The Deal of the Century

When J. P. Morgan formed U.S. Steel, the first billion-dollar corporation, in 1901, it marked not only his signature deal but the apogee of banker power in America. The negotiations would feature Morgan in his most famously histrionic mode: knocking heads together, barking out prices for properties, and forcing titans to truckle to his will. In the end, he fused together a trust that controlled 60 percent of the steel industry and employed 168,000 workers. This colossus encompassed everything from Andrew Carnegie’s massive steelworks to John D. Rockefeller’s iron ore and shipping interests in Minnesota.

As the deal’s impresario, Morgan forever altered the balance of power between American industrialists and New York’s financiers. Relations between the two camps had been cool ever since the industrial boom that followed the Civil War. Many manufacturers were plain. self-made men who had no use for Wall Street pashas and inherited wealth. Fierce individualists, they were determined to shield their firms from intrusive bankers who knew little about the grimy realities of smokestack America.

The case of John D. Rockefeller—a pious, puritanical Baptist who began as a teenage clerk in a commodities house—was emblematic. After creating Standard Oil in Cleveland in 1870, he borrowed lavishly at local banks while also wooing large investors such as Stephen H. Harkness. As his firm extended its dominion over oil refining and marketing, Rockefeller scaled back his borrowing to finance expansion from retained earnings, freeing himself from the thrall of bankers. Like other small-town businessmen, he viewed Wall Street tycoons as pompous and overbearing. He never forgot that in the early years of the oil business New York money men had scoffed at the industry as too speculative, a mirage destined to disappear with the draining of Pennsylvania’s wells.

Moguls in the Rockefeller and Carnegie mold dreaded not only meddling bankers but also the loss of control that might accompany a stock exchange listing for their companies. They feared that outside investors would force them to pay exorbitant dividends, sacrificing future growth for short-term gain. They saw shareholders less as a salutary check than a dangerous obstacle to their ambitions. Most of all, these chieftains valued secrecy and independence. They didn’t issue annual reports and seldom granted interviews, craving immunity from government regulators, snooping reporters, and prying bankers.

In welding together U.S. Steel, J. P. Morgan found himself dealing with several titans who had resisted Wall Street’s sway. By the late 1890s Morgan had begun to shift from his historic emphasis on railroad finance to organizing industrial companies, especially in steel. When he put together Federal Steel in 1898, he elicited this swipe from Carnegie: “I think Federal the greatest concern the world ever saw for manufacturing stock certificates . . . but they will fail sadly in Steel.” His gloating proved premature: By 1900, Federal Steel ranked second only to Carnegie Steel in production.

Unsettled by Morgan’s portly presence on his turf, Carnegie began to contemplate vertical integration—that is, diversifying beyond crude-steel production into manufacturing pipes, wire, and other finished products. He envisioned a vast tube plant at Conneaut on Lake Erie, designed to compete directly with another Morgan stepchild, the National Tube Company. A man with a keen relish for a fight, Carnegie braced for ferocious competition from his Wall Street adversary.

Mr. J. Pierpont Morgan detested nothing more than competition. He berated Carnegie as someone who would “demoralize” the industry with price cuts rather than do the smart, gentlemanly thing: join a cartel. While instructing his corporate wards to prepare for war with Carnegie in crude steel and finished products, he preferred an alliance that would eliminate competition altogether. So he was hypnotized by a speech he heard on December 12, 1900, when Charles Schwab, Carnegie’s right-hand man, addressed eighty financiers at the University Club in Manhattan. In sonorous phrases Schwab conjured up a vision of a supertrust that would make everything from raw steel to finished products. Morgan sat there so bewitched that he forgot to light his trademark cigar.

The linchpin of the new trust was to be Carnegie Steel. After consulting with Morgan in the storied “black library” of his Madison Avenue home, Schwab sounded out Carnegie, who was golfing at the St. Andrews Golf Club in Westchester County. Carnegie pondered the matter overnight, then handed Schwab a slip of paper the next morning with an asking price of $480 million scrawled across it. The instant Morgan set eyes on it, he exclaimed, “I accept this price.” Morgan had good reason to rejoice. When he later encountered Andrew Carnegie on a transatlantic crossing, the shrewd Scot fretted that he could have extracted another $100 million for his company. “Very likely, Andrew,” Morgan told him.

Morgan’s frosty relations with Carnegie were repeated with Rockefeller, again reflecting the residual tension between Wall Street and heavy industry. Through his Lake Superior Consolidated Iron Mines, Rockefeller owned most of the iron ore on the Mesabi Range in Minnesota, along with fifty-six ore-carrying vessels. Morgan couldn’t afford to exclude such rich holdings from his trust. Yet his visceral dislike of Rockefeller prevented him from approaching him about a purchase. When Judge Elbert Gary, president of Federal Steel, asked why he didn’t proceed with Rockefeller, Morgan snapped, “I don’t like him.” Gary was utterly perplexed. “Mr. Morgan, when a business proposition of so great importance to the Steel Corporation is involved, would you let a personal prejudice interfere with its success?” “I don’t know,” Morgan admitted. Rockefeller derided Morgan as a haughty aristocrat, pumped up with false pride. “For my part, I have never been able to see why any man should have such a high’and mighty feeling about himself,” he said.

Overcoming his dislike, the temperamental Morgan finally deigned to see Rockefeller. When he visited his home on West Fifty-fourth Street, Rockefeller, a skillful negotiator, insisted that he was retired and that their chat should be purely social; he said that his son, 27-year-old John D., Jr., would later take up the matter with him. Morgan doubtless grimaced at the snub. When Rockefeller, Jr., duly visited J. P. Morgan & Company, the boss repaid the compliment and didn’t look up from his desk for a long time. Finally he lifted his eyes and growled, “Well, what’s your price?” Since the Rockefellers were among the holdouts in forming U.S. Steel, they could stall to their advantage. In the end, Rockefeller received $88.5 million for his ore and steamship properties, or $5 million more than Morgan had originally offered.

Disposing of the avalanche of U.S. Steel shares was no small matter at a time when daily volume on the New York Stock Exchange had never exceeded two million shares. The stock was capitalized at $1.4 billion—inconceivably large at a time when all American manufacturing concerns were capitalized at just $9 billion. (We should point out that both hope and hype were packaged into that offering price; the underlying assets were worth only $880 million.) The $1.4 billion price tag surpassed the accumulated national debt and was nearly triple the size of that year’s federal spending. Morgan fielded a giant syndicate of three hundred underwriters to market the securities. In the process he showed that Wall Street commanded the capital to effect a tremendous new wave of mergers, introducing giant economies of scale to industry. Taking a big block of U.S. Steel stock, the Morgan bank placed four of its representatives on U.S. Steel’s board, making it a captive client. No longer the servant of industrial America, Wall Street had emerged irrevocably as its master. Or so it seemed.

The kaleidoscope of history forever shifts before our eyes, and the lessons of U.S. Steel have changed with time. From the vantage point of 1998, we can spy some hitherto unseen ironies in the deal’s long-term impact. By shaking loose steel companies from their original owners and binding them to his trust, Morgan hastened the end of an era when many large industrial concerns were still run by founding entrepreneurs. After that, under the tutelage of investment bankers, most corporations would be run by professional, salaried managers, beholden to their Wall Street sponsors. Yet the bankers’ reign wouldn’t survive the 20th century. By offering shares to the public, the financiers had paved the way, inadvertently, for a long-term demotion in their power. In time the shares of U.S. Steel and other companies would be widely dispersed among individual and institutional investors who would supersede the power of Wall Street investment houses.

As we approach the millennium, the ethos of American business has experienced a radical transfermation. The corporate ideal is now transparency, not opacity. Companies publish glossy annual reports, issue reams of information, and deluge stock analysts with reports on company developments. Chief executives monitor the share prices of their companies as prophecies of their future tenure and ignore the stock market at their peril. This state of affairs was unwittingly set in motion by J. P. Morgan, who never imagined when he formed U.S. Steel in 1901 that he and his fellow bankers would someday cede control of their foremost clients to tens of millions of small, obscure investors.