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

by Charles R. Morris

  *“Balloon houses” were a conceptual forerunner of the steel-frame skyscraper. Previously, walls were self-supporting, requiring heavy construction. Once the frame provided the support, the wall became a much lighter-weight weather screen.

  *The interpretive issue here is between the use of currency comparisons and purchasing-power parities (PPP), which attempt to correct for price differences. Today, for example, a middle-class Chinese can buy very inexpensive personal services, like housemaids and such, that are not captured in dollar/renminbi currency comparisons. PPP ratios make the Chinese household appear much richer. On a PPP basis, the Marches were clearly better off than the typical insurance company middle manager today, but the purchasing baskets are too different to construct meaningful comparisons.

  *“Overstringing,” or the diagonal arrangement of the bass strings, was still a fairly recent innovation to enable a deeper, richer bass sound. The catalog provided a fair amount of technical detail aimed at the knowledgeable buyer.

  7

  PAPER TIGERS

  Mrs. O’Leary’s cow probably didn’t do it, but there’s no doubt that the city took far too long to react. By the time the first hose company got to the fire in Patrick O’Leary’s barn in the Southside slums of Chicago, on a windy October night in 1871, at least five buildings were ablaze and the fire was out of control. It took two days for the Chicago Tribune to get the story out, since its own “fireproof” building was lost in the conflagration. It was “a perfect sea of leaping flames. . . . No obstacle seemed to interrupt the progress of the fire. Stone walls crumbled before it. It reached the highest roofs, and swept the earth of everything combustible.”

  Chicago was one of the fastest growing cities in the country, with a notoriously corrupt local government. No one had paid much attention to zoning or fire regulations, or even to ensuring reasonable water supplies for its fire department. Most of its buildings were wood, and even masonry structures weren’t fireproof—in short, the city was a tinderbox. The “Great Fire” burnt out about 2,500 acres of prime land; thousands of buildings were lost, or about a third of all the assessed value in the city. One hundred thousand people lost their homes.

  The good news was that the city had to rebuild. Chicago became the locus of the most spectacular sustained burst of architectural development in the country’s history. Especially in the 1880s and 1890s, the Chicago School of urban architecture—Louis Sullivan was its greatest exponent—pioneered clean, elevator high-rise, glass-enclosed steel-frame designs, with minimal ornamentation, well-lighted, open interior spaces, and separate shafts for utilities. As one leading Chicago architect put it:

  Bearing in mind that our building is a business building, we must fully realize what this means. . . . These buildings, standing in the midst of hurrying, busy thousands of men . . . should [carry] out the ideas of modern life—simplicity, stability, breadth, dignity. . . . [S]o imperative are all the commercial and constructive demands, that all architectural detail employed in expressing them must become modified by them. Under these conditions, we are compelled to . . . permeat[e] ourselves with the full spirit of the age, that we may give its architecture true art forms.

  The technical challenges that the Chicago school overcame, and the development of an aesthetic of functionality, are fascinating stories in themselves. But the interesting question for us is why were companies suddenly buying huge office buildings? Or more precisely, why did white-collar staffs start growing so fast that paper management—forms and ledgers, file jackets, filing systems, bookkeeping machines, typewriters and carbon paper, business charts and graphs—had become a major industry in its own right by the 1890s?

  The Conquest of the Clerks

  Economists say that bigger companies need paperwork to substitute for internal markets. It’s a nice point. In Lincoln’s era, an ax maker bought semifinished wood and steel and sold the finished wares to wholesale merchants. As long as there were several suppliers and several distributors, he was reasonably sure of getting fair prices on both sides. But life was much different for a Carnegie Steel. By the 1880s and 1890s, it supplied its own coke and iron ore, its own pig iron, and much of its own rail and lake shipping facilities, and it maintained its own sales force. How, therefore, to compute profits on steel? First, one had to tot up the costs for the coke, the ore, the shipping, and everything else. But in the absence of normal invoices from outside suppliers, one needed careful internal cost records, which required an ever-growing army of clerks.* Standard Oil’s operations were even more far-flung, and even more integrated, while big railroads housed a wide diversity of businesses, like their own coal mines, lumber forests, and extensive real estate operations. It’s no surprise that all of these enterprises paid close attention to cost tracking from their earliest days.

  But economists’ explanations skip past the daily textures of business life. At bigger scales and higher speeds, the little details became ever more crucial. No one understood this better than Alexander Holley, the guru of American steel-making. Before his untimely death in 1882, he was a one-man tsunami of productivity suggestions. In his reports to the Bessemer Association and addresses to professional societies, he scolded his clients for their backwardness. Best-practice steam engine technology could have saved the equivalent of a quarter of labor costs at most plants. Inefficient furnaces were oxidizing away huge amounts of metal. The Germans were pulling ahead in the use of overhead belt conveyors. It was absurdly wasteful to support 119 rail-shape standards. Better management of furnace linings, more intelligent reprocessing of scrap, more aggressive application of continuous processing were all big cost and quality opportunities. You could not argue with Holley: he was widely acknowledged as the most deeply knowledgeable steel engineer in the country, was constantly traveling the world in search of best practices, and could fully document his recommendations. The whole course of his work was to force steel-makers out of their old rule of thumb operations into analysis-based management.

  Two related crises in steel toward the end of the 1880s could have been object lessons from the Holley catechism. The first involved a shift to heavier rail standards. The weight of standard freight cars and locomotives, and the intensity of traffic, had all roughly doubled; it was very hard on rails, and rail service lives plummeted. The roads responded by increasing rail specifications from fifty-to-sixty-six pounds per yard to eighty-four-to-one-hundred pounds. But the big new rails had terrible service records, conjuring up memories of the iron rail failures of twenty years before. The second crisis related to structural steel. With their extensive bridge experience, the Carnegie companies dominated structural steel in the 1880s, especially in Chicago. They not only made the largest, deepest beams, but produced the industry design bible, the Carnegie “Handbook,” which included industry-standard sections—the details of joints and other critical segments—as well as sophisticated formulas for calculating beam and load relationships. In 1890, however, a large Carnegie beam for an important Chicago building shattered when it fell off the delivery wagon, causing much consternation in the industry.

  It took till almost the end of the century to conclude that both problems stemmed from the “hard-driving” production methods of American Bessemer mills. The clue was that there were no performance issues with rails or beams made from open-hearth steel, which was just beginning to make inroads in the 1880s. The difference, it turned out, was that open-hearth steel was worked more slowly. High-durability steel requires not only the right chemistry but also tight, finely grained molecular structures. Rolling (or hammering) forces the molecular restructuring, but it occurs in jumps and is temperature-dependent—the cooler the rail or the beam the better. Since heavier steel components took longer to cool, they needed to be rolled or shaped more slowly: in short, hard-driving methods on scaled-up modern components turned out a deeply flawed product. (Holley had long warned about working steel at excessive temperatures.)

  It was an especially bitter pill for Carnegie, who had
been one of the primary advocates of hard-driving, and who had resisted the gradual encroachment of open-hearth. Carnegie therefore suddenly found himself playing catchup, as the structural industry made a mass move away from Bessemer steel. Once he realized his mistake, however, he moved with characteristic speed, and by the mid-1890s the Homestead Works had been almost entirely converted to open-hearth, for both the armor plate and structural markets. The rail market took another decade to make the shift.

  Holley’s initiatives, and the disturbing problems in rails and structural steel, were characteristic of the new challenges that all companies faced as they shifted into modern production modes. Keeping up inevitably involved hosts of new job categories. The Pennsylvania may have been the first mover, with the appointment of Charles Dudley, a Ph.D. chemist, to organize a testing and research laboratory in 1870. Steel companies started to hire chemists shortly thereafter; by the 1890s, they were adding physicists to analyze slices of beam crystal structures. By the mid-1880s, Standard Oil had built a full-scale petroleum laboratory; its lubricant business, for example, had expanded to dozens of different lines, based on market research on target applications and their likely performance conditions—resistance to heat or cold, whether outdoors or indoors, what speeds, presence of contaminants. Railroad labs developed specification and testing protocols, and conducted rigorous tests of component failure modes to get control over their suppliers. Companies started to keep vendor histories and records of product performance. Industry committees sprang up by the dozen, serving as cross-company forums to hash out technical issues and to develop standard rail shapes, brake and signal conventions, structural loading formulas, safety practices, and much else. Operating manuals grew thicker, as did bid documents and contractual materials. Authority for railroad rates was shifting from senior executives to regional freight agents, whose stock-in-trade was detailed data on local business trends, traffic demands, and inventories of rolling stock.

  The conscious wedding of academic research to industrial practice sparked a mini-boom in professional organizations. Between 1870 and 1900, no fewer than 245 professional societies were founded in America—for chemists, engineers, metallurgists, lawyers, doctors, economists, and others—aimed at improving professional standards and qualifications, ensuring the dissemination of the latest academic research, and influencing government and industrial policy. The spreading “institutional matrix” for science-based industry was fed by the impressive American investment in higher education, including the extensive network of the 1862 Morrill Act land grant colleges. The undergraduate population grew from 52,300 in 1870 to 237,000 in 1900, and the number of graduate students jumped from fewer than fifty to about six thousand. Quality, of course, was very uneven, but no European country came close to matching the breadth of opportunity. America was also an aggressive recruiter of science “stars” from German universities, and Germans played a major role in the founding of the industrial research laboratories at General Electric and AT&T in 1900. Overall, the effect was toward greater systematization of product and process development, ever more intensive application of standards, and better operating predictability—in a word, bureaucratization in its best sense.

  At the same time, the complexities of company finance were growing apace. For a long time railroads had been virtually the only businesses that raised capital on semipublic markets. A new rail line, especially in the west, had to shell out millions for track and rolling stock before it earned a nickel. When Rockefeller went into oil refining, by contrast, he and a few friends could swing the costs of an oil refinery by themselves, and get it on line and churning out profits within a few months. Almost all his growth from that point was financed internally. (Rockefeller borrowed aggressively from banks, but those were mostly cash flow loans that were quickly repaid, not long-term investment capital.) Bridges and coal mines were usually financed with bonds, but investors treated them, reasonably enough, as railroad financings. Carnegie sold bonds through Junius Morgan to finance the Edgar Thomson Works, but that was exceptional, occasioned by his straitened circumstances in the 1873 crash. For the most part, Carnegie guarded his independence from investment bankers and securities markets as jealously as Rockefeller did.

  In the 1880s, however, Wall Street began to build a market in “industrial” securities, essentially shares in businesses other than railroads and banking. While public markets offered greater financing flexibility for big companies, they multiplied record keeping and correspondence requirements. Ironically, it was that most inward-focused of companies, Standard Oil, that indirectly created much of the impetus for industrials in the first place.

  As corporate enterprises increased in scale, paperwork became a major industry in its own right. The rapid expansion of office work opened new career possibilities for women. Pictured above is a mid-1890s insurance office.

  Corporate law was the province of American states. Typically, corporations were not allowed to own stock in other corporations, and there were usually burdensome restrictions on out-of-state corporations. Rockefeller’s Cleveland takeover was accomplished by merging the acquisitions into Standard Oil, an Ohio corporation. But the legal status of the wide-ranging acquisitions in the 1870s was increasingly anomalous. Matters came to a head after John Archbold joined the Standard and led the buyouts of the oil region’s refiners in 1879 and 1880. Rockefeller failed to get a bill through the Pennsylvania legislature that would have allowed him to reorganize and consolidate the separate properties. (Memories of the South Improvement Company still made him persona non grata in the state. That condition didn’t last: a decade or so later, wags complained that Rockefeller had “done everything to the Pennsylvania legislature except refine it.”)

  The solution was the “Standard Oil Trust,” the invention of Samuel C. T. Dodd, a leading region attorney, who joined the Standard about the same time as Archbold and was to be the company’s long-serving general counsel. Dodd’s trust structure became the standard technique for large combinations through the 1880s, until it was made unnecessary by the New Jersey Holding Company Act of 1890, which specifically enabled multilayered, multistate corporate structures. By that time, the term “trust” had become shorthand for almost any large business combination, regardless of its legal form.

  Dodd’s creation was as simple as it was cunning. The shares of all the constituent Standard companies, which eventually numbered thirty-nine, were put into the hands of a board of trustees in exchange for trust certificates. In theory, the trustees’ sole legal function, as a congressional committee noted in 1889, was “the receipt of the dividends declared by the various corporations and the distribution of the aggregate of them to the holders of the trust’s certificates, pro rata.” The trust did not even own property: the Standard Oil building in New York City where the trustees worked was owned by the Standard of New York. The reason for the elaborate subterfuge, in the committee’s words, was to shelter “the trusts and the trustees thereof from the charge of any breach of the conspiracy laws of the various States, or of being a combination to regulate or control the price or production of any commodity.” Maintaining the fiction required some blatant lying, as when Henry Flagler insisted to the committee that the trustees’ role was “merely advisory. No power as such is ever used,” and claimed never to have heard of a system of multistate market districts that had obviously been laid out at headquarters. The charade was ended in 1892 by incorporating as a New Jersey holding company and replacing the trust certificates with Standard of New Jersey stock.

  An unintended consequence of the trust form was that all the constituent holdings had to issue corporate shares as the common denominator for trust certificates. Although the reorganization of the Standard did not involve any new capital—shareholders simply exchanged one form of security for another—its imitators, like the Cotton Oil Trust, the Linseed Oil Trust, the Lead Smelting Trust, the Whiskey Trust, and others, usually needed cash and issued large volumes of new shares, as did a late
r series of nontrust combinations in the steel industry, like American Steel and Wire, American Tin Plate, and National Tube.

  The reputation of industrials was greatly enhanced by their performance during the market crash of 1893—at least they did much better than railroads, which had overexpanded yet again. After the merger boom among industrial companies in the first years of the twentieth century, their shares achieved roughly the same market presence as railroads. The creation of the Dow Jones Industrial Index in 1895 and John Moody’s Industrial Manual in 1900 were signposts of their growing importance. Rockefeller’s personal stock holdings in 1896, to take one example, were about 30 percent industrials, not including his gas and oil interests, while the remainder of his securities were in railroads and steamship lines. The spread of the corporate form and the ever wider distribution of corporate securities greatly multiplied paper requirements—prospectuses, annual reports, multicompany accounting and financial reports, and all the internal tracking systems to support them. Considering the paucity of mechanical aids, the breadth and sophistication of the financial systems at a company like turn-of-the-century Carnegie Steel are very impressive. The blast furnace cost tracking systems, for example, listed some eight thousand items. Furnace superintendents met monthly to review results and suggest improvements. The company calculated that the system saved $4 million the first year it was in effect.

  Finally, one further consequence of the shift to bigger, more bureaucratized companies was a radical restructuring of the relation between workers and bosses.

  Labor organizations had a long history in the United States, and work stoppages over wages and hours were common; but before the 1870s, unions tended to be local and craft-based: if the New York City hatters staged a walkout, it wasn’t likely to be coordinated with their brothers in Philadelphia or Boston. In the artisanal mode of manufacturing that prevailed before the Civil War, moreover, the owner-managers of factories were usually from the same craft ranks as their workers, and most establishments were small enough to foster a spirit of communal enterprise. British investigators in the 1850s had been particularly struck by that point. Even in large plants, the artisanal mode survived well into the 1880s through the system of internal contracting: various operations were farmed out on a piece-rate basis to local specialists who supplied their own equipment and craftsmen and were allocated their own plant floor space.