The Great Pierpont Morgan (21 page)

But there was one thing which stood squarely in the way of such a dream. The biggest, most efficient, and most fabulously successful unit in the industry was the Carnegie Steel Company, the control of which was held tightly in the hands of that twinkling little genius, white-bearded Andrew Carnegie. And while the new combinations which had been put together by Gary and Gates and Morgan and the Moores concentrated almost without exception upon making finished articles—wire, pipe, rails, girders, steel plate, etc.—Carnegie dominated the making of the crude steel from which they fashioned their wares. Obviously any supercombination must include Carnegie's company, or its life would be precarious indeed. Carnegie, who was in his middle sixties, was known to be looking forward to retirement. Perhaps he would sell. The trouble was that his company had become so incredibly prosperous, as the business boom of the late nineties continued, that men gasped at the size of the sum of money which would be required to buy out the principal stockholder. It would run into hundreds of millions.

Two of Carnegie's colleagues, Henry Clay Frick and Henry Phipps, toyed with various plans for buying Carnegie out. They engaged in a flirtation with the Moore brothers in the early months of 1899, and actually induced Carnegie to give them an option on the purchase of his company on behalf of some unidentified clients. (They did not dare tell Carnegie that the Moores were in on the deal, for if he had known it he would never have consented; he disliked everything that these speculator-promoters represented.) The scheme failed because too many other people distrusted the capacity of the Moores to manage such an undertaking; they could not get substantial financial backing. Morgan was among those who were approached, and would have none of any such deal. He too would not go into partnership with the Moores. Later, in the spring of 1900, Carnegie's chief aide, the brilliant Charles
M. Schwab, went to Gary to propose that Federal Steel should buy Carnegie out, and Gary consulted Morgan. “I would not think of it,” said Morgan; “I don't believe I could raise the money.” He was well aware that so many New Jersey holding companies had been launched during the past two or three years—not only in steel but in other industries—with lavish issues of stock, that the stock market was suffering from what he called “undigested securities.” Thus the matter rested. A supercombination seemed impossible.

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Whereupon, in the summer of 1900, there began a ferocious struggle within the steel industry. The various new combinations which made finished steel products were conscious of the need for “integrating” their businesses—for producing their own crude steel and even acquiring if necessary their own sources of iron ore, so as not to be dependent for their very existence upon the whims of Andrew Carnegie. They were so prosperous that they could save or raise money for the installation of blast furnaces or the leasing of ore fields. And so they began to make themselves ready to go into the manufacture of crude steel, in the hope of thus achieving independence. On behalf of American Steel & Wire, John W. Gates sent word to the Carnegie Company that he was canceling his contract for crude steel; in the future he would make his own. The Moore brothers sent identical notices on behalf of Steel Hoop and Sheet Steel. And word came that National Tube and American Bridge expected likewise to stop ordering from Carnegie.

Carnegie was idling that summer at Skibo Castle in Scotland, but there was nothing idle about his reaction to these rebuffs. He had noted for several weeks that the orders from some of these concerns had been dwindling, and had written to his colleagues in Pittsburgh that if the Steel Hoop people stopped ordering crude steel, the Carnegie Company should reply by going promptly into the manufacture of steel hoops. Now, when the full scope of the impending crisis became clear, he decided on a full declaration of war. The Carnegie Company would go into making finished products of all sorts.

“No use going halfway across a stream,” Carnegie wrote;
“should aim at finished articles only; it is coming to this in all branches.” And again he cabled: “… Urge prompt action essential; crisis has arrived, only one policy open: start at once hoop, rod, wire, nail mills; no halfway about last two. Extend coal and coke roads, announce these; also tubes … have no fear as to the result; victory certain.…”

Schwab, who was Carnegie's right-hand man, went over to Scotland to visit him, bringing plans for a great new steel works to be constructed at Conneaut on Lake Erie. “How much cheaper, Charlie, can you make tubes than the National Company?” asked Carnegie. Schwab said he could save at least ten dollars a ton. “Go on and build the plant,” ordered Carnegie, the fire of battle in his eyes.

The prospect that this decision opened up was staggering. All the steel combinations that had been effected during the past three years were in deadly peril. For Carnegie could produce steel more cheaply than anyone else on earth. He had immense resources. And he didn't mind stopping dividends entirely in order to pour the earnings of his company into new construction. If there were a lethal price war, could he not cut and cut his prices until his heavily capitalized rivals were doomed?

Morgan was uneasy; and not on the score of Carnegie's steel operations alone. For Carnegie had declared war on the Pennsylvania Railroad too. The Pennsylvania had raised Carnegie's freight rates, and now in answer to this move the little warrior was negotiating with George Gould for the building of a new railroad link to connect the. Western Maryland with Pittsburgh, thus destroying the Pennsylvania's monopoly of freight traffic between Pittsburgh and the seaboard. This new threat carried Morgan's mind back to the conference on the
Corsair
fifteen years earlier, when he had negotiated peace between the New York Central and the Pennsylvania, and thus had stopped the building of the South Penn. Was that episode going to have to be repeated? “Carnegie,” he was heard to say, “is going to demoralize railroads just as he has demoralized steel.” Morgan tried to get Schwab to come and see him for a talk. Schwab did not come. Carnegie drove ahead with his plans. Apparently there was no stopping him.

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But on the evening of December 12, 1900, two New Yorkers, J. Edward Simmons and Charles Stewart Smith, gave a dinner to Schwab at the University Club; Morgan accepted an invitation to attend, and was seated next to Schwab; and after dinner Schwab, who had a fine voice and was something of an orator, made an extraordinary speech on the future of the American steel industry. He told how the demand for steel was growing, and how America could dominate the steel trade of the entire world, if only the industry could be fully integrated for complete efficiency: if inadequate or badly situated plants could be abandoned, new plants could be built in the right places, every unnecessary mile of transportation could be eliminated, and every cost-cutting measure could be taken. Only a single corporation which could carry the manufacture of steel through every stage from the mining of the ore to the completion of the finished product could accomplish this, said Schwab. And so great would be the economies such a company could achieve, that it would not have to hoist prices to prosper, as had the recent combinations; it could even cut prices and still make millions.

Morgan was vastly impressed. The picture that Schwab had drawn was of an orderly and disciplined industry, at peace with itself; how much better than this crazy, wasteful warfare! And the idea was big, very big indeed. Morgan liked things big. “After the cheers had subsided”—I quote from Burton J. Hendrick's life of Carnegie—“he took Schwab by the arm and led him to a corner. For half an hour the two men engaged in intimate conversation. The banker had a hundred questions to ask, to which Schwab replied with terseness and rapidity.” Then Morgan went home to No. 219, and Schwab took the night train for Pittsburgh. But in the days that followed it was clear that Morgan was thinking long and hard about Schwab's idea, and was wondering how it could be turned into a reality. He would have to negotiate with Andrew Carnegie. How could this best be done?

He sent for Bet-a-Million Gates, who even if unreliable surely knew his way round, and asked whether Gates thought there was a chance that Carnegie would sell. Gates thought he might. Morgan suggested that perhaps the first thing to do
would be to talk with Frick. Gates, surprised that Morgan did not realize that Carnegie and Frick were then on bad terms, said this would never do; Schwab was the man to work through. All right, said Morgan; can you arrange this? Gates thereupon called up Schwab on the long-distance telephone and suggested that he come on to New York for a talk with Morgan.

Schwab didn't like the idea of talking with Morgan without telling Carnegie in advance; but Gates persuaded him that there would be no disloyalty to Carnegie if he, Schwab, were to happen to go to Philadelphia on a certain day and Morgan just happened to be there—say at the Hotel Bellevue. The date was accordingly set, and Schwab went to Philadelphia—only to find, instead of Morgan, a message to the effect that Morgan was laid up with a cold, and wouldn't Schwab be so good as to go on to New York and talk with Morgan that evening at No. 219? Schwab politely agreed to do so, and took the train to New York.

Whereupon there began, that very night, a momentous conference in the high-ceilinged, mahogany-paneled library at No. 219 that lasted until daylight. Four men took part in it: Morgan; his handsome and substantial partner Robert Bacon; the knowledgeable, easygoing Gates; and the young, self-made, energetic Schwab. They discussed what companies ought to be included in a merger, what companies omitted. Gates, who knew the whole map of the industry, explained why certain concerns such as Bethlehem and Cambria and Jones & Laughlin should remain independent. Gradually the picture of a new giant steel company began to take shape. Morgan asked Schwab whether he thought Carnegie would consent to sell; Schwab said he couldn't be sure, for the Scotchman was changeable, unpredictable. But Morgan had made up his mind to try. When the night-long session came to an end, Morgan asked Schwab to convey a firm proposal of purchase to Carnegie and to ask his price.

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Schwab was a little uneasy at the prospect of confronting his chief with such a proposal, and asked Mrs. Carnegie's advice as to how to proceed. She suggested that a game of golf might put her husband in the most approachable humor; and
so Schwab challenged the older man for a match the following morning at the links of the St. Andrews Golf Club in Westchester County. The two men played round the wintry links, and adjourned for lunch afterward to Carnegie's stone cottage on the hilltop above the club. There Schwab broke the news of Morgan's offer.

Now it must have occurred to the reader—it has occurred to a great many people—that possibly Carnegie had all this time been playing an elaborate game with a view to inducing just such a result as the Morgan offer: that his announced invasion of the territory of the other steel companies, and his threat to do battle with the Pennsylvania Railroad, had been conceived to this very end, and that he had concocted the idea of the Simmons-Smith dinner, and of getting Morgan to attend, and of turning loose upon him some carefully contrived oratory of the sort at which Schwab excelled. Perhaps; but there is no evidence of anything quite so Machiavellian. Like many men who one moment dream of retiring and then the next moment are filled with the lust of activity, Carnegie wanted to be bought out and yet didn't. And so when, after the round of golf at St. Andrews, Schwab finally broke the news, Carnegie at first was dismayed. But presently he realized that the time had at last come. This was it—the inevitable and desirable end of his years as a steelmaster—the moment when he could satisfy his long-standing wish to stop making money and begin making a career of giving money away.

On a slip of paper he jotted down in pencil a few figures. He gave the slip to Schwab and asked him to present it to Morgan.

What Carnegie proposed was that for every $1,000 in bonds of the Carnegie Company there should be exchanged $1,000 in securities of the new corporation which was yet to be formed; that for every $1,000 in stock of the Carnegie Company there should be given $1,500 in securities of the new corporation; but that he would take his own personal payment wholly in bonds. (Carnegie distrusted the stock of these new supercorporations; he thought there was much too much of it. And besides, if he were really to retire, it would be better not to have any responsibility for the new concern, but to be simply its creditor.) To Carnegie himself, who owned
some fifty-eight per cent of Carnegie Company stock, this would mean a payment in bonds to the amount of no less than $225,639,000 (par value). For all the bonds and stocks of the Carnegie Company, it would mean a payment of bonds and stocks to the amount of $400,000,000—later increased by throwing in some extra common stock for Carnegie's partners, so that the total reached $492,556,766 (par value). A huge transaction.

Schwab took the slip of paper to Morgan. Morgan glanced at it and said, “I accept.”

Not only was there no bargaining over terms, but it was not until weeks later, when Morgan was drawing contracts with the other concerns in the deal, that he suddenly woke up to the fact that he had no signed agreement from Carnegie at all—nothing but those penciled figures on a slip of paper. Suppose Carnegie should drop dead? Or utterly change his mind? Hurriedly Morgan sent for Stetson and for Carnegie's lawyer, and they prepared a suitable letter which Carnegie obligingly signed.

During this interval of time it occurred to Morgan that he and Carnegie had not met for a long time and that perhaps they should have a friendly chat. Being accustomed to meeting people on his own ground, he called up Carnegie and suggested that he come down to 23 Wall Street for a visit. Carnegie replied that since the distance from Wall Street to Fifty-first Street was no greater than the distance from Fifty-first Street to Wall Street, and since he, Carnegie, was the senior of the two, perhaps Mr. Morgan would care to call upon him. Morgan at once went, and the two men talked together in a closed room for just fifteen minutes; after which Morgan departed, saying as he shook his host's hand, “Mr. Carnegie, I want to congratulate you on being the richest man in the world!”