The Deal Of The Century

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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 organ- izing 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.