And Then There Was Rockefeller . . .
Morgan still had another tycoon to deal with. Gary and the Moore brothers insisted that the combine needed to secure its ore and ore shipping capabilities. The Carnegie holdings were a good start, but the dominant owner of the indispensable Great Lakes ore and related steamship transport was John D. Rockefeller. As Gary later recounted it to Ida Tarbell:
“How are we going to get them?” demanded Morgan.
“You are going to talk to Mr. Rockefeller.”
“I would not think of it.”
“Why?”
“I don’t like him.”
The feeling was reciprocated. Rockefeller had no reason to think highly of financiers. In his experience, they were functionaries, rather like plumbers. If you needed cash to buy a refinery, or make a settlement with Tom Scott, you told them how much, and they scrambled to get it for you. Henry Rogers and William Rockefeller both knew Morgan well, however, and William had once introduced Morgan to his brother. John later recalled:
We had a few pleasant words, but I could see that Mr. Morgan was very much—well, like Mr. Morgan; very haughty, very much inclined to look down on other men. I looked at him. For my part, I have never been able to see why any man should have such a high and mighty feeling about himself.
Allan Nevins comments, quite acutely: “There is a world of meaning in those four words: ‘I looked at him.’”
But there was a deal to be done, so Morgan ate a bit of crow, just as he had with Carnegie. After he had accepted Carnegie’s price for his company, he proposed that Carnegie come to his office to finalize the deal. Carnegie remarked that his house was about as far from Morgan’s office as Morgan’s office was from his house. Morgan took the point and made the call on Carnegie. Essentially the same exchange was repeated with Rockefeller, and Morgan, rather morosely one imagines, came calling upon Rockefeller. Rockefeller treated it as a social call, and when Morgan asked him for a “proposition,” replied that he was no longer active in business, and that his son, John D., Jr., and Frederick Gates handled his investments. Henry Rogers thereupon mediated a trip by young John to Morgan’s office, where Morgan tried some of the “Jupiter” treatment. He left Rockefeller sitting there, without acknowledging his presence, while he completed other business, then turned to him with his thunderous glare and a fierce “Well, what’s your price?” With great aplomb the young man answered, “Mr. Morgan, I think there must be some mistake. I did not come here to sell. I understood you wished to buy.” Rogers intervened with a proposal that Frick be called in to set a price, and a deal was quickly made. Rockefeller Sr. and Rogers were made directors of the new combination, although Rockefeller never attended a meeting. He resigned his seat in 1904, and was replaced by John D., Jr.*
U. S. Steel opened for business on April 1, less than three months after Schwab’s first nighttime meeting at Morgan’s house. At $1.4 billion final capitalization, it was by far the biggest company in history, and in real (disinflated) dollars, would remain the largest merger until the RJR Nabisco deal in 1987. The new entity comprised Carnegie Co., Federal Steel, and National Steel; all the finished steel combines in tubes, tin plate, sheet steel, and wire and nails; a national bridge-construction combine; and both the Rockefeller and Carnegie Lake Superior ore reserves and ore transport. Pulling that many entities together, as well as lining up the three hundred-member investment syndicate in such a short space of time, still stands as one of history’s great feats of investment banking. As Peter Finley Dunne’s Mr. Dooley put it:
Pierpont Morgan calls in wan iv his office boys, th’ prisident iv a national bank, an’ says he, “James,” he says, “take some change out iv th’ damper an’ r-run out an’ buy Europe f’r me,” he says. “I intend to reorganize it an’ put it on a paying basis,” he says. “Call up the Czar an’ th’ Pope an’ th’ Sultan an’ th’ Impror Willum, an’ tell thim we won’t need their savices afther nex’ week,” he says. “Give thim a year’s salary in advance. An’, James,” he says, “ye better put that r-red headed bookkeeper near th’ dure in charge iv the continennt. He doesn’t seem to be doin’ much,” he says.
Schwab was president of the new company, while Gary was chairman of the board and chairman of the executive committee. Schwab’s tenure was not a happy one, and he was gone by 1903. Although he made some progress on rationalization, and made rather larger plant investments than Morgan had hoped, he was constantly at odds with Gary, who was really the boss. Gary made it plain that the purpose of U. S. Steel was to stabilize prices and profitability, not to pursue technocratic Edens. The Conneaut tube plant, of course, was summarily scrapped—why would anyone want to lower tube prices? The price of steel rails was frozen at $28 a ton and remained unchanged for fifteen years. It is hard to point to a single new technology initiative that emerged from U. S. Steel for the next thirty years. The Pennsylvania Railroad, indeed, set up its own laboratories to pursue steel innovations, which were passed on to U. S. Steel as product specifications. The stock opened with a burst of enthusiasm, but traded well under par for most of the 1900s, until wartime and reconstruction opened up a long era of complacent dominance by American steel companies, and by U. S. Steel in particular. Gary and Morgan had brilliantly succeeded in winning their peace, although it occasionally looked like the peace of the tomb.
Assessing Morgan
Pierpont Morgan was the greatest banker of his age, occupying a world stage at the start of the new century much as Nathan and James Rothschild did in the old one. The walruslike figure of Morgan’s later years has provided the cartoon image of the “Banker” ever since. The gruff taciturnity, the direct stare, the resolute focus on facts and numbers, the crusty insistence on sticking by your word, all went to the very essence of banking. Morgan’s personal prestige and his enormous range of connections in global finance made it easier for the British chancellor of the Exchequer, despite xenophobic qualms at the Bank of England, to turn to Morgan when England was suffering its own gold reserve problems in the midst of the Boer War. The dollar would have emerged as the world’s dominant currency without Morgan—by 1915 America was sitting on the world’s largest gold reserve—but Morgan’s reassuring presence at a crucial period during the gradual, invisible, but ineluctable, passing of the financial scepter helped make the process more natural and less painful than it otherwise might have been.
Morgan’s microlevel behavior, however, was often oddly inconsistent with his image. Louis Brandeis was no admirer of Morgan but, unlike many of Morgan’s critics, had a thorough understanding of corporate finance. He once expressed puzzlement, with Morgan predominantly in mind, that bankers were credited with being a “conservative force in the community,” since in his experience they were so often associated with “financial recklessness.”
Brandeis was specifically referring to the New York, New Haven, & Hartford Railroad, which was not only a “Morgan road” but one of Pierpont’s favorite properties—his grandfather had been among the original investors and it had been one of Junius’s first directorships. Pierpont joined the board in 1891, and was its principal banker thereafter. He hand-picked the president in 1903, a Charles Mellen, who had managed the Northern Pacific under the Morgan voting trust; and Morgan strongly supported an aggressive expansion program in New England rail and steamship properties. Brandeis, sometimes as a representative of the public, sometimes on his own, challenged Mellen at every step, charging that the road was excessively indebted and maintained its dividends only through concealed borrowings, which was illegal. After a decade-long fight, it finally became clear that Brandeis had been right all along. Mellen was forced out, and the Morgans had to finance an expensive rescue operation substantially on their own. There is no possible justification or explanation for Morgan’s failure to supervise Mellen. A director might plausibly claim he was relying on the advice of the executive, but the Morgan bank underwrote the road’s securities all those years and made materially inaccurate representations to pu
rchasers, which was either incompetent or fraudulent.
The International Mercantile Marine (IMM) was another fiasco. A standard scholarly account is that it demonstrated “how even a combination of even the world’s most astute bankers and shipping men could be misled in analysis and held powerless to affect their own destiny by the march of economic and political events.” A less charitable reading would be that Morgan, who more or less managed the deal himself, behaved either venally or like a naïve rookie.
Morgan agreed to broker a merger of two American mercantile freight companies, Atlantic Transport and the International Navigation Co. (INC), in 1900. The Morgan bank held some of INC’s bonds, and also, in cooperation with another bank, extended a credit of $11 million to Atlantic Transport to upgrade its fleet. There was an expectation that Congress would approve an operating subsidy to assist the American merchant fleet, but the record is unclear on whether that was an important consideration. At some point, Morgan, INC, and Atlantic Transport agreed that the merged entity would be stronger if it included key British competitors. Preliminary talks were held with Cunard; White Star, a very profitable line; and Leyland, a family firm run by a canny financial operator named John Ellerman. Cunard dropped out, but Morgan proceeded with Leyland and White Star. His preliminary term sheet, for the two American and two British companies, envisioned an all-stock transaction of just under $75 million, including $60 million for the stock purchases, plus initial working capital, fees, and a takeout of the $11 million advance to Atlantic Transport.
Those terms quickly unraveled. The Leyland purchase had been penciled in as a buyout just of Ellerman’s position, which was enough for control. But Ellerman insisted that all shareholders participate equally, and that the purchase be in cash, not stock, raising the price from $3.5 million in stock to $11 million in cash. Then White Star insisted on $32 million instead of Morgan’s projected $24 million, and topped that off with an extra $7 million in cash to reflect their blowout profits in 1901. And so it went. At no point, it seems, did the “Jupiter” of the markets look his clients in the eye and say, “Sorry, gentlemen. This has gotten out of hand.” The term sheet ballooned from $75 million in stock to $115 million of stock plus $50 million in cash, with projected interest and dividend payouts absorbing the lion’s share of very optimistic earnings projections. And the subsidy bill failed to get out of Congress.
With Morgan’s name on the deal, IMM had a boffo initial reception—until investors realized that the company didn’t have a chance. IMM opened for business with an illiquid balance sheet: current liabilities (the obligations that were due within a year) were about 1.5 times current assets. A healthy company would have had perhaps a 2:1 ratio the other way. In addition, it was saddled with almost $64 million in gold bonds and $52 million in preferred. The financial press had warned all along that the very high 1901 shipping earnings were an aberration, and they turned out to be right, leaving the underwriting syndicate to eat some $80 million of unsold paper. IMM also owned the Titanic, which didn’t help, but it was doomed from the start, and was in and out of bankruptcy for the rest of its days.
Why did Morgan do it? Perhaps he had caught the deals fever. IMM has many of the hallmarks of the stretched to the limit leveraged buyouts of the late 1980s; and, indeed, the 1903 “rich man’s panic” on Wall Street has many parallels with the 1989 junk bond crash. Or perhaps he just wanted to recover his $11 million advance to Atlantic Transport. The Morgan bank was not a deposit-taking entity and, unlike a National City or an Equitable Life, didn’t have access to hundreds of millions in deposits or insurance premiums, so an advance of that size was a lot to carry. Since the IMM securities were almost all distributed among his syndicate partners, Morgan’s loss on the underwriting was only $2 million to $3 million, a small enough price perhaps. Neither interpretation is in keeping with the portrait of Morgan as a pillar of conservatism and rectitude.
It in no way diminishes Morgan’s achievements to say that he never transcended his milieu or its assumptions, or seems to have been possessed of a single original insight even in his own field of finance. He had little feel for the country’s political pulse. (See the wonderful comment to Roosevelt upon the announcement of the antitrust challenge to Northern Securities: Morgan visited the White House and told the president, “If we have done anything wrong, send your man to my man and they can fix it up.”) His industrial financings mostly followed the crowd; they were just bigger, because he was Morgan. The one discernible principle from a lifetime of railroad and industrial banking was avoiding “ruinous competition.” Morgan also never understood the need for external regulation after finance capitalism had burst the bonds of the tight family-based networks that prevailed in his father’s day. Later events showed that he had vastly overestimated the integrity and honesty of his business colleagues.
The 1911 “Pujo” investigations attempted to expose the machinations of the “money trust,” which was simply the Morgan network. As Brandeis described it:
J. P. Morgan (or a partner), a director of the New York, New Haven, and Hartford Railroad, causes that company to sell to J. P. Morgan & Co. an issue of bonds. J. P. Morgan & Co. borrow the money with which to pay the bonds from the Guaranty Trust Co., of which Mr. Morgan (or a partner) is a director. J. P. Morgan & Co. sell the bonds to the Penn Mutual Life Insurance Company of which Mr. Morgan (or a partner) is a director. The New Haven spends the proceeds of the bonds in purchasing steel rails from the United States Steel Corporation, of which Mr. Morgan (or a partner) is a director. The United States Steel Corporation spends the proceeds of the rails in purchasing electrical supplies from the General Electric Company, of which Mr. Morgan (or a partner) is a director . . . [and much more in this vein].
But the central claim of the investigations—that the Morgan bank used its power to exploit its clients—was never effectively established. A long list of alleged blue-chip victims assured the committee that they were proud to be Mr. Morgan’s clients, and that their companies were better for it.
Twenty years later, however, the Pecora investigation, in the wake of the 1929 crash, demonstrated that the men of Morgan’s circle had proved themselves disgracefully devoid of ethics or conscience when it came to disposing of the savings of working people. National City Bank’s investment trusts give some of the flavor. The bank routinely bundled bad loans and securities on its books into mutual funds that were sold to retail investors, pumped up the funds’ nominal assets with borrowed money, and engaged in deceitful trading operations to drive up their prices. The same example would be multiplied many times throughout the Wall Street community, and was an important factor in the 1929 crash. Whatever sense of honor such men had in their dealings with each other clearly did not extend beyond their class.
Morgan spent his career working on the canvas his father left him, although on a scale Junius could never have imagined. That he did it so well was a massive achievement in itself, and signally important for his country. Given the remarkable new phenomenon unfurling itself in America, it was Morgan’s very lack of originality, and his solid roots in the world of European banking, that allowed him to play such a crucial mediating role in the immense power shift that was under way.
*Bankers loved America’s dominance of world grain markets and the consequent strength of the greenback, but didn’t seem to connect them to the dirt-cheap freight rates and pell-mell western railroad construction of the previous two decades.
*The puzzling feature of Adams’s Interstate Commerce Association is that the plain language of section 5 of the Interstate Commerce Act prohibits pools. The railroad leadership, it seems, was so convinced of the importance of reaching some kind of rate-stabilizing agreements that they assumed, possibly correctly, that the commissioners would go along with it.
*Republicans had reason to grumble that it was all Carnegie’s fault. Without the disaster at Homestead, they might have held the White House, and foreigners would have had no cause to worry about the American comm
itment to gold.
*Sterling served as the equivalent of gold, much as the dollar did after World War II. So long as the greenback retained a solid parity with sterling, investors would have no reason to undertake the expense and inconvenience of holding gold.
*This purchase, of the Tennessee Coal and Iron Co. from an insolvent brokerage, was later subject of a noisy congressional investigation, and is the most frequently cited instance of taking advantage. Accusations that U. S. Steel virtually stole the company, or masterminded the attack on the brokerage, aren’t supported by the evidence. The steel company may have wanted the property to enhance its control over iron reserves, but Morgan would not have been involved in that level of fine-grained strategizing. The brokerage needed to be saved, and TC&I was its largest asset, so Morgan asked Elbert Gary, the chairman of U. S. Steel, and Frick, who was on its board, to take a look at it. Frick didn’t like the deal, but Gary said he would buy it if the government cleared it in advance.
*Not unlike the modern software industry (although software cycles turn on obsolescence, not scarcity). Although Microsoft has managed to achieve “discipline,” in Morgan’s sense, in personal computer software, there is no clear leader in business software. Software is deceptively easy to enter, but fixed costs can be quite high (for testing, documentation, maintaining cross-platform compatibility, the required stream of new features, etc.), so each stage of product innovation is usually marked by a cycle of cutthroat competition and a nasty shakeout. Computer hardware is already approaching a state of nearly frictionless economic pricing. Even the biggest and most successful companies have no margin for stumbles—vide the swift demise of Compaq.
The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany Page 33