So rapidly did the promoters work that by 1900 the census showed that there were no less than 185 industrial combinations in existence, with a total capitalization of three billion dollars—one-third of all the capital invested in manufacturing enterprises in the whole country. Charles R. Flint, the “father of the trusts”; Judge William H. Moore and his brother James; H. H. Rogers, William Rockefeller, and other members of the Standard Oil group of millionaires, behind whom stood James Stillman with the additional funds of the National City Bank of New York; Elkins, Widener, and other combiners of gas and electric light companies; “Bet-a-Million” Gates, Reid, Morse, Addicks—these were only a few of the more conspicuous and daring promoters. And Pierpont Morgan himself, the monarch of Wall Street, took a conspicuous part in the movement, putting the rich resources of his private banking house and the bulwark of his prestige behind a number of ambitious combinations.
The center of gravity of American industrial control was moving, and the direction of its motion was immensely significant. It was moving toward Wall Street. The reins which guided the great industries of the country were gradually being taken into the hands of bankers and financiers who could finance these immense holding-company operations and distribute stock by the millions of shares.
From wide-eyed young bank clerks in Wall Street the miracle-workers of this new dispensation commanded an awed respect like that which the new-era financiers of 1929 were to command a generation later. Meanwhile the outside public looked on in mingled admiration and alarm and bewilderment. They feared the power which was now concentrating in downtown New York and the other financial centers of the country, they watched with dismay the inroads being made on the domain of free competition, and yet the processes of change were so multiple, so obscure, and so baffling that they did not know what to do.
4
The epidemic of promotion and consolidation struck the vast steel industry in 1898, the year of the Spanish War. John W. Gates, a jovial buccaneer of finance with the confidence and daring of a born gambler, brought together a quantity of wire and nail companies in the American Steel and Wire Company of New Jersey. Gates and Morgan arranged another big combination, the Federal Steel Company. Morgan arranged two more without Gates’s intermediation, the National Tube Company and the American Bridge Company. And Judge William H. Moore and his brother, who as promoters roved at large from the biscuit industry to the steel industry and back to the chewing-gum industry, formed a whole fleet of combinations in steel—the American Tin Plate Company, the American Steel Hoop Company, the American Sheet Steel Company, and the National Steel Company.
It seems incredible that within the space of hardly more than two years the investing and speculative public should have been able to ingest the flood of securities resulting from this mania of combination and recapitalization; and to tell the truth, there were moments when the investors seemed to gag a little. But by the summer of 1900 a considerable part of the huge and hitherto disorganized steel industry was mobilized into these eight new groups.
Yet there was one glaring exception to the rule of combination, one company outside the fold which was more powerful than any company or group of companies within it. It was headed by Andrew Carnegie, the sharp-eyed little Scotchman who had been born in a weaver’s cottage at Dunfermline, had begun his business life as a bobbin-boy in a Pittsburgh cotton mill, and had become the ablest steel manufacturer and the richest man in the world. Carnegie hated Wall Street methods, hated stock-watering; he set the par value of the shares of his company at a thousand dollars in order that they would not be dealt in on the Stock Exchange, and that his partners might not be working with an uneasy eye on the rise and fall of security prices. The Henry Ford of his day, Carnegie believed in competition, not combination; and when he competed he fought to a finish and won. For he was a brilliant judge of business capacity, he surrounded himself with able technicians, and he conducted his battles for markets with brilliant strategy and without compunction.
The Carnegie Steel Company had made for itself an impregnable position in the industry. Through the Oliver Iron Mining Company it controlled its own mines in the rich Mesabi Range; through H. C. Frick’s coke company it controlled the coke that it needed; and it also controlled steamships and railroads. Furthermore it dominated the production of crude steel. The sprawling aggregations of steel companies which had been brought together by Gates and Morgan and the Moores were nearly all engaged in the making of finished products-rails, beams, steel plate, wire, and what not. For the crude steel which served as the raw material for their operations, they depended upon a department of the industry in which the little Scotchman from Pittsburgh was supreme. That fact gave him a huge advantage in competition with them. Carnegie’s mills were amazingly efficient; if, when a new one was being built, some new way of cutting costs of production was pointed out to him, he was quite ready to tear the mill down and rebuild it; he could undersell his competitors; and having no army of holders of watered stock to worry about, he stood quite ready to forego present profits in a price-war if one should be declared.
In the summer of 1900 the battle between Carnegie and the new combinations in the steel industry was definitely joined. Gates and Moore and the other leading spirits in the new steel combinations decided that they could no longer tolerate the sort of venomous competition which Carnegie had been giving them, and threatened to produce their own crude steel.
To Carnegie this threat was a declaration of war. When it was made he was idling at Skibo Castle in Scotland, enjoying one of those extensive leisure periods of his which are so seldom mentioned by the exponents of success through hard work. At once he prepared his forces for action. He wrote to young Schwab, his chief executive, quoting Richelieu’s advice: “First, all means to conciliate; failing that, all means to crush.” He authorized Schwab to build a new twelve-million-dollar tube plant at Conneaut on Lake Erie—a direct challenge to Morgan’s National Tube Company. The situation at Conneaut was ideal for a huge steel plant; much too ideal for the peace of mind of Carnegie’s industrial rivals. He instructed Schwab to acquire further land at Conneaut on which he might build huge factories for other finishing works—factories which would directly compete with his adversaries. “No use going half way across a stream,” he advised his associates; “should aim at finished articles only.”
Nor was this all. Feeling that the freight rates charged by the Pennsylvania Railroad for carrying his steel to the seaboard were unduly high, Carnegie gave aid and comfort to George Gould, who had bought control of the Western Maryland Railroad and needed only to build 157 miles of track, from Pittsburgh to Cumberland in Maryland, to have an alternative route to the sea which Carnegie would patronize.
Carnegie possessed all the implements for conquest. Clearly he meant to fight, even if fighting meant driving his competitors to the wall. As reports of his huge plans began slowly to leak out, there was consternation among the hosts of Moore and Gates and Morgan. The prospect which confronted them was formidable.
There was, however, another element in the situation to be taken into account. Carnegie had long wanted to retire. More than thirty years before, at the age of thirty-three, he had written a memorandum, carefully kept thereafter, in which he declared his intention of not making too much money. “The amassing of wealth,” he had written, “is one of the worst species of idolatry, no idol more debasing. To continue much longer overwhelmed by business cares and with most of my thoughts wholly upon the way to make more money in the shortest time, must degrade me beyond hope of permanent recovery.” He had continued, it is true, to amass wealth, contenting himself, as time went on, with taking six months of vacation each year and thereby perhaps escaping in some measure the degradation which he had feared; but always he had looked forward to the day when he might leave business forever and devote himself to giving away what he had amassed—running the money-making machine in reverse, as it were. He was now approaching his sixty-fifth birthday. His associates kne
w well that he was thinking of retiring. His plans for a mighty price war in the industry were probably thus made with a double purpose, which may be expressed in a paraphrase of the text from Richelieu which he had used as his call to battle: First, by all means to frighten his competitors into buying him out; failing that, by all means to crush them.
What were the competitors to do? Mobilize a combination large enough to defeat Carnegie? Impossible: even if their scattered forces could be assembled, he would still occupy a very strong position; he would still have his grip on the production of crude steel. In the words of William C. Temple, a steel manufacturer, “The cooks who were preparing this meal … found that they had prepared and were ready to bake the finest plum pudding ever concocted financially, but that Mr. Carnegie had all the plums.” Well then, could they buy out Carnegie? But a combination of steel companies which would include Carnegie would have to be so enormous that one could hardly contemplate it seriously. Only one man could conceivably command the mobile capital, the prestige, and the influence with banks and investment houses to attempt to create such a combination—Pierpont Morgan; and Morgan would not venture it. Gary suggested it to him but received no encouragement. “I would not think of it,” said Morgan. “I don’t believe I could raise the money.” And there the matter lay, while Schwab and shrewd old Andy studied the blueprints for the Conneaut mills.
Election Day, 1900, came and went. McKinley and Mark Hanna and expansion won; Bryan was submerged again. Big business rejoiced; for four years more it would be able to feast on the fat of the land. Sound money, a high tariff, a conservative Senate under Mark Hanna’s influence, and an Attorney General who would regard business combinations with a near-sighted eye: what more could one want?
The stock market leaped with delight; the total sales for the day after Election Day of 1900 were 1,418,735 shares, the second largest in the history of the New York Stock Exchange. A front-page news story in the conservative New York Tribune of November 8, 1900, began its account of the excitement in Wall Street with a paean of triumph: “Upon the issue of the national election of Tuesday, it was everywhere recognized by thinking men, depended the restoration of business confidence, the existence of which is a vital element of commercial and industrial activity and enterprise, and the integrity of which was so desperately assailed and so gravely impaired by the nomination of William J. Bryan at Kansas City. That confidence has now been re-established” … The weather-vanes of politics took notice of the direction in which the winds of opinion were so surely blowing. Even Governor Theodore Roosevelt of New York, finishing out his term at Albany and preparing to endure four years of dreadful inactivity in the Vice-Presidency to which he had just been elected, bent to the prevailing wind: the future champion of trust-busting actually gave a dinner to Pierpont Morgan, a dinner which, as he confided to Root, represented “an effort on my part to become a conservative man in touch with the influential classes.”
It was just at this juncture—as the warm sun of political approval promised to shine steadily upon the influential classes, and as Carnegie threatened to plunge the steel industry into virtual civil war—that J. Edward Simmons and Charles Stewart Smith invited Charles M. Schwab, Carnegie’s right-hand man, to be their guest of honor at dinner at the University Club.
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It has been assumed by many people that Carnegie engineered the Schwab dinner of December 12, 1900, as a Machiavellian means of bringing Morgan and Schwab together for negotiation; but such an assumption perhaps gives too much credit to Carnegie’s accuracy of foresight and too little credit to chance. The evidence is simply that Simmons and Smith and a party of other New Yorkers had been visiting Pittsburgh and had been lavishly entertained there by Schwab, and that they wished to return the compliment. But can it be doubted that Schwab saw a great opportunity before him when he found that Morgan was to be at the dinner?
The livery-stable keeper’s son had come far since the days when he had used to bring the horse and wagon round to the Carnegies’ cottage of a summer afternoon. Step by step young Schwab had risen in the steel business, and now at the age of thirty-eight he was president of Carnegie’s company—and here were eighty of the leading financiers of New York gathered to do him honor, and at his right hand sat Morgan himself, the titan of American finance—massive, jovial, friendly, alert to hear him speak.
Schwab spoke. The voice that Carnegie had delighted to hear in the summer evening at Cresson Springs, when the stableman’s son had sung for the guests on the Carnegies’ porch, could be eloquent in speech as well as in song, and it was eloquent now. Schwab had intended to speak for only a few minutes, but he was on his feet for an hour; and presently it appeared that his theme was to be a bold one, intended primarily for the ear of the man beside him.
Schwab talked of the immense future in world trade which lay before the steel industry of America—if only it were properly organized and operated. He made it clear that proper organization and operation implied three things: first, specialization—one mill or group of mills concentrating on a single product such as rails, another mill or group of mills concentrating on another single product; second, integration—the control by a single authority of all the processes of steel-making from the mining of the ore down to the completion of the finished product; and third, the translation of economy in operation into lower prices. The Carnegie company had gone far in achieving economies, he explained, but only a steel company larger by far than Carnegie’s could achieve the necessary integration and thus capture the world trade which was waiting for it. Meanwhile the practice of throttling competition by pools and trade agreements and little monopolies and then jacking up prices to win a quick and easy profit was ruining the chances for American supremacy in steel. The day for that sort of thing was past, Schwab insisted. A huge concern such as he proposed would not descend to such methods. It would enforce not higher prices but low ones, for the sake of expanding its markets at home and abroad.
Morgan listened hard, his expression unmoved, his piercing eyes fixed upon his plate, as Schwab rebuked by implication the methods of Gates and the Moores and the other promoters in the steel industry who had doubled and tripled their prices as soon as their monopolistic holding-company control permitted them to. Morgan himself had countenanced such methods; the rebuke was aimed at him too. He was a man capable of volcanic anger, but he showed no anger now. “After the cheers had subsided he took Schwab by the arm and led him to a corner.” (I quote from Burton J. Hendrick’s excellent biography of Carnegie.) “For half an hour the two men engaged in intimate conversation. The banker had a hundred questions to ask, to which Schwab replied with terseness and rapidity. The talk ended, Morgan left for his home and Schwab took the midnight train for Pittsburgh. The germ that resulted in the world’s largest corporation had been implanted.”
During the next few days Morgan’s mind was full of what Schwab had said. He kept speaking of it to his partners. The reason why he was so deeply impressed may easily be surmised. It was not merely that the launching of a super-corporation in steel would be the most ambitious financial project which he or any other American banker had ever undertaken, and, if successful, one of the most profitable. Morgan was a promoter, it was true, who could speak the language of the Gateses and Moores and Rogerses, but he was much more than this. He could take a large view. In his re-organization of railroads and his mediation between the conflicting interests of railroad barons, he had taken his profits in millions with the best of them, but always he had sought harmony, conciliation in the interest of all, coordination of competing railroads into coherent regional patterns. This passion of his for order, for the smooth-running economic machine, was ready-made for the acceptance of what Schwab had to suggest. For Schwab, with his talk of specialization, integration, and price reduction, was expounding the philosophy of orderly mass production: the notion of a single economic unit reaching from the raw material all the way to the finished product; the notion of the assembly line; the
notion of low cost, low prices, and profits through vastly increased sales. It was in essence what we have come to call the Ford idea—though Henry Ford was then merely the chief engineer of the feeble Detroit Automobile Company, and the largest automobile company in the United States was turning out only four hundred cars a year.
Furthermore, Schwab’s talk of the capture of foreign markets, though one might dismiss it as merely a sample of the resounding expansion talk of the moment, was well devised to appeal to Morgan. For Morgan could think in international terms. His whole training as the son of an American banker in London, as a dealer in foreign exchange, as a distributor of American securities in Europe and European securities in America, prepared him to see American industries in terms of the trade of the world. Criticize Schwab’s speech though one may as chiefly a spread-eagle appeal to the American business man’s lust for size, for power, and for profit, nevertheless it looked toward a sort of industrial combination more disciplined than the gross money-making machines which the incorporation-mill at Trenton was turning out by the score; and it is only reasonable to assume that Morgan, who was not without public spirit, felt the difference.
Lords of Creation Page 3