Carnegie

by Peter Krass

  There was a railroad line already serving part of the proposed route to Lake Erie, the Pittsburgh, Shenango & Lake Erie Railroad, which ran from Butler, about twenty-five miles directly north of the steel mills, to Conneaut, a small Ohio village on the lake with a modest port. A Colonel Saul B. Dick, president of the railroad, had already looked into the possibilities of extending his line to Pittsburgh, but the railroad was run down and had no financing. In stepped Carnegie with the promise of guaranteed freight if he connected with Pittsburgh. Eager to please, Dick confidently told Carnegie that he could organize a syndicate of wealthy Boston men he knew to finance the extension to Carnegie Steel’s Union line, which looped through the mills. “After the syndicate is formed and the Agreement made,” a very confident Carnegie told J. G. A. Leishman, “the other lines will simply make the best of it, and you may be certain they will do far more for us thereafter, than you can possibly get them to do now.”6 His partners were still wary, however.

  As a less aggressive alternative, Frick explored the possibility of buying their own trains to run on the Pennsylvania Railroad’s tracks. The railroad’s president, George Roberts, was open to this suggestion and negotiations ensued, but Carnegie put an immediate stop to them, cabling, “Board is not free to negotiate with the Pennsylvania Company. . . .” He was intent on dealing the Pennsylvania a serious blow no matter the cost.

  The cost to extend Dick’s line to Pittsburgh was put at $600,000, a serious investment; but if millions were saved over the coming years, then it was well worth it. There was just one problem: Colonel Dick failed to come through with his syndicate. Publicly committed to the project, Carnegie had to scramble to find financing for what was to be a newly organized railroad company with $3 million in capital. He was forced to do something he had not done in years and had piously warned against: he attempted to take out a personal loan of $1 million from the United States Trust Company of New York. Money was tight during the depression, so, in writing to the bank’s president, John Stewart, he concluded his letter with an incentive: “You would also have something quite unique—my note. It is many years since I have had a personal obligation, and I have none now, nor do I intend to have any but this, which I would be about one million for 12 mos. $80,000 each mo. 1 year.”7 For a year, Stewart would have bragging rights that he owned a piece of Carnegie. It worked. The $1.5 million in Frick Coke Company bonds Carnegie put up for collateral helped, too. Colonel Dick was put in charge of extending the line and refurbishing the existing road, now called the Butler & Pittsburgh Railroad Company. The steel master wasn’t finished, however. To ratchet up the pressure on the Pennsylvania, Carnegie turned his eye toward building a line to Connellsville, heart of the coke region.

  From their Philadelphia offices, the Pennsylvania Railroad executives had seen and heard enough; they knew they could indeed make a profit at lower rates and could not afford Carnegie’s agitation. In April, they indicated they were prepared to make serious concessions, and Carnegie crowed to Dod that it “seems really as if we were going to save one cool million per year in Freights.”8 He was so overjoyed that he told Dod, who was planning a summer yachting trip for them, not to limit the size of the boat. For his old railroad comrades at the Pennsylvania, George Roberts and Frank Thomson, he ordered a cask of fine whiskey. That was April 29. The first week of May brought a different story.

  Carnegie Steel lost a bid to Illinois Steel to supply ship plates bound for Newport News, Virginia, and while investigating the matter Carnegie discovered that the reason their Chicago rival was able to undercut his price was due to lower shipping costs. The Pennsylvania Railroad was to blame, and, on May 5, he unleashed his frustration with the conniving and apparently remorseless Thomson:

  I think the great Pennsylvania Railroad has come to a sad condition, when it is only not willing, but not anxious to stand behind its own customers, and give equal rates per ton per mile to those which its competitors receive. . . . If the thousands of idle men in Pittsburgh to-day knew that this was one reason for its idleness, I would not give much for the receipts of the Pennsylvania road in and around Pittsburgh after a month or two. Even if you do not arrange with us, something must be done soon, or an explosion will take place.

  I send the enclosed contract to you personally and not as an official of the Pennsylvania Railroad, and I depend upon you returning it by messenger, and not taking a copy. Any notes you may desire for your personal use, of course, are all right.9

  Enclosed was a contract for secret rebates, a contract Carnegie would guard alone.

  Thomson conferred with Roberts as the reactionary Scotsman moved rapidly ahead with the Lake Erie connection. His threat to also build south had to be taken seriously, and so, realizing they had pushed Carnegie too far, Thomson politely requested a meeting in Philadelphia. To prepare for the meeting, Carnegie ordered his freight agent, George E. McCague, to obtain the rebates offered to his competition—they were the decisive weapon. “You must obtain them,” he demanded. “How you are to get them I don’t know and I don’t care. But I must have them.” As McCague started for the door, Carnegie left him with a line from Richelieu, one of his favorite plays: “From the hour I grasp that packet, think your guardian star Rains fortune on you!” The singsong voice had just given the freight agent carte blanche—cash payment, bribery, whatever necessary—to get the rebate information, for which he would be rewarded.

  When, on the anointed day of May 11, Carnegie bounced into President George Roberts’s office, he found Roberts and Frank Thomson sitting together, a united front. From their perspective, Carnegie was the son who’d long ago forsaken his father, the railroad, only to return again and again demanding gifts, rebates, money. Damn ungrateful. The Little Boss could be very childish, an ego prone to tantrums laced with fancy, multisyllabic words, always telling everyone how to run their business. He thought he was above everyone else, and in many aspects he was. Roberts and Thomson hated to acquiesce to Carnegie’s demands and did their best to take advantage of Andy—it was a game—but ultimately, Carnegie was an economic force to take quite seriously.

  “How are you, Andy?” said Roberts.

  “How are you, Mr. Roberts? How are you, Frank?”

  There the cordialness ended as Roberts questioned why Carnegie was fighting the Pennsylvania. In response, Carnegie simply threw a package on the table containing the secret rebates given to his competition. The railroad men were cornered, and Thomson said resignedly, “Well, tell us what you want.”

  “I don’t want anything. I did not ask to see you. You asked to see me.” It was a jab meant to humiliate.

  “Don’t talk that way. What do you want?”

  All Carnegie wanted was competitive rates. Well, the railroad men said, you’ll have to stop building that line to Lake Erie. No, that could not be stopped, he was obliged and committed, but he did agree to halt any plans for building the spur to Connellsville. When they signed a secret agreement five days later, Carnegie was the victor, reaping rebates on shipping coke, ore, and various steel products. He estimated that from these rebates the company saved $1.5 million a year, which would immediately boost profits by 25 per-cent.10 He won rebates over which muckraker Ida Tarbell would crucify John D. Rockefeller; he won rebates that had been made illegal by the 1887 Interstate Commerce Act. As long as there were no enforced reforms in regulating the railroads, Carnegie would benefit from the inequities.

  Carnegie’s railroad line to Lake Erie met with mixed results initially. Colonel Dick turned out to be more interested in nightcaps in the smoking room than talking business during a July 1896 visit to Cluny, and the cost to refurbish the old line rocketed to almost $2.5 million. Despite the rising costs, Carnegie was so pleased with his triumph over the Pennsylvania Railroad that he wrote playfully to Frick about their railroad’s physical ailments: “Her case is respectfully submitted to the attention of Dr. Henry Clay Frick, Surgeon and Physician (amputations may be necessary).”11 Work on her moved forward, and by th
e end of the year Carnegie could claim to his partners that Pittsburgh was a lake port.

  The triumph was somewhat offset by deteriorating business conditions as the presidential election approached. Since the onset of the depression, Cleveland’s administration had failed to restore confidence. The Treasury’s gold supply was drained to dangerously low levels several times, as U.S. and foreign investors withdrew the money from American markets and companies. Disillusioned with Cleveland, in July the democrats nominated William Jennings Bryan, who preached monetary revolution and supported the unlimited coinage of silver. Republican candidate William McKinley, on the other hand, offered no definitive leadership on monetary policy, prompting an irate Morgan to say McKinley had a “backbone of jelly” and that his waffling was “nauseating.” Reflecting the political and economic uncertainty, the Dow Jones Average, created by Wall Street Journal cofounder Charles Dow in 1884, fell from 40.94 on May 26 to 28.28 at the end of August, more than a 30 percent drop.12

  On the eve of 1896, Carnegie had known business would be slow, but the degree of deterioration he now witnessed was unexpected. There was talk of cutting wages and ending the bonus, which had been instituted in the prior year. “There is a very easy way to stop bonus,” Carnegie wrote to Leish-man, in his “Thoughts on Minutes.” “When mills stop for a time, as they must, before starting them, let the men be told quietly that the firm regrets it cannot go on paying bonus under present conditions. The men will agree to start without bonus; if not, you can wait.”13 More telling of just how bad business was, on August 6, he ordered a halt to the construction of the Carnegie Library of Homestead and warned his board of managers of a coming economic storm “the like of which we have not seen in our days” and the need to break pooling agreements. “There is one way to secure safety, but to pursue that, we must be free. . . . We should play for safety not profit.”14 The specter of a greater threat than the depression now took shape, however: John D. Rockefeller.

  John D. Rockefeller had been using the depression to wrap his hands around the weakened iron ore industry in a stranglehold, his plan to dominate ore as he did oil refining. Despite repeated warnings from Frick and other comrades in steel, Carnegie ignored the challenge—until he began to gasp for air.

  One Rockefeller investment that appeared to have unlimited potential was the Minnesota Iron Company, operating in the Mesabi mountain range of northern Minnesota. The range rose unexpectedly above the surrounding land, inspiring the Native Americans to name it Mesabi, loosely translated as “Daddy of Them All.” This remote area had been ignored for years until 1856, when the Merritt family settled in Duluth, a frontier post, and heard stories about strange red sand in the Mesabi Range. After a few incursions into the remote area, the Merritts were convinced a rich ore supply lay on the surface and immediately bought large tracts of land. Leonidas “Lon” Merritt knew high-quality ore remained a crucial element in the mix of steel, so, in the spring of 1891, he traveled to Pittsburgh to entice Frick into building a railroad from Lake Superior to the range. Surely, Carnegie Steel would want this ore, but when Frick looked over this coarse pioneer from the Minnesota backwoods, he dismissed him high-handedly. “Frick did not use me like a gentleman,” Merritt recalled, “and cut me off short and bulldozed me.”15 Mesabi simply wasn’t strategically located, as far as Frick was concerned. Meanwhile, there was still plenty of ore easily accessed in West Virginia and other nearby locales.

  Next to attempt to entice Frick was Carnegie’s boyhood chum Henry Oliver. Oliver served as a delegate to the National Republican Convention at Minneapolis, and while there he heard of a rich ore field discovered in the Mesabi Range. On investigating the Merritt’s property, he was immediately convinced of the ore’s quality and gave Lon Merritt a $5,000 check to lease one of the family’s large mines. Later in the summer, Oliver took a shot at interesting Carnegie Steel, but when he offered an interest in his newly created firm, the Oliver Mining Company, Carnegie was as equally shortsighted and biased as Frick had been. “Oliver’s ore bargain is just like him—nothing in it, . . .” he wrote Frick in August 1892. “If there is any department of business that offers no inducement it is ore. It never has been very profitable, and the Mesabi is not the last great deposit that Lake Superior is to reveal.”16 Granted, at the time, Carnegie was a little preoccupied with Homestead.

  Back at Mesabi, the Merritts continued to develop their tracts of land, albeit recklessly, borrowing heavily, and even embarked on the construction of a railroad to carry the ore to Lake Superior. The 1893 panic quickly curtailed their activity, and Rockefeller now stepped in. He loaned them $100,000 and formed a holding company, Lake Superior Consolidated Iron Mines, to manage his iron ore assets and theirs. Before the year was out, the loan ballooned to almost $2 million. Carnegie, assuming the powdery ore simply could not be of good quality, arrogantly ridiculed Rockefeller’s extensive purchases.

  Frick was the first to recognize their blunder. In the spring of 1894, he arranged for Carnegie Steel to advance $500,000 to Oliver, whose finances had been crippled by the depression. In return, they received a 50 percent interest in the Oliver Mining Company and a new source for ore now proven to be of excellent quality. Reluctantly, Carnegie agreed, but he still insisted the venture “will result in more trouble and less profit than almost any branch of our business. . . . I hope you will make a note of this prophecy. . . . If Mas-sawba ore requires special form of furnaces, it will add force to my instinctive aversion to making investments hundreds of miles away.”17 His intentional misspelling of Mesabi was his way of poking fun at what he considered a backward and second-rate mining operation.

  Meanwhile, the Merritts’ bad luck—or rather, bad management—was never reversed, and in 1895 they were forced to turn all of their holdings over to Rockefeller. Suddenly, there was a justifiable fear that the Caesar of oil would soon dominate ore. Carnegie, who had failed to seize the opportunity, was now subject to Rockefeller’s whim.

  Frantic to establish himself in iron ore, Carnegie behaved compulsively and impulsively as he became determined to monopolize what he believed to be unlimited supplies of quality ore in West Virginia. Carnegie had one of his flashes—here the next battle would be fought, and he would triumph—so he ordered his furnace manager to “get options upon all available properties before we are known in the matter.” Secrecy was crucial to outflank the competition; and, for once, Carnegie kept his mouth shut. He ridiculed the high prices “Rockafellow” was paying for ore land and found it “amusing, in view of what we know is coming.”18 What was coming, Carnegie assumed, was a bonanza of cheap ore from West Virginia that would depress prices and hurt poor old “Rockafellow,” whose name he knew how to spell without a doubt. But the very next month, Carnegie was forced to pay his respects when he realized he didn’t have the strength to go it alone and joined an iron ore pool at Rockefeller’s behest. If the company refused, Carnegie explained to Leish-man in January 1896, “we should lose the friendship of Rockefeller. . . . I think Rockefeller is the coming man in ore and it will be to our advantage to stand in with him. As his ownership in ore lands will be very large, I believe it will be more to our advantage to mine ore in his territory, paying him a royalty, than to attempt to purchase ore property for ourselves.”19

  Carnegie, who had been battling with the Pennsylvania Railroad, quibbling over Venezuela, and touring the Continent, failed in his West Virginia iron ore endeavor. There was no bonanza; but, in seeking a silver lining, he concluded, “It is well worth knowing just what was there. Lake Superior, after all, is to be our source of supply.”20 Just as Carnegie was preparing to approach Rockefeller about buying his ore in the Mesabi, the situation darkened: rumors circulated through the press that Rockefeller was planning to build a major steel mill in either Cleveland or South Chicago to rival Carnegie Steel. Such a move would set up a clash between the two undisputed titans of the Gilded Age—two ruthless businessmen who crushed their competition by scooping the market, reinvested profits t
o achieve ever-greater efficiencies, and drove their men mercilessly. This was to be a battle of the ages, and their critics relished the idea of the two despots—one of oil, the other of steel— destroying each other.

  Instead of retaliating with threats, Carnegie and his men had to devise a plan to dissuade Rockefeller from entering steel, which, they realized, would be most easily achieved by becoming his greatest customer. The Carnegie men offered to buy all their ore from Rockefeller if he kept out of steel—and not only that, but Carnegie Steel, as well as Oliver Mining, would promise to halt its own mining forays in the Mesabi Range. Rockefeller could reign supreme. In early negotiations, Leishman sat down with one of Rockefeller’s top lieutenants, Frederick Gates, but they failed to make any progress. Carnegie realized he would have to approach Rockefeller personally, and, although coming from the weak position, he would have to find a way to do so on equal footing. He took comfort in knowing Rockefeller admired him and, in particular, his philanthropy, so he decided the best approach to take with the reclusive titan was to write an honest letter. He admitted that Leish-man and Gates had failed in their negotiations, but he said their differences weren’t