Nonetheless, Carnegie understood the industry’s vast potential appetite for an improved form of iron. Not only did everything in the business move on iron rails, but the cars and the engines were built of iron, as was the machinery that loaded and serviced them, and as were the new bridges that spanned the rivers and chasms of the American West. If there were a cheaper and more durable substance than iron, it would lead to a revolution in the business, not to mention a fortune for those who got in on the ground floor.
In the post–Civil War United States, where growth seemed to have no bounds, it was also understood that the apparently limitless expansion of commerce would naturally be served by railroads. Though Carnegie had been burned by railroad building itself, he understood that an occasional failure could not hold back the expansion of the nation’s rail system into every part of the country where business might be conducted. And if one were to gain a favorable position feeding the appetite for expansion of a good portion of this industry, while assuming none of the accompanying risks . . . well, then, why would one not think of placing steel eggs in steel baskets?
When his talks with Henry Bessemer convinced him that sources of impurity-free iron ore had recently been discovered that would allow the British to begin production of high-grade steel rails for export to the United States, Carnegie made up his mind. He returned to Pittsburgh intent upon building his own steel mill and beating the British to the punch.
He rounded up his brother, Tom, and six other business associates as partners in the new venture, and persuaded Edgar Thomson, the first president of the Pennsylvania Railroad, to lend his name to the new mill. The Edgar Thomson works would be built on Braddock Field, a former battleground of the French and Indian War, conveniently located some twelve miles east of Pittsburgh and adjoining the Monongahela River, as well as a line of the Pennsylvania and Baltimore & Ohio railroads. Carnegie would contribute $250,000 of his own to the new enterprise, with the others rounding out the total capitalization of $700,000. Given that most mills at the time had been launched with one-quarter to one-third as much capital, Carnegie’s announcement caused a major stir in Pittsburgh.
As it turned out, however, he could not have chosen a worse time to begin. A financial panic had begun in Europe in early 1873, causing the collapse of the Vienna stock market and sweeping on through the rest of the major markets on the Continent, until ruin finally swept all the way to London. On September 18, the tide reached the United States, when the banking firm of Jay Cooke, heavily extended in rail construction loans, was forced to close its doors in bankruptcy. The consequences led to panic and sent the United States into its first great depression.
Railroad building, which employed numbers of workers second only to agriculture, had seemed impregnable until that time. More than 35,000 miles of new track had been laid since the end of the Civil War, and the “golden spike” had been driven at Promontory, Utah, in 1869, joining the East and West Coasts by rail at last, igniting the imagination of expansionists and investors everywhere. As a result, Cooke’s firm had funded plans for the building of a second transcontinental railroad, the Northern Pacific, and was heavily invested in several other new lines.
But with the flow of speculators’ funds from Europe abruptly cut off and domestic investors suddenly wary, the bubble of optimism burst. The New York Stock Exchange would close its doors for the first time in history, remaining shuttered for ten days. Of the more than 360 railroad companies in the United States, fully one-quarter declared bankruptcy. Nearly twenty thousand businesses of all types failed, and one-sixth of the nation’s workforce found itself out of work.
The collapse of railroad projects in which Carnegie was involved led his old mentor Thomas Scott to beg his former protégé for loans that would shore him up. Carnegie, however, stood resolute. He had sunk what he had into the construction of the Edgar Thomson Mill, and his loyalty and his capital would reside there. Carnegie would write that spurning Scott’s pleas “gave me more pain than all the financial trials to which I had been subjected up to that time,” but his course was set. The Edgar Thomson Mill was his first priority and its stacks would rise, no matter what.
Despite the fact that Carnegie’s assets were in danger from various suits brought by investors in railway projects that were failing all about him, he was able to convince local bankers in Pittsburgh that he was solvent, and thereby avoided foreclosure on construction loans for the mill. And when high winds caused the collapse of a portion of the Edgar Thomson roof as it was being maneuvered into place, Carnegie managed to secure yet another loan to make up the cost.
The depression actually played into his hands; as he pointed out in an 1877 letter to the plant’s first general manager, William Shinn, the decreased demand for materials and labor caused by the economic downturn resulted in a nearly 25-percent savings over the costs Carnegie had projected. For Carnegie, it was another invaluable business lesson: the best time to expand was when no one else dared to take the risks.
On September 1, 1875, the first steel rails rolled off the line at the Edgar Thomson Mill in Braddock, Pennsylvania, an event overseen by the man Carnegie had chosen as his plant superintendent, Captain Bill Jones, a Civil War hero and legendary steelmaker who had overseen the installation of one of Bessemer’s converters at the rival Cambria Iron works in Johnstown, Pennsylvania, sixty miles to the east. The hiring of General Manager Shinn and Superintendent Jones typified the personnel decisions of Carnegie, who was fond of saying, “There is no labor so cheap as the dearest in the mechanical field.”
For key positions, he hired the best and paid top dollar, though he held all who worked for him strictly accountable, demanding no less dedication and effort from others than from himself. He also preferred to compensate his chief executives with an interest in the company that would supplement a modest salary. For one thing, he had discovered for himself that ownership rather than salary provided the true path to riches. He also understood that making a man a partner bound him to the firm far more effectively than did a handsome salary, which could easily be outbid by a rival concern. While Carnegie may not have pioneered the practice, his widespread use of the technique is much emulated today, though Carnegie would surely be ambivalent about modern schemes to share profits with rank-and-file workers.
In addition to the maintenance of a loyal and fiercely hardworking chain of command, Carnegie’s success can be attributed to another lesson he had learned on the way up: the value of meticulous cost accounting. This was likely the most valuable legacy from his days working under Edgar Thomson at the Pennsylvania Railroad. After forming the Cyclops/Union Iron Works, Carnegie revolutionized that industry’s practice by applying the same standards he had learned in freight hauling to the foundry’s production line.
As a result, when Union Iron or Keystone Bridge submitted a bid on a project, there was no guesswork involved. If Carnegie chose to undercut a rival’s figure, he did so with absolute confidence that he could deliver what he promised and make a profit, for his was the only firm in the field with near-fanatical devotion to cost accounting. As Charles Schwab would later put it, “Carnegie never wanted to know the profits. He always wanted to know the costs.”
His insistence on careful recordkeeping extended beyond data on material in versus product out. To a degree that had never been practiced before, Carnegie demanded a log be kept comparing the productivity of individual workmen, supervisors, and even entire shifts. Those who excelled could expect to advance, and even to become partners in a Carnegie enterprise. “If he can win the race, he is our racehorse,” as Carnegie put it. “If not he goes to the cart.”
Even his key employees were not spared Carnegie’s heavy-handed management style. To almost every positive report out of Edgar Thomson, Carnegie’s response was “Good, but let us do better.” Despite the storied efficiency at the Thomson works, Captain Jones was the recipient of an endless series of Carnegie memoranda urging him to find ways to cut labor costs until Jones was mo
ved to write an angry reply: “I must earnestly say let us leave good enough alone. Don’t think of any further reductions. . . . Our labor is the cheapest in the country.”
Carnegie’s approach may seem ruthless, but the idea of treating the complex process of manufacturing like a giant machine with component parts that must be constantly retooled seemed to him completely natural. It was an approach that reflected his faith in Spencer’s doctrine of ever-evolving struggle, and one that holds in most industry to this day.
Efficiency, however, was the least of Carnegie’s worries as he began his career as a steelmaker. The more important goal was to find customers for his product. By 1876, nearly half of all United States railroads had filed for, or were nearing, bankruptcy, and the price for finished rails had dropped nearly in half. Furthermore, his chief intended customer at the Pennsylvania Railroad, Edgar Thomson, after whom the new mill had been named, had died, and his relations with Thomas Scott, his other contact from the railroad days, had been cut.
Still, Carnegie persevered. While other manufacturers were charging seventy dollars a ton for their rails, Carnegie offered his for sixty-five dollars, following another of his well-known dictums: “Cut the prices, scoop the market . . . watch the costs and the profits will take care of themselves.” Also, the depression once again proved to be a boon to Carnegie. The price of raw materials fell so precipitously that Carnegie would write to Junius Morgan in the summer of 1876 boasting that he was able to produce his rails for less than fifty dollars.
Still, the effects of the depression lingered, and business opportunities, especially in the railroad industry, were limited. As a result, the ever-resourceful Carnegie, who served as principal salesman for his iron and steel interests, pursued a wide variety of projects. In 1876 he landed a contract for Keystone Bridge and Union Mills with the Philadelphia Centennial Exposition, which agreed to construct half of its facilities out of iron and steel; and in 1878 he signed a contract to supply all the steel for the building of the Brooklyn Bridge. Not long after, he reached an agreement to supply the steel used in the building of the New York City elevated railway.
All along, Carnegie had been resistant to forming cost-fixing alliances with other manufacturers as a way out of his difficulties—not because he was above such manipulation, but because he was confident that he could make his rails more cheaply than anyone else. Invited in 1877 to join such a “pool” by the owners of the other leading area firms, including Pennsylvania Steel, Jones & Laughlin, Scranton Iron & Steel, Bethlehem Steel, and Cambria Iron, Carnegie balked when he deemed his proposed share to be too small. Were they actually offering him 9 percent of the total pie when he could make steel more efficiently than any of them, he asked in disbelief, pounding the table around which his fellow titans sat. Preposterous! What did he need with them? With that, he drew up his five-foot-three-inch frame in indignation, and walked out of the meeting.
Indignation aside, however, Carnegie was a pragmatist. So it was not long after he had stormed out of that meeting that he approached his peers at both Cambria and Bethlehem Steel to form such alliances, albeit at terms more favorable to himself.
In any case, and despite the difficulties he encountered, Carnegie’s new enterprise proved a success. The Edgar Thomson works turned a profit of $11,000 in its very first month of operation, a feat that Carnegie was proud of pointing to as unique in the annals of modern manufacturing. If anyone had ever done better, in fact, they were apparently keeping it to themselves; by 1878, profits at Edgar Thomson had risen to more than $400,000, against the company’s $1.25 million total capitalization.
“Where is there such a business!” Carnegie crowed to Shinn, and to others he expressed the confidence that he had truly arrived. His iron and steel interests were so solidly established, he said, that he could easily take a leave of months with no fear of ill effects. And with that in mind, he set out on an eight-month voyage around the world. The trip took Carnegie and his mother to Japan, China, Ceylon, India, and Egypt, among other exotic locales, and inspired him to undertake his first significant literary project, a traveler’s memoir that blended his experiences with philosophical reflections prompted by the trip. It was more than closet scribbling; Scribner’s agreed to publish the volume in 1884, under the title Round the World.
As to the nature of the philosophical ruminations, Carnegie had found during his travels nothing but support for his conviction that survival of the fittest was not only the operating principle upon which the world order depended, but that Darwinism justified every action he would take in his own business life. The measuring stick was calibrated in dollars, and every tick that Carnegie marked off was a sign of progress toward the greater good.
Of course, Carnegie did not find it easy to impute an equal capacity for fostering such growth to others, certainly not to his competitors or even to his own employees. Shinn, for one, had cabled Carnegie during his absence, seeking a raise as well as a change in title, from general manager to chairman, this in recognition of what most would see as a four-year, remarkably successful stewardship of a major manufacturing enterprise. For Carnegie, favor was to be bestowed, not sought, and he was always wary of any seeming power grab by a subordinate. When he stalled, Shinn began negotiations with a competing steelmaking firm in St. Louis.
Carnegie exploded when he discovered what Shinn was up to. He demanded his manager’s resignation on the spot, and Shinn complied. Carnegie appointed his brother, Tom, as chairman of the company and, in order to secure the loyalty of his remaining linchpin employee, raised the salary of Captain Jones (a down-to-earth sort who had always steadfastly refused any offer of partnership in the company) to $25,000 a year, pointing out that the figure was the same as that of the President of the United States. It was a staggering sum for a “working man,” to be sure, but Carnegie had it to spend: profits at Edgar Thomson had risen to $512,000 in 1879 and to $1,550,000 by 1880.
With profits soaring, his brother as chairman, and Jones’s loyalty effectively purchased, Carnegie settled into the pursuit of a long-cherished goal, that of besting the steel production of his most despised rivals, Cambria, Pennsylvania Steel, and Bethlehem Steel. Since labor costs had already been cut to the bone and efficiency was at the apparent maximum, prospects for Carnegie’s desire seemed dim, until Captain Jones hit upon a solution that would have a profound effect, not only on Edgar Thomson, but on United States manufacturing practices in general.
Until that time, men at Edgar Thomson, as elsewhere, worked one of two twelve-hour shifts. Jones, however, had watched closely as the efficiency measures put into place reached a point of diminishing returns. After months of cajoling and pushing, Jones, a hands-on manager, determined that it was simply impossible for human beings to expend maximum effort for so long a period, and came up with a suggestion. They could simply divide the workday into three shifts rather than two.
Men could maintain almost any pace for eight hours, Jones reasoned, and after sixteen hours of rest they would return refreshed, ready for more of anything. The company would thereby gain a greatly increased output while expending the very same amount on wages. Jones’s elegant notion was not only wildly popular with the men, it proved to be as effective in practice as it seemed on paper, and the eight-hour workday was born to steel.
At the same time, Carnegie continued his quest to cut costs, focusing now on the raw materials demanded by the steelmaking process. After iron ore, the next indispensable substance for the production of steel was coke, a substance derived from baking bituminous coal in conical-shaped ovens resembling beehives, to drive off impurities and yield a hot-burning, nearly smokeless cake (the term is a derivation of “coal cake”) of almost pure carbon. When mixed with iron ore and heated, the coke combined with impurities in the ore to form “slag,” and leave behind a pure molten iron. It required nearly one ton of coke in order to smelt an equal amount of iron, though the purer the coke, the more efficient the process.
A steady supply of high
-grade coke at a consistent price was thus essential to the efficient production of iron and steel and had led Carnegie to buy his own coke ovens in the nearby Connellsville coal region in the early 1870s. He had also brought his cousin George “Dod” Lauder, a trained coaling engineer, across from Dunfermline to manage them. By the early 1880s, however, the demands of Carnegie’s mills had far outstripped the capacity of his coke ovens, and besides, their limited capacity meant that Carnegie could actually buy cheaper coke from competing operators.
As a result, Carnegie decided to sell his own ovens and buy all his coke on the open market. To that end, he dispatched his brother, Tom, to the Connellsville coal region, about forty miles southeast of Pittsburgh, to meet with the principal manufacturer of coke in the area, Henry Clay Frick. The object of Tom’s trip was to see if Frick might be interested in buying the Carnegie ovens. Although Carnegie’s intention was simply to reduce his business expenditures, it was a decision that would one day exact more from his purse and his person than he could possibly have dreamed.
5
THE KING OF COKE
THOUGH HE HAD NOT STARTED OUT as a penniless immigrant, Henry Frick was not a stranger to hard times. Born in 1849, he was the second son of John W. Frick, a failed painter and an only slightly more successful farmer, whose forebears had emigrated from Switzerland to the colonies in the early 1700s. The younger Frick, named after the Kentucky senator Henry Clay, who spent much of his late career trying to broker a compromise between North and South on the issue of slavery, grew up on the family farm near Mount Pleasant, just north of Connellsville, often falling prey to one illness or another, including typhoid fever, and working hard just to keep himself fed and clothed.
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