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

by Charles R. Morris

  Screwing down the wage rate wasn’t even smart business. Standard Oil offered an instructive example. Rockefeller detested unions as openly as Frick, but a congressional committee investigating the trust reported that “[a labor expert] agreed with practically all other witnesses who gave evidence on this point that the Standard Oil Company pays good wages and gives steady employment to its men.” Not surprisingly, while the company was not unionized, it had been virtually free of labor strife.* After Homestead, Carnegie had protested to England’s prime minister William Gladstone, “The Works are not worth one drop of human blood. I wish they had sunk.” He would readily give up the works, that is, but a dime more on the daily wage was beyond him.

  The problem went beyond wages. Living conditions in the Pittsburgh steel towns, all observers agreed, were appalling. Hamlin Garland wrote a famous account of Homestead in 1894:

  The streets of the town were horrible; the buildings were poor; the sidewalks were sunken, swaying, and full of holes, and the crossings were sharp-edged stones set like rocks in a river bed. Everywhere the yellow mud of the street lay kneaded into a sticky mass, through which groups of pale, lean men slouched in faded garments, grimy with the soot and grease of the mills.

  The town was as squalid and unlovely as could well be imagined and the people were mainly of the discouraged and sullen type to be found everywhere where labor passes into the brutalizing stage of severity. . . . Such towns are sown thickly over the hill-lands of Pennsylvania. . . . They are American only in the sense in which they represent the American idea of business.*

  An 1890s Pennsylvania steel mill town. “Hell with the hatches on,” one traveler called them.

  British observers were similarly depressed. Stephen Jeans, secretary of the British Iron Trade Association, who was a great admirer of Carnegie and wrote a penetrating report on turn-of-the-century American steel plants, was surprised at the workers’ living conditions, which left “a good deal to be desired” compared to those of British workmen. Another British visitor of the same period was more graphic:

  If Pittsburgh is hell with the lid off, Homestead is hell with the hatches on. Never was [a] place more egregiously misnamed. Here there is nothing but unrelieved gloom and grind. . . . I was not surprised at the English workman who told me that if anyone would give him five dollars a week he would go home and live like a gentleman in—the Black Country. . . . Trade unionism has been put down with an iron hand, dipped in blood. . . , but it is a plant which does not die when it has anything to feed on, and here it has much. . . . The management shows obvious signs of nervousness on the subject, and nervousness is weakness.

  Carnegie’s mendacity on labor matters is breathtaking. He would wink and smile at pre-Homestead rumors that his men were making up to $25 a day. Just a few years after Homestead, he wrote that people “may be surprised to know that we do pay the highest wages in the world. Every man at Homestead last year made two dollars and ninety cents per day average. This embraced common labor as well as skilled.” If anyone else paid rates as high, he insisted, “I have never known of it.” Actual wage rates were hardly a third of that figure. When Stephen Jeans was mystified at the stories that Carnegie plants paid an average $4 a day in wages, he checked personally with Carnegie, who assured him that the actual average was $2.25, which was still quite good. Jeans then puzzled over information from a plant superintendent that wages were much lower than that. It never occurred to him that Carnegie would simply lie.

  Carnegie’s one creditable action after Homestead was that he came to the plant the following year and spoke to the men. He came, he said, not “to rake up, but to bury the past,” and, while stressing that he had “neither the power nor disposition to interfere . . . in the management of the business,” he emphasized his strong support of Frick, a man of “ability, fairness, and pluck.” Otherwise, one can watch him testing out Homestead narratives. He wrote to a leading Republican that the company “thought the three thousand old men would keep their promise to work and therefore opened the works for them. The [Pinkertons] were intended only to protect them.” Other fictions included a last-minute letter ordering Frick to back away that somehow didn’t arrive in time, and, finally, the desperate “Kind master, tell us what you wish” plea from his workers that was “alas, too late.” And there was, of course, the convenient memo he had left with Frick. At least some contemporaries were beginning to see through the humbug. Here is the St. Louis Post-Dispatch:

  Count no man happy until he is dead. Three months ago, Andrew Carnegie was a man to be envied. Today he is an object of mingled pity and contempt. In the estimation of nine-tenths of the thinking people on both sides of the ocean he had not only given the lie to all his antecedents, but confessed himself a moral coward. One would naturally suppose that if he had a grain of consistency, not to say decency, in his composition, he would favor rather than oppose the organization of trades-unions among his own working people at Homestead. One would naturally suppose that if he had a grain of manhood, not to say courage, in his composition, he would at least have been willing to face the consequences of his inconsistency. But what does Carnegie do? Runs off to Scotland out of harm’s way to await the issue of the battle he was too pusillanimous to share. A single word from him might have saved the battle—but the word was never spoken. Nor has he, from that bloody day until this, said anything except that he had “implicit confidence in the managers of the mills.” The correspondent who finally obtained this valuable information expresses the opinion that “Mr. Carnegie has no intention of returning to America at present.” He might have added that America can well spare Mr. Carnegie. Ten thousand “Carnegie Public Libraries” would not compensate the country for the direct and indirect evils resulting from the Homestead lockout. Say what you will of Frick, he is a brave man. Say what you will of Carnegie, he is a coward. And gods and men hate cowards.

  The Creation of the Carnegie Company

  By 1895, after Frick had been at the helm of Carnegie Steel for only three years, the relationship was clearly breaking down. Carnegie initiated the split, exhibiting immense animosity toward Frick, possibly reflecting lingering resentments from Homestead. For his part, Frick was thoroughly sick of the accumulated irritations of living under Carnegie’s thumb—as he explained with characteristic directness:

  Mr. Carnegie, . . . I desire to quietly withdraw, doing as little harm as possible to the interests of others, because I have become tired of your business methods, your absurd newspaper interviews and personal remarks and unwarranted interference in matters you know nothing about.

  At least some of the partners were alarmed. An agreement was finally worked out that Frick would give up the presidency but retain the title of Chairman. John Leishman, not yet forty, was appointed president, and Frick ceded him a 5 percent interest in the company from his own 11 percent stake. Henry Phipps, a long-time partner now semiretired, professed himself much relieved, writing to his nephew that “A.C. must have climbed down a very long and steep way.” By all accounts, Frick was doing a fine job, especially in integrating the far-flung Carnegie steel businesses into a unified operation. Carnegie had organized each major component as a separate company—probably because it increased his control over the managers. Frick built the “Union Railroad” to tie together all the Carnegie plants, and gradually developed a fully integrated business structure, from ore through initial distribution, much as Rockefeller had done. The last link in the chain, a Great Lake steamship line, opened on his last day at the company in 1899. As the early company historian, James Bridge, wrote, at that point Carnegie Steel controlled “every movement of its material, and all its operations, from mining of the crude ore to the shipment of the finished steel, paying no outsider a price.”*

  The Frick-Carnegie tensions markedly eased in the first days of the new management structure. Frick stayed very active in the company, but lightened up on his work schedule, began to travel more, and started his famous art collection (he had a sur
prisingly good eye). But the stars once again shifted against Frick when Leishman, grievously over his head in the presidency, asked out in early 1897, and was replaced by Charles Schwab, only thirty-four, but a clear up-and-comer, and a special favorite of the old man.

  Schwab proved to be one of the greatest of American steel executives. He was a store clerk when he caught the eye of Captain Jones, and, at seventeen, started at the company as a dollar-a-day stake driver. Six months later, Jones had him running a major blast furnace construction program. At age twenty-five Schwab was thrown into, and straightened out, a very troubled postacquisition Homestead Works, which had been seriously mismanaged during its short history, and after Jones’s death in 1889, Schwab was his natural successor. A fine picture of Schwab’s presidential style can be gleaned from the minutes of the weekly operating committees: he was crisp and decisive, deeply informed, and with an easy, collegial, command. The plant rank-and-file loved him; he was one of their own and a regular back-slapping presence on the factory floor, although he held the line on costs and wages as hard as Carnegie and Frick. He was also formidably self-educated in the technical aspects of steel-making and controlled the roadmap for technology investments. On top of all that he was a charmer and a jester, with just the touch of sycophancy that made him dear to Carnegie. Although Schwab stayed on good terms with Frick, his mere presence fed into Carnegie’s lamentable tendency to adopt one favorite at a time and make everyone else miserable. With Leishman gone and fair-haired “Charlie” ensconced in the presidency, Carnegie’s bilious energies inevitably refocused on Frick.

  Adding to the frictions was Carnegie’s uncharacteristic turn to caution in the 1890s. Instead of his usual cheerleading for new investment, he shifted to something nearer obstructiveness. He resisted the trend to open-hearth steel in the structural market, and vetoed the acquisition of the rich Mesabi ore ranges around the Great Lakes, allowing John D. “Reckafel-lows,” as Carnegie called him, to snatch the ore region from under his nose. Rockefeller later professed to have been “astonished that the steel-makers had not seen the necessity of controlling their ore supply.” Fortunately for Carnegie, Rockefeller was more interested in his Great Lakes shipping interests than in iron, and leased the fields to Carnegie Steel at very attractive rates. Carnegie’s ore subsidiary company almost immediately violated the leasing agreements, drawing a shocked response from Frederick Gates, who managed the Rockefeller portfolio. For the second time, Rockefeller passed up the chance to squeeze Carnegie and agreed to a reasonable settlement.

  Sometime in early 1898, Carnegie’s partners, with Frick and Henry Phipps in the lead, floated the idea of either selling the company or buying out Carnegie. Mostly they wanted to get rich. The deals market was heating up, and Carnegie’s tight-fisted approach to dividends had not allowed them to realize the wealth commensurate with the value of their stakes. But there are also discreet hints of the attractions of running the business without the constant second-guessing from Scotland. Carnegie vacillated maddeningly on the idea—sometimes luxuriating in the notion of a glorious retirement and a career in philanthropy, sometimes insisting that their best days were still ahead and no sale could give them real value. Phipps began to spend much of his time in Scotland, enlisting Carnegie’s wife’s support for a sale, and sending Frick weatherlike updates on their senior partner’s moods.

  Valuation discussions were tense. Frick thought his coke company was worth $70 million by itself, which was high even by modern standards. Carnegie was thinking of a $250 million valuation for the steel businesses, which was also high but closer to reality. Steel output was suddenly growing at a breakneck 20–25 percent a year, and profits were up two-thirds, to $11.5 million in 1898, and looked to keep on growing strongly. For Carnegie, even contemplating such valuations was a violent departure from his long habit of pouring scorn on the inflated numbers of his fellow industrialists. Conservative practice focused on book value: a business was worth no more than its actual investment in plant, inventory, and other hard assets plus undistributed profits, less liabilities and depreciation. Carnegie Steel’s book value in 1898 was $49 million, while the coke company’s was $5 million. Anything more, in the traditional view, was just “water,” an unsecured claim on future success. Normal valuation rules, however, were just then being turned upside down by Pierpont Morgan’s highly capitalized deals in steel and other industries. To the frustration of his partners, the hot deals market led Carnegie into reveries about how much more he could get if he only waited a few more years.

  Finally, in the first week of the new year of 1899, at a partners’ meeting at his New York home, Carnegie gave the go-ahead to a sale at $250 million, stressing that his consent came “with great reluctance” and only for the sake of “his oldest Partner,” Phipps. He immediately began to worry that the price was too low, since he expected very high 1899 earnings (which, in fact, came in even better). But Frick was given the mandate to put together a sale, as Carnegie hovered anxiously in the background.

  To Frick’s great chagrin, the Rockefeller interests declined to bid, and discussions quickly broke down with the Morgan representatives. They thought Carnegie’s price was high—they also may have been tapped out of ready funds—and insisted on an all-stock transaction, while Carnegie wanted half stock and half gold bonds. (Elbert Gary, who was informally looking after Morgan’s steel interests, said he “received no encouragement at all” from Morgan, but also noted that Morgan had not yet focused on his steel businesses and knew little about them.) The partners explored a recapitalization on their own—in effect, taking the company public—but that also got tangled in valuation arguments.

  Frick was then approached by “Judge” William H. Moore, a prototype of the 1980s leveraged buyout artist. He and his brother John had just organized several big steel deals, as well as the mergers that created the National Biscuit and the Diamond Match companies; in short, he was just the type of operator Carnegie detested. To make it worse, Moore had once mocked Carnegie for knowing only how to make steel, and nothing about “making securities, preferred and common stocks and bonds.” Carnegie exacted $1 million for a ninety-day option to Moore for a buyout at the same price offered to Morgan. The option price was subsequently recalculated to $1,170,000, but Frick and Phipps put up the additional cash themselves on the understanding that Carnegie would not keep the money if the deal fell through. (There was no written agreement to that effect, but Carnegie had confirmed that intent in a note to the board.)

  Word of the impending deal quickly leaked out. Iron Age wrote a highly laudatory piece on “Andrew Carnegie’s Retirement,” although Carnegie must have bristled at the attention they paid Frick, whom they called “the principal factor in [the company’s] phenomenal development,” just as he had been “one of the principal factors in the industrial development of the United States.” John Gates wrote Carnegie a congratulatory telegram, while Schwab and Frick gleefully projected how easily the expected 1899 profits would support the buyout debt. But then Moore unexpectedly ran into trouble with his financing. While he did manage to pull together another proposal, and the glowing press notices continued to flow, there was no longer a chance of closing within the option period.

  Frick and Phipps made the pilgrimage to Carnegie’s castle in Scotland to arrange an extension. Carnegie was cold: “not one hour,” he told them; it was high time for the partners to refocus their “attention to business.” The meeting seems to have ended cordially enough, with some discussion of recapitalizing on their own. But a slow-burning anger was building in Carnegie, which is understandable, especially for one so thin-skinned and protective of his reputation. His personal creation, the greatest steel company in the world, had been trapped in a failed financing by a disreputable operator, and he felt the fool. And he blamed Frick.

  When the option expired in early August, Carnegie not only kept Moore’s million-dollar option payment but told Frick and Phipps that he was keeping their $170,000 as well. According to Car
negie, he was upset because he had not known Moore was running the deal, and on top of that, had just discovered that Frick and Phipps had arranged to divide a $5 million stock bonus if the deal closed, which they indignantly denied. Both sides were exercising selective memory. It is extremely implausible that Carnegie didn’t know about Moore. He would never have allowed an anonymous syndicate to shop his company, and his demand for the large option payment was consistent with his mistrust of Moore. Besides that, the deals world was very small, and Carnegie was very plugged in, so he couldn’t easily have avoided knowing who was involved. On the other hand, there is also no question Frick and Phipps had made the offending bonus arrangement. But it wasn’t a secret, for they had described it in a cable to Carnegie early in the deal. Presumably, if he had objected then, they would have dropped it. In any case, it was hardly as egregious as the ones he had routinely arranged for himself in his bridge deals.

  Relations between Frick and Carnegie never recovered. The final detonation came over coke prices. Carnegie claimed that Frick Coke had committed to delivering its coke at a permanent price of $1.35 a ton, or less than half the market price. There was in fact no such contract, although Frick conceded that he and Carnegie had discussed one. As Frick also pointed out, he was just a minority holder in the coke company, despite its name, and he had no authority to make contracts. Besides that, siphoning profits from Frick Coke for the account of the steel company was a breach of duty to the coke company’s minority holders. Frick was clearly right on the merits, but Carnegie understood his stance as a “Declaration of War,” as Frick expected him to.