by Jean Strouse
Henry Adams, who felt more at home in the twelfth century than in the twentieth, did not share Depew’s centennial triumphalism. After touring the 1900 Paris World’s Fair, he genuflected in sardonic awe before the power of technology: “As he grew accustomed to the great gallery of machines,” wrote Adams of himself in “The Dynamo and the Virgin,” “he began to feel the forty-foot dynamos as a moral force, much as the early Christians felt the Cross. The planet itself seemed less impressive, in its old-fashioned, deliberate, annual or daily revolution, than this huge wheel, revolving within arm’s length at some vertiginous speed, and barely murmuring,—scarcely humming an audible warning to stand a hair’s breadth further for respect of power,—while it would not wake the baby lying close against its frame. Before the end, one began to pray to it; inherited instinct taught the natural expression of man before silent and infinite force.”
Adams then compared this “occult mechanism” for the conversion of motion into energy to an older and higher power: at the Louvre and at Chartres, “the force of the Virgin” was “the highest energy ever known to man, the creator of four-fifths of his noblest art, exercising vastly more attraction over the human mind than all the steam-engines and dynamos ever dreamed of.… All the steam in the world could not, like the Virgin, build Chartres.”
Unlike Adams, Morgan experienced no moral shock at the force of the new machine. On the contrary, his own energies had for years been helping to drive the industrial dynamo. What little he said about the changes he was setting in motion contained no modernist note of irony or ambiguity and no question about their ultimate meaning. If he perceived conflicts beneath the surface of life at the beginning of the new century, he did not seem to find them irreconcilable. He was subsidizing commerce and art, the modern and the medieval, railroads and Rainsford, the ideas of Darwin (at the Museum of Natural History) and the idea of God.
He left no reflections on the state of the union in 1900, nor on the death of Queen Victoria in January 1901. She had begun her reign the year he was born, and had ruled over the world he knew, as monarch and metaphor, all his life. H. G. Wells said she had sat on England like a great paperweight, and after her death things blew all over the place.
Political conservatives, including Morgan, were relieved to see McKinley reelected in November 1900, with 51.7 percent of the vote. William Jennings Bryan had run again on a Democratic/Populist ticket, but did less well (45.5 percent) than he had four years earlier: a Prohibition Party candidate and Eugene Debs, running as a Social Democrat, took a few points off the Bryan vote. Morgan was not sure what to make of McKinley’s Vice President, the reform-minded young Governor of New York, Theodore Roosevelt. The Republican insider Mark Hanna had warned the party’s nominating convention, “Don’t any of you realize there’s only one life between this madman and the Presidency?”
From London early in 1901, Clinton Dawkins sketched for Alfred Milner in South Africa a picture of his employer that surpassed Junius Morgan’s dreams. “Old Pierpont Morgan and the house in the U.S. occupy a position immensely more predominant than Rothschilds in Europe,” Dawkins reported. The New York and London firms combined “probably do not fall very far short of the Rothschilds in capital, are immensely more expansive and active, and are in with the great progressive undertakings of the modern world.” The next twenty years should “see the Rothschilds thrown into the background, and the Morgan group supreme,” but Dawkins thought the head of it all must finally be winding down: “Old Pierpont Morgan is well over 60, and no human machine can resist the work he is doing much longer.”
Dawkins radically underestimated the force still left in the aging Morgan machine. Visiting New York six months later, he took more of an insider’s view: “This is a place where things ‘hum,’ ” he wrote, “and they have been humming a good deal … since I have been over here.… [I]t is extremely interesting to find oneself in the very heart of Wall Street excitement and combinations, and to note the prodigious amount of nervous excitement and energy the Americans throw into their work.… Few of them live through it to advanced years except physical and intellectual giants like Morgan who has something Titanic about him when he really gets to work.”
Charles Coster, Morgan’s master of detail, did not live through it. He collapsed with pneumonia and died in March of 1900, at forty-seven. The New York Times blamed his early death on a workload “far heavier than any one man ought to bear.” John Moody echoed Dawkins in noting how many Morgan partners “succumbed to the gigantic, nerve-wracking business and pressure of the Morgan methods and the strain involved in the care of the railroad capital of America.” Only “ ‘Jupiter’ Morgan” himself managed to “come through that soul-crushing mill of business, retaining his health, vigor, and energy.”
James J. Hill, head of the Great Northern Railway, feared that Coster’s death would leave the railroad end of Morgan’s business “unprotected.” Morgan wasted no time replacing the partner he most relied on: at Coster’s funeral he persuaded an astute railroad lawyer named Charles Steele to join the firm.
Thinning white hair, occasional trouble hearing, and use of a silver-tipped mahogany walking stick were the chief signs of Morgan’s advancing years. Dawkins described his senior partner’s face as “delightful in spite of his beastly nose; it is so lit up with intelligence and quickness.” The Markoes’ daughter recalled that when “the Commodore” entered a room “you felt something electric: he wasn’t a terribly large man but he had a simply tremendous effect—he was the king. He was it.” The bishop of Massachusetts said that a visit from Morgan left him feeling “as if a gale had blown through the house.”
The gale that blew through the American economy early in 1901 was the creation of U.S. Steel. Financial historians nine decades later called it “the deal of the century.” The century was three months old.
Somewhat to the surprise of the financial community, industrial securities had come through the depression of the nineties in better shape than railroad stocks, and several of the biggest corporations had suffered least. As business confidence picked up in 1897–98, that performance helped persuade investors to venture into the market for industrial stocks and bonds. It helped persuade Morgan as well. His firm had handled just a few non-railroad issues in the past—for the Atlantic Cable, the Illinois & St. Louis Bridge, James Scrymser’s Mexican Telegraph Co., a French company trying to build a canal across Panama—and had not played a major role in the mergers of the early nineties. Morgan had just managed to recoup his loan to National Cordage, the overextended “rope trust,” before its second failure, but had been more involved in the organization of General Electric, which used the long contraction to cut costs and broaden operations, and emerged at the end of the decade strong, diverse, and profitable.*
Enforcement of the Sherman Antitrust Act hit a “low water mark” during McKinley’s first term. In E. C. Knight and Hopkins v. U.S., the Supreme Court created the impression—short-lived, as it turned out—that the Sherman Act would not be applied to mergers among local manufacturing concerns, since the government had failed to show that they restrained interstate commerce. These judicial decisions, combined with a surge in economic activity, the surprisingly strong performance of industrial securities during the depression, and Wall Street’s sky’s-the-limit mood, created a tidal wave of industrial combinations between 1897 and 1904. Virtually overnight, in the most intense merger activity in American history, 4,277 firms consolidated into 257. The hundred largest concerns quadrupled in size and took control of 40 percent of the country’s industrial capital. “Every conceivable line of manufacturing had its trust,” wrote the financial historian Arthur Stone Dewing—“conservative bankers, shrewd business men, and doctrinaire economists became infected with the virus of large-scale production. People condemned the trusts one moment and bought their securities the next. It was the harvest time of promoters.”
Steel, which had succeeded railroads as the country’s most important industry, seemed t
o Morgan a natural next step. Even in the context of the long-term postwar expansion, American steel productivity had been phenomenal. World output rose from roughly half a million tons in 1870 to almost 28 million in 1900—a 56-fold increase. U.S. output grew from 22,000 tons in 1867 to 11.4 million by 1900, increasing 520-fold. The new machinery and production processes that made this spectacular growth possible fueled competition as well, and in the boom that followed the depression of the nineties the steel industry was faced with overcapacity, price cuts, buccaneer profiteering, hostile takeovers, and speculative raids—all familiar to Morgan from the railroad wars.
Andrew Carnegie remained the uncontested sovereign in steel. He had combined his operations into the Carnegie Steel Company, Ltd., in 1892, capitalized at $25 million, although in fact it was worth far more; three years later he acquired exclusive rights to the richest iron-ore deposits in the country—the Mesabi Range in Minnesota—from John D. Rockefeller, whom he referred to as “my fellow millionaire.”† Carnegie Steel made money throughout the depression, and its earnings doubled yearly as the economy recovered, from $11 million in 1898 to $21 million in 1899 to $40 million in 1900.
Carnegie’s personal control of this gigantic business was a rarity by the nineties, when most large corporations had outgrown the ability of their founders to finance and run them. Converting private companies into publicly held corporations had helped establish the market for industrial securities, and also a class of professional managers. Unlike the new corporate officers, Carnegie could plow his earnings back into the company rather than pay them out as dividends to investors.
Even though he dominated the industry from Pittsburgh, there were successful steelmakers in other parts of the country, and the merger mania of the late nineties brought new contenders into the field. Among the most flamboyant were the Chicago brothers James and William Moore, and the notorious gambler John W. Gates, a burly man with a bullet-shaped head who allegedly once bet $1,000 on which of two raindrops would reach the bottom of a windowpane first. The Moores cobbled together combinations of companies—primarily makers of finished products such as wire, nails, hoops, and tubes—and embarked on competitive price-slashing sprees. “Bet-a-Million” Gates had built a barbed-wire trust in the eighties with the help of a loan from Morgan, and in 1895 became president of Illinois Steel, the largest producer west of Pittsburgh. Two years later he asked the Morgan bank to finance a consolidation of steel and wire companies. Morgan entertained the idea for several months, then—partly because of the Spanish-American War and partly because he did not trust Gates—said no.
Gates enlisted Elbert Gary, general counsel for Illinois Steel, and put together a $90 million combination called American Steel and Wire in April of 1898. Gary was a corporate merger expert and former county judge from Illinois who looked like “a Methodist bishop—benign, suave, cordial and earnest.” Morgan preferred the Methodist bishop to the speculative plunger, and when Gary approached 23 Wall Street late that spring with a meticulous proposal for combining Illinois Steel with raw-material suppliers and transport systems into one self-contained, low-cost, centrally managed firm, Morgan assigned his partners to study the figures, then said yes.
Over the summer of 1898, Gary and Bob Bacon worked out the details. In September they contracted to buy controlling interests in Illinois Steel, the Lorain Steel Companies of Ohio and Pennsylvania, the Minnesota Iron Company (the second largest producer in the northern ore country), and two railroads, and to bring them all into a holding company called Federal Steel. It did not include Gates’s American Steel & Wire. The New York Commercial described the Gary/Morgan combine as “the beginning of one of the greatest contests for supremacy that the world has ever seen. It is a fight between a new concern and the Carnegie interests, both backed by almost unlimited capital.”
Carnegie was generating “almost unlimited capital” through his spectacularly remunerative steel operations, while the bankers for the new concern had to raise money in markets that were still wary of industrials. Morgan’s name on the deal assured investors that Federal would issue “investment quality” securities, in contrast to those of the fly-by-night promoters.
The organizers of Federal Steel issued $100 million each of preferred and common shares. Since there are few surviving records of this deal, exactly how the financing worked is not clear, but it probably went like this: Morgan exchanged about $100 million of Federal shares for the stock of the properties he was bringing into the merger. At the same time, he organized a syndicate to provide the consolidation with $14 million in immediate cash. Syndicate members put up $4.8 million of this commitment right away, and pledged to furnish the rest pending the outcome of a public sale of Federal stock. The Morgan bank offered the second $100 million of stock for purchase—first to the shareholders of the constituent companies, then to the public, although not a very wide segment of the public. The buyers of industrial securities were still an elite group of wealthy institutions and individuals; small investors did not enter the capital markets in large numbers until the 1920s. The stock sold so well that the syndicate never had to produce the rest of its $14 million commitment. During the first year of operations, Federal Steel paid dividends on its preferred and common shares, and produced about 15 percent of the country’s steel ingots.
“Bet-a-Million” Gates, who made half a million dollars selling Illinois Steel stock to Federal, wanted to run the new consolidation, but Morgan had a better idea. As soon as the deal was complete he called Elbert Gary to his office.
“Judge Gary,” he said, “you have put this thing together in very good shape. We are all very well pleased. Now you must be president.”
Surprised, Gary said no.
“Why not?” asked Morgan.
“I have a law practice worth $75,000 a year,” Gary explained, “and I cannot leave it.”
“We’ll take care of that,” Morgan assured him. “We must make it worth your while.”
Gary wanted time to think it over. Morgan, as always, wanted an answer right away.
Who, asked Gary, would be the directors of the new concern?
Morgan shrugged: “You can select the directors, name the executive committee, choose your officers and fix your salary.”
Twenty-four hours later, Gary said yes.
Like the head of the house of Morgan, the new head of the second largest steel producer in the United States knew little about making steel—one adversary said that Gary didn’t see the inside of a blast furnace till the day he died. Gary did know about law and corporate organization, and he believed, with Morgan, in rationalizing competitive and overlapping enterprises through administrative consolidation and coordination of production and pricing. Since both men also believed that corporations issuing publicly traded securities had to account for their financial performance, Federal took the then unusual step of issuing quarterly reports.
Andrew Carnegie did not think Gary and Morgan could make the consolidation work. Now in his mid-sixties, with his close-cropped beard and hair gone white, the diminutive Scot took an entirely different approach to the market, and in 1898 he dismissed his new rivals out of hand: “I think Federal the greatest concern the world ever saw for manufacturing stock certificates,” he said, “… but they will fail sadly in steel.”
Carnegie represented the pure type of autocratic free-market competitor—capitalism in its most effective, ruthless form. Unlike the railroad pirates whom Morgan had been trying all his adult life to control, the steelmaster was not a profligate wrecker. He concentrated on primary steel and heavy products—ingots, rails, billets, sheets, bars, and beams—and he dominated the industry by making a better, cheaper product than anyone else, keeping tight control over costs, supplies, and output, and holding workers’ wages down. One of the worst labor-capital conflicts of the 1890s had taken place at Carnegie’s steelworks in Homestead, Pennsylvania.
The Amalgamated Association of Iron, Steel, and Tin Workers had already organized the pla
nt when Carnegie bought it in 1883, and after a strike in 1889, the Amalgamated leaders accepted a sliding wage scale that would parallel industry profits in exchange for union recognition. Although Carnegie, born into poverty and reared among radical Scots Chartists, liked to see himself as an enlightened champion of workingmen, he opposed organized labor, and his hardheaded instincts won out over his benevolent ideals when the Homestead contract came up for renewal in 1892. The man in charge of the Homestead works in 1892 was the president of Carnegie Steel, Henry Clay Frick, an enormously successful coke producer who shared Carnegie’s antipathy to unions but not his avowed compassion for individual workers. Since the steel markets were in decline in 1892, Carnegie and Frick proposed to reduce the minimum wage in the new contract and to abolish the bargaining power of the union. Just before the old contract expired, Carnegie went to Scotland for the summer, leaving the situation in Frick’s hands. He knew that his own sympathies would be divided, and that Frick would use draconian measures to win the fight. He may not have realized just how draconian.
Frick built a stockade around the Homestead works, fortified with barbed wire and rifle slits, and hired three hundred men from the Pinkerton Detective Agency to stand by. On July 1, he offered union officials conditions they could not accept. The Amalgamated called a strike. Five days later the Pinkertons came down the Monongahela River on barges in the middle of the night to take over the plant, but steelworkers surprised them with an armed counterattack. The battle raged all day, until the heavily outnumbered Pinkertons surrendered and the workers seized control of the plant. Nine strikers and seven guards had been killed, and hundreds of others wounded. The governor of Pennsylvania sent eight thousand troops to occupy Homestead while strikebreakers operated the plant. An anarchist who tried to assassinate Frick succeeded only in wounding him—and in eroding sympathy for the walkout. Frick made no concessions to the union. When the strike ended in November, the company imposed lower wages and longer hours. Carnegie said nothing in public at the time. He continued to talk about his friendly relations with workers, but he knew where the fault for this hideous confrontation lay, and that it undermined all his pious claims. Years later he wrote, “No pangs remain of any wound received in my business career save that of Homestead.”