by Jean Strouse
Once the Illinois/Federal consolidation of raw-material suppliers, basic-steel producers, and transportation facilities was complete, Judge Gary began to aggregate makers of finished products as well, aiming to build a “steel republic” that would reach around the world. With Morgan’s backing he organized companies called National Tube (a consolidation of 14 large manufacturers, capitalized at $80 million) and American Bridge (25 companies, $60 million). Early in 1900, according to his biographer Ida Tarbell, he suggested to Morgan that they buy the gigantic Carnegie Steel as well, which would give them the “capacity to develop a systematic foreign trade.” Morgan replied, “I would not think of it. I don’t believe I could raise the money.” When a market downturn later that year reduced demand, the Gary/Morgan group and the more speculative Moore brothers’ trusts decided to economize by expanding their manufacture of basic steel and reducing their dependence on Carnegie’s firm.
To Carnegie, these canceled orders amounted to a declaration of war. If his rivals were integrating backward to encroach on his territory, he would move forward to take over theirs. “The situation is grave and interesting,” he wrote from Scotland to the new president of his company, Charles M. Schwab. “A struggle is inevitable and it is a question of the survival of the fittest.” There was no question as to who would survive. No one could beat Andrew Carnegie at the steel game.
He asked Schwab how much more cheaply they could make tubes, if they built a new manufacturing plant, than Gary’s National Tube could. “At least $10 per ton,” reported Schwab.
“Well,” said Carnegie, “go ahead and build the plant then.” Schwab started work on a $12 million factory at Conneaut Harbor, Ohio, with its own ore source, cheap transportation on Lake Erie, and the technology to make a new type of seamless tube.
Carnegie outlined to Schwab what he would do to run the steel industry “if I were czar”—pretty much what he already was doing—which prompted his biographer Joseph Wall to remark that “his use of the subjunctive … was an amusing conceit. He was czar.”
If Morgan wanted to win this contest and prevent a hugely disruptive battle in the country’s basic industry, it would have to be with dollars, not tubes, and an opening appeared on December 12, 1900. That night he attended a dinner in honor of Charles Schwab at the new University Club designed by Charles McKim on Fifth Avenue at 54th Street. Schwab was just thirty-eight, two decades younger than most of the men who had come to pay him tribute—among them Jacob Schiff of Kuhn, Loeb, E. H. Harriman of the Union Pacific Railroad, Standard Oil president H. H. Rogers, and Bishop Henry Codman Potter. He had started out at seventeen carrying leveling rods at Carnegie’s Edgar Thomson plant in Braddock, Pennsylvania, and worked his way up through the ranks to become president of Carnegie Steel by the time he was thirty-five, in 1897. Dark and strapping, with a clean-shaven, pudgy face that made him look even younger than he was, he knew almost as much about the industry as Carnegie himself. He also knew that Carnegie intended to stop work at some point in order to give away his fortune, and would be willing to sell out under the right circumstances.
For the testimonial dinner at McKim’s formal Renaissance palazzo in December 1900, Morgan was seated next to the guest of honor. After coffee had been served, Schwab gave a speech that outlined his hopes for American steel. Carnegie’s hard-driving methods had brought production costs down as far as they could go, noted Schwab, but there were large economies still to be gained at the distribution end. If a giant, centrally managed, superefficient firm could run specialized plants that concentrated on single products, it should be able to rationalize and almost infinitely expand the markets for steel. Locating plants near the buyers of products would cut delivery costs. Combining competing sales forces into one streamlined unit could match supply to demand. Coordinating product shipments would eliminate “crosshaul” duplications. Evaluating comparative plant performance would enable the firm to concentrate resources on the best producers and managers, and to strengthen or eliminate stragglers. Executives would cooperate on pricing and production in mutual self-interest. Research would find better ways of making and using steel. If this kind of consolidation could be achieved, concluded Schwab, the premier enterprise driving the American economy would continue to grow, ensuring stable markets and ample profits for producers, lower prices for buyers, and pride of place in the modern industrial world for the United States.
This picture of industrial/national order was tailor-made for Morgan, who listened closely. He and Schwab talked briefly before the evening broke up, and agreed to meet again. Bob Bacon described his “Senior” as “very much impressed by the new light that had been thrown on the whole steel situation, its growth and possibilities, and for the first time he indicated to me that it seemed a possible thing to undertake the purchase of the Carnegie Company.”
Early in January 1901 Morgan and Schwab resumed their conversation over dinner, then met Bacon in Morgan’s mahogany-paneled study at 219. Fanny was in New York that winter—she had stayed for Louisa’s wedding in November, and would not go abroad until early March—but her husband’s guests did not see her or any other member of his family that night. The three men talked until 3:00 A.M., and agreed that they would try to put together a giant combination in steel. Its pillar would have to be Carnegie’s firm. A few days after the midnight meeting at 219, Schwab brought down to 23 Wall Street a list of all the companies he thought should be included. Morgan, glancing over it quickly, said, “Well, if you can get a price from Carnegie, I don’t know but what I’ll undertake it.”
Carnegie apparently knew nothing of these plans. He and Morgan had worked together in the early seventies, and though they never became intimate, their enmity has been exaggerated. Carnegie participated in several Morgan underwritings, called on Junius whenever he visited England, and later said that after Pierpont bought out a $60,000 Carnegie interest in a railroad for $70,000—showing a “nice sense of honorable understanding as against mere legal rights”—he “had in me henceforth a firm friend.” Carnegie joined a party Morgan took to Philadelphia in December 1891 to celebrate the opening of the Drexel Institute. Still, he had not been pleased when the West Shore Agreement interfered with his attempt to break the Pennsylvania Railroad’s monopoly in the coal regions in 1885, and he had far more faith in competitive action than in negotiated “communities of interest.”
Schwab had no idea whether or not Carnegie would sell to Morgan. It depended in part on how eager the steel czar was to get on with dispersing his fortune. It also depended on his puritanical streak. Schwab had taken care to conceal certain facts of his own life from his uncompromisingly straitlaced boss—estranged from his obese, childless wife, he had an illegitimate daughter by her nurse—and he suspected that Carnegie’s misgivings about Morgan had more to do with the banker’s womanizing than with his manufacture of stock certificates. According to Schwab’s biographer, Robert Hessen, “Carnegie could not fault Morgan for no longer being sexually attracted to his wife, but he was appalled by the rumors that Morgan kept a steady succession of mistresses, as many as seven at a time, and he was revolted by the rumor that Morgan had made a gift of land, buildings, and funds for the New York Lying-In Hospital in order to have some place to accommodate the women whom he was alleged to have made pregnant. To Carnegie’s mind, these rumors far outweighed the well-known facts that Morgan was an active layman in the Episcopal Church and a patron of the arts.” The rumors also outweighed the truth.
In early February, Schwab called on Carnegie’s wife, Louise, at home on 51st Street, for advice. She suggested that he broach the subject of selling out to Morgan over golf, which usually put “Andy” in a good mood. Accordingly, Schwab joined his chief for a round of golf on a dry, wintry day in Westchester County, and let him win. He presented the proposition over lunch: Carnegie could name his price.
Carnegie deliberated overnight. The next day—apparently disregarding moral qualms—he handed Schwab a single sheet of paper with his terms s
pelled out in pencil: the price he wanted for the Carnegie Company and all its holdings was $480 million.‡ Since the company made approximately $40 million a year, the purchase price amounted to about twelve times earnings. Schwab drove downtown and presented the paper to Morgan, who took one look and said, “I accept this price.”
Thirty years earlier, Carnegie had been enthralled when Junius agreed “to move into the market the necessary gold to heat the foundries in Pittsburgh and put iron beams across a muddy river 5,000 miles away.” The necessary gold in 1870 was £1 million. In 1901, Junius’s son promised with a nod of his head to move half a billion dollars into the market.
A few days after accepting “this price,” Morgan drove up to 51st Street to congratulate Carnegie on becoming the richest man in the world. The owner of over 50 percent of Carnegie Steel stood to make $240 million at one stroke, in addition to the fortune he had already earned. According to Wall Street lore, Carnegie several months later sidled up to Morgan on board a steamer headed for Europe and, clearing his throat, said, “Mr. Morgan, I believe I should have asked you for another $100 million.” Morgan allegedly replied, “If you had, I’d have paid it.”*
Although he had been skeptical about the “manufacturers of stock certificates,” Carnegie wrote to one of his partners at the end of February 1901: “Morgan has succeeded as I felt he would. Now we are all right”—and he added to a friend a week later, “It is a marvel … the new company will make such enormous profits it can afford to pay Carnegie Company what it has.”
Less than twelve weeks had elapsed between the Schwab dinner and Morgan’s announcement on March 3, 1901, that he was organizing the largest corporation in the world. United States Steel would be capitalized as a New Jersey holding company at $1.4 billion. Hardly anyone thought in terms of billions in 1901. The federal government was spending about $350 million a year—$130 million less than Carnegie’s selling price. As Dawkins observed, things were indeed “humming” at 23 Wall Street.
Working with his partners and lawyers, Morgan bought up the other properties on Schwab’s list, mostly without haggling over prices—he wanted them in the new combination, and took their own measures of their value. (One exception was John W. Gates, who tried to hold up the combination for far more than Morgan thought his American Steel and Wire company was worth, and had to back down.) The bankers contracted to pay for shares in the old companies with stock in the new. They also acquired rights to additional Lake Superior iron-ore deposits from the Rockefellers; when Gary balked at the price ($30 million), Morgan said: “Judge Gary, in a business proposition as great as this would you let a matter of $5,000,000 stand in the way of success?”
The giant holding company would own steel mills, blast furnaces, coke ovens, ore mines, barges, steamships, thousands of acres of coke and coal land, and several railroads. It would control nearly half of America’s steelmaking capacity, and produce more than half its total output—7 million tons a year. The $1.4 billion figure was equivalent to 7 percent of the U.S. gross national product in 1901. A comparable percentage in the 1990s would come to roughly $400 billion.
Power over this colossal enterprise would be concentrated in the hands of a few men, all appointed by Morgan. Charles Schwab resigned from Carnegie Steel to become president of U.S. Steel—Morgan had asked Carnegie about the younger man’s ability to run the new corporation, and the steelmaster had recommended him “unreservedly.” Elbert Gary was made chairman of the Executive Committee, Bob Bacon the head of Finance. Morgan himself would sit, with three of his partners, on the twenty-four-man board of directors, and also, with his friend George Baker of the First National, on the Finance Committee. He refused to give Bet-a-Million Gates a seat on the board.
The formation of U.S. Steel captured headlines all over the world, and reactions to the “Billion Dollar Trust” overshadowed reports of the ceremonies ushering in the McKinley-Roosevelt administration. Senator Albert Beveridge of Indiana called Morgan “the greatest constructive financier yet developed among mankind.” A writer in Hearst’s Cosmopolitan magazine announced that “the world, on the 3rd day of March, 1901, ceased to be ruled by … so-called statesmen” and had been taken over by “those who control the concentrated portion of the money supply.” The journalist Ray Stannard Baker, who published a study of the new corporation in McClure’s magazine, concluded that U.S. Steel was “planning the first really systematic effort ever made by Americans to capture the foreign steel trade,” and that it was virtually “a republican form of government, not unlike that of the United States.” Yale’s president Arthur T. Hadley predicted that unless the government checked the advancing power of the trusts, the United States would see “an emperor in Washington within twenty-five years.” The inimitable Henry Adams said, “Pierpont Morgan is apparently trying to swallow the sun.”
Some of the criticism was surprisingly good-humored. William Jennings Bryan’s populist Commoner quoted Morgan as saying, “America is good enough for me,” and replied: “Whenever he doesn’t like it, he can give it back to us.” Finley Peter Dunne described Morgan’s power in the voice of his fictional Irish saloonkeeper, Mr. Dooley: “Pierpont Morgan calls in wan iv his office boys, th’ prisident iv a national bank, an’ says he, ‘James,’ he says, ‘take some change out iv th’ damper an’ r-run out an’ buy Europe f’r me,’ he says. ‘I intind to re-organize it an’ put it on a paying basis,’ he says. ‘Call up the Czar an’ th’ Pope an’ th’ Sultan an’ th’ Impror Willum, an’ tell thim we won’t need their savices afther nex’ week,’ he says. ‘Give thim a year’s salary in advance. An’, James,’ he says, ‘ye betther put that r-red headed book-keeper near th’ dure in charge iv th’ continent. He doesn’t seem to be doin’ much,’ he says.”
In London, bizarre rumors said that people were insuring Morgan’s life at 3 percent a month for £2 million—not true, Jack told Fanny, but one man had taken out a policy at 3 percent a year for £50,000: “It’s a curious idea,” reflected Jack, “but this man considered it the wise course, as Father is in the same category with Queen Victoria and other rulers on this side of the Atlantic!” Since Victoria had just died, Jack’s analogy was as curious as the idea of insuring Pierpont’s life.
Compared with the high-rolling speculators, Morgan looked like the Rock of Gibraltar, but he was using unfamiliar financial procedures and techniques. Investors were accustomed to bonds—loans mortgaged by “hard” assets of physical plant, real estate, and equipment—and critics of U.S. Steel, noting by how much the new securities exceeded the assets of the constituent companies, accused the bankers of “watering” the stock. The corporation issued $304 million in 5 percent gold bonds, and $1.1 billion in stock—$550 million in 7 percent convertible preferred shares, $550 million in common—for the $1.4 billion total. Even the experienced banker Isaac Seligman pronounced it “enough to take one’s breath away.” The Bureau of Corporations, a fact-finding agency in the Department of Commerce and Labor, later estimated that the tangible value of the properties in the combination was somewhere between $676 million and $793 million.†
U.S. Steel easily had enough tangible assets to back its $304 million issue of bonds, and even at the low estimate, nearly enough to cover its $550 million of convertible preferred shares as well. The value of the common stock depended on the company’s future earnings, which, as in Morgan’s railroad reorganizations, were expected to rise because of increased efficiencies, economies of scale, and administrative rationalization. To the extent that the consolidation worked, it would create value for the $550 million of common stock.
Since this financial structure did not differ in kind from those Morgan devised for railroads, it was apparently the sheer size of the consolidation that took Wall Street’s breath away. The pro-industry Iron Age praised the stabilizing Morganization of steel in February, but in April criticized the company as “an aggregate of large consolidations, each liberally dosed at the time it was formed with aqua pura,” plus “additional quantiti
es of water … sprinkled in to cement the amalgamation.” The Wall Street Journal acknowledged a certain “uneasiness over the magnitude of the affair,” wondering whether the company would ever pay dividends, and warning that the extraordinary transaction might be “a turning point in the market: The high tide of industrial capitalism.”
The organization of U.S. Steel did mark the high tide of the turn-of-the-century merger movement, but Morgan entertained none of his critics’ doubts. Experience with the railroads’ high fixed charges had led him to prefer equity to debt. Regarding what others called “water” as capitalized future earnings, he expected the benefits of consolidation to enable the corporation to service its debt and pay dividends, probably without raising the price of steel. In a circular issued on March 2, 1901, he said: “Statements furnished us … show that the aggregate of the net earnings of all the companies for the calendar year 1900 was amply sufficient to pay dividends on both classes of the new stocks, besides making provision for sinking funds and maintenance of properties. It is expected that by the consummation of the proposed arrangement the necessity of large deductions heretofore made on account of expenditures for improvements will be avoided, the amount of earnings applicable to dividends will be substantially increased and greater stability of investment will be assured, without necessarily increasing the prices of manufactured products.”
