by Jean Strouse
From Morgan’s point of view it was wildly irresponsible of “the politicians” to interfere with the delicate financial mechanisms over which he was unofficially presiding as the balance of economic power shifted from the Old World to the New. Half a century after his father moved to England to funnel European capital to America, two decades after Morgan syndicates sold U.S. government bonds abroad, and five years after Morgan himself secured foreign gold for the Treasury, the British government was raising capital in the United States.* In putting together Northern Securities and U.S. Steel, Morgan was, as he saw it, building unassailable systems to compete in world markets and launch an American century. If his enterprises succeeded, they would benefit steelworkers and coal miners as well as bankers, and he counted on intelligent men in government to back him up.
By 1902, however, relatively few of Morgan’s compatriots shared his point of view. The country now objected so strenuously to the dominion of big business that groups who traditionally feared state authority—labor, farmers, small businessmen, the growing middle class—began looking to the government for protection. It was a political moment to which Theodore Roosevelt could not have been more perfectly suited. He wrote later that “the absolutely vital question” of the government’s power to control corporations “had not yet been decided.” The Supreme Court decision in the 1895 case against the sugar trust (E. C. Knight) “had, with seeming definiteness, settled that the National Government had not the power.” TR was determined to prove that it did.
After meeting with the President on February 23, Morgan dined at Chauncey Depew’s with Wayne MacVeagh, who occasionally worked with Stetson’s law firm.† “The whole party was black,” reported Henry Adams, “in spite of dear Wayne’s efforts to cheer it up. Pierpont sulked like a child. From the White House came a telephone [call] inviting the party to come over. Pierpont refused but they made him go. There the President was very cordial, and they sat about for a while and went home. The [Morgan] party had come on to see whether some arrangement could be made so that they could go on with their consolidation-scheme, but as far as Wayne saw, not a beginning of a step had they made.”
Morgan reluctantly attended the President’s dinner for Prince Henry the next evening after all, then returned to New York. Early in March he took Adelaide, the Markoes, and his daughters Anne and Juliet to Jekyl Island for a week in the sun (Fanny was touring Italy with her sister Clara). He stopped in Washington on the way down and back to confer with Hanna as the administration built its case against his railroad trust.
Henry Adams’s antic running commentary on the Morgan-Roosevelt clash that spring cast the banker as competent adult and the President as obstreperous child. On March 2: “Theodore’s vanity, ambition, dogmatic temper, and cephalopodic brain are all united on hitting everybody, friend or enemy, who happens to be near.… He has knocked the stockmarket silly, and has made enemies of pretty much every man in Congress.”
March 4: “Theodore is blind-drunk with self-esteem. He has not a suspicion that we are all watching him as we should watch a monkey up a tree with a chronometer. Cleveland was a mere donkey beside this bucking broncho [sic].… Luckily for him, all his … friends and enemies hate each one the other worse than they hate him.… What he would never enjoy or forgive is to become seriously conscious that his father’s old friends look at him with precisely the same curious interest with which they regard … a naughty boy who breaks china when his mother isn’t looking.”
March 11: “I do not know whether Pierpont Morgan can once more hold up the market and save a panic.”
On April 6, as the markets grew increasingly bearish: “Wall Street is in a desperate state of mind since Roosevelt so nastily struck it his foul blow on the Northern Securities; and Pierpont Morgan and Hanna insist that, at any cost, Hay and Root [the Secretaries of State and War] must stay. Until they have worked Roosevelt into harness, or he has fairly kicked over the traces, the old machine has got to be kept running. You can see how necessary it is for Wall Street to lose no more ground here.”
April 7: “Hanna [who maintained his interests in Ohio steel mills] says that not an order has been booked in Cleveland beyond November, and all on account of the Northern Insecurities.”
Conflict with the government did not slow the pace or diminish the scale of Morgan’s consolidations, but trouble was erupting on other fronts as well. Early in 1902 the “gigantic, nerve-wracking business and pressure of the Morgan methods” took their toll on another partner—Bob Bacon. After a year of work on the organization of the steel trust, the Northern Pacific panic (for which he bore some responsibility), White House communications, and the controversy over Northern Securities, the former all-star athlete suffered a nervous breakdown. He took a leave of absence at his physician’s insistence.
He hoped to return to 23 Wall Street after an extended rest in Europe, but the doctors warned him he would “smash up completely” if he did. During his young friend’s recuperation, Morgan put him on the board of U.S. Steel and visited him in Europe. The Boston Adonis withdrew from the firm at the end of his leave.
As Governor of New York in 1900, Roosevelt had urged Bacon to give up banking for politics. As President in 1905, he appointed Morgan’s former partner Assistant Secretary of State under Elihu Root, and when Root resigned in 1909, Bacon served as Secretary for the final weeks of Roosevelt’s second term. The federal government was apparently an easier taskmaster than the house of Morgan, since Bacon’s health held up well. Pierpont and Jack stayed in close touch with their former partner at the State Department and after he became William Howard Taft’s ambassador to France.
Things were not going well at U.S. Steel when Bacon left for Europe early in 1902. Having outraged public opinion with the size of its initial capitalization, the corporation found after less than a year that it needed another $50 million in cash—primarily to repay construction loans incurred by the constituent companies before the merger; though consolidation had made the additional building largely unnecessary, the companies could not cancel their commitments. Perkins, who replaced Bacon as chairman of the Steel Finance Committee, came up with a plan to retire $200 million of the company’s preferred shares in exchange for $200 million of 5 percent second mortgage bonds, and to sell an additional $50 million of bonds for cash. Since the preferred shares paid a 7 percent dividend, the exchange was expected to decrease the company’s annual charges by $1.5 million.
Morgan, busy with other projects, assented to this plan even though he generally opposed increasing debt—and just about everything possible went wrong. Jack paraphrased the reaction he expected from London: “Here is the greatest company in the world, with the largest capital ever known, only running 9 months, and which has got to call for 50 million of new capital. We do not understand, but feel were fully justified in mistrusting at the beginning.” Shareholders were reluctant to trade stock paying 7 percent for bonds paying 5 percent, even though bonds carried less risk. When J. P. Morgan & Co. organized a syndicate in March to underwrite the conversion, Perkins had such trouble securing participants that he had to promise matching commitments from the Morgan bank.‡ In May and June, two groups of minority shareholders sued to stop the exchange, objecting to the syndicate’s 4 percent commission and the increase in bonded debt, among other things. (One litigant offered to drop the suit if Perkins gave him a call on 20,000 shares each of Steel preferred and common.) The lawsuits held up the conversion until February 1903, when a court ruled them groundless, but by that time the steel business had entered a decline, share prices and earnings had plummeted, and it was impossible to effect the exchange. The conversion offer expired in May with only $45 million of stockholders’ shares (separate from the syndicate’s commitment) converted into bonds and a mere $12,000 raised in cash. A desperate Perkins extended the syndicate’s term to June 1904, but in the fall of 1903 the corporation called the whole thing off.§
Internal conflicts at U.S. Steel were as troublesome as its f
inances. There had been two distinct groups with potentially clashing aims all along—the Gary/Morgan lawyers and bankers, interested chiefly in industry stability, steady profits, and staying out of court, and the production-oriented steel men represented by Schwab. Schwab’s dream of a centralized, superefficient firm never came true, and he blamed its failure largely on Gary’s opposition to the aggressively competitive policies that had made Carnegie Steel a success. Yet Schwab’s own actions and imprudence contributed to his undoing.
As president of U.S. Steel, Schwab alienated colleagues already worried about the company’s image by attracting exactly the kind of notoriety they did not want. When he announced to the graduating class of a New York City trade school in May of 1901 that boys going into business did not need college educations, speakers and writers all over the country fulminated against him, Big Steel, the decline of American culture, and a “delirium of material drunkenness.” After he told an industrial commission that unions reduced their members to the “level of the cheapest workman, instead of the most capable and highest priced,” Hearst’s Journal reported that the Steel Trust was planning to destroy unions once it had tricked the public into buying its worthless stock. Executive Committee chairman Gary had to deny rumors that Schwab earned $1 million a year, saying, “He is a very wealthy man, a large holder of the stock of the company, and does not need and would not accept an extravagant salary.” Schwab apparently did need an extravagant house, for he began in 1901 to build a multimillion-dollar mansion, modeled on Chenonceaux in the Loire, with ninety bedrooms, six elevators, a 116-foot tower, a sixty-foot swimming pool, a bowling alley, a gymnasium, and its own power plant. It took up an entire city block at 73rd Street and Riverside Drive.
These crimes against conservative decorum paled next to the scandal that erupted when reporters spotted Schwab at a Monte Carlo casino in January 1902. SCHWAB BREAKS THE BANK read the headline in the New York Sun, and newspapers played up the story for days. Carnegie was so outraged that he cabled his former protégé: “Public sentiment shocked.… Probably have [to] resign. Serves you right,” and wrote to Morgan: “I feel … as if a son had disgraced the family.… He is unfit to be the head of the United States Steel Co.—brilliant as his talents are.… I recommended him unreservedly to you.… I have had nothing wound me so deeply for many a long day, if ever.”
Morgan did not share Carnegie’s rhadamanthine views. When Schwab offered to resign “if Morgan thinks I should,” Perkins replied that the uproar had not made “the slightest impression on Mr. M. Do not give the matter any further thought.… Go ahead and have bully good time.”
“Many thanks,” wired back Schwab, “appreciate Mr. Morgan attitude more than possible to express,” and continued by mail: “Steel Co. first—me second … I’ll do anything Mr. Morgan wants. He’s my idea of a great man. Carnegie has condemned me without a hearing. Mr. Morgan a new friend is broader gauged by far. I’m his to command.”
When Morgan saw Schwab for the first time after this episode, in March 1902, he told him to “forget it, my boy, forget it.” The press, however, was not willing to forget the “moral delinquency” of the head of the Steel Trust, nor was the narrow-gauged Carnegie, who subjected his former understudy to such a barrage of condemnation that Schwab had a nervous breakdown. In August 1902 he retreated to Aix-les-Bains (probably at Morgan’s urging) and stayed abroad for nearly a year. When he finally decided to resign from U.S. Steel in 1903—having also been charged by a New York court with “ruinous extortion” in connection with a shipbuilding trust—Morgan helped him make a graceful exit, praising his “unequalled powers as an expert in the manufacture of steel,” attributing his departure entirely to ill health, and keeping him on as a member of the Steel board and Finance Committee.
Carnegie’s prodigal son may not have been the right man to run the Morgan/Gary consolidation, but Morgan had correctly assessed his expertise. In 1904 Schwab took over management of Bethlehem Steel, a small Pennsylvania producer of rails and specialty items, and over a decade built it up into the second largest firm in the country, the chief rival to U.S. Steel.‖
After Schwab’s departure, his assistant, William E. Corey, became president of U.S. Steel, but it was Gary who effectively set company policy for the next twenty-five years. He did not follow Schwab’s prescription for geographic rationalization, unified sales facilities, and innovative research, nor did he carry forward Carnegie’s hard-driving, cost-cutting, price-slashing lead. Instead, he presided over a loose holding company of intact subsidiaries, and created a structural umbrella that allowed the giant firm and its smaller competitors to maintain steady prices even in fluctuating markets. He and Morgan wanted primarily to stabilize the country’s fundamental industry—and secondarily to avoid antitrust prosecution—and under their governance U.S. Steel squandered the advantages it inherited from Carnegie. Its share of the American steel market declined from about two thirds in 1901 to one third by the 1930s.
The presidential waffling that Finley Peter Dunne lampooned (“On wan hand I wud stamp [the trusts] undher fut; on th’ other hand not so fast”) accounted for much of Morgan’s consternation at the move against Northern Securities. Roosevelt had recently given a dinner in honor of the country’s “Railroad Bismarck,” and even as he filed suit against the northwest rail consolidation in February 1902 he was encouraging Morgan to organize a giant international shipping trust (see Chapter 23).
In the fall of 1902, TR welcomed Morgan’s help in settling a major labor-management dispute. Workers in Pennsylvania’s anthracite coal mines—most of which were owned by Morganized railroads such as the Erie and the Reading—had gone on strike in the late summer of 1900 for a wage increase (which they had not had in twenty years), an eight-hour day (instead of ten), better working conditions, an end to excessive charges at company stores, and union recognition. UMW President John Mitchell negotiated a settlement that fall with the help of Morgan and Mark Hanna, who convinced the railroad presidents that a prolonged strike would hurt Republicans in the last weeks of a presidential election campaign (the party slogan was a “Full Dinner Pail” for American workers). The settlement included a 10 percent wage increase, recognition of workers’ grievance committees, and two related promises—Mitchell would guarantee a year of no strikes in the coal regions, and Morgan would try to get the mine operators to recognize the union.
Neither side proved able to keep its promise: local, unauthorized strikes continued, and the coal-road presidents adamantly opposed union demands. The conflict came to a head again early in 1902. Mitchell, who had meanwhile tried to mediate between workers and executives in the 1901 U.S. Steel strike, met with Morgan in February 1902, and reported to Hanna that the banker said he would “do what was right when the opportunity for action came”—that “if the railroad presidents were wrong he would not sustain them; if the miners were wrong he would not help them.” Ralph Easley, head of the National Civic Federation, a group of industrialists and labor leaders organized to head off violent confrontations and promote industrial peace, told Mitchell that Morgan was “a good deal in the same fix with these coal roads, as he was last summer with the Steel Corporation. He has a lot of unruly presidents on his hands who are willing to resign any minute if he undertakes to coerce them. He has not got a lot of men standing around to put in their place.” Easley counseled patience, assuring Mitchell that in time “we will have friendly men instead of hostile old cranks at the head of [the coal roads].”
In May, after a futile meeting between Mitchell and the railroad presidents, 140,000 miners went on strike. Over the next few months Mitchell earned the union widespread popular support by curtailing violence and emphasizing to the press the strikers’ honesty, reasonable demands, and willingness to negotiate. The mine owners, by contrast, were arrogant and harsh. Easley considered them “forty years behind the times in their attitude toward organized labor,” which seemed an understatement when the Morgan-appointed president of the Reading Railroad,
George F. Baer, answered a clergyman’s appeal for settlement by saying that the “rights and interests of the laboring man” would best be protected “not by labor agitators, but by the Christian men to whom God in his Infinite Wisdom has given control of the property interests of the country.” After Baer’s letter was published in the press, Clarence Darrow pronounced him “George the Last,” and the Chicago Tribune said that the “real subverters of law and order” were not the strikers but the coal-road presidents.
The striking miners supplied new words to the popular song “Just Break the News to Mother”:
Just break the news to Morgan that great official organ,
And tell him we want ten per cent of increase in our pay,
Just say we are united and that our wrongs must be righted,
And with those unjust company stores of course we’ll do away.
When Morgan returned from Europe in August, Mitchell, Easley, Hanna, and Chauncey Depew tried to get him to arbitrate between the owners and strikers—Samuel Gompers and James Duncan at the AFL told National Civic Federation leaders that they believed “in the absolute integrity and fairness of Mr. Morgan.” According to Herbert Satterlee, Morgan thought the two sides should reach an agreement on their own, and if they couldn’t, it should be the government, not he, who stepped in. Nonetheless, Mitchell said Morgan began working for settlement behind the scenes in August. Between May and October the price of coal rose from $5 to $30 a ton. Morgan helped set up, supply, and pay for a depot on the Lower East Side of Manhattan, where people could buy coal below cost.
In September, New York’s Democratic State Convention endorsed nationalization of the mines, and a rally of ten thousand people in Madison Square supported the strikers. A Socialist organizer in Pennsylvania said the coal strike had “done more for the cause of Socialism than all the events that ever happened in the United States before.” Jacob Riis warned Roosevelt that if he did not find a remedy, “the arrogance of the money power will bring a revolution.”