series of consolidations in the industry that would attempt to break free of this reliance on Carnegie’s raw steel and to wound the Scotsman.
Rain was falling as Gates and his partner Ike Ellwood took a train from Chicago to Pittsburgh, a tiresome journey. To pass the time, the two picked raindrops on the window, betting $1,000 on which would reach the bottom first. Gates, who subsequently won $22,000 on the trip, was still in a gambling mood when he reached Pittsburgh and repaired to the Duquesne Club, stronghold for the city’s iron and steel men. There he met a number of men who owned steel wire mills similar to his up the Monongahela River in Rankin, Pennsylvania, and to each he made a proposal to buy them out. Word of Gates’s visit spread rapidly. As Carnegie was digesting what had transpired at the Duquesne Club, a more potent piece of news reached him. Gates had sought the backing of Pierpont Morgan, who was already reviewing the financial status of the companies agreeing to sell out to Gates and those the gambler proposed to include.
Due to the impending war with Spain and the shaky financial markets, Morgan withdrew from participating, but he was intrigued with the concept of consolidation in the steel industry. It was the “Era of Finance Capitalism” that once the Sherman Antitrust Act proved impotent, witnessed the creation of trusts and consolidations in every industry from typewriters to sugar. Between 1897 and 1904, 4,227 firms would consolidate into 257. Steel was ripe to join the unstoppable trend because the industry met a prime condition for consolidation—overcapacity.2 Morgan would enter the fray in due time.
Gates pushed forward with his monopoly, and on March 18, less than two weeks after Schwab warned Carnegie, he formed the American Steel and Wire Company of Illinois, which controlled 75 percent of the country’s wire products.3 While not in direct competition with Carnegie Steel, but with plants in Pennsylvania, Indiana, and Ohio, the new company could purchase raw steel from any number of producers; thus, Carnegie could be locked out. Sure enough, two weeks later, Frick warned Carnegie, “Gates seems to have it in for us, but Illinois crowd may find, some of these times, a formidable competitor alongside of them, on Lake Michigan.”4 Roused from the languorous Mediterranean life, Carnegie agreed wholeheartedly that the battle had to be taken to Gates’s home ground of Illinois, but instead of building a plant there, he proposed using a different tactic: to find cheaper avenues for shipping their product to Illinois and dumping it on the market at cutthroat prices.5 Profit margin meant nothing to Carnegie if he could destroy his enemies.
To secure a cheap supply line west, Carnegie once again turned to the Pennsylvania Railroad, which the year before had given him major rebates. While the Pennsylvania offered excellent freight rates for rails, it still cost more to ship beams, structural steel, and other products on a tonnage basis. Frank Thomson had just been elected president of the colossus; before he could settle into the new position, Carnegie pressed him by making the usual threats to take his business elsewhere unless given rebates for structural steel products that competed directly with Illinois Steel.
Thomson came into line without a fight and agreed to lower rates. “This understanding is meant to bring the PRR and the CSCo. into close alliance,” their agreement stated, “and is never to be referred to, except to the parties hereto. It is in noise intended to be a legal document, on the contrary, it is not. It is however an honorable understanding between the parties.”6 It was an illegal rebate at its best. Although Carnegie was again breaking federal and state laws, he didn’t recognize his agreements as such; he was too enraptured with defeating the enemy at any cost. Armed with exceptionally competitive rates, Carnegie now had the weapon to cut the legs out from under Gates and Illinois Steel. The enemy on the western front was about to be fully engaged.
The Spanish-American War inspired Carnegie. He became more militaristic in his business affairs. No longer was it enough to cut prices to crush the competition; now more sophisticated strategies were called for, especially when a formidable enemy emerged on the eastern front. Illinois Steel’s general counsel Elbert H. Gary, who had drawn up bankruptcy papers for his company more than once, knew the only way to compete with Carnegie was to surpass the vertical integration the canny Scot had—iron ore to finished products—they would do so by merging with other companies. Gary, who always dressed in dark suits and spoke in a quiet, pious voice, came across as a Methodist minister, but he was usurping power from the philanderer Gates. It was Gary who put together a plan that proposed the amalgamation of Illinois Steel, the Minnesota Iron Company, the Lorain Steel Company, the Johnson Company, and two railroads operating in the Chicago area. And it was Gary who traveled to New York and presented his plan to Morgan, whom he knew had been enticed by Gates’s proposal to consolidate the steel wire industry. Morgan did indeed endorse the plan.
To follow these ominous developments, Carnegie Steel employed spies, including John A. Potter, the ex-superintendent of Homestead. Still alive and well in 1898, he visited the Illinois works in June and reported to Schwab that the company’s operations continued to lose money, but that its rail mill was busy.7 It took three months for Gary and Morgan to work out the details with all of the companies, but both men were patient; they knew they needed a critical mass to be able to effectively strike at Carnegie. On September 9, the $200 million corporation, christened Federal Steel, issued stock, half preferred, half common, and Carnegie’s most dangerous enemy yet was fully operational. Morgan appointed Gary president, while Gates was left out in the cold—almost. Once Federal’s stock was listed, Morgan’s cronies, including the former governor of New York, Roswell Flower, bulled it and made a killing on Wall Street. Gates, who held a sizable stake, won a prodigious booby prize. It also prompted Carnegie to write Dod, “I think Federal the greatest concern the world ever saw for manufacturing stock certificates—we are not in it—but they will fail sadly in Steel.”
His breezy dismissal of the new rival was premature. Federal was a legitimate threat, with plants strategically located in Illinois, Ohio, and Pennsylvania, booking almost as many rail orders as Carnegie Steel, and throwing any past pooling agreements into uncertainty. The New York Commercial trumpeted: “The completion of the consolidation of these ore and steel interests is the beginning of one of the greatest contests for supremacy that the world has ever seen. It is a fight between the new concern and the Carnegie interests, both backed by almost unlimited capital, and each holding patents for many similar articles manufactured from iron and steel.”8
While Carnegie was having a good laugh over his stock-watering joke, Morgan was working on his next consolidation in the steel industry, which would be called National Tube and eventually combine nineteen companies making steel pipe and tube, many of them Carnegie customers that would soon be former customers.
Morgan was intent on creating fully integrated organizations that sold a wide spectrum of finished steel products. In this way he would outflank Carnegie, who sold raw steel, rails, beams, armor plates, and projectiles, but no other finished goods. Adept at the art of war, Carnegie anticipated the maneuver, envisioning the day orders for his steel declined as huge cons
olidations did indeed become independent. It was time to fully engage his troops on both fronts; he would take the battle to New York, to Morgan himself, in his plush office surrounded by fine artwork and his latest mistress, tumors of the Gilded Age. Even though Carnegie had had an amicable relationship with Junius Morgan, he perceived the blue-blooded Pierpont as a degenerate. For him, it would always be the Scotsman against the Yankee, his boys and him against Wall Street. Good against evil. As early as July, Carnegie prepared his board of managers for the upcoming war when he advised them, “There are three stages in the development of manufactures; we began in the middle making Iron and Steel and buying our Pig and Raw materials. We have now our Raw materials. The third stage, which is coming, is at the other end; we have to put our Iron and Steel into finished forms. . . . We can get as much ahead of competitors as we ever have got by first accepting the truth that eventually the manufacturer of Steel must also be the manufacturer of Finished Articles. At all events the concern which does this first will remain first.”9
Two weeks later he wrote another letter, reiterating his point: “I am convinced we should turn our attention to finishing certain articles. Suppose we made Steel Cars for instance. No one could stand against us.”10 If Carnegie was consistent in one trait, it was persistence. He was determined to push his men into the finished products arena, and for each product he would do to the competition what he had done to them in rails—bring them to their knees. Carnegie’s call to arms had the desired effect on his lieutenants, who declared in a joint letter they were all for “whipping Illinois Steel into line, and better controlling the markets.”11 Now it was a simple matter of deciding what finished products to manufacture. But before definite plans were made, Carnegie was again stricken with doubts. He had to decide whether to continue the war, to meet the competition head on, or to sell out and enjoy retirement at Skibo with his family. The voice of the fiercely competitive businessmen told him to meet Morgan and the others head on; the voice of the father said sell.
When Carnegie returned to New York City in October 1898, Theodore Roosevelt was running for governor of New York on a war-hero platform. He would win and, two years later, become McKinley’s vice presidential running mate. America, now a world power, was also enjoying a coming-out party. Carnegie didn’t join in the euphoria. In the postwar world of consolidation and expansion, New York City didn’t appear the same to him. It was claustrophobic—both the skyscrapers made with his steel and the people encroaching on his Fifty-first Street home oppressed him. To escape the long shadows, he searched uptown for property to build on and purchased two blocks, comprising thirty lots, between Ninetieth and Ninety-Second Streets on Fifth Avenue, across from Central Park. “As for building a grand palace,” Carnegie told inquiring reporters, “that is foreign to our tastes.”12 The new home would be palatial, however, and construction took several years.
Carnegie’s growing desire to escape not only the crush of New York but the rigors of business was reinforced in the first week of November when Louise and he traveled to Pittsburgh. On November 3, they, along with Henry Phipps and William Frew, attended the annual Founder’s Day celebrations at the Carnegie Library of Pittsburgh, a nifty ploy to pay tribute to the benefactor, who naturally appreciated the attention. The audience wasn’t disappointed, either. After congratulatory telegrams from McKinley and other dignitaries were read, Carnegie rose to speak, but thunderous applause prevented any words for several minutes. Then, in his speech, Carnegie announced that the library, now also called the Carnegie Institute, would be enlarged. Wings would be added to permanently house the art and museum exhibits, to which he would commit millions more.
Carnegie’s plans to expand the institute were indirectly underscored when, later in November, he was reading the New York Journal and his attention was grabbed by a headline: MOST COLOSSAL ANIMAL EVER ON EARTH JUST FOUND OUT WEST! On the article, Carnegie scrawled a note to William J. Holland, who had been appointed director of the Carnegie Museum of Pittsburgh (a division of the institute), to “buy this! For Pittsburgh.” He enclosed a $10,000 check.13 All that had been found was a single eight-foot bone belonging to an Apatosaurus, but Holland sought out William Reed, who had made the discovery, and signed him to a one-year contract. The investment paid off when, on July 4, 1899, the most complete Diplodocus to date was discovered, and in the patron’s honor it was named Diplodocus carnegii. Carnegie had plaster copies made of the dinosaur, which were shipped to other museums to both tout and share the discovery. Everything Carnegie touched seemed to turn to gold.
The day after Founder’s Day, the Homestead library was dedicated. The carriage brought Carnegie and Louise up the rising ground where the state militia had camped six years earlier, and which was once part of Pittsburgh’s City Poor Farm property that Frick, Christopher Magee, and he had purchased at a good price. Although no one else was aware of it, for Carnegie, the proceedings had been somewhat tainted more recently, for it was that prior June that Carnegie had written the enigmatic instruction to John Van Dyke to give John McLuckie all the money he wanted. Despite all the sordid history associated with this piece of land, Carnegie was a picture of poise as he took the podium and announced to the townspeople it was a day he had long looked forward to. The men in the past had been difficult to deal with, he explained, but today they were blessed to have good men. “The building has rightfully in the center as the focus ‘The Library’—Music Hall upon the right and the Working Man’s Club upon the left,” he said with great flair. “These three foundations from which healing waters are to flow for the Instruction, Entertainment and Happiness of the people. Recreation of the working man has an important bearing upon his character and development as his hours of work.” He was at his dramatic best, sighing at appropriate moments, looking stern at times.
The Pittsburgh library expansion and the Homestead library dedication reminded Carnegie of what he would prefer to be doing: casting his benevolence and promoting goodwill among men. To sell or not to sell, that was the burning question in November and December.
Whether to sell was a wrenching decision to make, but it appeared fatherhood was winning. In the fourth week of a rather busy November, Carnegie and Harry Phipps, who still promoted the company’s interests, rendezvoused at the Arlington Hotel in Washington. Carnegie’s main purpose in going there was to meet with the politicos and argue for giving the Philippines its freedom, but he also talked business with Phipps. After a Tuesday dinner out at a restaurant, they strolled along the boulevards, Carnegie’s arm around Phipps’s shoulders. Despite his prior biting comments about Federal, Carnegie intimated he was willing to sell to that company. The next day, he gave Phipps an outline of the terms for sale, putting the price at somewhere between $200 and $250 million. Phipps, who was astounded by Carnegie’s unexpected decision, excitedly wrote Frick, “It is a chance of a life time— comes to but few and is rarely repeated.”14
Once Carnegie was back at the Fifty-first Street house, Dod visited to talk the matter over with his cousin. During the intense discussion, Louise happened to enter the library, unwittingly provoking an ugly scene. Dod subsequently reported to Phipps: “Louise came in and sat down, he turned to her and told her what we were talking about, his thoughts were running favorably to the sale at the time—she remarked that when it was done she ‘would be the happiest woman in America’—He immediately turned on her quite savagely and went into a tirade on men who retired from business dying etc. etc.—that he would be laying down a crown etc. etc., so I judge the matter will make the most progress by being let alone as much as possible—He is in a considerably excited state about the Philippines anyway and this coming on the back of it may have had physical effects I fear.”15 Dod, perceiving that if one pressured Carnegie too much it would have the opposite effect, warned Phipps to drop the subject of selling for now.
After a brief cooling-off period, in early December, Frick gingerly took up the discussion of the merger of Carnegie and Federal. To make i
t easier to sell the company, Frick recommended a reorganization of their interests into a holding company, the Carnegie Company, Limited, with its capital to be $250 million.16 Now leaning toward selling and looking to convince himself that merging with Federal was the proper course, Carnegie penned an article for Iron Age, “Iron and Steel at Home and Abroad,” in which he wrote: “The consolidation of the iron and steel interests is a natural evolution. If we are going to sell 3 pounds of steel for 2 cents, it must be made by the millions of tons. It is a tight race for the best concerns.” He was careful not to annoy Morgan, Gary, and other potential suitors in explaining: “Do not understand me as reflecting on the management of these concerns. Very far from it. It is not the management but the situation.”17
Frick tested the waters by discreetly shopping their respective companies to Morgan and Gary at Federal Steel, as well as to Rockefeller, but the asking price of $250 million was too rich. With mixed feelings, Carnegie wrote Dod, “Mr. Rodgers, Standard Oil, and Federal, said truly, ‘Too big a dog to be wagged by so small a tail.’”18
