American Colossus: The Triumph of Capitalism, 1865-1900
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His reputation spread. Thomas Scott, a division superintendent of the Pennsylvania Railroad, offered Carnegie a job as his personal assistant. He would make thirty-five dollars a month and receive the best business education America had to offer, Scott said. He would learn accounting, marketing, scheduling, inventory control, and personnel management. Carnegie absorbed the lessons as fast as they came and missed no opportunity to expand his responsibilities. One day a derailment fouled traffic throughout western Pennsylvania. Scott was away, but Carnegie had watched him deal with similar tangles and thought he could handle it, despite the danger to persons and property if he put trains on the wrong tracks. “Death or Westminster,” he told himself. “I knew it was dismissal, disgrace, perhaps criminal punishment for me if I erred. On the other hand, I could bring in the wearied freight-train men who had lain out all night. I could set everything in motion. I knew I could.” And he did. He forged Scott’s signature on the orders he sent up and down the line; before long, traffic was flowing normally.
Scott arrived to discover what his young assistant had done. “He looked in my face for a second. I scarcely dared look in his. I did not know what was going to happen. He did not say one word.” But neither did he rescind Carnegie’s orders, and soon he was boasting to his colleagues about him. “Do you know what that little white-haired Scotch devil of mine did?” he said. “I’m blamed if he didn’t run every train in the division on my name without the slightest authority.” An associate asked if Carnegie had run them right. “Oh, yes, all right,” Scott answered.19
Carnegie’s star rose with Scott’s during the 1850s, till in 1859 he took over Scott’s old post as superintendent of the western division. That same year saw the oil rush to the region north of Pittsburgh. By now Carnegie was a capitalist in his own right, having followed Scott and Scott’s lieutenant Frank Thomson into a partnership with a maker of sleeping cars. The deal entailed what a later generation would deem an egregious conflict of interest, as the principal purchaser of the cars was the Penn. Even by the standards of that day, it made Scott and Thomson nervous, and so they put their shares in Carnegie’s name lest someone have to take a fall. But no one complained, and within two years Carnegie’s income from the venture was three times his salary from the Penn. “Blessed be the man who invented sleep,” he said.20
Upon the discovery of oil, Carnegie determined to invest in this new industry. “Everyone was in high glee,” he said of a visit to the oil region. “Fortunes were supposedly within reach; everything was booming.” Carnegie invested some of his sleeping car profits in oil properties, and while several hundred thousand other men his age marched off to the Civil War, he hired a substitute and counted his money. An old friend visited him in 1863 and asked how he was doing. “Oh, Tom, I’m rich! I’m rich!” he replied. His tax return for 1863 showed just how rich: Carnegie made nearly $48,000 that year, of which only $2,400 came from his day job on the Penn.21
Carnegie thereupon decided to become a full-time capitalist. “Thenceforth I never worked for a salary,” he said. “A man must necessarily occupy a narrow field who is at the beck and call of others. Even if he becomes president of a great corporation he is hardly his own master, unless he hold control of the stock. The ablest presidents are hampered by boards of directors and shareholders, who can know but little of the business.”22
Seeking new fields for investment, Carnegie identified iron and steel as a likely choice. As the war ended and the postwar railroad boom began, thousands of tons of ferrous metal were being consumed as fast as the smelters and furnaces could produce them. Carnegie’s initial venture was with a company that built iron bridges, including the Eads Bridge at St. Louis, the first span across the Father of Waters below the mouth of the Missouri. But before long he had moved upstream (in the business sense), into production. He organized the Union Iron Works, which became an early producer of steel rails for trains, replacing the iron rails that bent and failed under heavy usage.
The state of the art in steel production was the Bessemer process, named for English foundryman Henry Bessemer, who discovered that blasting air through molten iron dramatically improved alloying efficiency. Carnegie knew of the Bessemer process but didn’t appreciate its potential till he visited the mother plant in Derby, England. Nor did he recognize his own potential till then. Carnegie had been a conventional capitalist to this point in his career, investing here and there, without passion or overall plan. But now, staring at the incandescent liquid pouring from Bessemer’s furnace, he discovered his calling. “I believe the true road to preeminent success in any line is to make yourself master in that line,” he later wrote. “I have no faith in the policy of scattering one’s resources, and in my experience I have rarely if ever met a man who achieved preeminence in money-making—certainly never one in manufacturing—who was interested in many concerns. The men who have succeeded are men who have chosen one line and stuck to it.” Carnegie decided that steel was his line, and he stuck to it the rest of his career. “My advice to young men would be not only to concentrate their whole time and attention on the one business in life in which they engage, but to put every dollar of their capital into it.” This was precisely what Carnegie did. On another occasion he summarized his philosophy more prosaically: “Put all your eggs in one basket and then watch that basket.”23
MORGAN, ROCKEFELLER, AND CARNEGIE were too busy making money to worry about the political reconstruction of the Union and the moral and constitutional issues it raised. But they couldn’t ignore an event that, in its own way, marked the end of the era of the Civil War.
Jay Cooke was a Union stalwart no less valuable to the Northern cause than Ulysses Grant or William Sherman, but like Morgan, Rockefeller, and Carnegie, he confined his fighting to the economic front. At a time when bonds were something only rich folks bought, Cooke sent small armies of agents across the Northern countryside selling Union war bonds to farmers and mechanics, lawyers and merchants, wives and widows, and aunts and orphans. In all he sold more than $1 billion of bonds, and it was largely because of this that the greenbacks the Union government printed during the war didn’t depreciate the way the Confederate currency did. Cooke grew rich in the bargain, earning around $1 million, but those who thought seriously about the subject accounted his services cheap at that price (which amounted to a commission of one-tenth of 1 percent).24
After the war Cooke devoted that same promotional zeal to underwriting railroads. He hawked $100 million in bonds for the Northern Pacific, a prospective second transcontinental, particularly targeting European investors whose knowledge of American geography was acquired chiefly from Cooke’s agents. Duluth, Minnesota, at the eastern end of the line, was dubbed “the Zenith City of the Unsalted Seas.” The Great Plains were an agricultural wonderland requiring only railroad access to become the breadbasket of the world. The Pacific Northwest, where the road would end, was luscious beyond imagination. “There is nothing on the American continent equal to it. Such timber—such soil—such orchards—such fish—such climate—such coal—such harbors—such rivers.… The empire of the Pacific Coast is to be enthroned on Puget Sound. Nothing can prevent this.… There is no end to the possibilities of wealth here.” The rumors were even more marvelous than the printed statements. Monkeys were said to frolic in the orange groves that flanked Puget Sound. When skeptics made sport of the exaggerations, deriding the Northwest as “Jay Cooke’s Banana Belt,” he didn’t bother to rebut.25
The campaign to unload the bonds might have succeeded had peace not broken out in Europe unexpectedly. The Franco-Prussian War ended sooner than anyone but Bismarck anticipated, causing world grain prices to plunge and, with them, the prospects of a new railroad to the wheat fields of the northern Plains. Then a scandal regarding the finances of the Union Pacific surfaced, prompting a federal investigation (of which more in chapter 12) and blackening the bonds of all railroads. Not even the irrepressible Cooke could overcome this double blow, and his Northern Pacific issu
e went begging. So far had he extended himself on the road that the failure sealed his business fate. In September 1873, in the anniversary week of Jay Gould’s Black Friday, Cooke announced that he couldn’t meet his obligations and would have to close his doors.26
The news staggered Wall Street. “Dread seemed to take possession of the multitude,” the New York Tribune reported. Cooke had been a pillar of the financial community; if he could fall, anyone could. A correspondent for the Nation observed, “Great crowds of men rushed to and fro trying to get rid of their property, almost begging people to take it from them at any price.” Banks trembled and collapsed; brokers issued frantic margin calls before going under themselves. One Wall Streeter called the debacle the “worst disaster since the Black Death.” The governors of the stock exchange shut the system down, causing the panic to spread to Boston, Philadelphia, and even Chicago. President Grant traveled to New York, where the bankers and brokers pleaded with him to bolster the banking system by an infusion of federal cash. Grant demurred on constitutional grounds but agreed to an emergency buyback of government bonds, which had a similar, though insufficient, effect.27
The panic revealed the rickety nature of corporate America. Leland Stanford’s railroad, it turned out, hadn’t been the only company to sacrifice quality to speed in its pursuit of profit; the temptation had grown irresistible since the Civil War first stirred the waters of speculation. The failure of the financial system, starting with Cooke & Company, caused huge sections of the capitalist structure to collapse. Thousands of firms—railroads, manufacturers, merchant houses, commodity traders, law and accounting offices—went under, leaving the survivors to count their blessings and reckon that the fat days of the Civil War were finally over.
AS ALWAYS, THOUGH, some people thrived on the bust, it being a tautology that for every seller there is a buyer. Jay Gould, by now recovered from the lawsuits, if not the scandal, of Black Friday and from the shocking murder—by a rival in love—of partner Jim Fisk, swooped in and snatched up a number of bargains, especially in railroads. Cornelius Vanderbilt renovated the New York Central’s grand depot at Forty-second Street and Park Avenue in Manhattan with construction laborers desperate for work for any wage.
But the big winner was J. P. Morgan. Though a banker, Morgan was also a student of capitalism. When he loaned money, he insisted on knowing his borrowers. As these were typically corporations, he learned a great deal about various facets of American business. He learned, for example, that the railroad industry was badly overbuilt, with too many lines chasing too little traffic. This was what made the industry so vulnerable to bond failures like that which claimed Jay Cooke and touched off the Panic of 1873. In the wake of the panic, Morgan conceived a plan to restructure the industry—to eliminate superfluous lines and curtail competition.
He tested his plan in minor ways until a larger opportunity arose, upon the 1877 death of Cornelius Vanderbilt. To the astonishment of the financial world, Vanderbilt left almost his entire fortune to his son William, whom the Commodore had often and publicly castigated as a dolt. The younger Vanderbilt immortalized himself by declaring, in response to a question whether the public interest ought to be considered in corporate decisions, “The public be damned. I am working for my stockholders.” (In the retelling, Vanderbilt’s second sentence was typically omitted.) William decided he owned more of the New York Central than he needed, and he turned to Morgan to unload a quarter million shares.28
Morgan’s fee in the transaction was $3 million, but his more important compensation was a place on the Central’s board of directors, as the representative of British investors to whom he sold large blocs of the shares. This became Morgan’s modus operandi in similar deals, and it was a strategy that paid off handsomely in information and influence. As director of any single company, Morgan gained privileged access to intelligence about that company; as director of multiple companies he multiplied his intelligence many-fold. Soon he knew more about the railroad industry than anyone else in the country. And because railroads touched nearly every other industry, he learned more about the economy as a whole than anyone else. His imprimatur became essential for mergers and acquisitions; his disapproval could kill otherwise promising deals. When competing rail lines, and eventually competing firms in other industries, came into destructive conflict, Morgan stepped in as arbiter and peacemaker.29
He played both roles—arbiter and peacemaker—in a clash between the New York Central and the Pennsylvania Railroad. The Central started the conflict by commencing a new line from Philadelphia to Pittsburgh, in the heart of Penn country. Andrew Carnegie, John Rockefeller, and other shippers applauded the increased competition for their business, but the directors of the Penn took it seriously amiss. They struck back with a foray into the Central’s home territory, building a line up the Hudson. As it happened, the new road passed near Morgan’s summer home, and the blasting disturbed his vacations, while the proximity of the unwashed workforce made him worry for his children.
Morgan decided the Penn–Central battle had to cease. He summoned two principals of the Penn, George Roberts and Frank Thomson, to join him and fellow Central director Chauncey Depew aboard Morgan’s steam yacht, the Corsair. Depew, one of the great talkers of the era, harangued Roberts and Thomson on the folly of the Penn’s offensive into New York; they reminded him and Morgan that the Central had invited its troubles by invading their turf. Depew suggested a truce and reciprocal retreats. Thomson, softened by Morgan’s hospitality, consented, but Roberts resisted. He continued to resist as the Corsair passed the Palisades. He was still resisting when the craft had to turn around below West Point. His boycott held as the boat approached its Jersey City slip. Morgan directed the skipper to keep going—past the Battery, past Ellis Island, all the way to Sandy Hook. Roberts remained obdurate all afternoon; only when the boat was tying up that evening did he consent to withdraw the Penn’s construction gangs.30
The “Corsair compact” provoked relief and outrage. Other railroad men were relieved, hoping that what Morgan had done to rescue the Penn and the Central from their ruinous competition could be done to save themselves similarly from themselves. Shippers and advocates of the public interest were outraged that Morgan could so blithely conspire in this blatant attempt to foster monopoly.
Both emotions—the relief and the outrage—intensified when Morgan convened a meeting of the foremost railroad association at his Murray Hill house in Manhattan. Over Morgan’s food and wine and amid the smoke of his cigars, the railroad magnates heard their host appeal to their sense of self-preservation. “The purpose of this meeting is to cause the members of this association to no longer take the law into their own hands when they suspect they have been wronged, as has been too much the custom heretofore,” Morgan explained. “This is not elsewhere customary in civilized communities, and no good reason exists why such a practice should continue among railroads.”
The meeting wasn’t an entire success. Some of the barons preferred their chances in the field. Jay Gould bolted Morgan’s house and convened a counter-session of Western railroaders who thought Morgan unfairly favored the East. Yet Morgan got enough from the remaining presidents to support the lead in the next day’s paper: “The New York bankers triumph.”31
AS JOHN ROCKEFELLER’S refining costs fell, his price advantage over his rivals increased, allowing him to expand his market share. And as his market share expanded, he gained leverage both over the firms that supplied him his oil and over the companies that carried away his refined products. By the late 1860s Rockefeller was one of the largest shippers in Ohio, and his business meant a great deal to the railroads that connected the Great Lakes to the Atlantic. Jay Gould appreciated the implications, and during the same period when he was bulling gold to move wheat, he offered Rockefeller a rebate on oil shipped through the Erie system. Rockefeller liked the idea so much he accepted Gould’s offer and applied the principle to other roads. Rockefeller approached the Lake Shore Railroad, an Er
ie competitor, and promised to give it a huge amount of business for the time—sixty carloads of refined oil products per day—in exchange for a discount. Because railroads, as Gould explained more than once to Ulysses Grant, chronically suffered from seasonal swings in demand for transport, the guarantee of a Rockefeller trainload per day, season in and season out, was worth a lot of money. Rockefeller told the Lake Shore just how much it was worth: 75¢ per barrel, deducted from the posted price of $2.40. The Lake Shore agreed.
Both parties took pains to keep the arrangement secret. The Lake Shore didn’t want other shippers to know what a discount it was giving Rockefeller; they might demand the same for themselves. Rockefeller wasn’t eager to reveal the cost structure of his business lest his competitors gain useful intelligence and his customers discover how large his profits were. Moreover, there was something unseemly about this kind of discount. Under English common law certain transport firms had long been classed as “common carriers” and obliged to treat all shippers on equal terms. The concept had crossed the Atlantic and informed American practice if not always American law. Whether the concept applied to the new technology of railroads was a much debated issue. Not surprisingly, those shippers who could command discounts contended that it didn’t apply and shouldn’t; those with less market power held that it did and should.
Rockefeller saw nothing wrong with the rebates. Large customers almost always got better prices than small. “Who can buy beef the cheapest—the housewife for her family, the steward for a club or hotel, or the commissary for an army?” he later asked rhetorically. “Who is entitled to better rebates from a railroad, those who give it 5000 barrels a day, or those who give 500 barrels—or 50 barrels?” In fact, Rockefeller believed it would have been unjust for him to have been charged the same rate as other shippers. His trainloads of oil were much cheaper for the Lake Shore to handle, per unit volume, than the carload shipments of his competitors. If he didn’t claim some of that cost saving, he would be subsidizing his competitors’ inefficiency—a concept that offended both his business sense and his moral sensibility. Nor was the arrangement without risk to the Rockefeller group. He committed to ship sixty carloads whether the demand existed for that quantity or not. As for the secrecy surrounding the rebates, this was simply prudent business practice. “These arrangements were not, except by the academic, expected to be published, any more than the general of an army’s plans are published to enable the enemy to defeat him.”32