The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany

by Charles R. Morris

  The center of attraction was Machinery Hall, with a goliath steam engine powering thirteen acres of machinery through a liana-forest of belts and shafting. The engine, designed and built by George Corliss, a Providence manufacturer, was forty-five feet high, with two ten-foot pistons and a massive flywheel, fifty-six tons, thirty feet in diameter, rotating thirty-six times a minute. On opening day, Grant and Dom Pedro climbed up on the apparatus before a packed, hushed hall and pulled the levers that released the steam. There was a hiss, a visible shudder, the pistons slowly began to move, and then the flywheel turned, picking up speed as the shafts and belting stirred, and all the machines moved, hesitantly for a moment before springing into life with a vast clatter, sawing logs, shaving metal, printing wallpaper and newspapers. The pharaonic immensity of the Corliss engine became the symbol of the Exposition. But its silence—the product of beautifully precise engineering—was as awesome. Amid all the busy machine-clamor, the engine dispensed its vast reserves of power serenely, as a god would do. Walt Whitman came and sat before it for a full half hour. William Dean Howells wrote:

  The Corliss engine does not lend itself to description; its personal acquaintance must be sought by those who would understand its vast and almost silent grandeur. It rises loftily in the centre of the huge structure, an athlete of steel and iron with not a superfluous ounce of metal on it; the mighty walking beams plunge their pistons downward, the enormous flywheel revolves with a hoarded power that makes all tremble, the hundred life like details do their office with unerring intelligence. In the midst of this ineffably strong mechanism is a chair where the engineer sits reading his newspaper, as in a peaceful bower. Now and then he lays down his paper and clambers up one of the stairways that cover the framework, and touches some irritated spot on the giant’s body with a drop of oil.

  The metaphor of the Mega-Machine captured the scale shift that was underway in America. With the upsurge of railroad building at the end of the decade, America doubled the track mileage of Europe. The railroads, in turn, were a primary force in the expansion and centralization of iron, steel, and coal operations and the industrialization of food production. The separation of population centers and food supplies became the norm, which was something new under the sun. Mega-Machine was also the natural metaphor for the megaorganizations arising to mediate the transition. Merely substitute the word corporation for engine in the snippet from Howell, and manager for engineer.

  Seizing on the openings created by the 1873 crash, Carnegie, Gould, and Rockefeller all played primary roles in driving the scale shift—Carnegie the expansion in steel, Gould in railroads, and Rockefeller, who started with the cleanest slate, actually creating an entity that came closest of any to the perfect global machine of the metaphor. Morgan plied his trade as a banker, and would emerge after yet another market break in the 1880s as the regulator of machines that other people built.

  The great Corliss engine that powered the machinery at the Philadelphia Centennial Exposition became a symbol of America’s mechanical prowess. President Ulysses S. Grant stands on the dais in this engraving.

  The Edgar Thomson Works

  Prior to the Civil War, the array of four-story brick textile mills in Lowell, Massachusetts, were America’s most imposing manufacturing plants. Andrew Carnegie’s Edgar Thomson Steel Works, opened in the summer of 1875 and covering 106 acres on the banks of the Monongahela River just outside Pittsburgh, was an altogether different proposition. The rail mill alone was bigger than a football field.

  More than sheer size, the process flow signaled a new era. Pig iron was melted in giant cupolas, then poured into twelve-ton “tipping cupolas” that fed the stream of iron directly into Bessemer converters. A converter looked like a giant black dinosaur’s egg; standing on end, it was as tall as a big tree. When it was full of molten iron, air was pumped into the center of the mass by steam-powered blowers, igniting oxygen with a thunderous shudder and triggering a chain of violent chemical reactions that left an almost pure, silvery pool of liquid steel. The converter, which was suspended on swivels, was tipped to pour the steel into oblong ingot moulds on moving rollers. As described by the plant’s designer, Alexander Holley, the ingots were dropped “hot out of their moulds” into railroad cars and were “not again lifted.” Moving rollers collected the ingots, still red-hot, at the rail mill where they were cut and trimmed, then:

  . . . pressed with uniformity and precision . . . by hydraulic fingers. . . .

  As a result, they cool almost perfectly straight . . . [in contrast to] rails which have been bent and twisted by hand operations, which cannot, of course, be precise and uniform. One man and a boy, by means of levers, operate all this moving and curving machinery, and also the saws.

  The cold saws were marvels in their own right. “Massively fitted” and “rigidly counterweighted” so they would stay true at speeds of 1,800 revolutions per minute, they could cut “a sixteenth-inch slice off the end of a rail.”

  Holley was the greatest steel plant designer of the era, and the “ET” works were his baby. The ET was the first he had built from scratch—all of his other plants were retrofits—and with Carnegie, when efficiency was at stake, cost was no object. In effect, it was Holley’s chance to do everything right; in his own words:

  As the cheap transportation of supplies of products in process of manufacture, and of products to market, is a feature of first importance, these works were laid out, not with a view of making the buildings artistically parallel with the existing roads or with each other, but of laying down convenient railroads with easy curves; the buildings were made to fit the transportation.

  The river site offered convenient barge connections for the indispensable supplies of coke, while the plant buildings were adjacent to both the Pennsylvania’s main line and the Pittsburgh branch of the Baltimore & Ohio. (Carnegie counted on the Pennsylvania as a major customer, but bitter experience had taught him to protect himself on railroad rates. The name “Edgar Thomson”—after the Pennsylvania president—was an all too transparent peace offering for setting up the competition with the B&O.) The ET’s internal product flow moved via its own narrow-gauge railroad, with tracks depressed or elevated as needed so materials were always loaded or unloaded downward. Time-consuming manual tasks were eliminated as far as possible. Since 2,000? temperatures quickly destroyed the fire-brick lining in the converters, Holley designed the converter bottoms to be snapped in and out, so brick relining would not interfere with production uptime. Almost thirty years later, an English expert detailed the hallmark features of American steel-making—the absence of manual processing, the continuous flow of material, the pervasive mechanization; all of them, along with a gimlet eye to the costs of sourcing and distribution, were in place from the beginning.

  The ET works is one of the clearest highway markers on America’s push to the front ranks of manufacturing nations. Carnegie, of course, wasn’t playing the pioneer as a gift to his adopted country. The plant was profitable almost from the moment it opened, producing a 20 percent return on investment by its second full year of operation. “Where is there such a business!” Carnegie crowed.

  Steel Is King

  If you believed in America, you believed in railroads. And if you believed in railroads, you believed in steel. It was insatiable demand for steel rails by American railroads that made steel a mass production business and led to its gradual supplanting of iron for most industrial purposes. The conversion to steel from iron rails was led by the Pennsylvania’s Thomson in the mid-1860s. The Pennsylvania, in the heartland of American heavy industry, had the most intensive traffic patterns and heaviest freights of any system, and its managers were alarmed at the ever-shorter service lives of iron rails. Thomson began experimenting with imported steel rails in 1861, and by mid-decade was convinced they would give him eight times the service life at only twice the cost. Since there was only a handful of American suppliers, the Pennsylvania, with characteristic thoroughness, created its own steel
company, Pennsylvania Steel, with both Thomson and Tom Scott as major shareholders. The steel company was spun off after the board forbade management cross-holdings in suppliers in 1874.

  High-quality steel, especially for bladed weapons, was known almost from the beginning of history. Damascus steel, which originated in India, was the best-known of the ancient steels, while a beautifully executed Toledo sword was de rigueur for the wealthy medieval knight. Sheffield was already an important British steel center by the time of Chaucer, and its craftsmen began to develop comparatively high-volume production methods in the eighteenth century. Even in the 1870s, American toolmakers who needed high-quality cutting steel bought from Sheffield.

  Traditional steel-making began with a high-quality iron ore. The ore was mixed with a carbon fuel, usually charcoal or coal, and later, coke, and melted in a furnace (smelting). The hot-blast furnace, invented in 1828, achieved very high temperatures by injecting superheated air, allowing the use of more abundant lower-quality ores. Since iron has a strong preference for oxygen, its impurities tend to be oxides that bind to the carbon in the fuel and are precipitated out as slag; nonoxide impurities were sequestered by additives like limestone. As the heavy iron sank to the bottom of the furnace, the slag was poured off the top, leaving a relatively pure, but carbon-rich, iron. High-carbon iron is fine for castings, but is brittle and hard to work. The softer, malleable “wrought iron,” which accounted for the bulk of traditional sales, must be nearly carbon-free. (It was originally made by hammering out the carbon, hence its name.) Steel is wrought iron with small amounts of carbon added back to reach a balance of hardness and malleability. From the mid-eighteenth century, wrought iron was made by “puddling”—reheating the iron in a furnace with a high-oxide lining and slowly working it with a pole until the carbon was precipitated out. The last step in steel-making was to “recarburize” molten wrought iron by slowly working it in a carbon bath, separating out small quantities of steel by color and texture.

  Making a modest batch of steel could take a week or more, and traditional techniques were carefully passed down from father to son; one Sheffield recipe started by adding “the juice of four white onions.” Superb product, like Sheffield’s “crucible” steel, which was made in clay ovens to withstand the high temperatures required to remelt normal steel for further finishing, was both fiercely expensive and much in demand. As the underlying chemistry was better understood in the nineteenth century, steel came to be defined as a purified iron with a carbon content between 0.1 percent and 2 percent. Definitions remained controversial throughout the 1880s, as steel users like the Pennsylvania drove toward consistent quality standards and testing protocols.

  The breakthrough to large-scale steel-making came in the 1850s from the prolific British inventor Henry Bessemer. Bessemer guessed that if he simply injected cold air into a chamber of molten iron, the oxygen in the air should, by itself, ignite the carbon in the iron and burn it off without puddling. It worked the first time he tried it: the oxygen almost instantly turned the iron white hot and burned off the carbon and most other contaminants in minutes, leaving the purest iron. Add back a small amount of carbon while the iron was still superheated and you had steel—the chemical violence in the chamber took care of the mixing. A process that had taken days, or even weeks, was reduced to twenty minutes or so. The fuel savings alone were as much as sevenfold.

  Bessemer patented his invention in 1855, and his demonstrations were ecstatically received by the industry. Ecstasy turned to consternation when steel-makers trying it on their own got only a brittle, granular mess. Bessemer had unwittingly started with an ore that was unusually low in phosphorus, which turned out to be the one type of ore his process worked with. It was twenty years before the phosphorus problem was solved by a Welsh iron chemist and his cousin, a police court clerk, who came up with a “basic” furnace lining called the Thomas-Gilchrist process that precipitated out the acidic phosphorus. By that time, Bessemer’s process had a rival in Charles Siemens’s “open hearth” method. Siemens used a furnace similar to an iron puddler’s, but achieved the required superheating by recycling waste gas through a clever array of brick chambers. The process was slower than Bessemer’s, but many steel-makers thought it gave them better control.

  An 1880s-vintage Bessemer converter. It has just completed its “blow” and is beginning to tilt to pour its newly made steel into ingot molds.

  Alexander Holley brought the gospel of steel to America. He is not much known now, but was important enough in his day that his statue, in full mustachioed glory, stands in New York City’s Washington Square Park. Holley was a physically impressive polymath, born into a well-to-do Connecticut cutlery manufacturing family, and spent his formative years in the midst of the Connecticut River Valley machining boom. Holley naturally gravitated to machines and machine-assisted processes. He graduated from Brown University as a mechanical engineer, wrote a treatise on ordnance and armor manufacture, worked as a designer of locomotives, wrote reports on European railways, edited the Railway Review, wrote hundreds of articles for the New York Times on technical subjects, and was the moving spirit behind the formation of the American Society of Mechanical Engineers (ASME). Hearing of Bessemer’s experiments, he went to England and convinced Bessemer to assign him the rights to the patents in America. By the time of his death in 1882 at the age of only fifty, Holley had personally designed six of the eleven Bessemer plants in America, and had consulted on three more, while the remaining two were copies of one of the plants he designed.

  Holley’s first design, in Troy, New York, was a radical departure in almost every feature from the plants he’d seen in England. From the start, Holley’s plants were marked by continuous processing, a high degree of mechanization, and careful attention to materials management and process controls. In his designs, his speeches, and his addresses and articles for the ASME, he alternately scolded and goaded the industry to higher standards, better designs, more careful chemistry, less wasteful operations. “Where Bessemer left the process that bears his name, Holley’s work began,” one contemporary commented. When British steel-makers spoke with mixed admiration and fear about “American practice” in the 1880s, they were talking mostly about Alexander Holley.

  There were two problems to be overcome before Holley could seed America with Bessemer mills. The first was the requirement for low-phosphorus ore, which was solved by the discovery that vast, but largely unexploited, ore reserves in the Michigan Upper Peninsula were ideal for Bessemer mills. The second was a dreadful patent snarl. There were two other competing patents in England and America besides Bessemer’s. The incentive for a settlement was the dangling plum of a royalty contract from the Pennsylvania Steel Company. After prolonged haggling—and much mediating by Holley—the patents were pooled in 1866 in a new corporation that eventually took the name of the Bessemer Steel Association. The association was owned by the steel companies who were awarded the patents, so it ensured orderly accounting for the patent holders.

  The members of the association did not fail to notice that they had also created an ideal forum for running a steel cartel. After 1876, they refused to issue patent rights to new entrants, and apparently subsidized the last patentee, the Vulcan Iron and Steel Works in St. Louis, as it struggled during its start-up phase. The association’s attempts to control prices and assign market shares were never especially successful, in part because Carnegie typically broke the sharing agreements when it was in his interest to do so, but more fundamentally because of the spread of the Siemens open-hearth process in the 1880s. The key technical players in the association’s meetings were Holley, John and George Fritz, brothers and innovative steelmen who ran the Bethlehem and Cambria works respectively (George died in 1873), and later Capt. William Jones, the formidable ET plant manager, and a fertile innovator in his own right.

  King of Steel

  Steel was Carnegie’s first full-time commitment to a business since his early days at the Pennsylvania
, and an ideal platform for displaying his superb talents as a chief executive. He was the controlling partner in the Keystone Bridge Co. and the Union Iron Mills,* which fabricated bridge parts; but except for the St. Louis Bridge, where he got stuck with the unenviable task of managing Captain Eads, he tended to act as the promoter and bond salesman, leaving bridge construction to his partners.

  Carnegie circled cautiously around steel for some time before taking the plunge. He had invested in a small plant that tried its hand at Bessemer steel in 1866 without success, in part because of problems with the ore. He had also prevailed upon a reluctant Thomson to try steel-capped iron rails, but they were a dismal failure. He had chafed at Eads’s insistence on steel parts on the St. Louis Bridge; he eventually had to concede that Eads was right, but the steel was necessary only because Eads had vetoed the Keystone’s original, very sensible, iron design. But Carnegie’s lingering doubts were swept away by the huge British Bessemer plants he visited in 1872. Few businessmen understood the economics of scale as well as Carnegie: if steel could escape the realm of the hand craftsman, it would have a very big future indeed.

  Carnegie put together a steel plant syndicate as soon as he got back to America, quickly raising $700,000. He put up $250,000 himself, while William Coleman, Tom Carnegie’s father-in-law, put in $100,000, and also chose the plant’s site on the Monongahela. The rest of the financing came from Pittsburgh businessmen, including William Shinn, a vice president of the Allegheny Valley Railroad, and David McCandless, one of the city’s most respected leaders. (Respected enough that Carnegie named the new company Carnegie, McCandless & Company, although McCandless was one of the smaller investors.) The Union Iron Mills partners, Tom Carnegie, Andrew Kloman, and Henry Phipps, each put in $50,000, though they were skeptical of steel. Carnegie also sold a small amount of his own stock to Thomson and Scott, but later bought it back during the 1873 market crisis.