The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany
Page 41
Conclusion
Depending on which Oliver estimate is used, the range of 1900 earnings of the constituent entities of the holding company would be:
TABLE 5
Estimated 1900 Earnings, Carnegie Steel and Carnegie Co.
($ in millions)
High Oliver
Adj. Oliver
Carnegie Steel
23.77
23.77
All Other
7.27
5.27
Total Carnegie Co.
31.04
29.04
Source: ACLC; author’s calculations
Either number is consistent with a private note from Carnegie to his cousin and director, George Lauder, that 1900 earnings were “30 millions or thereabouts” (January 24, 1901, ACLC).
Some Additional Questions
Did Carnegie Co. Pay Dividends and Interest Due in 1900?
For the nine months of 1900 following the recapitalization, Carnegie was entitled to receive $3.6 million in interest and a similar amount in preferred dividends. His income statement, however, shows only $2.2 million in interest received and no dividends.
There was clearly enough money to pay both interest and dividends. Even with the terrible second half, the Steel Co.’s spectacular first half fully covered the holding company’s obligations. In addition, Carnegie Co. operations reports for the first five months following the recapitalization, i.e., through September, show that it collected an additional $2 million of Coke Co. dividends.
On the other hand, Carnegie might have been uncomfortable with distributing all that cash on the eve of what was shaping up as another all-out price and investment war. Carnegie’s income statement has no supporting detail, so it must be interpreted with caution. It may support an inference that Carnegie himself deferred his interest and dividend payments in order to support the investment program. I did not find any discussion of the question in the board minutes except for Carnegie’s July suggestion to withhold interest and dividend payments. The board rejected the idea, but earnings were still relatively strong at the time. Some board minutes from 1900, however, were doctored after the fact, and some seem to have been removed, so if there were such references, they may have been expunged.
Depreciation Accounting
Carnegie Steel and its predecessors consistently overstated profits by failing to expense plant depreciation. Andrew Carnegie’s practice was always to invest most of his cash flow in new plant investment. The failure to expense depreciation therefore had the effect of treating plant investment as a free good. (But as Carnegie’s partners could bitterly attest, it was coming out of their profits.) The book value of Carnegie Steel’s plant, property, and equipment was about $59 million in the spring of 1900. Assuming a ten-year plant life, which was probably realistic, there would be an additional $5.9 million charge against earnings (or $2.95 million if a twenty-year schedule is used). Note that this practice would benefit Carnegie companies in comparison with competitors that raised their investment capital through borrowings, since they would be carrying an explicit cost of capital expense. The failure to expense depreciation was a common practice at the time, for there were no settled accounting rules for noncash expenses. (Standard Oil maintained depreciation accounts in the first couple decades of its existence, but for some reason dropped the practice about 1893.)
Efficiency Indices
The table below shows earnings per ton of steel at Carnegie Steel in 1899 and 1900, stripping out all non-steel earnings, compared to estimated 1900 earnings per ton at Federal Steel and National Steel.
TABLE 6
Comparative Earnings per Ton of Steel
Year
Company
Tons (000s)
Earnings per Ton
1899
Carnegie Steel
2,664
$7.41
1900
Carnegie Steel
2,970
$7.83
1900
Federal Steel
1,225
$8.16
1900
National Steel
1,400
$5.71
Source: ACLC; author’s calculations
The 1900 estimates for Federal Steel and National Steel were made by Schwab in early 1901. (The earnings per ton are perhaps deceptively precise, because his earnings estimates, $10 million for Federal and $8 million for National, are clearly round numbers.) Note also that the conventional assumption that Carnegie earned $40 million in 1900 produces the spectacular profitability figure of $13.47 a ton, which so amazed later congressional investigators. There are reports that John W. Gates, a major shareholder in Federal Steel, was irritated that Morgan was effectively paying six times the price per ton of capacity for Carnegie Co. as he was for Federal. On these numbers, he had cause to be upset.
Federal was the product of a Morgan merger that also included ore, coke, and railroad properties, so the $8.16 is doubtless inflated by some non-steel earnings. But Federal’s subsidiary holdings were not nearly so large as Carnegie’s, and they had been investing heavily in their steel plants since the rail price war, so it is not surprising that they had attained approximate parity. Iron Age also claimed that Jones & Laughlin could match anyone on price by 1900.
Finally, the convention followed by many historians of reporting earnings as a percent of nominal capital is not a useful measure, since private companies, like Carnegie Steel, either kept their nominal capital constant from year to year, or else wrote it up in the occasional huge swoop, as they did in 1900. The statement by Carnegie biographer Joseph Frazier Wall, for example, that Carnegie Steel’s 1899 earnings were “more than an 80% return on capital” is meaningless. Allan Nevins slips into the same gee-whiz tone with Standard Oil’s late 1890s returns, which were running at the 50-percent-plus level on nominal capital. Using a more sensible basis of book equity (net hard assets and retained earnings, less liabilities), Carnegie Steel’s 1899 return was 28%,* a very good, but not astonishing outcome, and lower than that if depreciation is properly accounted for. Standard’s earnings ratios were roughly comparable, as shown in Appendix II.
*I assume Bridge got the number from Frick, who was a major source for his book. Frick wasn’t speaking to Carnegie, but probably got it from Schwab.
*1898 earnings are often reported as $16 million. The higher number includes several extraordinary items—a $2 million right-of-way payment over one of the railroads, plus a collection of estimated market value writeups on subsidiaries (none of which was publicly traded). The company rounded its earnings by drawing from/paying to a contingency fund depending on whether the figure was being rounded up or down.
*There are minor discrepancies between the Steel Co. numbers reported here and those in Table 2, doubtless due to closing adjustments. Since they are immaterial, I let them stand.
*The 1899 capital base includes $15 million in securities held for investment, almost all of which were transferred to the holding company in the spring of 1900. I included them in the 1899 base, since they represent accrued equity stemming from Steel Co. earnings. (But I took out the $2.5 million 1898 write-up, so they are comparable with other investments.) The 1899 book equity was therefore $71.5 million.
APPENDIX II
Standard Oil Earnings
Standard Oil was a far larger and more profitable company than Carnegie Steel. The data below were revealed as part of the discovery material for the government’s 1906 breakup suit. Dividends were obviously very high, especially after Archbold took control in the mid-1890s and apparently began to monetize the Standard’s market power to a greater extent than Rockefeller had done. Until the breakup, however, the company stubbornly maintained its nominal capital at $100 million, even though proper accounting shows that book equity was from two to three and a half times higher. Historians, including Allan Nevins, tended to report earnings and dividends as percentage of nominal capital; in 1900, therefore, earnings and dividends would
be reported as 55.5% and 46.7% of capital, respectively, instead of the numbers in the table, which are robust enough, but not quite so outrageous.
TABLE 1
Standard Oil Book Equity, Earnings, and Dividends
($ in millions)
Year
Book Equity
Net Earnings
Earnings/Equity
Dividends
Divs/Equity
1883
$72,869,596
$11,231,790
15.4%
$4,268,086
5.9%
1884
75,858,960
7,778,205
10.3%
4,288,842
5.7%
1885
76,762,672
8,382,935
10.9%
7,479,223
9.7%
1886
87,012,107
15,350,787
17.6%
7,226,452
8.3%
1887
94,377,970
14,026,590
14.9%
8,463,327
9.0%
1888
97,005,621
16,226,955
16.7%
13,705,505
14.1%
1889
101,281,192
14,845,201
14.7%
10,620,630
10.5%
1890
115,810,074
19,131,470
16.5%
11,200,089
9.7%
1891
120,771,075
16,331,826
13.5%
11,648,826
9.6%
1892
128,102,428
19,174,878
15.0%
11,874,225
9.3%
1893
131,886,701
15,457,354
11.7%
11,670,000
8.8%
1894
135,755,449
15,544,326
11.5%
11,670,000
8.6%
1895
143,295,603
24,078,077
16.8%
16,532,500
11.5%
1896
147,220,400
34,077,519
23.1%
30,147,500
20.5%
1897–99
N/A
N/A
N/A
N/A
N/A
1900
205,480,449
55,501,775
27.0%
46,691,474
22.7%
1901
210,997,066
52,291,768
24.8%
46,775,390
22.2%
1902
231,758,406
64,613,365
27.9%
43,851,966
18.9%
1903
270,217,922
81,336,994
30.1%
42,877,478
15.9%
1904
297,489,225
61,570,111
20.7%
35,188,266
11.8%
1905
315,613,262
57,459,356
18.2%
39,335,320
12.5%
1906
359,400,195
83,122,252
23.1%
39,335,320
10.9%
Note: N/A = not available.
Source: Allan Nevins, John D. Rockefeller
According to newspaper reports, dividends for the years 1897 through 1899 totalled $96 million. Assuming that the years 1907 through 1910 were roughly at the 1900s average, and that Rockefeller owned about 25% of the Standard throughout this period, his total dividends received would have been about $170 million from 1883 until the breakup, or perhaps $175–180 million over the life of the company.
According to Nevins, Rockefeller’s personal net worth several years after the breakup was just short of $1 billion, and would have easily exceeded $1 billion except for a number of large gifts. I suspect that is an understatement. In the personal balance sheets that I was able to examine through 1915, Rockefeller still maintained his Standard holdings as a single unit—as if there had been no breakup—credited with a total nominal capital of $200 million. While he had doubled the nominal valuation from the pre-breakup $100 million, his valuation basis was still far too low, at just over half of the real book value of the company as early as 1906. On a market valuation basis, especially after breakup, Rockefeller was undoubtedly a billionaire several times over.
Notes
Abbreviations
The Andrew Carnegie Papers, Library of Congress (ACLC)
Carnegie Steel Company Records, Historical Society of Western Pennsylvania (HSWP)
The Pierpont Morgan Library, Syndicate Books (PML)
John D. Rockefeller Papers, Rockefeller Archive Center, Sleepy Hollow, New York (RAC)
Preface
All material in this section is sourced in the notes to the main text.
1. Prelude
The details of Lincoln’s funeral and the funeral journey are drawn from Ralph G. Newman, “‘In this Sad World of Ours, Sorrow Comes to All’: A Timetable for the Lincoln Funeral Train,” Journal of the Illinois State Historical Society (Spring 1965), 9–20; Dorothy Meserve Kundhardt and Philip B. Kundhardt, Jr., Twenty Days (North Hollywood, Calif.: Newcastle Publishing Co., 1985); and the contemporary accounts in The New York Times and the New York Tribune. There are minor differences among all sources.
On the Brink
Besides the sources cited above, I used: For the early oil fields, Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry: Vol. I, The Age of Illumination, 1859–1899 (Evanston, Ill.: Northwestern University Press, 1959), pp. 117–35. For Philadelphia industry and the Franklin Institute, Philip Scranton, Endless Novelty: Specialty Production and American Industrialization, 1865–1925 (Princeton, N.J.: Princeton University Press, 1997), pp. 52–56, 61–64; for New York, Thomas Kessner, Capital City: New York City and the Men behind America’s Rise to Economic Dominance, 1860–1900 (New York: Simon and Schuster, 2003), pp. 48–55.
For New York’s farmers, Donald H. Parkerson, The Agricultural Transition in New York State: Markets and Migration in Mid-Nineteenth-Century America (Ames, Iowa: Iowa State University Press, 1995), and Nancy Gray Osterud, Bonds of Community: The Lives of Farm Women in Nineteenth Century New York (Ithaca, N.Y.: Cornell University Press, 1991). The “trumpery” quote is in Parkerson, p. 10. Additional detail is from Donald E. Sutherland, The Expansion of Everyday Life—1860–1876 (Fayette, Ark.: University of Arkansas Press, 2000), especially pp. 53–78. For growing regional specialization, Nathan Rosenberg, “Technological Interdependence in the American Economy,” Technology and Culture (January 1979), 25–38. For evolution of Midwestern farming, and role of Chicago, Paul David, “The Mechanization of Reaping in the Ante-Bellum Midwest,” in Henry Rosovsky, Industrialization in Two Systems: Essays in Honor of Alexander Gerschenkron by a Group of His Students (New York: Wiley, 1966), pp. 3–39. For the Pullman contribution, see Scott D. Trostel, The Lincoln Funeral Train (Fletcher, Ohio: Cam-Tech Publishing, 2002), pp. 84–85. Description of railroad penetration is from the fine maps in “Railway Statistics,” from Thomas M. Cooley, ed., The American Railway: Its Construction, Development, Management, and Appliances (New York: Scribner’s Sons, 1889), pp. 385 ff.
For the decline of independent farming in the South, see the essays in Mary Beth Pudup et al. (eds.), Appalachia in the Making: The Mountain South in the Nineteenth Century (Chapel Hill, N.C.: University of North Carolina Press, 1995), especially Dwight B. Billings and Kathleen M. Blee, “Agriculture and Poverty in the Kentucky Mountains,” 233–69, and Mary Beth Pudup, “T
own and Country in the Transformation of Appalachian Kentucky,” in ibid., 270–96. Details on gauges and ferrying are in Carl Bateman, The Baltimore and Ohio Railroad: The Story of a Railroad that Grew with the United States (Baltimore, Md.: The Baltimore and Ohio Railroad Printing Plant, 1951), pp. 16–20. For the frenetic scheming after riches, see the Colonel Sellers character in Mark Twain and Charles Dudley Warner’s The Gilded Age: A Tale of Today (1873) and Anthony Trollope’s Hamilton Fisker and Augustus Melmotte of The Way We Live Now (1873) from an English perspective.
The Artisanal Eden of Abraham Lincoln
The Lincoln “best for all” quote is in Reinhard H. Luthin, The Real Abraham Lincoln (Clifton, N.J.: Prentice-Hall, 1960), p. 129. The discussion of the Republican party follows Eric Foner, Free Soil, Free Labor, Free Men: The Ideology of the Republican Party before the Civil War (New York: Oxford University Press, 1970), especially pp. 301–17 for the connections between antislavery and prodevelopment positions. For the deplorably low level of investment and development in the South, see Eugene D. Genovese, The Political Economy of Slavery: Studies in the Economy and Society of the Slave South (New York: Vintage Books, 1965), pp. 55–61. For the 1860 nomination, David Potter, The Impending Crisis, 1848–1861 (New York, Harper & Row, 1976), pp. 422ff. For Lincoln’s law cases, I used Luthin and Stephen B. Oates, With Malice toward None: A Life of Abraham Lincoln (New York: HarperPerennial, 1994). The quotes on the patent laws and “Discoveries and Inventions” quote are from Roy P. Basler, ed., The Collected Works of Abraham Lincoln, 9 vols. (New Brunswick, N.J.: Rutgers University Press, 1953–55), III:361, 363. Lincoln wrote a version of the “Discoveries” talk in the spring of 1858, then redrafted it for his 1859 speaking tour, and gave it several times in the first months of his tour. For the revised historiography of the causes of the war, see Foner, op. cit., and also his “The Causes of the Civil War: Recent Interpretations and New Directions,” Civil War History, vol. 20 (September 1974), pp. 197–214. The Webster quote and “two profoundly” are from Foner, Free Soil, pp. 15, 9–10. Quotes from Lincoln’s Wisconsin speech are in Basler, op. cit., pp. 478–79. The “mean duties” quote is in Foner, Free Soil, p. 66. The speaker was South Carolina senator James Hammond; the talk, called his “mudsill” speech, was well known at the time. For the explicit antagonism between slavery and white egalitarianism, William W. Freehling, The Road to Disunion: Secessionists at Bay, 1776–1854 (New York: Oxford University Press, 1990), pp. 450 and ff.; it is a major theme of Freehling’s treatment of the 1850s. For Lincoln’s Chicago speech, Basler, op. cit., II:499–500.