The Great Pierpont Morgan (20 page)

As a matter of fact the answer to this question had already been found—found, indeed, before the Sherman act was even passed. The machinery for combining businesses had already been invented by a cheerful, rosy-faced New Jersey lawyer named James B. Dill.

On being asked in 1889 by the governor of New Jersey how the state's revenues might be increased, Dill had suggested passing a New Jersey law permitting one corporation to hold the stock of another corporation—a thing previously considered grossly improper, and only rarely sanctioned by special legislation. The law was accordingly passed, and New Jersey's revenues swelled as business men began to discover
that now the door was wide open to perfectly legal combination. Did you want to combine ten companies into one? All you had to do was to go to New Jersey, incorporate a holding company under the New Jersey laws, make a series of agreements by which this company would buy the stock of the ten companies, giving its own shares in return—and the thing was done. The ten companies had now become in effect mere subsidiaries or departments of one big boss concern—which now might be big enough to capture the whole national market.

By the time the business tide turned in 1897, Dill's invention had become very well known. Lincoln Steffens tells in his
Autobiography
how, when he was a financial reporter in New York, he was shocked to hear that all sorts of outrageous things could be done under the shelter of the New Jersey Holding Company Act, and went to see the author of the act, James B. Dill. Somewhat to his surprise, Dill appeared to share Steffens' dismay, told him that such abuses must be exposed and stopped, and provided him with even more scandalous facts than he had already gathered. Steffens wrote a detailed story and it was published. Not until some time later, when Steffens had got to know Dill really well, did the rosy little lawyer explain to him, with vast amusement, why he had been so helpful. “You thought that the things you were describing were dreadful,” said Dill in effect. “But I knew that to a lot of business men they would look mighty inviting. I was advertising my wares and the business of my state.”

The possibilities of the New Jersey law were certainly wonderful. How, you may ask, could anyone persuade the owners of, say, ten businesses to sell out to a new holding company? Well, suppose each of these businesses represented an investment of one million dollars. The promoter of the new holding company would offer the owners of each of them
two
million dollars' worth of the shares of the new company; that would bring them in all right. Yes, but would these new shares actually
be worth
two million dollars? Possibly not—but to the eye of optimism the advantages of monopoly or near-monopoly, plus the gain in efficiency that should come from integrating all these concerns, plus the appeal of a big and forward-looking scheme, would be very persuasive. What the promoters of the new holding company were doing was capitalizing, at one fell swoop, the prospects for the long future.
Crazy? Perhaps. But was not America coming of age, and was not the future something to conjure with? As soon as the shares of the new holding company were launched on the Stock Exchange, the public swarmed to buy them; and the man who had sold his control of the Podunk Street Railway Company to a new Consolidated Traction Company, accepting stock in the latter as his payment, found he could sell this new stock at a fat price—and would be suddenly a rich man.

Not only that, but if the promoter, merging ten companies into one, was increasing their total capitalization from ten million to twenty million, why not increase it still more, say to twenty-two million, and award the additional stock to himself for his services in bringing the boys together and organizing the syndicate that would launch the new shares on the market? The idea began to get round that there was nothing so remunerative as promoting New Jersey holding companies. You could become a promoter without even learning much about the businesses you were combining; did not the Moore brothers, within the space of a few years, organize a combination of match companies, a combination of biscuit companies, and a combination of tin-plate companies, and profit preposterously thereby? What Dill had invented might well have been described as a device for the manufacture of millionaires.

Yet it was also a device for expanding and co-ordinating the industries of America to meet the conditions of a new day. A mature and united country offered a field for business operations on a national scale. And Dill's invention made such operations abundantly possible.

4

It was in the late summer of 1897 that Pierpont Morgan got his first real glimpse of the possibilities of combination in the great steel industry.

His life that year had been full of variety. Early in January he had given a million dollars to the Lying-in Hospital for a new building. Then he had taken a short sub-zero winter holiday at his friend W. West Durant's camp in the Adirondacks, enjoying the place so much that he bought it the following year. In March he had promised to build a new rectory for the Church of the Holy Innocents at Highland Falls, of which he was senior warden (as he was of St. George's in New
York). On March 24 he had departed from Wall Street and No. 219 Madison Avenue for his annual trip abroad, sailing this time on the
Teutonic
with his daughter Louisa. While in England he had supervised the affairs of his London banking house, had prepared the way among British investors for the refunding of the New York Central mortgage debt, and had also found time to make heavy purchases of objects of art, for himself and for the Metropolitan Museum, in which he was now taking an expanding interest. And returning from Europe in June, he had divided his summer attention between financial affairs and his plans for the annual regatta of the New York Yacht Club, of which he had recently been elected commodore.

They were big plans, for the new commodore liked to do things in a spacious way. The yachts were to assemble at Glen Cove, Long Island, proceed to New London and then Newport and then Vineyard Haven, and then go on the longest jaunt in their history—a race round Cape Cod and all the way to Mt. Desert, Maine. Morgan offered gold and silver cups for the winners. And at the beginning of August he filled his 204-foot black
Corsair
to capacity with guests and set out upon the festivities of regatta week.

The Yacht Club had never had such a gala cruise. When on the afternoon of August 4, the schooners and sloops and steam yachts slipped by twos and threes into Newport Harbor past the gleaming white warships of the Atlantic squadron, there was “a constant coming and going of launches and gigs filled with gay people, sunburnt yachtsmen and pretty women, carriages and traps bringing down favored ones for dinners on the yachts, and other favored ones driven off for dinners on shore”; after dusk fell, the harbor glittered with moving lights and on the shore there was a grand show of fireworks. And when, days later, the yachts had finished their long deep-sea race at Mt. Desert Light (
Vigilant
leading, followed in turn by
Colonia, Navahoe, Emerald
, and the rest of the long procession), they sailed round the lovely island to Bar Harbor, where Commodore Morgan gave a big dinner aboard the
Corsair
in honor of the winning captains; and again the night skies were bright with fireworks—furnished, of course, by the commodore himself, who had arranged to have a bargeload of them brought from New York.

It was not long after this regatta that he was waited upon in New York by Judge Elbert H. Gary, a Middle Westerner who had himself been vacationing that summer, in a somewhat less spectacular way—taking his first trip to England and dutifully doing the cultural round there, from Bunyan's grave and Dickens' “Old Curiosity Shop” to the British Museum and the Tower of London. Gary—whom Morgan had met before—had now come to New York on behalf of John Warne Gates, a rising manufacturer of barbed wire who had already, with Gary's help, combined a number of steel and wire companies into one, and who now wanted to combine a great many more—to form an eighty-million-dollar American Steel & Wire Company.

Charles Coster had already examined the data which Gary had brought with him, and had reported that the project was worth his chief's attention. Morgan talked with Gary, was favorably impressed, and gave his provisional OK to the ambitious project; and Gary and Gates thereupon went to work trying to line up the numerous manufacturers of wire for the great merger.

Morgan was dealing now with two quite different men. Gary, born and bred in an Illinois farm town, had become a leading Chicago lawyer, had been mayor of Wheaton, Illinois, had served two terms as a county judge, and had been president of the Chicago Bar Association; recently, as legal adviser for Gates, he had become an expert matchmaker among corporations. A shrewd, diplomatic man with the ability to frame a compromise which would satisfy both parties to a deal, Gary was aptly described by Herbert N. Casson as resembling, in appearance and manner, “a Methodist bishop—benign, suave, cordial, and earnest.” But there was nothing about Gary's friend Gates that remotely resembled a bishop. Gates was a plunger, a gambler, a large, genial all-night poker player, once described by his secretary as a “great boy with an extraordinary money sense annexed.” He had made his start in business as a barbed-wire salesman; had gone to San Antonio, rented a tract of land there, built a corral of his barbed wire, and challenged the ranchers to find a steer that could get out of it; and had triumphantly accumulated so many orders for wire that he abandoned his employer, went to St. Louis, raised some capital, and went into the wire business
himself to fill those orders. Now he had become a big shot in the wire industry and was ready to become a bigger one. They called him “Bet-a-Million” Gates; he was said to have spent a rainy afternoon on a way train betting with a companion on which of the raindrops coursing down the windowpane would reach the bottom first—at a thousand dollars a race.

All that fall and early winter the negotiations over the proposed wire combine went on, but in February Morgan would go no further. What he said was that he was disturbed by the financial showing of one of the companies that was to be included in it. But there may have been other reasons. The American battleship
Maine
had just been sunk in Havana Harbor, and there was a threat of war with Spain; perhaps that fact contributed to Morgan's uncertainty. Or the main factor may have been distaste for Gates and the “Waldorf crowd” of speculative plungers who surrounded him. At any rate, Morgan would not say yes—whereupon Gates and Gary went ahead without him. The result was the formation, first, of a small combination, and then, a few months later, of a larger one called the American Steel & Wire Company, put together without aid from 23 Wall Street.

But Morgan had had his initiation into the steel industry. And he had found Gary both able and reliable. And so, in the summer of 1898—while the brief Spanish War was being won by the United States with one hand tied behind its back—he willingly embarked with Gary upon another combination scheme: a scheme for tying together the Illinois Steel Company, and an ore company, and several other concerns, to form what was to be known as the Federal Steel Company. And when, by September, the job was done, he called Gary to his office and said, with his customary brevity:

“Judge Gary, you have put this thing together in very good shape. We are all very well pleased. Now you must be president.”

Gary was amazed. He had had no inkling of any such plan. He said he couldn't think of it.

“Why not?” said Morgan.

“Why, Mr. Morgan, I have a law practice worth $75,000 a year and I cannot leave it.”

“We'll take care of that,” said Morgan. “We must make it worth your while.”

“But I must think it over,” said Gary desperately.

“No, we want to know right now.”

“But who are the directors to be?”

“You can select the directors, name the executive committee, choose your officers, and fix your salary.”

Gary begged for a week to think the matter over. Morgan gave him twenty-four hours. Gary accepted.

And so, the following month, the Chicago lawyer came East at the behest of the New York banker to become the head of what had become the second biggest steel concern in the country. He was not a steelmaster, knew little about steel manufacturing. He was there because the banker trusted him.

Now Morgan was free to proceed to Washington, where, with a number of bishops as his guests at the Arlington Hotel, he spent several weeks attending the Triennial Convention of the Episcopal Church, at which there was especially vehement debate over the question whether a bishop, under certain carefully guarded conditions, might take “under his spiritual oversight” a “congregation of Christian people not theretofore in communion with this church.”

5

So contagious did the idea of combining steel companies become during the next two years that it was as if a giant magnet had moved over the surface of the industry, pulling together into compact groups the innumerable separate particles of which it had previously consisted. Morgan himself helped to bring together two more groups—the National Tube Company and the American Bridge Company. And as for the Moore brothers, they worked with such diligence as to produce the National Steel Company, the American Tin Plate Company, the American Sheet Steel Company, and the American Steel Hoop Company. Each of these constituted a merger of a number of hitherto competing businesses; and each, as it acquired a partial monopoly of the operations in its special field of steel manufacture, lifted its prices sharply. The profits accordingly rolled in. During its very first year Gary's Federal Steel Company was handsomely in the black and paid dividends on its preferred and common stock, despite its heavy capitalization; early in 1900 American Steel & Wire paid a seven per cent dividend.

Inevitably, now, a new notion popped into many minds.
Why not combine the combinations?
Why not make them into a mammoth supercorporation, the biggest and most powerful thing of its kind in the world? Since the Spanish War, America had suddenly become conscious of being at last a world power; could not such a colossus of American steel capture the market not only of its own continent but of other continents, too?