Financier J. P. Morgan, seeking stability for his steel, railroad, and financial interests, purchased Carnegie Steel, creating U.S. Steel, the first billion-dollar corporation.
Formal incorporation of the United States Steel Corporation (U.S. Steel) on February 26, 1901, was an epochal event in American industrial and financial history, merging Andrew Carnegie’s steel empire—the country’s largest—into a giant holding company assembled by the manipulative genius of J. P. Morgan, the nation’s most powerful financier. Preliminary talks between Morgan and Carnegie interests became a prelude to serious negotiations on December 12, 1900, at Manhattan’s University Club. With Morgan seated next to him, Charles M. Schwab, an intimate of Carnegie and president of Carnegie Steel,
Morgan was interested and convened a meeting at his home on Madison Avenue early in January, 1901. Attending were Schwab, who at his own risk had not yet reported events to Carnegie, along with Morgan partner Robert Bacon and financial speculator John W. “Bet a Million” Gates. Their discussions lasted through the night, concluding with Morgan’s offer to purchase Carnegie Steel. Shamefaced, Schwab conveyed word of Morgan’s proposition to his boss, who laconically asked his junior associate to meet with him the following morning.
Overnight, Carnegie scribbled his calculations and weighed his options. He was close to absolute dominance over the American steel industry, which included Morgan’s own Federal Steel, the National Tube Company, and American Bridge Company. The last of those, like many other competing facilities, was overcapitalized and dependent on Carnegie for steel ingots, and thus was vulnerable. Carnegie already was committed to the construction of huge new steel and seamless tube plants and was planning a thousand miles of rail line to challenge Morgan’s railroad interests, over which the two men had clashed years earlier and about which Morgan had insulted Carnegie. Also weighing against a sale to Morgan was Carnegie’s pride in the unmatched quality and efficiency of his operations as well as in the relative solidity of their financing.
On the other hand, Carnegie was sixty-five years old. For his own sake and his wife’s, he was eager to retire. His wealth was practically boundless, and he was eager to work as hard giving it away as he had earning it. His philanthropies, along with his golf, were passions. He wanted nothing more to do with the operations of, or financial holdings in, his industrial empire, desiring instead to convert his wealth into easily negotiable securities that would transfer simply to his existing and prospective charities, organizations, and endowments. With these things in mind, he decided to sell. Estimating that an acceptable price would be $480 million, he had Schwab deliver news of his decision to Morgan, who at once responded, “I accept this price.”
Several days later, Morgan summoned Carnegie for a final meeting and handshake at the financier’s Wall Street office. Carnegie’s pointed response was a countersummons to Morgan for a meeting in Carnegie’s own West Fifty-first Street mansion. The two met there for exactly fifteen minutes, ending with Morgan congratulating Carnegie (erroneously) for being the richest man in the world. Details of the negotiation took a bit longer and were resolved by the principals’ respective boards and associates by February 26. On March 2, public announcements proclaimed creation of the United States Steel Corporation, a holding company trust. The U.S. Bureau of Corporations subsequently estimated the value of the U.S. Steel transaction at $682 million, but the declared capitalization in 1901 was $1.403 billion, making it the world’s first corporation of such immensity.
What Morgan had sought in buying out Carnegie and fashioning the new trust was foremost, but not solely, restriction of competition. Morgan enjoyed a superior university education as well as considerable knowledge of Great Britain and of Europe. Only two years younger than Carnegie, the acknowledged leader of American capitalists, he was an accomplished banker-financier whose gold, loans, and securities offerings had launched, backed, or helped fight many of the country’s major industrial empires. In 1895, his actions had even saved the U.S. federal government from acute financial embarrassment.
A logical thinker, an orderly, meticulous planner with a penchant for bringing greater coherence and predictability to the country’s economic life while promoting his own legitimate profits, he detested cutthroat competition and the disorder and unpredictability attending it. Carnegie, in his opinion, was one of industry’s rogues, prone to underpricing his goods during economic downturns and forgoing profits to keep plants in operation while in the meantime driving his scrambling competitors to the wall. Moreover, Carnegie’s plans for a giant new pipe and tube plant at Conneaut Harbor, Ohio, and Morgan’s suspicion that Carnegie intended to shift his steel mills into production of finished products and build railroads confronted the financier with prospects of renewed industrial warfare, with its accompanying chaos and costs. The purchase also afforded Morgan opportunities to proceed with a full-scale rationalization and vertical integration of steelmaking and closely related industries.
With his massive new cartel-like corporation and his ability to draft into its direction the tested capacities of such men as Schwab, Elbert Henry Gary, and Henry Clay Frick, Morgan appeared able to turn his priorities into realities. Under the rubric of U.S. Steel were half of the twenty major business combinations formed between 1897 and 1901, during the opening years of the nation’s greatest wave of mergers. Seven-tenths of the country’s steel concerns, including twelve of its biggest producers, had joined in Morgan’s grand merger. The capacities of these huge companies were augmented by the inclusion of 138 firms of varying size.
Despite its formidable potential, U.S. Steel was far from being a monopoly. At its inception, it controlled only 44.8 percent of American steel production. It had plenty of competition from those steel companies that still accounted for more than half of the industry’s products, among them Bethlehem, Jones and Laughlin, Lackawanna, Cambria, Colorado Fuel and Iron, and Youngstown Steel and Tube. Consequently, the primary objective of Morgan’s giant firm was to further the integration of its own facilities while avoiding the renewal or exacerbation of cutthroat competition.
U.S. Steel underwent expansion between 1902 and 1908. The objective was to enhance its independence from the rest of the industry through vertical integration of its operations; that is, the aim was for U.S. Steel to own and manage every constituent of production through to the finished products, including land, ore deposits, coal and coking properties, transportation facilities such as iron ore railroads and Great Lakes shipping, plants to produce heavy steel ingots, and mills designed to satisfy various specialty steel orders. By 1901, it was a common belief within the steel industry that the limits of the technically possible were being approached. Schwab himself had called attention to this purported fact. It therefore became trade wisdom that additional efficiencies and profits would derive chiefly from precisely the type of reorganization planned by Morgan. Furthermore, expansion and vertical integration, paralleled by managerial changes, meant that U.S. Steel divisions would no longer pay their potential profits to other firms for transforming raw steel into the thousands of products and specialties (most steel was produced for specific orders) that characterized the industry.
J. P. Morgan.
Gary, the former head of Morgan’s Federal Steel and one of the principals behind the assemblage of the giant trusts, led U.S. Steel’s expansion, both organizational and geographic, as chairman of its board of directors. Between 1902 and 1908, U.S. Steel purchased seven major steel-related companies, among them Union Steel and Clairton Steel, with their substantial iron ore and coking coal deposits. Of all the purchases, the most important was the Tennessee Coal, Iron and Railroad Company. With headquarters in Ensley, Alabama, it was the South’s largest steelmaker, specializing in the production of open-hearth steel rails and accounting for 59 percent of U.S. production of this item. Equally significant, Tennessee Coal owned more coal and iron ore than any firm except U.S. Steel, and with its raw materials literally on site it manufactured steel at lower cost than anyone else. When Gary negotiated the purchase, the Tennessee company posed a real threat, for it was planning to double its steelmaking capacities.
U.S. Steel’s own expansion was extensive. It built a large steel mill at Duluth, Minnesota, close to iron ores of the Mesabi Range. Through a subsidiary, it constructed a huge cement mill near Chicago. Nothing, however, matched the cornerstone of its growth, the world’s largest steelmaking facility. Technically the peer of any, the plant in Gary, Indiana, cost more than $62 million to build. Despite the immensity of expenditures for its new acquisitions and mills, U.S. Steel was able to pay them out of its profits. It realized a return of about 12 percent on its investments while increasing its capitalization.
Notwithstanding these achievements, U.S. Steel steadily lost its share of national steel production to other companies. Competitors marketed 60 percent of American steel by 1911. In the meantime, the price of steel, which had risen shortly after Morgan created the trust, remained relatively stable during these years. Clearly, the earlier era of cutthroat competition had given way—although fears of regression remained—to an era of price stability and intraindustry cooperation, as Morgan had hoped it would. U.S. Steel appeared to produce below its full capacity, accepting lower profits in order to forestall outbreaks of price warfare.
Industrywide cooperation and the stabilization of steel prices have been imputed to a number of causes, two of which were singularly important: the “Pittsburgh plus” basing point system
When government suits to dissolve U.S. Steel on grounds of monopolistic practices were decided in New Jersey’s federal district court and reaffirmed in 1920 by the U.S. Supreme Court, the corporation was exonerated. It had strived for a monopoly, yet the fact remained that 60 percent of the nation’s steelmaking capacity was in the hands of its competitors. Similarly, its intraindustry exchanges of price information and the like were ascertained to be reasonable business practices. Essentially, the judiciary found U.S. Steel to be a “good trust” rather than a harmful monopoly.
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Carosso, Vincent P. The Morgans: Private International Bankers, 1854-1913. Cambridge, Mass.: Harvard University Press, 1987. Massive, authoritative, and fine reading. Surpasses other studies in use of fresh primary sources. Excellent on historical context. Good photos, extensive notes to pages in lieu of bibliography, and a valuable index. Splendid and essential, with detailed materials on U.S. Steel. -
Jones, Eliot. The Trust Problem in the United States. New York: Macmillan, 1921. Old but useful analysis resting on public rather than private documentation. Chapter 9 deals with U.S. Steel in some detail. Sections discuss antitrust suits against the corporation. Informative notes and useful index. -
Ripley, William Z., ed. Trusts, Pools, and Corporations. Boston: Ginn, 1916. Valuable for U.S. Bureau of Corporation documents and an essay by trust specialist Edward Meade. Chapters 6 and 7 concentrate on U.S. Steel’s organization, production, and prices. Useful for lay readers. Informative notes and good index. -
Sinclair, Andrew Corsair. The Life of J. Pierpont Morgan. Boston: Little, Brown, 1981. Briefer, breezier, and less authoritative than the Carosso book but a good journalistic review of Morgan and friends. In places warmer about the subjects than are more scholarly works. Interesting photos, chapter notes, and extensive select bibliography, useful index. Enjoyable and informative deployment of the Morgan papers. -
Strouse, Jean. Morgan: American Financier. New York: Random House, 1999. Comprehensive biography of Morgan offers insights into the culture, political struggles, and social conflicts of the Gilded Age. Explains in easy-to-understand language the financial controversies of Morgan’s time. Includes photographs. -
Wall, Joseph Frazier. Andrew Carnegie. New York: Oxford University Press, 1970. Authoritative; written sensitively and well. Easily one of the best biographies of Carnegie. The book’s length should not discourage readers, for Carnegie was not only one of the world’s most powerful private citizens but fascinating as well. Fine photos, extensive notes to pages, splendid index. -
Whitney, Simon N. Antitrust Policies: The American Experience in Twenty Industries. 2 vols. New York: Twentieth Century Fund, 1958. Scholarly and authoritative. One of the best overviews of U.S. Steel’s organization and activities is in chapter 11. Updates events to the early 1950’s. Many notes and tables. No bibliography, but a fine working index.
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