The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany
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Holley was engaged almost immediately; he had made the first contact himself as soon as he heard of the new plant. His offer—$5,000 for the drawings and $2,500 a year for construction supervision—was one that could not be refused. The drawings took Holley only six weeks; he’d been thinking about the ideal plant for years and needed merely to fit his concepts to the Monongahela site. It was also Holley who introduced Carnegie to Captain Jones, who had fortuitously left the Cambria Works when Holley started his ET engagement. Jones may have been the greatest steel plant superintendent of the nineteenth century. He’d gotten his first job in an iron foundry at age ten, knew iron and steel inside out, was worshiped by his men, and was a creative inventor to boot—the ET rail-straightening apparatus that Holley was so proud of was Jones’s invention, as was a later iron-mixing machine, a critical component of the continuous flow process. When word spread that Jones was joining the ET, two hundred of Cambria’s best men chose to follow him.
Shadows fell with the 1873 market crash, just as construction was moving into high gear. The ET was running out of cash—they had underestimated start-up costs—and wise men were telling Carnegie to put on the brakes. This was the precise moment when Carnegie was in most trouble on the St. Louis Bridge. The desperation bridge refinancing through Pierpont Morgan was not concluded until after the crash, and Morgan had set the strict December deadline for the closing of the span, which was met only by a hair’s breadth after weeks of frantic work. Tom Carnegie and Kloman probably did not know how strapped Andrew was, but they were acutely aware of the shaky position in St. Louis.
Carnegie’s financial stringencies led to a painful break with Tom Scott. Scott, still keeping his day job at the Pennsylvania, became president and chief shareholder of the Texas & Pacific Railroad in 1872. Carnegie didn’t like the deal, but put in $250,000 as a friend, although he declined any management role. When the T&P got into serious trouble the next year, Scott, with Thomson adding his voice, pleaded with Carnegie to put in more money, or at least to help with Junius Morgan. Carnegie refused, fully acknowledging that Scott had a claim on him, but as he later put it, he was still a Scots and wasn’t going to do anything stupid. That was doubtless part of it—the T&P was unrecoverable—but Carnegie also didn’t want to admit that he had no money and that his reputation was at a low point with the Morgans.
Carnegie later boasted of the ET start-up, “A man who has money during a panic is a wise and valuable citizen.” But the truth was that his funds were tapped out, and the decision to proceed with the ET was gutsy to the point of foolhardiness. On paper, Carnegie was a wealthy man: his personal balance sheet showed $2.1 million in assets at the end of 1873 and a net worth of $1.7 million. But it was almost all in stock, most of it illiquid securities in his own companies, with railroad-related shares the next largest category. His cash balance was under $5,000, and while he also showed $66,000 in receivables, some of them were probably very doubtful; this was a time that his companies, like the Union Iron Mills, were having trouble with their collections. His financial statements, moreover, recorded securities at par. That was the practice of the time, but it would have grossly overstated their value, since all shares, and especially railroad shares, were in free-fall. Carnegie did sell some of his Pullman shares, probably the stars of his portfolio, but there was no way he could float the ET on his own or come up with any money for Scott. The $250,000 he already had in the ET was all he could afford.
Somehow the ET stayed on schedule, aided by the collapse in construction and materials prices and the contractors’ desperation to keep working. Then, as soon as Carnegie could certify that the St. Louis Bridge was finally completed, he boarded a boat with Holley for a pilgrimage to London and Junius Morgan, where they extolled the brilliant future in steel. (It is interesting that he didn’t save time and boat fare by dealing through Pierpont. He probably had endured enough of Pierpont’s famous brusqueness, while Junius, who clearly liked him, seemed more susceptible to his silver-tongued sales pitches.) Steel rails were fluctuating around $100 a ton in 1874, and he and Holley were confident that, with their huge converters, mechanized rail mill, and automated handling and loading, they could produce them for only $69. Morgan was sold, and agreed to float a bond issue of $400,000, enough to take out some of the weaker partners and see the project through. It is not likely that any other bank could have come up with the money in such an unsettled time. Missing the December deadline on the St. Louis Bridge would have bankrupted the bridge company, almost certainly forced a shutdown of the ET project, and might have ended Carnegie’s foray into steel. On such threads the course of history hangs.
Carnegie gave a preview of his steel strategy two months before the ET got its first order. The occasion was a meeting of the Bessemer Association in June 1875, called by the “Fathers,” the CEOs of the Bessemer companies, to discuss the continued depression in steel markets. Since the ET was nearing completion, Carnegie, McCandless was invited to send a representative. Carnegie chose to go himself—a clear sign that he attached special importance to the event. He doubtless knew through Holley and Jones, who were very plugged in at the association, that the Fathers were planning to lay down a market-pooling proposal.
The report of the meeting comes from an employee who was present at Carnegie’s postmeeting partners’ briefing and who recalled it many years later. The Fathers had duly proposed their pricing and market-allocation plan, which had obviously been agreed well in advance; Cambria was awarded the largest share at 19 percent, and so on down the list, with the ET, as the newest company, receiving the smallest allocation, at 9 percent. Carnegie jumped to his feet to claim the same share as Cambria, since the ET was the largest and most efficient plant in the industry. Otherwise, he announced, “I shall withdraw from [the pool] and undersell you all in the market—and make good money doing it.” Carnegie had bought shares in all the other companies—all but the ET were publicly traded—so he knew what their costs and salaries were, and proceeded to lay out how much lower they were at the ET. Making all allowances for Carnegie’s propensity for exaggeration, and the fallibility of second-hand accounts, something like that surely happened, for the ET, which had yet to produce an ingot, was allotted the same share as Cambria, the largest in the pool. The fact that his first full year’s production barely covered the original 9 percent allocation wouldn’t have bothered Carnegie: he was staking out a position as an agent of disruption. The story also illustrates Carnegie’s lifelong disdain for pools. He was happy to join them, and was vigilant in enforcing them when it was in his temporary interest to do so, and as freely violated them when they were not.
Within twenty years, Carnegie Steel, Inc.—the product of successive reorganizations that consolidated all of Carnegie’s steel-related properties, including the ET, the Lucy Furnace Works, the Union Iron Mills, acquisitions like the Homestead Works, and a host of coke, coal, and ore properties—was the largest steel company in the world, with total production about half that of Great Britain’s and about a quarter of America’s. It was also the most profitable by leagues, and was widely perceived as the market leader. By the 1880s, its structural steel handbooks, which covered beam and section designs, as well as loading and stress tables, were the industry bible. Its great capital resources enabled it to keep on the pressure during good times and bad. As a British scholar put it, “When demand slumped, the firm with the newest equipment—it was often Carnegie’s—found that its losses were least (or those of its rivals most) when it reduced its prices so as to run fully occupied.” With the purchase of the Frick Coke Co., Carnegie Steel enjoyed a dominant position in coke, and its acquisitions of vast Lake Superior ore reserves gave it a nearly overwhelming advantage in high-quality ore.
The rise of Carnegie Steel was not based on any hidden advantage or technical edge. Carnegie was a relatively late entrant to the industry, and all of his American competitors used essentially the same Holley plants as he did. The St. Louis Vulcan Works, for example, was v
irtually a duplicate of the ET; Holley himself once described the ET’s rolling mill as the best in the United States, “[e]xcepting the mill of the Bethlehem Iron Company, as it will be when completed,” which Holley, of course, was just then, in 1878, in the process of completing. The company’s competitive advantage, it appears, was mostly Carnegie—his relentless pressure, his hounding to reduce costs, his instinct to steal any deal to keep his plants full, his insistence on always plowing back earnings into ever-bigger plants, the latest equipment, the best technologies. Other companies went through cycles of rise and decline, as founders got comfortable, shareholders demanded payouts, or good times allowed workers and managers to cruise a bit—as almost the entire British steel industry did after the great rail boom of the 1880s. But for twenty-five years Carnegie never let up.
Although Carnegie held no title, he was clearly the boss: the very ambiguity of his role may have increased his power, for there were no channels or protocols that might limit his access. Until Captain Jones’s death, from a blast furnace accident in 1889, they maintained an active correspondence in which he goaded Jones with Cambria production figures, although the ET almost always outproduced them: the “ET nag is beginning to show in front as usual,” Jones crowed in mid-1881. The correspondence also suggests the degree of involvement Carnegie had in day-to-day affairs. Here is Jones, writing in 1883, for example, as part of an extended exchange on a method for eliminating a step in the rail-making process that had been espoused by Holley:
I tried this week rolling direct from shears but I confess I do not like it, and am sure it will increase our percentage of seconds besides being too severe on the machinery . . . better and cheapest as well as the best plan is to re-heat on my proposed new arrangement I hope to have plans ready in a few weeks to show you what I am aiming at.
Carnegie also insisted on railroad-style cost accounting, with impressive results. Jones’s monthly reports carefully spread labor costs over each product and process, tracked all raw material inputs and percentages of waste and scrap, as well as defective manufactures and returns, uptimes and idling of major plant components, like furnaces and converters. Month-to-month trends and annual comparisons were split out by ton produced, by furnace, by type of ore, by source of the coke, by type of transport. Some reports are clearly the results of special analyses, like an analysis of alternative conversion processes and an 1883 study of metal losses, which was a major bugaboo of Holley’s. The report samples surviving in the archives are often heavily annotated in Carnegie’s swift, elegant hand. He later said that managers hated the reports and it took years to get them right. Carnegie had a fine eye for talent, but he was a high-tension manager, battering his partners with questions on anomalies, or slippages, and especially on quality problems, which he abhorred, writing, for example, that complaints from a railroad were:
. . . 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 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.
Carnegie’s quasi-official role in the early years was as the company’s salesman, a job that he filled superbly. ET production was then almost 100 percent devoted to rails, and Carnegie’s connections among railroaders were both deep and broad. He was also an inveterate haggler, and while he hated to lose a deal on price, he never left money on the table. Price negotiations with John Garrett, the head of the B&O, who was as devoted a haggler as Carnegie, were always battles. In one prolonged negotiation, when Cambria was significantly underbidding the ET, Carnegie stuck with his price, but got the sale by demonstrating that the B&O’s profits from shipping the order would offset the discount from Cambria, which had to ship via the Pennsylvania. (Typically for Carnegie, he was unmoved when the reverse argument was pressed by Henry Frick, who became chairman of Carnegie Bros., the ET’s parent, in 1889: Frick wanted Carnegie to ease up on his constant war against railroad shipping rates, since the roads were his main customers.)
The dual roles as primary owner and chief salesman gave Carnegie the ideal vantage point for tuning production and pricing, and evaluating the profitability of new investment. He understood the subtle absorptions of fixed costs that improve margins as production is pushed further out the curve of the possible. As he put it early in the ET’s life:
Two courses are open to a new concern like ours—1st Stand timidly back, afraid to “break the market” [or] . . . 2nd To make up our minds to offer certain large customers lots at figures which will command orders—For my part I would run the works full next year even if we made but $2 per ton.
Carnegie loved Jones’s devotion to “hard-driving,” or pressing the limits of furnace capacities and constantly striving toward higher temperatures in blast furnaces and converters. The British thought hard-driving was wasteful, since furnace linings had to be replaced more frequently, but Carnegie had the cost figures to back up his strategies. Significantly, hard-driving was most effective with very large blast furnaces, which suited Carnegie’s taste exactly. He must have gnashed his teeth when he could not bid on a major Pennsylvania order in 1878 because the ET had no spare capacity; and there were major plant additions in 1879 (including a massive new blast furnace). Finally, since Carnegie traveled more than anyone else in the company, and was constantly on the lookout for new technologies, he was among the best informed people within the company on technical developments.
Over the years, the reinvestment imperative became a major source of contention between Carnegie and his partners. Carnegie insisted on keeping salaries low, since the partners stood to become wealthy through their shareholdings. (The exception was Bill Jones. He didn’t want stock—he claimed to be a simple man—but felt he deserved to be the highest-paid superintendent in the industry. He asked for $20,000 a year, but said he would settle for $15,000. Carnegie, in a brilliant stroke, gave him $25,000, binding his loyalty for life.) Dividend payouts were also very low, only about 1 percent, a risible amount by nineteenth-century standards. Carnegie himself had no difficulty financing a regal life style, for he owned such huge blocks of his companies, and had many other investments besides. But his partners, although they were well-to-do, did not have nearly the incomes of their peers in less successful companies. There had also been flare-ups over stock valuations when two partners had departed under contentious circumstances. The rules for stock withdrawals were finally standardized only in 1887, with the so-called Iron-Clad Agreement. It provided that a withdrawing partner would get a book-value payout, with larger withdrawals scheduled over a period of years. A partner could also be forced out upon a three-quarters partners’ vote—a provision that obviously did not apply to Carnegie, since he owned more than half the stock.
There was always a double standard for Carnegie and his partners. He was adamant, for example, that they should not have outside business interests, although in the 1880s, he spent half his time in the United Kingdom playing newspaper tycoon. Unlike Rockefeller, Carnegie always displayed an approach-avoidance relation with his enterprises. When he had to, as during his stints with the army railroads or as the Pennsylvania’s western superintendent, he could throw himself into the work. But one suspects it was a massive exercise of will, for his instinct was always to recoil from gritty reality, and from ordinary workers. He usually stayed well removed from Pittsburgh, preferring to manage through written reports and correspondence (he insisted he wasn’t managing, merely expressing opinions). It may have made him more effective. By staying clear of operating responsibilities, he was free to criticize and harass without worrying about possible shortfalls in his own performance. (He was responsible for sales in the early days, of course, but no salesman fears a quota if he has final say on price.) Had he been more involved, with more to account for, he may not have been so obdurately unreasonable, so unwilling to understand how there could be a defective sh
ipment, or budget overruns, or unplanned furnace downtimes. He might have been easier to live with, that is, but a less successful tycoon.
Gould, Back from the Grave
The wise men of Wall Street had seen Jay Gould safely buried with a bloody stake in his heart in 1872. To their shock, just two years later, he walked the earth yet again, suddenly in control of the Union Pacific, one of America’s greatest, if most troubled, roads. Given his lurid record during the Erie Wars and in the Gold Corner, investors worried in public that he would just “steal all [the UP’s] available money . . . and ultimately leave the long bond holders out in the cold.” The New York Times was caustic about “the elevation of Mr. Gould . . . following upon the heels of an infamous career.”
Of all the railroads beaten down by the crash of 1873, the UP may have been laid the lowest. The UP was the transcontinental link from the Atlantic to the Pacific, a cornerstone of the Whig development program rushed through Congress in the darkest days of the Civil War. It was also one of the heroic engineering feats of the age. Muletrains fought through blizzards to haul rails up Rocky Mountain passes. Tunnels of extraordinary length were blasted through solid rock, and spidery bridges flung over nearly bottomless chasms. Workers were killed by Indians, were taken by grizzlies and cougars, and died from falls or from exposure after becoming separated from their party in the trackless wilderness. And yet when the “Golden Spike” linked the UP with the Central Pacific at a point just north of Utah’s Great Salt Lake, in May 1869, the road was within shouting distance of its schedule and budget.
Engineering may have been among the least of its problems. As a creature of Congress, the UP was plagued by politics at every stage of its life. Critical decisions, like choosing the eastern terminus for the line, triggered frenzied lobbying. A core problem was that, in their zeal to protect the public purse, suspicious congressmen riddled the legislation with protective provisions that made the road’s securities unsalable. The promoters, who included Massachusetts senator Oakes Ames and his brother, Oliver, therefore fell back on a common railroad financing device, the independent construction company. Since the road was entitled to collect federal construction subsidies as each section was completed, the construction company could sell its own stocks and bonds and repay investors as the subsidies were earned. But since the same men managed both the construction company and the railroad, there was an almost irresistible opportunity for self-dealing. Perversely, the managers called the construction company the Crédit Mobilier of America, after a well-known French development bank (they liked the cachet). Small-town congressmen naturally smelled foreign influence, and suspicions rose higher when the French bank collapsed amid a noisy scandal of its own in 1867.