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

by Charles R. Morris

  *General Electric was a merger between Edison Electric and Thomson-Houston, primarily to clear up patent disputes. Edison had resisted the Westinghouse/Thomson shift toward AC power, which could be transmitted over long distances, insisting on sticking with DC power, which required networks of small generators. The deal started as a takeover of Thomson-Houston by Edison, but when Coster realized how poorly the Edison company was managed, he and Morgan insisted that the Thomson-Houston management take control of the new firm. The spectacular Cataract project at Niagara Falls demonstrated the feasibility of long-range commercial electrical power generation in 1896. Electricity permitted efficient decentralization of manufacturing facilities, and spread first in industry. But only about 5 percent of American factories had been electrified by 1900, and electricity did not come into widespread residential use until the 1920s. Edison greatly resented the Thomson-Houston takeover, although it made him wealthy. He hated losing the DC versus AC argument, and he missed his name on the signplate.

  *Integrating backward is not always and everywhere impossible. Armco (originally steel building materials) and Inland Steel (agricultural equipment) both took advantage of the shift to open-hearth rails in the early 1900s to integrate backward into steel-making. But they clearly knew what they were doing. The railroads’ growing preference for open-hearth had created a shortage of open-hearth rails. The U. S. Steel combine provided a generous pricing umbrella, and was anxious not to appear the predatory monopolist. Carnegie was under no such constraints.

  *That would have been a crushing advantage. A reasonable steady-state price for tubes was $45–50 a ton. Picking up $10 would have probably let Carnegie price under the National Tube cost of production.

  *There was no transcript of Schwab’s talk, although he described it some years after the fact. But he laid out a similar vision in a North American Review article published just after the U. S. Steel deal was closed, which is quoted here.

  *Carnegie, his wife, his sister, and his cousin were paid entirely in first mortgage gold bonds. The other Carnegie Co. shareholders got mostly stock, but at a better ratio than Carnegie’s. Details are in the the chapter Notes.

  *The relationship between Morgan and the senior Rockefeller was better in 1907. While Morgan was struggling to pilot the country through the market crash, Rockefeller made a point of calling on him at his office and pledging half his fortune if it were required. The news report itself had a calming effect.

  9

  AMERICA RULES

  Natty” Rothschild, the head of the family’s London branch, and grandson of old Nathan, the London house’s founder, was close to Cecil Rhodes, and was the primary financier of Rhodes’s DeBeers Diamond Co. True to the family tradition, he abhorred Rhodes’s provocative military free-lancing against the Boers and local tribes, and devoted much of his energies through the 1890s trying to avert a South African war. When the Boer War finally broke out in 1899, however, he fully expected his government to honor the second leg of family tradition and place its war financing through the Rothschild bank. He was therefore less than pleased to discover that the Exchequer planned to grant half the financing mandate to an American syndicate led by Morgan. Recriminations by Rothschild and other City leaders forced the government to restrict the Morgan bank to a very minor role during the first tranche of fund-raising. But as drawn-out war pressured British gold reserves, the Exchequer had no choice but to give Morgan an equal role. Perhaps out of pique at the government’s dithering on the first round of financing, Morgan insisted on, and got, a commission twice as high as the British consortium’s. It had been more than a century since Great Britain had to borrow from a foreign power to finance a war within its own empire. The historian of the Rothschild family, Niall Ferguson, writes, “It was an early sign of that shift in the centre of financial gravity across the Atlantic that would be such a decisive—and for the Rothschilds fateful—feature of the new century.”

  The raw numbers tell the story: well before the end of the nineteenth century a tidal surge of American growth carried it soaring past the older industrial powers. In 1800, the output of American factories and mines was only a sixth that of Great Britain; by 1860, it was a third, and by 1880, two-thirds. America pulled ahead of Great Britain sometime in the late 1880s; by 1900, its industrial output was a quarter larger, and by the eve of the World War, 2.3 times larger. In 1860, Great Britain accounted for about 20 percent of world industrial output, and the United States only about 7 percent; by 1913, the American share was 32 percent, while Great Britain’s had slid to 14 percent.

  Strikingly, despite rapid growth in population, per capita industrial production also grew faster in the United States than anywhere else in the world. Industrial output per head grew sixfold in the United States from 1860 to 1913, compared to only 1.8 times in Great Britain. Only Germany among the major powers showed per capita growth rates (5.6 times) comparable to that in America, and the Germans started from a much lower baseline: on the eve of the Great War, British per capita output was still about a third higher than that of the Germans. For the total period from 1870 to 1913, American industrial output grew at a compound annual rate of 4.9 percent, Germany’s at 3.9 percent, and Great Britain’s at 2.2 percent. As for the other Great Powers, France steadily lost ground to both Great Britain and Germany, while Russia remained a sink of despondency.

  Even per capita comparisons understate the American performance, for some 40 percent of its workforce was still engaged in agriculture, so the industrial output measures are spread over a larger population base. American industrial workers used twice the capital and twice the energy as British workers, had 50 percent higher wages, and produced up to five times the value added. American manufacturing productivity consistently doubled Great Britain’s throughout the nineteenth century. By the end of the 1870s, America also dominated international trade in grain—in most years accounting for 30–50 percent of the Western world’s available grain crops—and enjoyed a near monopoly of the world meat trade, with a 70–80 percent share.* The American growth rates are the more impressive when one considers that Americans’ incomes may have surpassed English incomes as early as the 1820s. The very high rates of growth in the second half of the century, that is, took off from a very high base; by century’s end, the United States was in a league of its own.

  What Happened to England?

  Late nineteenth-century British savants were mesmerized by the relentless American advance. A near-obsessive search for the causes of the relative British decline spurred a century’s worth of economic history on both sides of the Atlantic that offers a superb lens for tracing the sources of American advantage. The divergent paths followed by the American and British steel industries have been perhaps the most intensively researched and are a rich source of insights.

  Loss of leadership in steel was especially painful for Britons. Steel was the foundation industry for the late-Victorian period, much as information technology is today. Military power, high-technology capital equipment, and mass production of consumer goods, all depended on steel, and British steel had been the global benchmark literally for centuries. America was not even a player in steel at the outset of the Civil War; although its craftsmen were forced to use local steel during wartime import interruptions, they quickly switched back to British suppliers when imports resumed. Sheffield steel set the quality standard for the world, and its crucible steel had almost the status of a semiprecious metal. Nor did there seem to be any question of Great Britain’s technological leadership. Almost all the era’s steel-making advances came from the United Kingdom—the hot-air blast furnace; the Bessemer process; the Thomas-Gilchrist “basic” lining, enabling the use of high-phosphorus ore. Charles Siemens, whose open-hearth furnace eventually supplanted the Bessemer process, was German, but he spent much of his career in England.

  The suddenness of the American challenge therefore made it all the more astonishing. Stephen Jeans, secretary of the British Iron Trade Association, an
d the steel engineer Frank Popplewell both wrote book-length surveys around the turn of the century seeking the reasons for the American success. As Jeans put it, just the increase in the American output over the six years from 1895 “is considerably larger than the total output of steel of all kinds throughout the world in any one year prior to 1890, and is about half a million tons more than the total make of steel in Great Britain in any two years prior to 1897.” It was also “more than three times the total steel output of the United States so recently as 1887, and more than nine times as much as the total output of any one year up to and including 1880.” Jeans glumly noted that American annual steel and pig iron output was already twice as large as Great Britain’s, and greater than the total of Great Britain and Germany combined. By this time, the German industry was advancing as rapidly as the American. The prospect of steel juggernauts to both the west and the east was a source of much disquiet among knowledgeable Britons.

  Popplewell and Jeans each make it clear that the American advantage involved no fundamental breakthroughs, but was rather about methodologies, work organization, and, above all, mechanization. Popplewell’s list of the characteristic features of an American plant were all in place at Carnegie’s Edgar Thomson Works by the early 1880s, most of them incorporated in the original design. There were some splendid British steel plants—Holley, indeed, had extolled several as models for the United States. After Americans invented a new kind of high-speed tool steel in the early 1900s, for example, the leadership in producing the new tool steels quickly migrated to Sheffield. But the British industry had many more older, and smaller, plants than did America, a lower degree of mechanization and continuous processing through the entire ore to steel cycle, and less recourse to the most expensive equipment, like the “chargers” that injected the various chemical and mineral additives into the converter mechanically rather than by hand. American rail and rod mills routinely produced three times the output of British mills with fewer than half the men; it was Popplewell who commented on the “very conspicuous absence of labourers in the American mills.”

  The cost advantage once enjoyed by the British industry from its conveniently located ore and coal supplies gradually disappeared as Americans mechanized ore mining and transport through the 1890s. Great Lakes Mesabi Range ore was surface-mined with giant steam shovels, and Popplewell was awestruck at Lake port ore handling—huge mechanical clamshell shovels unloaded 5,000-ton oreboats into moving lines of freight cars, at rates over 1,000 tons an hour. There was hardly a laborer in sight, and none of the shovelers or wheelbarrow handlers who worked the British loading docks. Carnegie Steel’s own Pittsburgh to Erie railroad, with some of the largest cars and the most advanced loading facilities, had driven ore transport costs to just pennies a ton. At the same time, American product standardization facilitated very large production runs, while British manufacturers were plagued by a multiplicity of product designs. Some of the British diversity stemmed from perverse pride in local idiosyncrasy, but it was also an inevitable consequence of serving a very diverse export market. In America, by contrast, Carnegie Steel, as Jeans noted, could “act for the steel trade generally.” Its structural steel handbook defined construction beam sections, and with the help of the burgeoning professional engineering associations, similar standards had been worked out for axles, plates, rivets, and rails.

  The British still led the world in the scale and quality of their ship plate production and in other very high-end products, and no other country, Jeans felt, could match the British in ultralarge steam forges for ship components. Although American locomotives from Baldwin were spreading throughout the world, Jeans did not think they came up to the British quality mark, but conceded that they were cheaper. British workers were much better treated than those in America, he thought, and typically worked eight-hour days rather than the American twelve, and he was appalled by conditions in the American steel towns. By this time, with very strong growth in American factory wages through the late 1890s and early 1900s, American steel wages were half again as high as in Great Britain. But the late-Victorian era in England was a time of major public investment in working class housing, transportation, and other amenities, like parks and seaside resorts, so British workers probably did enjoy more pleasant lives.

  Jeans’s overall conclusion—that American steel “can compete with Great Britain and Germany in the leading markets of the world”—was sugar-coating for his parliamentary audience. The scale, the aggressiveness, the modernity of the American plants that he so painstakingly documents leave little doubt that the contest was over. Indeed, just about the time Jeans completed his review, Great Britain was transmuting from the world’s dominant steel producer into the largest steel importer. Both American and German steel, it seemed, were underselling Great Britain in its home market.

  But why did Great Britain lose its leadership? The menu of causes cited by Jeans, Popplewell, and other contemporary commentators is much like that of modern scholars, although debate continues on which factors were most important.

  Britain, first of all, suffered the disadvantages that accrue to any path-breaker. By the time American and German competitors appeared on the scene, the structure of the British industry already had a long-settled character. The prevalence of smaller companies, many specializing just in iron, or just in steel, made continuous-flow processing from blast furnaces to steel converters less widely practicable. British railroads were designed for densely populated areas, and were smaller-scale, with tighter turns, so their speed and efficiency couldn’t match those in America. The list of locked-in early-generation adverse choices could go on and on. Overcoming problems like these would have required changes all the way through—a whole-scale reorganization and resizing; but the highly decentralized, laissez-faire economy that was the glory of the Victorians was a poor environment for a ground-up restructuring. Market signals actually added to the confusion. An orgy of American railroad building in the late 1870s and early 1880s drove British steel exports and profits to record levels. In an era of chest-puffing success, the Cassandras’ warnings of the looming American threat—and there were more than a few—were dismissed out of hand.

  The machine tradition that played such a central role in the growth of American manufacturing prowess somehow never took hold in Great Britain. At the 1851 Crystal Palace Exhibition, British industrialists had been dazzled when Robbins and Lawrence technicians disassembled a stack of rifles, mixed up the parts, and reassembled working rifles. More than a half century later, British industrialists were still amazed when Cadillac engineers performed the same feat with three cars at a Royal Automobile Club exhibit. Despite the early success of the Enfield armory, it took another forty years for American machine methods to gain a foothold—1890s bicycle manufacturers may have been the first commercial adopters. In contrast to the big American plants, British steel-making stayed resolutely craft-oriented. Jeans noted that three-quarters of British steelworkers were in skilled crafts categories, few of which still existed at American plants.

  Mechanization, moreover, was hindered by the smaller scale of British plants. Mechanical furnace chargers and automated rolling mills were too expensive for any but the largest works. The enormous size of the American home market readily conduced to very large plants that could fully exploit scale economies; German plants were similarly of very large scale. The slowdown in British steel itself created problems. Both Popplewell and Jeans noted that the high growth rate of the American industry created a continuous demand for new plants, so the average works was much newer than its British competitors. The high rate of growth in Germany would have had the same effect.

  Finally, a long finger of suspicion points at both British workmen and British managers. Most fair-minded observers conceded that American and German workers and bosses were better educated and more open to scientific advances than their British counterparts. Worker recalcitrance and union resistance were a major obstacle to mechanization at all British plant
s. As early as the 1870s, Capt. Bill Jones had warned his Carnegie bosses that they “must steer clear as far as possible from Englishmen, who are great sticklers for high wages, small production, and strikes.” The insistence on traditional craft practices, much as in small-arms making, tilted toward more specialized, small-market products. Some contemporaries even worried that British workers were a “distinctly deteriorated race.” But if that was true, British managers played a big role in the deterioration. The entrepreneurial drive of the 1840s and 1850s had markedly ebbed. Old-school managers, consciously or not, connived with their workers to stick with what they knew—the smaller plants, the old methods, the clubman’s version of genteel competition. While geography undoubtedly constrained the efficiency of the railroads, they were also badly organized, with lots of empty runs. As one expert put it, “outside England people say, ‘What is the saving?’ In England, the first question is, ‘What is the cost?’” A sympathetic American was struck by the “pessimism and lack of courage” among British iron and steel men.

  The same slippage can be seen throughout British industry. In midcentury, Great Britain led the world in inorganic chemicals (ammonia, caustic soda, sulfuric acid), but failed to adjust when the new Solvay technology emerged in the 1870s; within a decade German and Belgian manufacturers had perhaps a 20 percent cost advantage, with far less environmental damage. The Americans came on very strongly in the late 1890s, starting with the Solvay process and the even newer electrolytic technology. Similarly, in electrical power generation, the steam turbine engine, one of the critical enabling technologies, was invented by an Englishman, Charles Parsons, in 1884. But the industry was quickly dominated by America’s General Electric and Westinghouse and Germany’s Siemens. The small field systems of British agriculture, laid out, like its rail network, for a densely populated country, could not adapt to the mile-long harvester runs that were standard on American factory farms. And some failures seem cultural. In reaction to a wave of machine-made American shoe imports in the early 1900s, British industry switched to American shoe-making machines, yet somehow never realized American productivity levels.