The Myth of the Robber Barons

by Burt Folsom

  The fragmentation of some of Scranton's larger family fortunes seems remarkable. For example, brothers Thomas and George Dickson became president of a national railroad, the largest manufacturing company in northeast Pennsylvania, an iron company in New York, the vice president of the largest bank in Scranton, and directors on many large companies. Yet only one of Thomas Dickson's three sons went into business; and, under his leadership, the Dickson Manufacturing Company went out of business. George Dickson's only child, Walter, became a mere salesman and held no corporate influence. The four sons of multimillionaire James Blair were nonentities. Only one of Blair's sons appears to have been gainfully employed, and his job was that of assistant cashier in his father's bank.48

  Even the Scrantons of Scranton were almost extinguished. George, Selden, and Joseph Scranton were the founding fathers of American rail making, but only one of their sons showed entrepreneurial skill. Selden was childless, and went bankrupt in any case. George was worth $200,000 when he died; but his sons, James and Arthur, became men of leisure, not entrepreneurs. Joseph's son William gave business a try, but his story was often sad. Joseph was president of the Lackawanna Iron and Coal Company from 1858 until his death in 1872. But during these years, the New Yorkers bought up so much stock that William was not allowed to succeed his father as company president. Young William was restless as a mere local manager, so he studied the new Bessemer process in Europe and returned to start his own Scranton Steel Company in 1881. The city's low tax on new industries gave him an edge over the larger Lackawanna Company, but the older company won the competition and absorbed his enterprise in 1891. William did prove to be a very capable builder and operator of the Scranton Gas and Water Company. He and his son, Worthington, ran this company profitably and, in 1928, Worthington sold it for $25 million.49

  Some of the sons of Scranton's early industrialists literally squandered fortunes. Benjamin Throop, who was described earlier, became a millionaire in coal land and urban real estate. His surviving son had, at best, modest business skills, and when he and his wife died prematurely in 1894, the eighty-three-year-old Throop undertook the task of rearing his only grandchild, five-year-old Benjamin, Jr. The elder Throop died shortly thereafter, but young "Benny" inherited a ten-million-dollar fortune. Young Throop married into a prominent local family and, having no financial worries, began raising German shepherd dogs. He served in World War I, but by that time his wife had divorced him and he seems to have lost any interest that he might have had in gainful employment or in the city of Scranton. During the 1920s, like a character from an F. Scott Fitzgerald novel, he spent most of his time in Paris indulging champagne tastes in cars and women. He married a French movie star and traveled widely during their marriage. Throop died in 1935, in his mid-forties, of undisclosed stomach ailments after apparently dissipating his grandfather's entire fortune.50

  Throop was a rare but not unique example of dissolution. Given the tradition of partible inheritance, many of the sons of economic leaders knew that they would never have to work, and so they became men of leisure with no business interests. For example, James Blair's son Austin was "a gentleman of leisure [with] [n]o[thing] to do except fish and hunt." According to a credit agent, "his fa[ther], James Blair, is a millionaire and supports him [and] lets him have a fine residence rent free and supplies him with funds when required."51

  Without strong parental guidance, a slothful life was understandably attractive to these scions of wealth. Owing to the genetic improbability that Scranton's 1880 elite would produce only children like themselves, with a knack for business, the fragmenting of economic leadership should not surprise us. Edmund B. Jermyn's taste for horse racing—this son of the multimillionaire coal operator apparently "never missed a day's [horse] racing at Honesdale or at Goshen, N. Y."—becomes understandable. The son grew up under different conditions with different options in life from those that were available to his rags-to-riches father.52

  The Throop and Blair families may provide clues to one possible relationship between parental guidance and entrepreneurship. On one hand, all of Benny Throop's parents and grandparents died before he was eight years old, so he had no family pressure to become a businessman and pass on the family fortune. The four sons of James Blair, on the other hand, had a long-lived father, who personally directed many of his own enterprises until his death at age ninety. The elder Blair outlived two of his sons, and the other two had passed middle age by the time they were independent of paternal control. By living so long and holding on so tightly to his investments, Blair may have quenched the spirit of entrepreneurship in his sons. The role of the parents, the lack of business talent, the quest for leisure, and the problems of family continuity in general all seem to have combined to fragment the Scranton economic elite of 1880.

  Of course, not all of Scranton's early industrialists had downwardly mobile sons. Nine of the forty top capitalists in the Scranton of 1880 passed the torch of leadership from father to son in 1920. hi any randomly selected group of forty families, of course, some would produce sons or have sons-in-law with a flair for business. It is improbable, however, that nine of forty randomly chosen families would have corporate officers as sons. This merely shows that industrial leaders are much more likely than other groups in the population to father corporate officers. It does not show continuity of economic leadership because more than three-fourths of the industrial families of 1880 in Scranton failed to continue a line of corporate succession in the following generation.53

  While most of the sons of entrepreneurs stumbled, a variety of new immigrants in Scranton saw their opportunities and took them. By 1920, for example, Andrew Casey, an Irish liquor dealer, had become a bank president and a hotel magnate. Michael Bosak, a Slovak immigrant who started life as a breaker boy in the 1880s, owned banks, a manufacturing company, and a real estate firm in Scranton in 1920. Few had the talent and vision to build such empires, but those who did picked up where the city's founders had left off.54

  Scranton was, in a sense, America's first manufacturing city. It marked the spot where America began its independence from British iron. During the next generation, Scranton became a showcase of remarkable entrepreneurship and industrial growth. In this relatively open environment, Scranton's economic order was fluid: upward mobility for the poor existed side by side with downward mobility for the rich. Entrepreneurs were prize possessions for cities and for the nation; but their vision, talent, and drive were hard to transfer from generation to generation. Most of the families of Scranton's early industrialists died out as entrepreneurs; they didn't inherit their fathers' vision and turned over the city's economic leadership to newcomers.

  And so the cycle goes—which means that if Scranton is typical, then two seemingly contradictory generalizations about the rise of big business are both true. First, a small constantly changing group of entrepreneurs consistently held a large share of the nation's wealth. Second, the poor didn't get poorer, and the rich didn't get richer either.

  CHAPTER FOUR

  Charles Schwab and The Steel Industry

  When asked for the secret of his success in the steel industry, Charles Schwab always talked about making the most with what you have, using praise, not criticism, giving liberal bonuses for work well done, and "appealing] to the American spirit of conquest in my men, the spirit of doing things better than anyone has ever done them before." He liked to tell this story about how he handled an unproductive steel mill:

  I had a mill manager who was finely educated, thoroughly capable and master of every detail of the business. But he seemed unable to inspire his men to do their best.

  "How is it that a man as able as you," I asked him one day, "cannot make this mill turn out what it should?"

  "I don't know," he replied; "I have coaxed the men; I have pushed them, I have sworn at them. I have done everything in my power Yet they will not produce."

  It was near the end of the day; in a few minutes the night force would come on duty. I
turned to a workman who was standing beside one of the red-mouthed furnaces and asked him for a piece of chalk.

  "How many heats has your shift made today?" I queried.

  "Six," he replied.

  I chalked a big "6" on the floor, and then passed along without another word. When the night shift came in they saw the "6" and asked about it.

  "The big boss was in here today," said the day men. "He asked us how many heats we had made, and we told him six. He chalked it down."

  The next morning I passed through the same mill. I saw that the "6" had been rubbed out and a big "7" written instead. The night shift

  had announced itself. That night I went back. The "7" had been erased, and a "10" swaggered in its place.The day force recognized no superiors. Thus a fine competition was started, and it went on until this mill, formerly the poorest producer, was turning out more than any other mill in the plant.1

  Schwab showed the ability to find solutions to problems even as a lad growing up in Loretto, Pennsylvania. According to one of his teachers, "Charlie was a boy who never said, 'I don't know.' He went on the principle of 'pretend that you know and if you don't, find out mighty quick'." Schwab knew early that he would have to live by his wits; his parents and immigrant grandparents weaved and traded wool products, jobs which put food on the table but not much money in the bank. Young Charlie, therefore, started work early in life: in one job he was a "singing cabby"; he drove passengers from nearby Cresson to Loretto and entertained them with ballads along the way. One of his passengers, impressed with the gregarious youth, gave him a travel book and Schwab later said, "It opened my eyes to the glories of the outside world, and stimulated my imagination tremendously." Soon, Loretto, Pennsylvania, population 300, would be too small to contain the ambitious Schwab. With his parents' blessing> he left home at age seventeen to clerk in a general store in Braddock, a suburb of Pittsburgh.2

  Braddock was a steel town, varied in its cultural and urban life. Working in the store, young Charlie often pleased customers with his good looks, wit, and charm; one man whom he impressed was William "Captain Bill" Jones, the mill superintendent at Braddock for Carnegie Steel. Jones offered Schwab a place as a stake driver for the engineering corps who designed plans for building furnaces. Schwab accepted, proved himself capable, and soon became a draftsman. Here, he worked overtime to master his craft; within six months he became Jones' righthand man at the mill. As Jones' messenger boy, Schwab came into contact with the mill owner, the Scottish immigrant Andrew Carnegie. Carnegie took a special liking to Schwab, who wisely spent some of his off hours playing Scottish ballads on Carnegie's piano.3

  Schwab worked hard to please Jones and Carnegie. Doing so allowed him to advance in the Carnegie organization. Fortunately for Schwab, Carnegie did not recruit his leaders on the basis of wealth or family standing. He used a merit system; he wanted people who could make the best steel possible at the lowest price. To succeed under Carnegie's system, Schwab would have to master the methods of steel production.

  Carnegie stressed cutting costs: in fact his motto was "Watch the costs and the profits will take care of themselves." This meant hard work in innovating, accounting, and managing. Purchases, for example, were made in bulk to achieve economies of scale. Also, Carnegie strived for vertical integration, the control of his steel business from the buying of raw materials to the marketing of finished steel.4

  At the heart of Carnegie's system were bonuses and partnerships for those who excelled. Strong incentives were given employees who could figure out how to save on iron ore, coke, and limestone; or how to produce a harder, cheaper steel; or how to capture new markets for steel. Carnegie explained that success "flows from having interested exceptional men in our service; thus only can we develop ability and hold it in our service." In fact, Carnegie said, "Every year should be marked by the promotion of one or more of our young men."5

  Captain Jones had risen to mill superintendent this way. Among other things he had invented the Jones mixer, a device that cut costs in the transferring of steel from the blast furnace to the Bessemer converter. For his inventions and know-how, Carnegie paid him the highest salary in the business, $25,000—the same salary as that of the President of the United States.6

  Schwab rose through the ranks just as Jones did. He completed small tasks and was given larger ones. At age twenty-three, he designed and built a bridge over the Baltimore and Ohio Railroad tracks; he saved time and money doing the job and received as a bonus ten $20 gold pieces from Carnegie himself. Other assignments followed: he installed meters in the factories and reduced waste of natural gas; he redesigned a rail-finishing department and saved ten cents per ton of steel; he effectively helped in calming down workers during a violent strike in the Homestead plant. When Captain Jones died in a blast furnace explosion in 1889, Schwab became the logical choice for superintendent at Braddock.7

  Gregarious and competent, Schwab became Carnegie's problem solver. For example, the workers at Braddock were turning out "seconds," or substandard rails. Schwab's solution: give $20 cash bonuses to those steelmakers producing the fewest seconds. The quality of the rails shot up and the resulting increase in profits more than paid the bonuses given. No wonder that Carnegie soon gave Schwab a small partnership in Carnegie Steel, with the promise of more to come if he could keep producing. Carnegie even wrote one of his senior partners, Henry Clay Frick, that Schwab "gives every promise of being the man we have long desired" to eventually run the business.8

  Schwab idolized Carnegie and found him amazing to watch. Carnegie's efficiency and his thorough knowledge of the industry made him a terror among fellow steel producers. He spied on them, used their annual reports against them, and even wrote them to secure information on costs of production. Meanwhile, Carnegie Steel was a closed corporation; he told outsiders nothing of his costs or his future plans. Carnegie disdained "pools," secret agreements among competitors to divide up the market and keep prices high. Pools were for the weak; Carnegie wanted to "scoop the market [and] run the mills full."9

  Not that Carnegie didn't use friendships and other means to help him. In bidding on a large Union Pacific contract for rails, he may have outmaneuvered the veteran Scranton family. Joseph Scranton was a director on the Union Pacific as well as president of the Lackawanna Iron and Coal Company. But Carnegie had done a favor for Sidney Dillon, the president of the Union Pacific, and Dillon agreed to give Carnegie the contract if he would match the lowest bid.10

  In the case of the Scrantons, Carnegie showed no mercy. When Carnegie went into the steel business in 1872, he was told that he could never compete against the Lackawanna Company; Joseph Scranton was a founding father of American rail-making; he had a generation of experience making rails. But that year Joseph Scranton died, and his sons William and Walter would be the ones to challenge Carnegie: first with the Lackawanna Company, then with their Scranton Steel Company. Carnegie and the Scrantons joined the Bessemer Steel Association in 1875, but their approaches were different: the Scrantons wanted a pool, but Carnegie told them and others that unless he got the largest share he would "withdraw from it and undersell you all in the market—and make good money doing it." The Scrantons and the others were bluffed by Carnegie and gave him his way. Carnegie then studied the Scrantons and learned their strengths and weaknesses. He discovered that they (and others) were discarding the thin steel shavings, called "scale," that fell on the floor when the steel passed through the rollers. When he learned this, he regularly sent a man to Scranton to cart away tons of the Scrantons' scale, almost free of charge, and brought it to Pittsburgh to use in making rails for Carnegie Steel.11

  As Carnegie moved to the top of the American steel business, Schwab watched, learned, and proved himself time and again. In 1897 the thirty-five year old Schwab became president of Carnegie Steel and the two men ran the company together. Business was never better. Schwab put in sixteen new furnaces at the Homestead plant, and costs per ton of finished steel fell 34 percent in on
e year. To promote esprit de corps Schwab held Saturday meetings with all of his superintendents to work out problems. Meanwhile, the results of large-scale production took hold: the cost of making rails fell from $28 to $11.50 per ton from 1880 to 1900, but the profits from the larger volume of business went from $2 million in 1888 to $4 million in 1894, to $40 million in 1900. Some people wondered if Carnegie Steel might soon capture the steel trade of the entire world.12

  Such speculating was premature. The next year, at age sixty-five, Carnegie retired and, with Schwab as his emissary, sold Carnegie Steel to J. P. Morgan for $480 million. Morgan then combined Carnegie Steel with other companies to create U. S. Steel, the first billion-dollar company in American history. The choice for president of the company: Charles Schwab.13

  Reporters and critics condemned "The Steel Trust," as they called U. S. Steel, for its size and its potential to monopolize. Who would be able to compete, they asked, with such a large vertically integrated company? At his disposal, Schwab would have 213 steel mills and transportation companies, 41 iron ore mines, and 57,000 acres of coal land—enough, critics charged, to dwarf competitors and keep prices high.14

  Schwab discovered, however, that he would not be able to use the Carnegie system at U. S. Steel. In fact, he would not have authority to run the company at all. Morgan and his friend Elbert Gary had organized U. S. Steel so that an executive committee, headed by Gary, and the board of directors would set the policies of the company; Schwab, as president, would carry them out. Morgan and Gary were interested in business stability, not in innovating or in cutting the price of steel. For example, when Schwab wanted to secure more ore land, Gary said no. He also opposed price-cutting, aggressive marketing, giving bonuses, and adopting new technology. Schwab later said, "Gary, who had no real knowledge of the steel business, forever opposed me on some of the methods and principles that I had seen worked out with Carnegie—methods that had made the Carnegie Company the most successful in the world."15