by H. W. Brands
If the states wanted to restrain such combinations in production, Fuller said, they might do so. But they had not, and therefore the merger could stand.
John Marshall Harlan, unsurprisingly, was the sole dissenter. Harlan thought the majority was splitting hairs on an issue that had already been settled, by no less an authority than the justice for whom he was named. “Commerce, undoubtedly, is traffic, but it is something more; it is intercourse,” Harlan quoted John Marshall. And if such intercourse wasn’t jeopardized by the sugar trust’s stranglehold on manufacturing, Harlan didn’t know when it would be. The majority’s reading of the Sherman Act rendered antitrust a nullity. “This view of the scope of the act leaves the public, so far as national power is concerned, entirely at the mercy of combinations which arbitrarily control the prices of articles purchased to be transported from one state to another state.” Harlan thought democracy deserved better. “In my judgment, the general government is not placed by the Constitution in such a condition of helplessness that it must fold its arms and remain inactive while capital combines, under the name of a corporation, to destroy competition, not in one state only, but throughout the entire country.”2
THE KNIGHT DECISION effectively offered carte blanche to capitalists contemplating additional mergers and acquisitions. During the next several years some two hundred trusts—the term had lost its original, specific meaning and now referred to just about any giant corporation that dominated its market sector—arose in industries as diverse as leather and lead, copper and coal, insurance and machine tools. Some trusts (sugar, oil, leather, coal, insurance) touched individual consumers directly; others (lead, machine tools, farm equipment, transport) pinched producers, who then passed the monopoly prices along.
The trusts didn’t always raise prices in absolute terms. In fact consumer prices on average held steady during the second half of the 1890s (after falling by a third since 1870). But prices were almost certainly higher than they would have been in competitive markets. Capitalism wasn’t philanthropy; the point of the integration was profit—and power. The integrators aimed to fatten their bottom lines, but they also intended to shelter themselves from the vicissitudes of competition. Having—in many but not all cases—bested their capitalist competitors, the trust makers now sought to rest on their victories, protected by their size and strength from the essential anarchy of the capitalist marketplace.3
Of all the mergers of the era, one stood out for its size and for the power it conferred upon its creators. Perhaps predictably, this behemoth of behemoths combined the resources of the grand triumvirate of Gilded Age capitalism: Carnegie, Rockefeller, and Morgan.
Carnegie was still repenting from Homestead. The Pennsylvania town had become synonymous with capitalist oppression, drawing visitors to the site of the 1892 battle. The hard times of the depression punished the place further, leading author Hamlin Garland, for one, to see Homestead as where organized labor went to die. “The town, infamously historic already, sprawled over the irregular hillside, circled by the cold gray river,” Garland wrote in 1894.
On the flats close to the water’s edge there were masses of great sheds, out of which grim smoke-stacks rose with a desolate effect, like the black stumps of a burned forest of great trees. Above them dense clouds of sticky smoke rolled heavily away. Higher up the tenement-houses stood in dingy rows, alternating with vacant lots.… 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.4
Carnegie’s steel business suffered, too, during the depression, but not as much as his competitors’, and his position in the industry simply grew stronger. He had a scare when Rockefeller, flush with profits so large he couldn’t reinvest them all in petroleum, diversified into iron ore. For a time it appeared that the giants of steel and oil would engage in mortal combat. But Rockefeller’s heart wasn’t in the new venture, and when Carnegie offered to lease Rockefeller’s mines and transport the ore via Rockefeller’s steamship and rail lines, Rockefeller withdrew. Carnegie congratulated himself, perhaps excessively: “It does my heart good to think I got ahead of John D. Rockefeller on a bargain.” Yet Iron Age, the industry journal, concurred that Carnegie had made a good deal. “It gives the Carnegie Company a position unequaled by any steel producer in the world,” the paper proclaimed.5
Rockefeller’s position in petroleum was no less dominant. In 1892, responding to an antitrust finding of Ohio’s state courts, Rockefeller and his partners had dissolved the Standard Oil trust. But to the dismay of Standard’s many critics, the trust simply reorganized under a New Jersey law allowing a corporation to own shares in other corporations. The directors of the companies that had composed the trust became directors of a holding company called Standard Oil (New Jersey), exchanging their shares of the former for shares of the latter. Operations proceeded as before, directed, as ever, by John D. Rockefeller.
Yet the industry was changing, even if its dominant firm was not really. New oil strikes in Southern California shifted the industry’s center of gravity west, although the biggest find of the era—the Spindletop gusher southeast of Houston, which blew in at the beginning of 1901—kept it from moving beyond East Texas. Less dramatic though ultimately more revolutionary were the changes on the demand side. Since the early 1880s German engineers Gottlieb Daimler and Karl Benz had been experimenting with gasoline-powered engines mounted on wheeled vehicles of various sorts. By the 1890s the concept had crossed the Atlantic to America, where Henry Ford and others elaborated and improved it. Ford’s first motorcar—the “quadricycle,” he called it—rolled out of his shop in Detroit in 1896. The car was a sensation with all who saw and rode in it, and Ford returned to the shop to produce more and better machines. In 1899 he offered a two-passenger model that made America’s millions of bicyclists reconsider their devotion to exercise.
YET AS FULLY AS Carnegie dominated steel and Rockefeller oil, neither shaped the broader economy as decisively as Morgan, who at times during the 1890s might have been the most powerful person in the country, not excluding the president.
Morgan’s power became evident in early 1895 when the Treasury’s gold reserve again dipped toward the witching mark of $100 million—and then crashed into the nether region beyond. By the end of January the reserve had shrunk to $50 million; in another week it was down to $40 million, with daily withdrawals running at $2 million and more. Grover Cleveland felt trapped. The president had no choice but to borrow gold if he wished to maintain the credit of the government. But under the circumstances such borrowing would be on terms dictated by the big bankers and would enrage large numbers of Democrats. “Outside the hotbeds of goldbuggery and Shylockism,” the Atlanta Constitution fulminated, “the people of this country do not care how soon gold payments are suspended.” Many Americans, indeed, would have been happy for the government to be forced off gold, as this would compel the acceptance of silver. Cleveland requested new authorization to purchase gold, but the Democratic lame-duck Congress—after the Democrats’ 1894 debacle—threw the request back in his face.6
Cleveland might have waited for the Republicans to arrive, but the financial markets didn’t allow him time. The gold reserve in the Treasury’s New York vaults—that part of the government’s supply immediately available for redemption—plunged below $10 million. A single large draft could wipe it out, and with it the government’s financial credibility.
J. P. Morgan didn’t propose to let this happen. Morgan considered himself as much an American patriot as any man, but he believed capitalism a surer guide to the national interest than democracy. Capitalism was predictable; the pursuit of profit enforced reason on men and sifted the able from the incompetent. Democracy was unpredictable; politicians
appealed to passion and were rarely held accountable for their mistakes. National interest aside, Morgan’s self-interest dictated an effort to rescue the Treasury. He had made his fortune on the rise of the American economy; should that economy implode, he would be one of the big losers.
Accordingly Morgan in early February attached his private railcar to the Congressional Limited and traveled through a snowstorm from New York to Washington. Cleveland learned he was coming and sent Daniel Lamont, his secretary of war and closest adviser, to Union Station to meet him. Cleveland was desperate, but not so desperate as to risk giving Morgan a personal interview, which the Populists and silver Democrats would seize on as a sellout to big capital. Lamont thanked Morgan for coming to Washington but told him he couldn’t speak directly to the president. Morgan refused to be put off. “I have come down to Washington to see the president,” he said, “and I am going to stay here until I see him.”7
Within hours Cleveland relented, informing Morgan that he might come to the White House next morning. Morgan telephoned New York for the latest reports before hiking across Lafayette Square to the mansion. He was shown to the president’s office, where Cleveland, Treasury secretary John Carlisle, and Attorney General Olney soon joined him. Cleveland initially seemed evasive, not wishing to take the fateful step of asking Morgan for help. He mumbled about a public bond issue that might yet save the Treasury.
Morgan brought him up short. Morgan knew that the subtreasury at New York possessed only $9 million in gold. He had just learned that the subtreasury was about to be served with a draft for $10 million. “If that $10 million draft is presented,” Morgan told Cleveland, “you can’t meet it. It will be all over before three o’clock.”
Cleveland, his mind focused by the desperate news, asked what Morgan suggested.
Morgan proposed that the Treasury sell bonds to a private syndicate he would organize. This syndicate would pay gold for the bonds. The double effect of the deal would be to reverse the outflow of gold from the Treasury and to restore investor confidence in the United States government.
Cleveland was skeptical. Congress had refused to grant him new bonding authority, he reminded Morgan.
Morgan replied that he didn’t need new authority. A Civil War law—“section four thousand and something,” he said—allowed the Treasury secretary to sell bonds for gold whenever the national interest required. Morgan said he didn’t think the law had ever been repealed.
Cleveland turned to the attorney general. “Is that so, Mr. Olney?” he inquired. Olney said he didn’t know but would find out at once. He left the room, and returned carrying a volume of the Revised Statutes. Morgan had the number wrong—it was section 3700—but the gist was right. Olney handed the open volume to Cleveland, who examined it carefully and then passed it to Carlisle, who read the pertinent sentence aloud: “The Secretary of the Treasury may purchase coin with any of the bonds or notes of the United States, authorized by law, at such rates and upon such terms as he may deem most advantageous to the public interest.” Looking at Morgan and then at Cleveland, Carlisle remarked, “That seems to fit the situation exactly.”
Morgan suggested $100 million as a suitable amount for the transaction, but Cleveland refused to go higher than the amount required to restore the Treasury’s reserve to the $100 million mark. As the reserve was now a little below $40 million, the banker and the president agreed that Morgan’s syndicate would supply the government with 3.5 million ounces of gold, worth $65 million at the current world price, in exchange for thirty-year bonds with a face value of $62 million and paying 4 percent. The syndicate would recoup the $3 million premium by reselling the bonds.
Before they closed the deal, Cleveland asked Morgan a crucial question. “Mr. Morgan,” he said, “what guarantee have we that if we adopt this plan, gold will not continue to be shipped abroad, and while we are getting it in, it will go out, so that we will not reach our goal? Will you guarantee that this will not happen?”
Cleveland was asking more than he and the whole federal government had been able to accomplish, and probably more than anyone besides Morgan could credibly promise: to halt the run on the Treasury’s gold and restore confidence in the dollar.
Morgan didn’t hesitate. “Yes, sir,” he told the president. “I will guarantee it during the life of the syndicate.… That means until the contract has been concluded and the goal has been reached.”8
Of course Morgan’s guarantee was no stronger than his word. If he failed, Cleveland couldn’t well sue him. But in fact Morgan’s word was the strongest guarantee Cleveland could have hoped for in the economy’s present parlous state. Morgan was marshaling the power of capitalism, which would supply what democracy currently couldn’t.
Morgan proved as good as his word. News of the bargain brought immediate relief. Morgan’s syndicate included European bankers, who now returned to the Treasury vaults much of the gold they had been withdrawing during the previous months. More important was the psychological support the government drew from its association with Morgan. The word of Cleveland and Carlisle meant nothing to investors at this stage; the word of Morgan meant everything.
The deal received immediate praise from the capitalist classes and their sympathizers. Columbia University president Seth Low lauded Cleveland for holding the line against devaluation. “History will accord to you a place in the struggle as significant as that of General Grant when he vetoed the inflation bill [of 1874],” Low said. Henry Adams declared, with less irony than usual: “I support Pierpont Morgan for President on a distinct monometallic platform.”9
Yet debtors and Democrats took a different view. When Morgan and his partners resold the bonds, which they had purchased at the equivalent of 104.5, for 112.25, the critics cried theft. William Jennings Bryan branded the deal a sacrifice of the people upon the altar of wealth. Joseph Pulitzer’s World called it an “excellent arrangement for the bankers.” The World added, “For the nation it means a scandalous surrender of credit and a shameful waste of substance.”
Morgan didn’t improve the popular mood by his testimony before a Senate committee summoned to investigate the deal. “What profit did you make on this investment?” Democrat George Vest of Missouri demanded.
“I decline to answer,” Morgan responded. He said he would reveal “every detail” of the transaction up to the point where the bonds were paid for by his syndicate. But further he would not go. “What I did with my own property subsequent to that purchase I decline to state.”
Nor did he ever tell what he made on the deal. Contemporary and historical estimates ranged from $250,000 to $16 million, conflating all manner of costs and payouts, germane and otherwise, including the expense of marketing the bonds and the shares of Morgan’s partners. Whatever he earned directly, it was far less than the indirect benefit he derived from rescuing the dollar. Of course, that was a benefit he shared with the rest of the country—or at least the portion of the country that valued a strong dollar. For the others he accepted no responsibility.10
THE TREASURY RESCUE confirmed Morgan’s preeminence among the money men, but it was his creation of the U.S. Steel trust that cemented his title as grand master capitalist. Morgan later claimed that entering the steel business wasn’t his idea. The plan, he said, grew out of an attack by John Gates, a maker of steel wire, and others on Carnegie’s dominant position. “Bet-a-Million” Gates had a reputation for risk; he reportedly once bet a thousand dollars on a raindrop race—on which of two drops rolling down a window would reach the sill first—and won his nickname wagering seven figures on a single horse race. Gates took a gamble that Carnegie’s grip on steel could be broken, and he lined up allies, including Elbert Gary, a former judge and the head lawyer for Illinois Steel. The two men approached Morgan for financing. Morgan always asserted that character counted for more with him than collateral. “The first thing is character,” he told a congressional committee investigating his lending habits. “Before money or property?” his dubious que
stioner asked. Yes indeed, Morgan replied. “A man I do not trust could not get money from me on all the bonds in Christendom.” Morgan didn’t trust the gambling Gates, but he liked Judge Gary, and he consented to back the anti-Carnegie campaign.11
Experienced Wall Streeters battened the hatches. The New York Commercial declared the Morgan-Gary agreement “the beginning of one of the greatest contests for supremacy that the world has ever seen. It is a fight between a new concern and the Carnegie interests, both backed by almost unlimited capital.” But Morgan kept quiet, shunning publicity as he always did. Nor did Carnegie publicly profess to worry. He relied on the company he had built over decades, he said, to defeat the firm Morgan was cobbling together in a fortnight. “Mr. Morgan buys his partners,” Carnegie said. “I grow my own.” Carnegie was somewhat less sanguine in private. “The situation is grave and interesting,” he wrote one of his own-grown partners, company president Charles Schwab. “A struggle is inevitable, and it is a question of the survival of the fittest.”12
Schwab didn’t doubt the Carnegie Company’s fitness, but he wasn’t sure Darwin provided the appropriate model for the steel industry. Schwab hosted a large dinner for friends and associates at the University Club on Manhattan’s Fifty-fourth Street in December 1900, and he invited Morgan to sit beside him at the head table. Carnegie didn’t attend, and in his absence Schwab sketched a future for the steel industry based on cooperation rather than competition. The big firms should join forces in the pursuit of maximum efficiency and profits. Schwab’s vision appealed to Morgan, as Schwab supposed it would. (Schwab’s personal lifestyle held less appeal for Morgan. Schwab shared John Gates’s favorite vice, and after a particularly riotous weekend at the gambling tables of Monte Carlo, Schwab jokingly apologized to his by-then partner Morgan: “At least I didn’t do it behind closed doors.” Morgan rejoined: “That’s what closed doors are for.”)13
