The McKinley-Era Mega-merger

Once again, it’s merger-mania time in the United States as a new century draws nigh. Headlines proclaim the impending or actual union of Capital Cities/ABC and Disney; of Turner and Time Warner; of Chase and Chemical; of USAir and United—or perhaps American. Others doubtless wait in the wings. As the consolidators line up to woo the stockholders’ votes, I find myself looking for explanatory perspectives. The words that leap to mind are: “So what’s new?”

Corporate concentration was at least as much a part of the business scene a century ago, and despite the antitrust fervor that flourished alongside it, The New York Times could announce on New Year’s Day of 1900 that, after a decade of continued trust-building, “the era of consolidation was on all sides proclaimed as present and as full of blessings.” Almost exactly a year after that, the deal was struck that gave birth to the United States Steel Corporation, the first billion-dollar consolidation in our history. U.S. Steel went on to become a foundation stone of American industrial power. So did other consolidations, despite still another legislative “guarantee” of free competition, the Clayton Antitrust Act of 1914.

I like to recall the story of that prophetic turn-of-the-century steel merger because it involves two of the livelier individuals in the annals of American capitalism and because it harks back to the days when the principal business of the United States was manufacturing durable goods rather than providing informational and financial services. Life had hardships now too easily forgotten, but there were plenty of jobs for people without diplomas, and plenty of men who created those jobs, such as Andrew Carnegie and John Pierpont Morgan.

One has to begin with steel’s rock-bottom importance. From the 1859 introduction of the Bessemer converter, tough and flexible steel became the core element in the American rush to industrialism. Steel for the hundreds of thousands of miles of new railroad construction; for the skyscrapers of the booming cities; for the armor plating of the ships of the modern navy; for canned goods and streetcars and the machine tools that made the machines that spun the yarn and ground the wheat and sawed the planks and drilled for the oil and moved the coal that provided the power that went into the wealth that factories built.

In the 1890s, the king of steelmakers was Andrew Carnegie, a Scottish immigrant child who began working in a Pennsylvania textile mill for $1.20 a week, then climbed his way upward to telegraph delivery boy, then telegrapher, next private telegrapher and secretary to the president of the Pennsylvania Railroad. Steady saving and prudent investment had made him affluent by his thirty-fifth birthday in 1870. Soon afterward he put all his eggs into a single basket—steelmaking—and by then watching the basket (his own phrase), he turned them into more gold. By timely purchases to integrate steps in the process, technical innovations, shrewd pricing, good choices of managers, and ebullient salesmanship he drove down all his costs—including wages—and had his Carnegie Steel Company sitting atop the industry by 1899.

This was not enough for Carnegie, whose family included voracious readers and working-class radicals. It became his fancy, then, to be something special—a thinking man’s capitalist. At one time, he planned to quit moneymaking in his mid-thirties and retire to a life of self-education and philanthropy in Great Britain and the United States. He missed that target by thirty years, but in his sixties he was a respected friend of influential intellectuals in both nations. He had written Triumphant Democracy, a booster-like paean to American institutions, and was also the author of a so-called gospel of wealth, which argued that self-made rich men deserved their winnings but had an evolutionary duty to plow them back into improving society through gifts to educational and character-building institutions. In that way, they became nature’s chosen agents of inevitable progress.

Morgan was something else altogether. Unlike Carnegie, he was born (in Connecticut in 1837) to silver teething rings and private tutors. His banker father educated him abroad and brought him, aged 20, into the family business. Young John took masterful advantage of ‘its international connections, plus his understanding of the new links between finance and industrial capitalism, to make the “house,” in forty years, the most feared and respected on Wall Street.

Morgan’s well-proclaimed Episcopalianism did not interfere with his enjoyment of his fortune, which he spent with the efflorescence of Renaissance princes. It is likely that he shared Carnegie’s then-fashionable social Darwinism, which held that those atop the economic heap were the naturally selected survivors in a competitive struggle for existence.

This implied, however, that competition constituted the very marrow of advancing civilization. Carnegie said as much. But Morgan had no fondness whatever for business competition. He disliked its anarchic and wasteful side—the price wars, speculative frenzies, squandered opportunities for profit—and his major investments aimed to produce consolidations among railroads and other enterprises to promote market efficiency. As 1900 neared, his eye was on a potential steel trust that would unite the assorted wire, rod, hoop, and sheet manufacturing companies that, together with iron mines, coke ovens, and ore carriers, constituted the industry. That brought him onto a collision course with Carnegie. Morgan first organized and funded a pair of combinations called Federal Steel and National Tube. But any meaningful combination would have to include Carnegie, who appeared most unwilling to join.

Carnegie was in fact ambivalent (or perhaps simply wily) in his own expressed attitudes toward competition. He sometimes entered pools and market-sharing agreements but dropped out of them as soon as it suited him. He also took full advantage of the protective tariff. But he did seem confident that he could dominate the market himself in a free-for-all. “Carnegie Steel . . . should never in my opinion enter any Trust,” he wrote his deputy Charles Schwab in 1898. “An independent concern always has the ‘Trust’ at its mercy.” This judgment defied the actual record, but, in 1899, Carnegie showed signs of true faith in it. He announced that he would build new facilities to compete with any consolidation, factory for factory. He would even create a new railroad in competition with the Pennsylvania, then under Morgan control. Morgan was aghast. “Carnegie,” he predicted, “is going to demoralize railroads just as he demoralized steel.”

Carnegie simply had to be brought into the fold. His works alone produced 85 percent as much steel as National Tube and Federal Steel put together. Morgan was, an observer said, “about to make a very fine plum pudding,” but “Mr. Carnegie had all the plums.” Luckily for the banker, Carnegie was not completely unamenable—or his go-it-alone threat was a bluff. In any case, by coincidence or design, Schwab spoke at a dinner given by some financiers in his honor in December of 1900, to which Morgan was invited. Schwab sketched a bright future for a rationalized, competitionless industry that would produce the world’s best steel at the world’s lowest prices. Presuming that Carnegie was not unaware of his lieutenant’s thinking, Morgan promptly invited Schwab to a January meeting in his Madison Avenue home to talk nuts and bolts. It ended at dawn with his saying: “If Andy wants to sell, I’ll buy. Go and find his price.”

In 1901, multimillionaire industrialists hired lawyers to perspire over the fine print of deals, but did not waste their own time in haggling. Carnegie slept on it one night, then scribbled his terms in blunt pencil on a single sheet of paper: $480 million for capitalization, stock, and yet uncollected profits. Schwab took the paper to Morgan, who glanced at it and said, “I accept this price.” And U.S. Steel was born.

There were, of course, many more transactions to gather in all the plums, but, by 1901’s end, the incorporation papers of U.S. Steel were filed, and the chairman of its executive committee piously announced that its purpose was to “secure perfect and permanent harmony” and not at all “to . . . create any monopoly or trust.” But at a capitalization of $1.4 billion (4 percent of the entire national wealth at the time), U.S. Steel stood in a good position to impose its view of harmony on the remaining independent steelmakers.

There is an irony in the actual record, however. Some business historians echo George David Smith and Richard Sylla’s belief that U.S. Steel “struggled to remain profitable” despite “cartel-like techniques for setting prices in the early part of the century.” By 1920, in which year the Supreme Court rejected a government anti-trust suit against the corporation, its market share had slipped to half what it was in 1901, and it declined to a third of that in the 1930s. In short, say these scholars, U.S. Steel was neither the ogre painted by anti-monopolists, nor the benign guarantor of an efficient industry as depicted by Schwab’s dinner speech.

Carnegie’s personal share of the proceeds of sale came to some $230 million, paid in gold bonds bearing 5 percent interest. He therefore took a yearly income of more than $11 million pre-income tax, high-purchasing-power dollars, into his cherished philanthropic retirement. J. P. Morgan & Company’s portion of the $57.5 million in profits to the various syndicates underwriting the necessary new securities was $11.5 million. But there would be more in future stock trades. The immediate blessings of mergers fell on their organizers rather than on the manufacturers, who still had to earn their operating profits after the contracts had been signed and the debts repaid. Which may be at least one reason why mergers continued to flourish as America rushed into the new century, still echoing, as it nears its end, the seductive music of corporate mating dances.