Lords of Creation

by Frederick Lewis Allen

  Morgan’s intuition told him that Schwab was right, that a great steel combination such as had seemed impossible a few weeks before was possible after all, that this moment of supreme business confidence was the moment to move; and that the first requirement was to eliminate from the industry Schwab’s own chief—to buy out Andrew Carnegie.

  After a few days of thought Morgan called in John W. Gates, a sharp customer but a necessary ally and a worldly-wise negotiator. How should one approach Carnegie? he asked Gates. “Through Schwab,” Gates instructed him; Schwab was Carnegie’s white-headed boy, the one man who had real influence with the old Scotchman. Get Schwab to come to New York and see me, said Morgan.

  Out in Pittsburgh Schwab received Gates’s long-distance call with elation. Yet he realized that his situation was equivocal. What would old Andy say if he discovered that his subordinate had been negotiating with Morgan? He had best be a little careful. So he suggested an “accidental” meeting with Morgan. Presently Gates gave him his instructions. If Schwab chanced to be at the Bellevue Hotel in Philadelphia the next day, Morgan would be there too.

  Fortified with facts and figures, Schwab packed his bag and took the night train from Pittsburgh to Philadelphia. He went to the Bellevue. No sign of Morgan. But a telephone call came through. It was Gates again. Morgan had a cold, it was snowing in New York, and the doctor wouldn’t let Morgan go out. Now that Schwab had come this far, couldn’t he continue to New York and talk with Morgan at his home? Schwab duly went to New York, dined with Gates at the Manhattan Club, and proceeded with him at nine o’clock in the evening to the big brown-stone house at the corner of Madison A venue and Thirty-sixth Street.

  Four men conferred that night in the library of Pierpont Morgan’s home. Their diversity was suggestive of the diversity of the human elements in the overlordship of industry. Morgan had called in to support him a partner, Robert Bacon. One of the handsomest Americans of his day, Bacon was a gentleman of substance and cultivation and charm, an Overseer of Harvard University, a future Secretary of State and Ambassador to France: a fine though not brilliant product of the tradition which sent into Wall Street a large proportion of the well-born, personable young college graduates of each generation.

  Schwab stood for something quite different. He was self-made. A congenital optimist, an orator, a hearty young man who called hundreds of his employees by their first names, he was nevertheless a hard-headed man at figures and an authority on the technical processes of steelmaking. His friendliness and his eloquence were dedicated to salesmanship. He might be roughly classified as a Babbitt of the 1900 model: a representative of that zeal for efficiency, that pushfulness, that limited but intense vision, which led men to build bigger and bigger businesses as if under some blind inner compulsion.

  John W. Gates represented still another influence in the industrial world of the day—that of the gambler. He too was self-made; he had begun life in poverty in an Illinois village. His rise to success in the barbed-wire business had been the result of aggressiveness, shrewdness, and unscrupulousness. Gates was always gambling: once he was said to have spent a morning on a railroad train betting with an associate on the raindrops coursing down the sooty window of the car—at a thousand dollars a race; on another occasion he was said to have lost a quarter of a million dollars in a prolonged poker game at the Waldorf-Astoria with a group of other Wall Street plungers. He was a good fellow and a remorseless trader: the sort of man who will sit up all night at a friend’s bedside and then destroy the man financially the next day. Business, to him, was a poker game in which any sort of trick was permissible—if you could get away with it. He had built up his huge combination of wire companies by stock-watering and manipulation, and only a few months before the conference at Pierpont Morgan’s he had been charged with closing thirteen wire mills and issuing pessimistic statements about the steel business in order to clean up on a short sale in the stock of his own company. Gates represented the purely predatory influence which was dominant in many consolidations of the day.

  Finally, there was Morgan, an aristocrat like Bacon, an optimist like Schwab, a man who distrusted Gates yet made use of his practical knowledge of the technique of promotion: a man who combined some of the qualities of each of the other men and yet outmastered all of them: an embodiment of sheer force, a man of whom the financial and industrial community stood in awe, partly because of the ramifying power of his banking house, partly because they felt him and his word to be solid as a rock, partly because of the overwhelming authority that expressed itself in his few gruff words, his swift and far-reaching decisions, his piercing eyes. The other men sitting in his library that night represented types; Morgan was unique.

  Hour after hour the men talked. Schwab had a list of all the companies which might be brought into the big combination; he explained why this one was needed and why that one was not; he specified purchase prices; Morgan plied him with incessant questions, battered the project into practical financial shape as the talk progressed. Finally the conference ended.

  “The sun was now streaming into the library windows,” writes Hendrick in his life of Carnegie.… “Morgan brought matters to a close by rising.

  “‘Well,’ he said to Schwab, ‘if Andy wants to sell, I’ll buy. Go and find his price.’”

  One may imagine Schwab’s delight as he walked out into Madison Avenue that early winter morning. The great project had gained Morgan’s approval, almost precisely as he had laid it out. But an obstacle still remained—Carnegie. What if Andy should have changed his mind? The next step required caution.

  Schwab did a shrewd thing. He consulted Mrs. Carnegie.

  She advised him to invite Andy to play golf and to break the news to him after the game. Schwab did so. The two men made the frosty round of the St. Andrews links in the Westchester hills, and then Schwab told his story.

  The little white-bearded Scotchman was at first cast into gloom at the prospect of retirement. For thirty years he had planned to retire, but now that the gates of a financial Valhalla stood open before him, he saw them with a heavy heart, for he loved the fight. But he did not say no. He asked only to be given a little time to think the proposal over. Schwab knew then that he had won.

  The next day Carnegie discussed the sale again with Schwab, wrote his price—expressed in terms of exchange of Carnegie stocks and bonds for securities of the new corporation—in pencil on a slip of paper, and gave it to Schwab. Schwab took the paper down to Wall Street and showed it to Morgan. One glance, and Morgan said, “I accept,” and the thing was done.

  So completely informal were the negotiations, in fact, that it was not until weeks later, after the public announcement of the formation of the Steel Corporation had been made, that Morgan suddenly realized that he did not have Carnegie’s acceptance in writing—that technically he had sold the Carnegie Company short—and hurriedly sent his lawyer to Carnegie to sign a paper concluding the deal.

  6

  The months of January and February, 1901, went by, and not until the latter part of February did the public have an inkling of what was afoot. Conferences were being held daily at the Morgan offices, where Judge Gary, of the Federal Steel Company, installed as Morgan’s trusted agent, was bringing into line the other big steel companies which were needed for the merger.

  One by one they came in. Gates, of course, tried at the last moment to hold out for an impossible price, and capitulated only when Morgan came into the room where Gates and his friends had been bargaining with Gary for hours, and said sternly, “I am going to leave this building in ten minutes. If by that time you have not accepted our offer, the matter will be closed. We will build our own wire plant.” At this threat Gates accepted Morgan’s terms; an acceptance which so delighted Morgan that—as Gary later told his biographer—the banker went home as exuberantly as “a boy going home from a football game.”

  At last the negotiations were completed, and the United States Steel Corporation became a reality. On
the third of March, 1901, as the crowds were gathering in Washington for the triumphant inauguration of McKinley and Roosevelt, there appeared in the papers an advertisement addressed to the stockholders of Federal Steel, National Steel, National Tube, American Steel and Wire of New Jersey, American Tin Plate, American Steel Hoop, and American Sheet Steel, informing them that the United States Steel Corporation had been “organized under the laws of the State of New Jersey, with power, among other things, to acquire the outstanding preferred stocks and common stocks of the companies above named, and the outstanding bonds and stocks of the Carnegie Company.”

  The biggest of all giant holding companies had been born. Carnegie was out of the steel industry. Gates was on his way out—for Morgan sternly refused to make him a director of the Steel Corporation. Hundreds of steel companies—the Tin Plate group alone was a combination of 265 plants—were being brought under a single control; the fate of 168,000 steel workers, the production of half the steel used in the United States, now hung on the decisions of one man.

  7

  The distribution of the shares of the new corporation to those who had joined forces in it was done on a lavish scale. Carnegie, distrustful as ever of Wall Street methods and watered stock, insisted upon being paid in bonds, but the shareholders of the other constituent companies were paid for their holdings in these companies by being assigned preferred stock and common stock in United States Steel, and the terms of some of the various agreements rewarded them very generously for coming into the alliance.

  A stockholder in one of the Moore concerns, for example, received $145 worth (par value) of Steel Corporation stock for each $100 worth (par value) of common stock in the original company. A man who in 1897 had owned a $100 certificate of stock in the Consolidated Steel Company, and, as we have already seen, had subsequently exchanged it for stock to the par value of $490 in the American Steel and Wire Company of New Jersey, now found that he possessed, in Steel Corporation stock, certificates of a par value not of $100 or even $490, but of $564.37.

  It took an enormous amount of stock to meet the requirements of the agreements which Morgan had made with the already heavily capitalized components in his scheme. When two more big companies had been added to the collection—Morgan’s American Bridge Company and John D. Rockefeller’s Lake Superior Consolidated Iron Mines—and when the Morgan syndicate had taken for its services a block of stock with a par value of nearly one hundred and thirty millions, the capitalization of this greatest corporate monster in history reached breathtaking dimensions. It had underlying and miscellaneous obligations to meet of 81 millions; it issued 303 millions in corporate bonds, all of which went to the owners of the Carnegie properties and about two-thirds of which went to wily old Andrew himself; and it issued also no less than 510 millions in preferred stock and 508 millions in common stock, making its total capitalization some 1402 millions—over a billion and a third of dollars!

  No wonder the public gasped. No such immense financial operation had ever before been witnessed.

  How much of this immense figure represented the actual value of the steel factories and other properties taken over by United States Steel? Ten years later the Commissioner of Corporations issued a report in which this question was very carefully answered. His investigators attempted to arrive at the real value of the Steel Corporation investment in three ways. First, they traced back the financial history of the constituent companies in the effort to find out what they represented in money actually invested, and arrived at a figure of 676 millions. Second, they added together the market values of the constituents’ shares and arrived at 793 millions. Third, they made detailed estimates of the physical value of the various properties and arrived at 682 millions. Striking a rough average of these figures, the Commissioner decided that the fair market value of the properties of the Steel Corporation in 1901 was in the neighborhood of 700 millions. And the bonds and stock issued amounted to 1402 millions!

  According to these figures, the bonds and preferred stock alone more than covered the total value of the properties; all the common stock, and for that matter a part of the preferred stock, was sheer water—in other words, a huge collection of paper certificates representing not actual property but the hope of rewards through huge profits. The common stock might thus be regarded as a bonus, thrown in to sweeten the bargains with the Gateses and Moores and their allies and the other stockholders and promoters who had made the organization of the Steel Corporation possible.

  This estimate of value by the Commissioner of Corporations was made, however, as his report explicitly stated, without giving consideration to any “merger, integration or monopolistic factors arising from the combination of 1901.” In other words, it took no account of the fact that by combining, these innumerable steel companies were able to operate more effectively, more economically, and with less fear of competition than before: that their earning power was immensely enhanced. The orthodox Wall Street view of the capitalization of the Steel Corporation was that these factors of efficiency and partial monopoly must be taken into account; that if a combination of factories could earn twice as much as the factories could earn separately, they were of course worth twice as much; that their owners deserved the increased income which resulted from their ingenuity and far sightedness in putting the factories together; and that if the stock certificates which they received represented a capital sum twice as big as before, these certificates therefore represented not watered value but real value—a legitimate payment.

  As to the Steel Corporation, the Wall Street argument was later supported by the fact that the Corporation was actually able to earn a return upon its common stock: that it not only paid a dividend of four dollars a share in its very first year, with nearly forty-four millions to spare, but was able to continue its dividends with few interruptions for a long time thereafter. (There was one prolonged and frightening interruption in the Corporation’s early years.) If the proof of a pudding is in the eating, ran the Wall Street argument, then in this case the size of the common stock issue was ultimately justified.

  The question at issue is a large one; it has been debated hundreds of times with regard to dozens of incorporations for over a generation, for the Steel Corporation pattern of financing was followed again and again, with varying results, from that day on. Men and women will doubtless arrive at their own answers in accordance with their social convictions and prejudices. One aspect of the matter, however, may be suggested here. What made these vast combinations possible and profitable? Not simply the wisdom or daring of their owners and promoters, but also a number of other factors: the spread of population, the growth of cities and general urbanization of American life, the influx of immigration, the new efficiency of communication, the engineering skill which went into the design of new machinery, the labor of hundreds of thousands of workers: in short, the growth of the country and the advance of the machine age. If at one fell swoop a group of promoters and stockholders took advantage of these factors to consolidate a number of companies, were all—or nearly all—of the resulting profits legitimately theirs? And if not, was it quite proper so to increase the capitalization of the new company that it would be obliged to hand out to its owners and promoters—or to those who had bought their shares—all or nearly all of these possible profits, in order to justify its financial set-up? In theory the advantages derived from combination might have been distributed to labor in higher wages or to the general public in the form of lower prices; in practice they were almost completely absorbed by capital—and to a large extent by the promoters—and the lavish issue of stocks was the method through which this was done.

  In these latter days, when a large public has learned to think in terms of national purchasing power, the question whether such devices are legitimate clamors for answer; but in 1901 the end results of the financial methods which were illustrated in the formation of the Steel Corporation, and were given sanction and prestige by its success, were not visible. The outburst o
f public dismay which greeted the announcement of the formation of the Steel Corporation was not directed in any large degree at the financial methods by which the operation made money for those on the inside. An outburst there was, not only in the United States but abroad, but what frightened the general public was mostly the sheer size of the new concern, the thought of the concentration of power which it involved, the thought of what such power might do to snuff the little business concern out of existence, the thought that Pierpont Morgan might gradually take all American industry within his ample grasp.

  The London correspondent of the New York Tribune cabled that the British mercantile community was “appalled by the magnitude of the American Steel combination headed by J. P. Morgan.” President Hadley of Yale, in an address shortly after the Morgan announcement, said that if trusts were not “regulated by public sentiment,” the country could expect “an emperor in Washington within twenty-five years.” That aptest commentator of the day, Finley Peter Dunne’s “Mr. Dooley,” described Morgan as now being able to say to one of his office boys, “Take some change out iv th’ damper an’ r-run out an’ buy Europe f’r me.” Other critics of the steel combination feared that labor would now learn a lesson from capital, organize and seize the power from capital, and plunge the country into socialism. But of intelligent criticism of the corporate mechanism and the way in which it distributed the financial gains from such a deal there was comparatively little.

  Meanwhile, however, the gains were being made. James R. Keene, a stock-market operator of uncanny ability, was engaged to “make a market” in Steel Corporation stock on the Exchange, and presently, with the aid of his buying and selling, the shares were changing hands in large quantities—the preferred at prices ranging between ninety and a hundred dollars a share, and the common between forty and fifty dollars a share. Speculators leaped in to buy; investors followed, large and small; and presently the stock of the new concern was the center of a bull market of increasing proportions.