ROBBER BARONS
CHAPTER SEVENTEENTHE EMPIRE OF MORGAN
OF the three dominant financial groups which contended with each other for supreme power over the country, the banking organization known as J.P. Morgan & Co., by its close-knit, compact nature, by the solidness of its plan and its firm yet far-spreading fingers of control, suggested itself as the most formidable engine for economic rulership. The Morgan power by no means rested solely upon the gold possessed by Pierpont Morgan himself or by his partners—though that was considerable. The intricate and diversified manner in which this power was expressed is in itself astonishing and demands precise explanation. At the same time no other of the great money-lords confronted the turbulent age with so purposeful a mind and so resolute a program as Morgan.
The banker occupies the pilot-room of the capitalist system. By his intimate connection with his clients the banker is easily in a position to “know all, see all, hear all.” As safekeeper for the public, and with his own money chest, he guards a reservoir of gold or credit, susceptible of usage in a thousand ways for the contraction or the infinite expansion of loan capital in the form of short- or long-term credits. The merchant, the industrialist, the railroad manager come running to him with their negotiable paper, their collateral good and bad, their pledges or promises to pay ; they come in fat or lean days, to seize opportunities for enrichment or to save themselves from embarrassment or even extinction. And always the banker, “lynx-natured, thin-lipped, keen-eyed, hard-favored ... with lowered head,” as Balzac paints him in the “Comédie Humaine,” gazes calmly into the secrets of men with his devouring stare. His mind is always plunged into the future which holds the secret of whether the gold he lends will be repaid in full and with interest ; or now it measures the chance of sharing the proceeds of a promising speculation ; or calculates how far he may go in levying toll, because of the desperateness of an exigency, while still preserving “business honor” intact.
But the private banker, especially the private banker engaged in investment promotions, stands in a more strategic position still than the general money-lender. In the work of originating issues of stocks and bonds (that is to say, long-term capital), his field is boundless, especially in a country whose population doubles in two decades, whose industrial construction must be extended almost incessantly, whose underground resources demand ever larger exploitation. This was the work which Morgan carried on as he bought and sold and created issues of capital ; carried on with supreme confidence—“a bull on America.” Of the moneys he raised for railroads like the Northern Pacific or the New York Central, by means of vigorous public flotations in the market of savers and investors, a mounting share in the form of promoter’s commissions adhered to him ; large parts of the total sums also remained with him for deposit and could be set to work in further projects. Beyond this, he would open to himself still further resources of the public’s capital, as will be presently shown.
It was in the “reorganization” of bankrupt railroad properties, however, that the largest and most glittering opportunities for power came first to Morgan. With the prostrate client, whether it be an Erie Railroad or a Northern Pacific, in desperate need of fresh working capital, Morgan with his reserves of ready money could appear and impose hard terms. His work consisted first in the scaling down or reduction of old debts to a size which could be safely carried before new debts were contracted ; this he would do, no matter how bitterly the ruined bondholders cried out. Second, he demanded a dominant voice in the management of those enterprises which he helped salvage, by acquiring payments in the form of stock, or appointing himself or his agents directors, members of a “voting trust.”
The field of operations for marketing securities enlarged itself sensibly in the boom of the later ’90s. “Thus it was,” writes Mr. Justice Brandeis, “that they [the investment bankers] became promoters, or allied themselves with promoters,” the manufacturers of securities. And the Justice continues with humor, “Adding the duties of undertaker to those of midwife, the investment bankers became in times of corporate disaster, members of security holders’ ‘Protective Committees’; then they participated as ‘Reorganization Managers’ in the reincarnation of the unsuccessful corporations, and ultimately became directors.”
But often the mere need for new money brought from the banker a counterdemand for a seat in the management, membership in the board of directors. Or he asked that the stockholders’ proxies be deposited with him. “When once a banker has entered the Board—whatever may have been the occasion—” Mr. Brandeis concludes, “his group proves tenacious and his influence usually supreme ; for he controls the supply of new money.”
What shapes itself now in the mind of the great banker, as he verges from long, brooding calculations to negotiation or action, is the tremendously difficult plan for centralized control in which the warring railroad captains and even conflicting industries may be brought to labor peacefully and submissively together under his dictatorship. The times demanded such a control ; one saw this clearly enough in 1893 and in the years that followed ; and the Industrial Commission not long afterward appointed by Congress to study these very questions declared, on the subject of railways alone : “At no time in the history of American railroads has the need of efficient, wise and firm supervision by public authority of the terms and conditions of transportation been more imperatively demanded than at the present time.” But by then, 1900, it would seem too late to have spoken, for Morgan would have assumed for himself this “public authority,” this role of dictator which no one else seemed equal to, and no other man or group—up to the emergence of the Rockefeller clan—was in so strategic a position to seize.
As in 1889 Morgan had called together the leading railroad men in another conspiracy to create a monopoly of trunk lines, so now in the decade that followed he pursued the same object, stubborn, silent, unswerving as ever. In his mind, control of the country’s transportation machinery held the key to centralization of power everywhere else. To be sure there were other famous individuals, each in his way formidable enough, who worked more or less consciously to further industrial unification—Vanderbilt, Carnegie, Frick, Rockefeller, Huntington, Hill—yet none but Morgan, his official apologist Hovey declares, “stood so steadfast for combination.” None was to carry so far the purposive process of concentration, whose accomplishment lends to Morgan’s career its chief glory.
Hovey tells us candidly that as soon as he became an influential factor in the financial world, he exerted a constant pressure in this direction, and as a result of his solid and simple stand, fate threw larger opportunities in his hands than in those of any other man of his generation. In the period from 1893 to 1900 the railway systems of the country, gigantic, sprawling, and weakened to the point of helpless impoverishment by competitive battles, were forced with very few exceptions, to undergo complete reorganization. Mr. Morgan proved himself the most successful reorganizer, and he used the power and prestige thus gained to eliminate competition from the railroad business. The next ten years brought forth numbers of industrial combinations ; Mr. Morgan bested everyone at this sort of work ; and every corporation he formed or influenced did away with real competition.
It was with this “solid and simple” heroism, though with ingenuous phrases, that Morgan would say : “We do not want financial convulsions and have one thing one day and another thing another day.”
The process of conquest over so great a region is exciting to watch in its decisive stages between 1893 and 1901. It was at first gradual, like the almost invisible advance of a thin line of skirmishers ; then it grew into full and furious conflict for all the points of advantage, before the eyes of all the astonished, ignorant citizenry.
During the latest depression, the House of Morgan1 as a fighting organization was complete in all its parts, equipped much as it is today. In 1889, as forty years later in 1929, the house possessed a great amount of that “good-will” which is so vital to the investment banker in dealing confidentially with his clients. It was known to hold literally to its contracts or “deals” with colleagues or accomplices ; it impressed the legion of small investors, speculators and dealers with its “responsibility,” and “integrity.” Only the venerable though much smaller firms of Lee, Higginson and Kidder, Peabody in Boston, and the German-Jewish group of Kuhn, Loeb in New York, approached Morgan’s in these qualities of venerable probity toward its collaborators.
To be armed at all points, to see around corners, to have eyes peering everywhere, Pierpont Morgan had surrounded himself with a group of lieutenants who were able, energetic and often, as it happened, handsome as well. The standard of looks among his loyal younger men was so high as to cause the remark that “when the angels of God took unto themselves wives among the daughters of men, the result was the Morgan partners !” In Wall Street, they spoke of “Jesus Christ and his Twelve Apostles”—though Morgan was an ugly, lowering figure, charged with vitality, curt, decisive, with rare moments of tears and passion, which only a few saw. The ablest of his partners were Charles H. Coster, the railroad expert, Egisto Fabbri, the Italian economist and mathematician, George W. Perkins, who came from the First National Bank, George S. Bowdoin, J. Hood Wright, and Robert Bacon, future ambassador to England, of impeccable appearance but of lower tactical ability than the others. Coster especially was remarkable as a sort of “financial chemist.” He had joined forces with Drexel and Morgan in 1884, and ever since then carried on all their elaborate railroad reorganizations ; he is remembered as “a white-faced, nervous man, hurrying from meeting to meeting [of the fifty-nine corporations of which he was a member of the board of directors !] and at evening carrying home his portfolios. ...” A great master of detail, but of frail health ; he was suddenly carried away by a slight cold which quickly developed into pneumonia. Like the other Morgan partners he had given all of himself to the immense tasks of economic organization with a courage and energy that might have been fruitful to the government or the society at large under another dispensation. All of the Morgan partners were rewarded with liberal shares in profits, toiled madly, and died young. By 1900, as Lewis Corey remarks, the first generation of them were all dead. Only “Jupiter” Morgan “had come through that soul-crushing mill of business retaining his vigor, health and energy.”
There was a division of labor by which their work was departmentalized ; one specialized in government finance ; another in railroads ; another in steel companies. They wove together a broad network of relationships, and all reported back continually to the supreme commander for important decisions, wherever he might be.
But the most impressive thing that could be perceived, if one looked deeply enough at all this mysterious labor, this heaving and shaking of worlds, was the progress of Morgan’s ruling idea : an imperium in imperio of banking under his supreme command. Inalterably he continued to weld the numerous banks, trust and insurance companies into whose control he penetrated into a single concentrated financial structure, a solid pyramid at whose apex he sat. In this campaign of secret alliances he acquired direct control of the National Bank of Commerce ; then a part ownership in the First National Bank, allying to himself the very strong and conservative financier, George F. Baker, who headed it ; then by means of stock-ownership and interlocking directorates he linked to the first-named banks other leading banks, the Hanover, the Liberty, Chase. Soon he had spread his control to the great insurance companies. In the largest of these, the New York Life, George W. Perkins was vice-president, and at the same time a partner in the House of Morgan ; in the case of the great Equitable Life Assurance Society, Morgan was to pay $5,882 a share for control.
The three great life insurance companies which Morgan dominated, the New York, the Equitable and the Mutual, together owned approximately a billion dollars of assets toward 1900. They must invest from $50,000,000 to $55,000,000 each year. Their management (Morgan or Perkins or Baker) would, as officials for trust and life insurance companies, buy securities from themselves as investment bankers, that is, as partners or lieutenants of the House of Morgan ! What could be more perfect ? Morgan and his general staff had not only got the ownership of the goose that lays the golden eggs, Mr. Brandeis concludes, but also of the golden eggs laid by somebody else’s goose. “They control the people through the people’s own money.” As the Armstrong investigation in New York, which was directed by Charles Evans Hughes, and the later Pujo Committee investigation disclosed, Morgan directed a great pool of banks and insurance companies toward the purchase of securities which he floated ; but then the proceeds of these securities must be deposited either directly in the House of Morgan, or in his controlled banks, the First National, the Bank of Commerce, etc., which soon were to represent public deposits of $1,300,000,000. Thus the power of the Morgan Associates was “dynamic” as opposed to the static wealth of landowners or merchants who possessed goods. “The power and the growth of power of our financial oligarchs comes from wielding the savings and quick capital of others,” Brandeis said. It bred a concentrated control over a vast portion of the nation’s savings, which extended itself with amazing speed.
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From his power to allot securities at will to the various institutions under his influence, it will be seen how much greater Morgan’s domination was than his own personal wealth. He was in an admirable position, far more so than even men like Rockefeller and Carnegie for all their huge direct incomes from industry, to bring order—to end a condition he referred to contemptuously as “one thing one day, another thing another day.”
The unremitting vigilance and activity of his banking house reflected the anxieties that went with imperial power. The lights at 23 Wall Street, where the major staff and personnel seemed never to sleep, would be shining far into the night when all else was dark over New York. And Pierpont Morgan himself, though he traveled frequently to distract mind and body at doctors’ orders, was burdened intolerably by the superhuman tasks he had undertaken. The hard living, the drain upon his energy seemed to burn him up. He appeared poorly, to those who observed him intimately, living in pain for long periods, turning away food brought to him and puffing only at his eternal black cigar. Traveling through Egypt in a resplendent private car, a companion of his noted how, at the receipt of cablegrams from New York, he would be plunged in long glowering calculations, hours upon end, while the incredible, halfruined pyramids of other emperors and other ages which he had come to gaze at drifted by his window unnoticed.
In 1893-94, with nearly half the railroad mileage of the country in receivership, there were unheard-of difficulties in the path of centralization. The rigidly capitalized railroads as a rule could not withstand a long depression and falling receipts.
No single financial problem in the previous history of the world [writes John Moody] equaled in difficulty or magnitude this reorganization of the railroads of the United States. These crazy financial structures had been patched together by any possible method of cohesion. They were leased, interleased, subleased ; bought in whole or in part ; and securities of every degree of inflation represented questionable claims upon them.
Through a maze of financial detail, opposing claims, debts, spurious loans of broken or plundered enterprises, the Corsair and his lieutenants moved irresistibly to impose order “upon conditions of his own,” as his apologist writes. Then having “financiered away the discrepancies between earnings and outgo,” he would retain always his controlling voice in order “to prevent further mishaps or the use of bad judgment”; and afterward, there would always be “the necessity of extending that control to still other lines which might become competitors and start the old difficulties afresh. . . .”
Morgan’s immediate interest at an early date had been attracted to the group of Eastern coal railroads, which to his mind dominated most vital parts of the industrial organism. In Pennsylvania the Reading Railroad, headed by a certain McLeod, had shown ambitions to expand. Occupying a strategic position near the seaboard, it had been used in the struggle against the Pennsylvania Railroad in 1885, by Vanderbilt, Carnegie and others. Its president, after 1887, campaigned vigorously to build up a 5,000-mile system, acquiring control of other coal roads, and designing to penetrate the New England market by the Poughkeepsie freight bridge.
When Morgan had frowned upon this plan, McLeod had said : “I’d rather run a peanut stand than be dictated to by J.P. Morgan,” and he had gone to the Speyers for credits—at 9 per cent, or more. Whereupon the coal regions rang with war. In his most imperious manner, Morgan had notified men of capital that “they must not expect to maintain friendship with him if they continued to help McLeod finance his projects in New England.” And that, as Hovey said, “was a hint sufficient,” closing off sources of fresh credit to the Reading. Furthermore, Morgan used his complete control of the New York, New Haven & Hartford Railroad to cut off New England ; he attacked the Reading’s securities in Wall Street, until the collateral offered for loans by the enemy capitalist had so shrunk that their position was untenable and the railroad was plunged into receivership.
The resultant “reorganization” was of course conducted by Morgan, who placed one of his tools, George F. (“Divine Right”) Baer in direct charge. With the aid of the Lord and of Morgan, order was imposed. The instrument of the “voting trust” absolutely controlling the property for a certain period of time was introduced in the process soon called “Morganization.” Thus bondholders took heavy losses as the obligations they held were “scaled down” to sums considered supportable under the distressing circumstances—a ruthless wiping out of debt, from which the property emerged greatly relieved, naturally, and for which the Morgan Associates grew notorious. To all protests, he would say gruffly : “Your railroad ? Your railroad belongs to my clients ! ”
Another typical exploit of the depression was the seizure of a chain of ruined railroad systems in the South ; 9,000 miles of track were grouped around the old Richmond Terminal Company, capital debt slashed away, former owners and claimants banished, and the whole conglomeration revived as the Southern Railway. So Morgan carried on the fatal process of centralization, the expropriation of the “lesser capitals by giant capitals,” ending disastrous rate wars, and effecting great territorial consolidations.
But if the process of Morganization had its great social usefulness in welding together the productive forces of society as an integrated whole, so did it involve new and onerous costs in the shape of fees to the managers of the general reorganization, and the excessive capital debt which was ultimately saddled upon these means of production and whose burdens were borne thereafter by the great public. For the investment banker was forever under the dual temptation to sell “gold bricks” to the corporations he controlled or amalgamated, and to sell out to the public securities en masse against the Trusts which he combined—no matter what the ultimate social costs might be.
Thus, down East Morgan obtained control of the New Haven, which ran through the country of his boyhood and unified the scattered New England systems, so that one no longer needed to transfer at Springfield in order to ride from Boston to New York. In the process he merged with the New Haven all the divers local systems he had acquired : the Old Colony line of steamships and rails, the New York & New England, the Shore Line and 128 other properties—leaving the amalgamated company in complete monopoly of the New England states. But in effect, he had saddled a tremendous charge of debt upon the New Haven Railroad ; the properties purchased by him as a promoter were sold to himself as a director of New Haven, at prices which he alone determined and which the world never heard of until long afterward when the once rich railroad reached the end of its rope. By 1894, a few years after his “fatal entrance” into New Haven affairs, according to Barron’s diary, the consolidated company had assumed $100,000,000 of indebtedness, a burden which eventually proved too heavy.
In Pennsylvania the same process of Morganization was carried out with little regard to the final costs for the community. The hard-coal mines were nearly all indirectly owned by Eastern railroads over whom Morgan held influence or a decisive voice : these were the New York Central, the Pennsylvania, the Lehigh Valley, the Lackawanna, Erie, and New Jersey Central. When an independent group known as the Pennsylvania Coal Company arose to offer competition to the anthracite monopoly, Morgan at once hastened to buy control of the newcomer in the open market, paying an average price of $552 per share for its stock, in order to eliminate opposition entirely. Then he turned over this purchase to the Erie Railroad at a price which was termed by the Industrial Commission of 1900 the highest ever paid for such properties. Yet it was not high if it brought command of all the Eastern seaboard’s fuel. Similarly in the soft-coal regions, the Hocking Valley Railroad, the Baltimore & Ohio and Chesapeake & Ohio were soon swept into the unified control of the unified system which held through “the purchase or interchange of stock,” at once the coal mines, the roads that carried their coal to market and the banks which financed them all.
Every year, according to the Industrial Commission’s report of 1900, traffic in coal was now allotted evenly, output was restricted to a fixed amount—33 per cent under capacity, so experts estimated. Prices were steady and high ; railroad rates were extremely high : 6 to 10 mills per mile per ton for anthracite, and 3 mills for soft coal, when at this very moment Carnegie was hauling iron ore from Lake Erie to his works at Pittsburgh at 1/3 mill per ton mile. At the same time the condition of the coal-miners, for long years “comparable to that of slavery in the South” as the government commission reported, was kept unchanged ; and the insurgent movements of the miners up to 1901 were resisted, as we have seen, with that peculiar ruthlessness which fervent Christians such as George Baer and Pierpont Morgan, no less than the Spanish Conquerors, sometimes invoked.
In his march to power the imperious banker knew how to make governments as well as small capitalists and armies of rebellious laborers bend to his will. At the time of the Treasury crisis in 1894 and 1895, great fears spread everywhere as to the solidity of the national currency. With a universal cry rising from the hard-pressed people for inflation and for the “unlimited coinage of silver”—at a moment when the government’s gold reserve was dwindling—it was presumed that specie payments would be suspended at any moment by the federal Treasury.
In 1899 the Secretary of the Treasury, with Cleveland’s consent, had been compelled to go to Morgan to borrow $50,000,000 for the purchase of foreign gold. Morgan had thundered “Impossible !”—that is, save at his own terms, which he ultimately forced the government in its extremities to accept ; terms which were afterward furiously attacked in Congress as extortionate and unpatriotic. By mobilizing a powerful coterie of banks, life insurance and trust companies the Corsair had succeeded in financing the government’s needs and “saving his country” at usurious rates.
According to James Stillman’s account, Morgan had been hard put to it to raise the needed funds ; he came to Stillman, “greatly upset and over-charged, nearly wept.” Stillman had thereupon cabled to Europe for ten millions of Standard Oil gold, and gathering ten more from other sources, had brought this to Morgan, saying : “I have twenty millions.”
“ ‘ Where did you get them ? ’ cried Morgan. And . . . il bondit de l’abîme de désespoir au pinacle de bonheur, and became perfectly bombastic and triumphant as the Saviour of his country. He took all the credit. But then you see Morgan was a poet—Morgan was a poet ! ”
But “saving the country” once had been insufficient ; the gold had been drained away rapidly again by the great hoarders, the gold reserve had vanished anew. Cleveland, under fire for his dealings with the banking consortium, had been forced nevertheless to come, hat in hand, for a further issue of gold bonds in 1895, at terms imposed by the Morgan syndicate, and called by the financial historian A.D. Noyes “extremely harsh” and “unpitying toward the emergency of the government.”
Once more there was sharp trading to be done with Washington. Fearful of popular opinion, the President had resisted paying the “pound of flesh” exacted. The story has often been told of how Morgan, rebuffed by the President, waited alone and played solitaire at his hotel in Washington, massively silent, stubborn in his certainty—as the government’s gold reserve sank to only a day’s supply—that Cleveland, having no other refuge, must in the end submit once more to him, the master of Wall Street.
Under the previous plan, the bankers had loaned the government money to purchase gold, then used the conversion privilege to draw off government gold anew ! Now the high interest rate fixed by Morgan was the price paid, according to Hovey, for his promise to see to it that the flight of gold was stopped.
Getting the new 4 per cent gold bonds from the government at 104, the syndicate offered them at 112, and on news of the powerful Morgan support, the open market price soon rose to 118 and even to 123. It was not merely the huge immediate profits reaped by the Morgan syndicate which enflamed public opinion—(at a Congressional investigation, the Corsair refused to divulge these, saying, “I decline to answer”); it was the effect of secret negotiations between the President and the all-powerful banking syndicate composed of Morgan, Stillman and Belmont (acting for the Rothschilds) that roused the storm and fed the furious “yellow” Journals of Pulitzer and Hearst. The charges of a “sinister complot” to control the national destiny, the thunderings of the young demagogue from Nebraska against “bondage” and “bribery” left Pierpont Morgan outwardly unaffected. Impassive and solitary as Rockefeller—he had not fifty acquaintances in all his own purlieus of Wall Street who knew him personally—Morgan “never thought of meeting the public half-way with an explanation,” his historian records. He continued intrepidly with the main business at hand : to sweep together railroads into a few giant, regional systems, to consolidate numberless industrial enterprises into great Trusts after his own watery fashion.
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In the golden age of McKinley when the government itself, as Henry Adams observed, seemed to be encouraging finance capital “to pool interests in a general Trust,” there were gathered under the dominion of the House of Morgan between 45 and 50 per cent of the national railroad mileage according to various estimates. Hovey counts 55,555 miles owned or dominated by J.P. Morgan & Co.; but Corey’s estimate, of 30,446 miles directly and 37,700 indirectly controlled, seems more accurate. Adding to this mileage the Pennsylvania system, for which Morgan was fiscal agent, the Gould Southwestern lines, closely affiliated with him at various times, and finally the railroad empire of James Hill in the Northwest, we have a grand mileage of almost 100,000 toward 1900, virtually half of the country’s railway tracks. The largest single group of roads now lying outside of Morgan’s sphere were those of the Rockefeller-Harriman combination. From Maine to New Orleans in the deep South, from the Atlantic seaboard to the Mississippi the Morgan network extended itself ; and by a last step linked with Hill’s Northern roads it formed a completed transportation system carrying goods from the Atlantic seacoast to the Far East.
In reorganizing the repeatedly bankrupt Northern Pacific after 1893, Morgan had measured lances with Jim Hill ; he had found that without that railroad captain’s collaboration he could not reestablish the Northern Pacific at all. There had been interviews and trading conferences in London and New York. Finally the management of the two competing Northern lines had been entrusted altogether to Hill, who had won the banker’s regard and become his firm ally. Thus no sooner did the people of the Northwest obtain their two completed parallel trunk-lines than these were seen to pass quietly into the unified control of Hill and Morgan. As Hill wrote in confidence :
The sole object . . . was to bring together as nearly as possible the general policies of the Northern Pacific and Great Northern, so that both companies . . . would avoid unnecessary expenditures in building new lines, or in the operation of existing lines. We believe this could only be done by the holding of a large and practically a controlling interest in both companies by the same parties.
Then in further elaboration of their plans, it was decided in 1896 to purchase jointly the Chicago, Burlington & Quincy Railroad, a great feeder line running from Chicago through the richest grain regions of the Middle West. Morgan bluntly related his plan of unification to a committee of Congress afterward :
I think it was in 1898 or in 1899 that I made up my mind that it was essential that the Northern Pacific should have its eastern terminus in Chicago, in the same way as the New York Central, of which I am a director, has its western terminus there. . . .
So at his command, there reigned an effective “community of interest” in the railroad world, which only that “little fellow Harriman” menaced.
In the meantime other realms of industrial wealth waited to be conquered and enjoyed, Morganized, watered and distributed as investment securities to the public on the crest of financial “booms.” In the banking house at Wall and Broad streets Morgan’s legal and mathematical experts developed a perfect technique for the swift framing of industrial Trusts such as the International Harvester Company, and the General Electric Company. Trade wars, as between the two biggest electric-machinery manufacturers, General Electric and Westinghouse, were usually terminated by a financial statesmanship which brought a Morgan partner to the board of directors in each. Finally, the colossal steel industry which grew with fantastic haste from year to year in the United States, yet suffered from “feast and famine” and ferocious price wars, invited Morgan’s unifying genius.
The combination of the Western steel-producers in 1898 under the head of Federal Steel figured as the mightiest industrial corporation, in size of its capital, known up to that time, and the profits from its promotion gave Morgan much cause for satisfaction. At Morgan’s insistence the sanctimonious Gary was appointed to its command.
“Judge Gary, you have put this thing together in very good shape,” said Morgan. “We are all very well pleased. Now you must be president.” And this naturally was done.
The amalgamation of the great mills in the Chicago region, the framing by Morgan of other Trusts in the related business of pipes, bridges, sheet and hoop steel (which then ceased to buy their raw ingots from Carnegie), all this gave the country’s leading steel master more and more concern. During the brief war boom of 1898-99 there had been room for all ; there had been peace and collusion. But the outlook was now dark with the promise of future hostilities as powerful Trusts ranged themselves against him. The new times irked Carnegie, who felt himself getting on in years. He had never collaborated with other interests easily, except on terms of mastery. The head of a “close corporation,” he had no wish to become hereafter a great investment banker with multitudinous outside interests and allied with thousands of stockholders and petty absentee owners. He was now at odds with Frick, who, according to Harvey, “foresaw the trend of the times,” and who wanted the Carnegie Steel Company to become part of the consolidation movement. After January, 1899, it was noised abroad that the world’s steel king was ready to sell out and become the world’s leader of philanthropy.
Carnegie nowadays leaned more and more upon his lieutenants, Frick, Phipps, Schwab and others ; yet, since 1896, there was estrangement between him and Frick growing from a dispute over the contract price paid for coke to the underlying H.C. Frick Coke Company. In mournful tones, Carnegie wrote to his friend Lord Morley that though he was more tired than ever, he must give a closer eye to his business and could trust no one.
In May, 1899, Frick had come to Carnegie with the offer of the Moore brothers to buy the entire steel works. The offer was accepted, an option payment of $1,17o,000 was made—partly furnished by Frick—and then the deal had fallen through to Frick’s deep chagrin, and the option had been forfeited to Carnegie. Among the causes of the failure the secret opposition of Morgan has sometimes been mentioned. The Moores had counted on George F. Baker of the First National Bank to finance them, and on ex-Governor Roswell Flower, a famous market leader, to sell the Carnegie stock in Wall Street. But Flower had died, and Baker, probably at Morgan’s instance, had refused credit. In any case the war profits gathered in 1899 happily showed Carnegie that he had placed his ransom too low. According to Moody’s theory, Carnegie now bided his time, “until the Morgan interests had plunged so deeply into the steel business, in connection with Federal Steel Company, the National Tube, the American Bridge, that they could not possibly back out. . . .” He, Carnegie, would then show them how shaky their footing was, at the brink of an economic abyss. But in the meantime Frick must be eliminated, Frick with his far-flung affiliations in high finance, his intimate connections with Wall Street, with the great bankers whom Carnegie hated and feared. In October, 1899, Carnegie had his grounds for an open break.
Returning from Scotland in this month, Carnegie noticed that Frick had purchased some land adjoining the steel company’s mills, the Wiley farm, above Peter’s Creek, presumably to prevent construction of a rival plant or to hold in reserve for possible contingencies. This land Frick sold to the Carnegie company at $3,500 an acre. The story of the conflict has been told in many ways, but never so well as in the more recent chronicles of Barron :
When Carnegie came back from Scotland he always had the records of the meetings read to him. . . . Now Carnegie never allowed a man to get away with a dollar from him or his properties and he never forgave a man if he lost money. So when he came to this item of $1,500,000 paid to Frick for the Wiley farm, he said to Frick, “What did it cost you ?” and Frick intimated that that was his personal affair. Carnegie said that he would show Frick quickly that it was not. . . . The vote to purchase was rescinded and Frick forced to take hack the property for which he had paid only $500,000.
It was open war, Frick denouncing Carnegie’s “high-handed” tactics and demanding apologies. Each took hostile measures against the other. Finally Carnegie pressed Frick to surrender his share of partnership in the Carnegie Steel Company at terms fixed previously, years before, in a so-called “iron-clad agreement” whereby the stock was valued by its paid-in “book-value” rather than its current market-value in the light of recent earnings. Thus in vengeance, Carnegie would have deprived Frick of some $10,000,000—ultimately as it proved of far more—this being the difference between the stated and real value of Frick’s hard-earned minority interest.
At one stage of the quarrel, Carnegie visited Frick at his private office, insisting stubbornly upon the carrying out of the “iron-clad agreement,” and threatening also to strike at Frick’s interest in his coke company too. In turn Frick may have threatened to cut off the supply of coke at once. Carnegie, sitting on the edge of a chair close to Frick’s desk, had been nervous and impatient, while Frick had spoken in low tones. Then the autocrat of the Homestead struggle, always cool and self-possessed up to a certain point, suddenly “burst into flame.” The mad fiend in him raged wildly, and he must have flung himself upon the older man ; for in the next moment, Carnegie was seen by those outside the room in full flight down the hall, with Frick close upon his heels.
In the muffled duel that followed Frick was ousted from the chairmanship, but retained his share of stock in the teeth of Carnegie’s fiercest efforts to break him. All respectable interests, friends of both, begged them to spare the country such a scene, in which “secrets of the steel trust’s” fabulous profits would leak out.2 At this Carnegie had been induced to give up the fight. Besides, great events were preparing themselves before which the significance of their quarrel dwindled, and from which both parties reaped loot enough to satisfy “business honor.”
4
For good reason Gary, head of the Morganized Federal Steel Company, had been begging his chief to buy out Carnegie’s mills. There had been a lull in which the leading interests acted peaceably toward each other. But at the end of 1899—while President Charles Schwab of the Carnegie Steel Company discreetly appeared here and there offering to sell out the company—Carnegie suddenly broke the steel-rail pool and began underselling the market. The phase of conciliation had passed.
In the summer of 1900, we find Carnegie sending Schwab war orders from Skibo Castle in Scotland : “A struggle is inevitable and it is a question of the survival of the fittest.” “This is a crisis which can be used to enhance the value of the property, or which not being properly used will depreciate it.” “You have only to meet the occasion, but no half way measures.” Then further : “We will observe an ‘armed neutrality’ as long as it is made to our interest to do so. . . . If they decline to give us what we want, then there must be no bluff. . . . If it is a fight they want, here we are ‘always ready.’ Here is a historic situation for the managers to study—Richelieu’s advice : ‘First, all means to conciliate ; failing that, all means to crush.’”
In full tide of prosperity a profound crisis shaped itself. The scattered makers of nails, wire, tubes, pipes, boiler plate and a thousand other steel products who had formerly bought their raw materials from Carnegie were now “integrated” into Trusts, thanks to Morgan and his allies. Controlling from 75 to 100 per cent of their market for finished steel, they obtained their own raw material, ingots and steel billets ; they held up the selling price two and three times higher than before. Gates in the wire-nail Trust, the Moore brothers in tin plate, the new tube interests, had all notified Schwab that they would no longer need Carnegie steel ; the American Bridge, which had been a mere assembling plant for Carnegie structural shapes, rails, and beams, now set up its own blast furnaces and steelconverting plants.
Now in retaliation Carnegie plans to make finished articles himself in competition with all the world ; he says to Schwab, of one company after another which Morgan has organized, “we should go into making their products at once. . . . Lose not a day . . . crisis has arrived, start at once, hoop, rod, wire, nails mills. . . . Spend freely for finishing mills, railroads, boatlines. . . . Our safety lies in being independent and running our business in our own way. Whenever we do so we have the big trusts at our mercy.” “We have no Union in our works. . . . The sales department is not responsible for market prices, but it is for keeping the works full. . . .”
The cablegrams fly thick and fast to the battle front at Pittsburgh. July 11, 1900, Carnegie writes :
Briefly if I were Czar, I would make no dividends upon common stock ; save all surplus and spend it for a hoop and cotton tie-mill, for wire and nail mills, for lines of boats upon the Lakes for our manufactured articles and to bring back scrap. . . .
His rivals Carnegie despised. Was not the National Tube Company, as afterward proved in the Stanley Committee hearings, and by the admission of Morgan’s expert, composed of $19,000,000 assets in scattered plants, while capitalized at $80,000,000 ? This was typical. It earned now 17 per cent on this inflated capital with a 90 per cent monopoly in all pipe. But Carnegie had a new process for making pipe, with the use of reduced labor and cheap steel. What would happen when he began to compete ?
He set on foot a series of operations designed to create havoc among all the steel companies of the country. To fight Morgan he announced that he would go into the tube business in direct competition with the National Tube Company. His agents purchased 5,000 acres of water front at Conneaut, on Lake Erie, and let contracts for the construction of a $12,000,000 tube plant, of the most modern design. To fight Gates, of the American Steel & Wire Company, he announced a gigantic rod mill to be erected at Pittsburgh. To ward off Rockefeller he ordered the construction of a large fleet of ore-carrying vessels. He thus became “an incorporated threat and menace to the steel trade of the United States,” as contemporaries observed.
Attacks upon Carnegie now came from the other side. Was it by Morgan’s order ? The Pennsylvania Railroad, which had made peace with Carnegie in 1896, by offering special rebates, was in 1899 headed by Cassatt, under the system of “community of interest.” In unison with the Baltimore & Ohio, with which it was linked by stock purchase, the Pennsylvania now doubled freight rates from Pittsburgh to the seaboard. “With a stroke of his pen” Cassatt, as the furious Andrew exclaimed, had decreed that “Pittsburgh is stricken out as a manufacturing center. . . .” The steel master threatened mass conventions of the people and was restrained with difficulty. He seethed with anger : “We will teach Mr. Cassatt and Mr. Vanderbilt a lesson. . . . A life and death struggle ! . . . The Deliverance of Pittsburgh is my next great work.”(!) Uniting with George Gould, who had delusions of grandeur, and at the moment schemed rebellion against the Morgan “collar,” Carnegie drew plans to connect his short Bessemer line, Lake Erie to Pittsburgh, with the Western Maryland, 150 miles from Pittsburgh, thus to open a way eastward to the seaboard, by new construction over the Allegheny Mountains. He would use the millions in his war chest to cut his way to the sea ! Gould in the meantime professed to be building a new independent transcontinental railroad which had San Francisco as its western terminus.
At the start of the steel war, the entire steel trade of the country was thrown into confusion. There was actual panic among the railroad-owners and millionaires of Wall Street ; there was panic in the offices of Morgan, where to a great extent the bag was held for the vast paper amalgamations of the past four years, some $500,000,000 in steel securities. All rushed to Morgan, crying in effect : “Save us ! We must get rid of Carnegie ; he will wreck both himself and us ; he is a business pirate.” Years afterward, Gary said, “It is not at all certain that . . . the Carnegie Company would not have driven entirely out of business every steel company in the United States,” especially the eight great metal trusts which had recently arisen. Was it a bluff ? The railroads too were in a panic to head off the new piratical combination which struck at Morgan’s network of trunk lines. What would become of the plan of “community of interest”?
“Carnegie is going to demoralize railroads just as he has demoralized steel,” Morgan said to Schwab at this time.
It was very hard. The master of bankers had moved mountains to unify the railroads ; he had cunningly devised the system of reciprocal investments in stocks, of interlocking directorates—violating the law, facing prosecution continually—yet seen the great Union Pacific trunk line slip from his hands, revived, headed by the immitigable Harriman and enjoyed by the Standard Oil party. He had never acknowledged his bitterness at this error which measurably impaired his railway domain. Now for several years his whole attention had been directed to the new steel monopolies ; and in turn, he found them at the mercy of the implacable Carnegie. Tomorrow the Federal Steel, National Tube, and the others—in a great trade conflict—might tumble into bankruptcy, all the fiction of their bonds and stocks destroyed. The railroads too would be involved in the general ruin prepared for them all. By the autumn of 1900, where he had stubbornly resisted Morgan was beaten down. He was now amenable to pleas that the Carnegie interest—and with it the Rockefeller ore companies—be bought in if it were at all possible.
1 Drexel, Morgan & Co. became J.P. Morgan & Co. in 1895, at the death of Anthony Drexel.
2 If there had been a legal suit in public, the embittered Frick would have published a boastful letter of Schwab’s in 1899, showing that the Carnegie Steel Company was already grown so strong it did not need tariff protection. “You know we can make rails for less than twelve dollars a ton,” it ran. “I know positively that England cannot produce pig iron for less than eleven dollars fifty cents per ton. . . . This would make rails at net cost to them of nineteen dollars. What is true of rails is equally true of other steel products. As a result of this, we are going to control the steel business of the world.”