by Peter Krass
Profits in September were $11,000, a fair accomplishment for the start-up, and October’s were $18,000—the average ton of rails selling for $66.32 while costing $56.64.13 But the prospects for success remained dim enough that Tom’s father-in-law, William Coleman, who was financially overextended, elected to sell his partnership. Carnegie offered to buy him out for exactly what he put in—$100,000—with no premium to account for the firm’s increased market value. “He wanted much better bargain but I could do no better,” Carnegie wrote Shinn; “finally he said to write Tom what I had offered and he would talk it over. I suppose it will be arranged. Any portion of it you want you can have and I will take your obligation same as I give Coleman.”14 It was another credit to Tom that Coleman trusted him to handle the negotiations of the sale.
Tom was not quick to roll over during the ensuing negotiations, and the discussions between the two brothers extended into the spring. In April, Carnegie updated Shinn on Coleman, as well as Kloman, who was in the process of declaring personal bankruptcy: “I want to buy Mr. Coleman out & hope to do so. Kloman will have to give up his interest, these divided between Tom, Harry, you and I would make the Concern a close Corporation—Mr. Scott’s loan is no doubt in some banker’s hands and may also be dealt with after a little, then we are right and have only to watch the Bond conversions which will not be great as our foreign friends will want to stick to the sure thing I think.”15 The next month Coleman sold out on Carnegie’s terms.16 From his position of relative financial strength, Carnegie realized the opportunity to consolidate his personal power, another strategy to use in future financial crises. He wasn’t necessarily taking advantage of his strapped partners, but he was certainly profiting from their financial troubles. Such circumstances only reinforced his belief that he was superior; in fact, it fed his ego to such a point that within the steel industry he became known as “the Great Egoist.”
With the onset of 1876, Carnegie’s prophecy of depressed prices was realized: in 1875 the price per ton was $68.75; in 1876, $59.25; and by 1878, it would fall to $42.25.17 While there was enough demand to justify production, the downward-spiraling prices threatened the already slim profits, so the only hope for survival was to drastically reduce costs, a decisive strategy on which Carnegie’s lieutenants focused their efforts and Carnegie monitored vigilantly. At times, he proposed such radical ideas in cutting costs that as his legend evolved, it was assumed he was the genius behind his firm’s cost accounting methods. The truth was that Tom, Phipps, and Shinn played pivotal roles in developing the renowned Carnegie cost accounting system that could track the cost and use of every brick, nail, and other minute piece of material used in manufacturing.
Even in the iron industry during the boom years that immediately followed the Civil War, price was often the deciding factor in winning customers, so production costs had consumed Carnegie since the mid-1860s. From his railroad days of studying Thomson’s management practices, Carnegie knew how important it was to track the financial performance by department and division. Therefore, he was all the more stunned after first becoming involved in the iron industry when he realized the lack of attention costs received: “I was greatly surprised to find that the cost of each of the various processes was unknown. Inquiries made of the leading manufacturers of Pittsburgh proved this. It was a lump business, and until stock was taken and the books balanced at the end of the year, the manufacturers were in total ignorance of results. . . . I felt as if we were moles burrowing in the dark, and this to me was intolerable.”18 Implementing a system for recording costs in detail was easier said than done. It took Tom and Harry Phipps years to perfect a system involving weighing scales and a team of clerks to track the iron and other materials used by each department. Carnegie later acknowledged, “My brother and Mr. Phipps conducted the iron business so successfully that I could leave for weeks at a time without anxiety.”19
But that didn’t stop him from writing anxious letters. Concerned about labor costs, the one variable they could control more so than others, he wrote Tom, “I HAVE EXAMINED upper mill statement sent me. The Stationary Labor, that is, all we pay by the day I know must be practically the same whether we turn out much or little, & it would require very close management to save much, if anything, out of this Department after the forces are cut down to the proper number. 28 Mechanics seems very large indeed. I wish you would look over & see what each one does, & whether the time has not come to dispense with some whose services may have been necessary while extending.”20 In the letter, Carnegie went on to review labor cost per ton of rolled and finished iron and the output of iron per puddling furnace. Believing productivity was poor, he bolstered his argument by comparing the Union Mills to one of their competitors. For Carnegie, as it was for other manufacturers, labor was a resource to be maximized, and it was his unrelenting desire to depress labor costs that would embroil him a series of conflicts. From his first days as a manager and business owner, he recognized that labor was “a problem.”
Phipps also felt Carnegie’s heavy hand when it came to accounting for costs; the boss wanted information recorded daily, not according to his partner’s whim. “Things have come to such a pass that it is my duty to instruct you positively that the Books of the U.I. Mills must be balanced monthly,” Carnegie wrote, “and kept up with the current business day by day. You will no longer consider that you have any discretion in this matter.”21 When it came to dispersing salary and dividends, Carnegie was just as vigilant, of course, and he again criticized Phipps’s bookkeeping: “Can you explain why I am not credited with Salary for a long while, also why no dividends are credited. I understand you are dividing so much per month. Somehow or other we can never get a perfectly satisfactory a/c from your Dept.”22 Carnegie could hardly be blamed; his interest was significant in the Union Mills. In articles of agreement effective as of January 1, 1871, his share was 40 percent, while Tom, Kloman, and Phipps held 20 percent each.
Despite Carnegie’s criticisms, Harry Phipps was recognized as a very valuable contributor in managing the books and the costs. “He was a cheese-parer in every direction,” one executive commented, “making economies that would never occur to anyone else.”23 Stingy to the point of being disliked, it was he who uncovered mill foremen who were listing more men than they had on the payroll and pocketing the extra dollars come payday. He also suggested getting “rid of some very old men who are not capable of doing a days work.” In November 1875, he first suggested the brilliant idea of linking the superintendents’ pay to their performance in reducing costs, declaring that “tuppeny economics will not save us. We must strike for big things and when they are to be found. Tom believes something radical must be done. The plan I propose is Revolution, but is it not feasible? It upsets all the traditions of the past, which we must do, if we desire to make money.”24 It would appear that Phipps was not the timid number-crunching mouse that many of his peers depicted him as.
When Shinn came aboard, he built on the cost-tracking system Tom Carnegie and Phipps had implemented. He introduced a voucher system used at the Allegheny Railroad, which required the workmen to fill out a requisition voucher for any piece of material. Clerks then logged it in their books and management knew right down to the number of bolts what material was used where and what it cost. If costs in a particular department increased, management jumped all over the foreman. It wasn’t long before every workman was conscious of material costs. The importance of Carnegie’s partners could not be underestimated, although in later years, as he came to prominence, he would assume much of the acclaim.
To Carnegie’s credit, he promoted such cost consciousness. Whenever a new project was undertaken, he demanded precise costs estimates, right down to the brick type. In November 1874, when the partners elected to build a blast furnace for making pig iron, he was very hands-on. “Not one dollar to be spent upon ornament—” he wrote Kloman, who was in charge of its construction, “all this is bad taste & entirely out of place & everything to b
e of the plainest description.”25 Five months later, Carnegie was again berating Kloman over the plans: “Will you please send me by express as soon as ready the complete drawings . . . I want everything complete remember—ground plan—foundation, hoist, everything to show to parties here—When may I expect them.”26 Such bullying was salt to Kloman’s wounds, and the growing rift between the manic Scotsman and the overmatched Prussian would widen. Behind the oppressive letters was a very obsessive man.
To save on costs, Carnegie even suggested abandoning Holley’s patents and redesigning the works, a proposal that horrified Shinn, who replied, “You are entirely mistaken. We could not abandon the use of Holley’s patents for a cost of $100,000, as it would involve a re-construction of our converting works and then it is doubtful if we could manage economically to carry on the process.”27 Well, if not patents, why not insurance? Carnegie wrote his brother and Phipps: “We are paying double the Insurance on Buildings that we could collect in case of fire. Forty thousand dollars would replace our wooden building with iron. . . . I hope someday we shall have the entire building fire proof. If any parts of it require renewal from time to time let us put in Iron. Insurance is a deceptive thing.” On another occasion, a new, more efficient converter mill at E.T. had just been built to save fifty cents a ton in costs. When the obsessive Carnegie learned that a slightly different design would yield fifty cents more in savings per ton, he ordered the mill torn down and rebuilt—no questions asked. It was no wonder that one of the more renowned quotes that circulated about Carnegie was contributed by a complaining partner: “Carnegie never wanted to know the profits. He always wanted to know the costs.”28
Another bugaboo for Carnegie was quality. Winning a good reputation was crucial to gain the confidence of the railroads, which were biased toward English steel. That was why Carnegie was particularly galled when the New York & New Haven Line complained of defective rails. Although he moved quickly to control any damage, he struggled for an excuse in writing his customer: “I am surprised to hear of the defects in the New Haven rails and can only account for this first and only complaint upon the hypothesis that having to divide the forces into day and night gangs to run double turn compelled us to employ ½ green men and the imperfect rails may have been shipped at night.”29 He immediately dispatched an inspector to investigate, and when the report confirmed the defects, Carnegie lashed out at Shinn: “Mr. Roysten’s report on the New Haven rails is very sad indeed. No one can hold his head up when he looks at them. Now this will not do and should not be repeated. It is ruin to send out a bad rail especially to Eastern lines where inspection is always severe. . . . I would rather today pay out of my own pocket 5000 dollars than have had this disgraceful failure occur.” (Emphasis added.)30
One customer Carnegie attempted to capture in early 1876 who was biased toward English rails was Pierpont Morgan. He had invested in several railroads and was the recently named president of the Cairo & Vincennes Railroad in Illinois. “Morgan is trying hard to buy steel rails cheap,” Carnegie wrote Shinn, “& he will do it too—I could not bring him one cent above $64. . . . He has no American Steel Rails on his line but has heard of the wonderful work we have & sixty feet lengths (as who has not).” In dealing with Morgan, Carnegie encountered the banker’s purchasing agent, General Walker, with whom he was most impressed and was determined to hire. Once again, Carnegie wanted the best of men, and Walker was to be the cornerstone of the one piece of the puzzle yet to be put in place: a highly organized sales force.
Carnegie comprehended that success of his sales organization depended on him picking the man best qualified for specific territories and compensating them well. “I have come to the conclusion that if we could get Genl Walker to take our agency South of the Ohio & West of Cina or Louisville at 50 c per ton,” Carnegie apprised Shinn, “we will be the strongest seller in that region—The Genl is a West Pointer—a gentleman—much liked by Southerners—& can frequently get a preference—I consider Royston the right man for New England—With Genl Walker in the South we should want a man for the West—I could probably get Mr. Katte—not a bad selection—He has not more weight than is desirable but he is honest, well known—of good address & would try hard. Fifty cents per ton is not a high charge & you get the utmost exertion from agents in this form.”31 The fifty-cent commission per ton was indeed excellent compensation; at that rate, a man could live very comfortably for a year off a moderate five-thousand-ton order. Carnegie also advised Shinn to send one of the company’s managers to visit the Short Line in Cincinnati, among other railroads, for as he explained, “Nothing like personal effort on the ground & face to face.” Less than a year into E.T.’s operation, all the pieces were falling into place—highly cost-effective production, quality, and a vigorous sales force—and Carnegie was charging ahead, ready to do battle with any rival.
The gravest danger to Carnegie’s impressive start in the steel business—the final component in the template for success, as it were—was Carnegie himself. In dealing with his managers and foremen, rarely did he offer a compliment in motivating them; rather, it was biting sarcasm or a deflating What are you going to do for me next? When one lieutenant wired, “We broke all records for making steel last week,” Carnegie rejoined, “Congratulations! Why not do it every week?” When a sales agent signed a big contract, Carnegie replied, “Good boy!—Next!” When his blast furnace manager reported, “No. 8 Furnace broke all records today,” Carnegie responded, “What were the other ten furnaces doing?”32 On a daily report from manager Julian Kennedy, Carnegie scribbled madly, “Why did Furnace C fall below the average today?” Dryly, Kennedy explained there could be no average unless you occasionally fell below it.33 In dealing with his two most important men, Shinn and Jones, he was equally relentless in his oppressive management style, which threatened to undermine their desire to perform and their loyalty.
Early in their relationship, Carnegie was impressed with Shinn’s work and wanted him full-time. He didn’t like the idea of sharing the executive with the Allegheny Railroad; in fact, he was never a good sharer, a trait born in the empty belly of poverty. Shinn admitted that E.T. did indeed require more time than he imagined, but he stopped short of committing himself fully, so Carnegie’s wooing continued: “With you at the helm, and my pulling an oar outside, we are bound to put it at the head of rail-making concerns. My preference would be for you to double your interest & manage it to the exclusion of everything else. . . . we shall not quarrel about your compensation. The only objection I think of to increasing your salary directly would be that $5,000 is considered the figure for partners. Tom, Harry, Piper, Linville, Shiffler and Kloman all get this, and it would cost me a pretty penny should they raise the standard, quoting you as precedent, but this may be arranged. You shall be satisfied one way or another if you take command.”34 For Carnegie to offer to double Shinn’s interest to $100,000 was quite a testimony. Still, Shinn did not yield. Several months later, in August 1876, more cajoling from Carnegie was forthcoming: “I am naturally anxious to get all of you for E.T. I do not know your equal as an Ex. Officer & I always feel with you at the helm E.T. is safe but it makes all the difference whether your entire mind is bent on the concern. . . . Remember I can see no fault with your management as it is, on the contrary I assure you there are few nights in which before going to sleep I don’t congratulate myself at our good fortune in having you there—Tom & Harry ditto—but we don’t think we can have ‘too much of a good thing’ & want somehow or other to get you root and branch—compensation can be arranged—I don’t care about money so much as about success.”35 Charming compliments, he knew, would eventually yield victory.
Once Shinn came to Carnegie full-time, the honeymoon was over; and once he made his first mistake, Carnegie lashed out with a vengeance. Ears hot from anger and frustration, Carnegie could not believe the note before him at his new Broadway office: the Edgar Thomson steel mill had stopped for the want of coke. Shinn was responsible, but instead of d
ealing with him directly, Carnegie focused his ire on John Scott, who had originally promoted Shinn for general manager, and in a shrill note he demanded an explanation.
A competent man, Scott did not take the scolding lightly and wrote a long, testy response:
In regard to the Edgar Thomson having stopped for want of Coke, I think you are a little too fast in your remarks about that, as I think you will find on the day they were said to have stopped, they made an unexampled product, probably not excelled by any mill at any time in the world—The busy-body who made the report to you should know all the facts before he retails such nonsense. As I understand it, there was a short interruption—nearly all cars on all the roads being blockaded from a heavy fall of snow we had had.
Since the mill started last as far as I can see, every person connected with it has been doing his very best . . . and I would advise you before writing those complaining letters to get all the facts, because I see your hastily written notes keep those gentlemen in a state of irritation—36
“I would advise you before writing those complaining letters to get all the facts, because I see your hastily written notes keep those gentlemen in a state of irritation” was a valid point because Carnegie was extremely reactionary in all matters. Some days he launched two or more letters and cables, targeting partners and managers in his continuous bombardment of criticism. But would he heed John Scott’s advice, verify facts, encourage more than bully, and soften his tone?
With the reprimand in mind, Carnegie did decide to better express his appreciation for the men’s efforts—at least for the workingmen in the mill. Two months later, when they were exceptionally productive and Captain Jones suggested they be recognized, Carnegie heartily agreed, offering to pay all the men in gold and silver, or to give them a gold piece, along with a note commemorating their accomplishment.37 Shinn was not so enthusiastic and suggested “a neat circular in the form of a general order giving the product and commending them . . . would be better appreciated.”38 Well, at least Carnegie had tried. For all his bullying and maligning of men, he was always proud of E.T.’s accomplishments and touted them to industry notables, such as James Swank, secretary of the American Iron and Steel Association, and the media.39