The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany
Page 47
Profit
Firm
1886
2,925,350
C, Ph/CB
1887
3,441,887
C, Ph/CB
1888
1,941,555
C, Ph/CB
1889
3,540,000
C, Ph/CB
1890
5,350,000
C, Ph/CB
1891
4,300,000
C, Ph/CB
1892
4,000,000
C, Ph/CB
1893
3,000,000
C. Steel
1894
4,000,000
C. Steel
1895
5,000,000
C. Steel
1896
6,000,000
C. Steel
1897
7,000,000
C. Steel
1898
11,500,000
C. Steel
1899
21,000,000
C. Steel
Frick took over just Carnegie Bros. in 1889. Wall, Carnegie’s biographer, says of Frick’s performance: “In the year that he had been in charge of Carnegie Brothers, the profit had nearly doubled, from $1,941,555 to $3,540,000” (p. 535). That would indeed have been spectacular, but Wall is giving Frick credit for all the profit improvement, while he was actually in charge of only half the business. (Wall was probably misled by a table in ACLC 61 that allocates all steel earnings to Carnegie Bros., when it obviously includes both of the companies.) Wall further exaggerates, however, because 1888 profits were seriously affected by the five-month strike at the ET in which Carnegie resorted to the Pinkertons. As can be seen, 1889 profits were essentially the same as in the pre-strike year of 1887. In other words, fairly compared, there was arguably no improvement at all, and to the extent that there was, only a portion of it can be assigned to Frick.
Profits really took off in 1896 and 1897, which is when Carnegie waged a scorched-earth rail price war, reaping huge profit gains while other companies were driven to the wall. That degree of productivity advantage takes a long time to create, and probably owed much to Frick’s unification and systematization of the company’s operations. The elevation of Schwab must also have had an effect—he was very close to factory operations and was the best technologist in senior management—but Frick had created the unified machine for Schwab to exercise his skills upon. The even bigger jumps in 1898 and 1899 were mostly the consequence of very rapid price increases in most product lines, especially rails, assisted by the high-margin armor business. Even with all qualifications, Carnegie’s internal campaign against an executive with such a record looks like sheer, petulant destructiveness.
Trust-Busting
The more important works I used in this section include, among others, Rudolph J. R. Peritz, Competition Policy in America, 1888–1992: History, Rhetoric, Law (New York: Oxford University Press, 1996); Tony A. Freyer, Regulating Big Business: Antitrust in Great Britain and America, 1880–1990 (New York: Cambridge University Press, 1992); “Business Law and American Economic History,” in Stanley Engerman and Robert Gallman, eds., The Cambridge Economic History of the United States, Vol. II, The Long Nineteenth Century (Cambridge, U.K.: Cambridge University Press, 2000), pp. 435–82; and Richard Hofstadter, “What Happened to the Antitrust Movement?: Notes on the Evolution of an American Creed,” in Robert F. Himmelberg, ed., Antitrust and Business Regulation in the Postwar Era, 1946–1964 (New York: Garland Publishing, 1994). The quotes “way of life” and “farmers and small-town” are from Richard Hofstadter, ibid., pp. 74, 75.
For the political and business interests in railroad rate regulation see Albro Martin, “The Troubled Subject of Railroad Regulation in the Gilded Age—A Reappraisal,” in Robert F. Himmelberg, ed., The Rise of Big Business and the Beginnings of Antitrust and Railroad Regulation (New York: Garland Publishing, 1994), pp. 231–64. Joshua Bernhardt, The Interstate Commerce Commission: Its History, Activities, and Organization (Baltimore, Md.: The Johns Hopkins Press, 1923) offers the more traditional interpretation. For the shift in the Supreme Court’s interpretation, see Rudolph J. R. Peritz, Competition Policy, pp. 9–58, and Tony A. Freyer, Regulating Big Business, pp. 132–49. For the Northern Securities background, the case itself has an excellent summary, Northern Securities Co. v. U.S., 193 U.S. 197 (1904), and see Maury Klein, The Life and Legend of E. H. Harriman (Chapel Hill, N.C.: University of North Carolina Press, 2000), pp. 225–39, 307–16.
Spotlight on the Standard
A crisp narrative of the Standard’s legal and business difficulties is in Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry: Vol. II, The Age of Energy, 1899–1959 (Evanston, Ill.: Northwestern University Press, 1963), pp. 5–19; a more detailed account is in Allan Nevins, John D. Rockefeller: The Heroic Age of American Enterprise (New York: Charles Scribner’s Sons, 1940, 2 vols.), II:499–613. The “inordinately voluminous” quote is from Standard Oil Co. of N.J. v. U.S. 221 U.S. 1 (1910), pp. 48–49. For predatory pricing, John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics 1:1 (October 1958), 137–69. The “a single instance” quote is on p. 143. Also see his “Predatory Price Cutting Revisited,” Journal of Law and Economics 23:2 (October 1980), 289–330. The differing interpretation mentioned in the note is from Elizabeth Granitz and Benjamin Klein, “Monopolization by ‘Raising Rivals’ Costs’: The Standard Oil Case,” Journal of Law and Economics 39:1 (April 1996), 1–47. The quotes “many instances” and “may be considered” are from the United States Industrial Commission, Preliminary Report on Trusts and Industrial Combinations, vol. I (Washington, D.C.: U.S. Government Printing Office, 1900), p. 17. Jeremiah Jenks was the staff director of the Industrial Commission, and organized his findings in a book, The Trust Problem (Garden City, N.Y.: Doubleday, Page and Co., 1914), which went through multiple editions for some twenty years after the hearings. It contains much useful information and charts the steady fall in petroleum product prices during the Standard’s reign. The Archbold testimony on rebates is in United States Industrial Commission, II:516–17. The “the largest fine” quote is from Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (New York: Random House, 1998), p. 293.
The Indiana case details are from United States v. Standard Oil Co. of Indiana, 155 Federal 1st 305 (1907); Standard Oil Co. of Indiana v. United States, 165 Federal 1st 594, 1908; and, finally, 170 Federal 1st 988 (1909). Also see the reports in Railway Age and Gazette (January 31, 1908), p. 161 (for the local prevalence of six-to-seven-cent rates), and July 24, 1908, p. 594. Reversible errors were held by the court of appeals to include: the exclusion of the freight agent’s and traffic manager’s testimony, the failure to lay a foundation for the Standard’s ability to know what the real tariff was, and the failure to lay any foundation for including the holding company as the defendant, rather than the named defendant in the case, Standard Oil of Indiana. The opinion was couched in notably acidic language. One judge remarks that reversal was “inevitable,” implying that Landis intentionally wrote a sensational decision knowing it could not withstand review. Landis refused to preside over the retrial. The second judge ruled, among other things, that the Alton had never filed a “final” oil tariff, as required by the ICA, since the 1895 tariff applied to oil only by virtue of a state ruling, which could readily be changed. For the Whiting refinery background, see Allan Nevins, op. cit., II:7–11. The $91,000 figure for the value of the twelve-cent premium is my calculation: the standard tank car of the period carried 190 42-gallon barrels, and I used the weight/volume conversion tables from the American Society of Petroleum Engineers (0.136 tons per bbl.). The “gummy” and “bitter” quotes are from 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), p. 505. The “administrative fatigue” quote is from Harold F
. Williamson and Arnold R. Daum, op. cit., p. 6.
The “Good” Tycoon
The Carnegie/Cassatt episode is in Joseph Frazier Wall, Andrew Carnegie, pp. 775–83; “the rebates you” quote is on p. 783. All of the pools mentioned were discussed at various Carnegie Steel board meetings during 1899, ACLC, vols. 61–71. For collusion on armor, see Thomas J. Misa, A Nation of Steel, pp. 103–6, 125–29; “arithmetic precision” and “Probably the least” quotes are on pp. 106, 126–27; and see p. 322, n. 103, for an estimate of armor profits. The Schwab “the proposition was” is in ACLC, vol. 77.
8. The Age of Morgan
The account of the Corsair episode and Carnegie’s railroad venture primarily follows Joseph Frazier Wall, Andrew Carnegie (Pittsburgh, Pa.: University of Pittsburgh Press, 1989), pp. 512–17. The death count is from the Web site of the Pennsylvania State Archives. And see Jean Strouse, Morgan: American Financier (New York: Random House, 1999), pp. 246–49. For Rothschild diplomacy, see Niall Ferguson, The House of Rothschild: The World’s Banker, 1849–1999 (New York: Viking Penguin, 1999), pp. 128–30.
“Jupiter”
The quotes “Jupiter” and “driving power” are from Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, Mass.: Harvard University Press, 1987), pp. 433–34. Except as indicated, I use Carosso as the basic source for the banking transactions in this chapter. His book assigns a separate heading to each deal. The Schiff quote is on p. 387. For economic implications of crashes, I follow Paul W. Rhode, “Gallman’s Annual Output Series for the United States, 1834–1909,” National Bureau of Economic Research, Working Paper 8860 (April 2002). Gallman cautioned about the accuracy of year-to-year changes, but even at the most extreme margins of error, there is no question about the severity of the 1893–94 crash.
The Unbearable Elusiveness of Peace
The quotes from “1984 study” are from Thomas K. McCraw, Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn (Cambridge, Mass.: Harvard University Press, 1984), p. 75. For the Gould/Adams/Morgan search for railroad peace, I follow Maury Klein, The Life and Legend of Jay Gould (Baltimore, Md.: Johns Hopkins University Press, 1986), pp. 435–42 and 453–61. For Adams’s background, I follow Thomas McCraw, op. cit., pp. 1–56. The quotes “simply send,” “Jay Gould,” and “Smaller, meaner” are from Maury Klein, Jay Gould, pp. 440, 455, 457.
Harriman and Morgan
For Harriman, I follow Maury Klein, The Life and Legend of E. H. Harriman (Chapel Hill, N.C.: University of North Carolina Press, 2000). For his UP and SP investment levels, see pp. 144, 256. The Northern Securities background is clearly set out in the opinion Northern Securities Co. v. U.S., 193 U.S. 197 (1904); for the atmospherics, I use Maury Klein E. H. Harriman, pp. 220–39, 307–16. The speculation on Schiff’s motives is my own. I find it inconceivable that he would have disclosed his position to Hill if he had really wanted to win.
The Accidental Central Banker
The account here basically follows that in Vincent P. Carosso, The Morgans, pp. 311–49, 528–49. See also Matthew Simon, “The Morgan-Belmont Syndicate of 1895 and Intervention in the Foreign-Exchange Market,” Business History Review, vol. 42, no. 4 (Winter 1968), pp. 385–417. (The Belmont house served as the Rothschilds’ American representative); and for a careful summary of the Tennessee Coal and Iron episode, Jean Strouse, Morgan, pp. 582–93. Trade and current account data are from United States Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, D.C.: U.S. Government Printing Office, 1975, 2 vols.) II: Series U, 1–25, 187–200.
The Great Merger Movement
The discussion here, and the statistical data, follow Naomi Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985); much of the book is a reevaluation of Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass.: The Belknap Press of Harvard University Press, 1977). See also Vincent P. Carosso, Investment Banking in America: A History (Cambridge, Mass.: Harvard University Press, 1970), pp. 43–46. The 1900 employment data is from Stanley Lebergott, The Americans: An Economic Record (New York: Norton, 1984), p. 321. The Gompers quote is in James Gilbert, Designing the Industrial State: The Intellectual Pursuit of Collectivism in America, 1880–1940 (Chicago: Quadrangle Books, 1972), p. 52. The reconstruction of the work Moore or other brokers undertook in these mergers is based on my own experience in deals with far fewer participants; the numbers of participants Moore managed to work with is especially impressive. For details on several deals, including instances where the promoters’ interests turned out to be worthless, see Jeremiah Whipple Jenks, The Trust Problem (Garden City, N.Y.: Doubleday, Page and Co., 1914), pp. 88–95.
The Birth of Big Steel
The overall narrative of the U.S. Steel deal triangulates the accounts in Joseph Frazier Wall, Andrew Carnegie, pp. 767–93, and Kenneth Warren, Big Steel: The First Century of the United States Steel Corporation, 1901–2001 (Pittsburgh, Pa.: University of Pittsburgh Press, 2001), pp. 7–21, supplemented by the materials in ACLC and PML. I greatly benefited from an e-mail dialogue with Professor Warren on this material.
For the electricity wars, see Jill Jonnes’s fine Empires of Light: Edison, Tesla, Westinghouse and the Race to Electrify the World (New York: Random House, 2003). The quotes “The United States,” “the price,” “I believe,” “prevent utter” are from Stanley Committee, VIII:163–64, I:220, I:253. The price calculations are in ibid., VIII:161–62. The quotes “an object lesson” and “do business” are from David Brody, Steelworkers in America: The Nonunion Era (New York: Russell and Russell, 1970), pp. 6–7. Carnegie’s “The autumn” is in Kenneth Warren, Big Steel, p. 11.
For the finished steel competition, “favorite child” from Joseph Frazier Wall, Andrew Carnegie, p. 782; Jeans’s comment on National Tube, J. Stephen Jeans, ed., American Industrial Conditions and Competition: Reports of the Commissioners Appointed by the British Iron Trade Association to Enquire into the Iron, Steel, and Allied Industries of the United States (London, 1902), p. 154. Carnegie’s “Your cable” and Schwab’s “I do not see,” ACLC 75, 76. Carnegie’s Conneaut exposition is from Stanley Committee, I:116–17. Board vote and Schwab’s January 24, 1901, letter in ACLC 81. Morgan’s quote “Carnegie is” is in Joseph Frazier Wall, Andrew Carnegie, p. 784. There are slight variations in all the chronologies of the U. S. Steel deal, but all follow the contours here, except perhaps John W. Gates’s self-serving account before the Stanley Committee. Schwab’s article is Charles M. Schwab, “What May Be Expected in the Steel and Iron Industry,” North American Review 172 (May 1901), 655–64. The quote is on p. 656. His “I knew exactly” quote is in Robert Hessen, Steel Titan: The Life of Charles M. Schwab (New York: Oxford University Press, 1975), p. 117.
On the final deal proceeds allocations: to accommodate Carnegie’s insistence on receiving gold bonds even for his stock, the additional $80 million (tacked on for the presumed 1900 and 1901 profits) was allocated entirely to the other shareholders. In round numbers, according to the U.S. Steel Syndicate Book in PML, the figures worked out as below:
($ in thousands)
Carnegie Co.
U.S. Steel
Carnegie
Bonds
$86,000
$226,000
Preferred
93,000
0
Minority
Bonds
74,000
74,000
Preferred
67,000
98,000
Common
0
92,000
Total
$490,000
The final numbers reflect several minor adjustments. Carnegie’s $226 million in bonds comprised a 1 for 1 swap of Carnegie bonds for USS bonds and 1.5 USS bonds for each share of Carnegie stock (1.5 x 93 = 140; 140 + 86 = 226 million). The others got $74
million in USS bonds for an equal amount of Carnegie bonds, plus 1.5 times their shares in USS preferred plus an additional 1.5 times their shares in USS common. Their total preferred and common shares received were thus a 3:1 multiple (67 x 3 = 200 million, which for a variety of minor reasons was adjusted down to the $190 million [98 + 92] shown on the table). The ratio of gold bonds in the total consideration was (226 + 74 = 300)/490 = 61.2%.
And Then There Was Rockefeller . . .
The account of the Rockefeller ore fields purchase follows Allan Nevins, John D. Rockefeller: The Heroic Age of American Enterprise (New York: Charles Scribner’s Sons, 1940, 2 vols.), II:417–26. The Morgan exchange with Gary and the Moores is on p. 418. (Nevins is quoting Ida Tarbell’s biography of Elbert Gary, which was written with Gary’s close cooperation, so it is assumed that Gary was the source of the story. It might be noted that Tarbell greatly admired Gary, a monopolist who raised prices, while she reviled Rockefeller, who lowered them.) Rockefeller’s quote on Morgan, and Nevins’s comment, are on p. 419. The Mr. Dooley quote is from Jean Strouse, Morgan, p. 405.
For post–U. S. Steel sources of innovation, see Thomas J. Misa, A Nation of Steel: The Making of Modern America, 1865–1925 (Baltimore, Md.: Johns Hopkins University Press, 1995), pp. 170–285. For the Pennsylvania’s role in developing steel technology, Janet T. Koedler, “Market Structure, Industrial Research, and Consumers of Innovation: Forging Backward Links to Research in the Turn of the Century U. S. Steel Industry, ” Business History Review 67:1 (Spring 1993), 98–139.