The Farthest Fall


There is an old saying about the transitory nature of American fortunes: shirt sleeves to shirt sleeves in three generations. As Donald Trump has discovered, they can vanish a lot faster than that. But Trump is not the record holder for financial plummeting (at least not yet). That dubious honor almost certainly belongs to Charles M. Schwab.

Schwab had all the attributes needed for success and then some. Unfortunately he also had a fondness for the good life that drained even his formidable resources, a love of gambling in both casinos and stock markets, and an unshakable belief that the best was yet to come. It was the glory and the tragedy of Charlie Schwab that he was equally a Horatio Alger hero and WiIkins Micawber.

Schwab took the rising tide of steel, the miracle material of the late nineteenth century, and rode it on to fortune. Known for millennia, steel had always been very expensive to produce and thus limited in its uses. Then, in the 1850s and 1860s, new, much cheaper steelmaking processes were developed. As prices fell, the uses of steel expanded rapidly, and so did the American capacity to produce it. In 1880 the country’s steel mills—nonexistant before the Civil War—turned out 1.25 million tons. Twenty years later American production was more than 10 million tons, the greatest of any country in the world.

When Schwab left school in 1879, at age seventeen, he clerked in a store in Braddock, Pennsylvania. The manager of the nearby steelworks, which were owned by Andrew Carnegie, often came to the store to buy cigars, and he quickly noticed the bright, energetic Schwab. Soon Schwab had talked his way into a job at the steel mill, where he set about learning the business as quickly as he could.

Although he had not finished high school, Schwab proved so capable that he was named acting chief engineer of the mill within six months of his arrival. The manager came to rely more and more on him and began sending him to Pittsburgh to report to Carnegie.

At first Carnegie regarded Schwab as just a messenger boy. Then one evening Carnegie was late, and Schwab, who numbered music among his many talents, noticed a piano in the room. He sat down and played while he waited. Carnegie soon appeared and, loving music himself, asked Schwab to continue.

One of the keys to Carnegie’s success in business had been his ability to spot and promote men of talent. Having noticed the young engineer with a gift for piano playing, he soon marked him for great things, and it was the start of a nearly forty-year friendship. Indeed, the very last thing Carnegie asked for before his death in 1919 was that a picture of Schwab be brought to him.

In 1886 Carnegie made Schwab, only twenty-four, the head of the Homestead works at an annual salary of ten thousand dollars, a very substantial income. Ten years later Schwab was president of Carnegie Steel and owner of 6 percent of the company.

It was an exciting time to be a major player in the American steel industry, for it was changing rapidly. Although Carnegie Steel owned ore deposits, coalfields, railroads, shipping lines, and other companies that were “upstream” of its own production, it did not produce finished products itself, other than railroad rails. Rather, it sold steel to other companies “downstream” that produced the wire, nails, tubes, structural steel, and myriad other products.

J. P. Morgan had recently assembled the Federal Steel Company, now second in size only to Carnegie’s. Federal produced both steel and finished products. At first it bought additional steel as needed from Carnegie, but then it announced it would cut back these purchases as its primary capacity increased.

Carnegie realized that he would have to move into the manufacture of finished products if he was not to lose market share. He had no doubt that he could succeed, but he also knew it would be a titanic struggle. And Carnegie was already in his sixties. He had been thinking more and more about retirement and turning to his lifelong aim of distributing his fortune to worthy causes before his death. Schwab thought he smelled a deal that would make everyone happy.

On December 12, 1900, some New York bankers gave a dinner in honor of Schwab at the newly built University Club on Fifth Avenue. Present were eighty of the most important businessmen in the country, including Carnegie, Jacob Schiff, E. H. Harriman, and J. P. Morgan. After dinner Schwab rose to make what were supposed to be a few remarks. They lasted over an hour.

The American steel industry was already the largest and most efficient in the world, Schwab told the bankers and industrialists, who paid rapt attention, but it could be even more so. If a great consolidation could be arranged so that a single company owned the largest and most efficient mills in the industry, economies of scale and specialization would allow it to dominate the world market in steel. After Schwab’s speech Morgan took him aside for a private conversation and with characteristic dispatch made up his mind to pursue Schwab’s vision. Both men knew that Andrew Carnegie would have to agree for it to become reality.

Schwab went to see his boss at Carnegie’s cottage at the St. Andrew’s Golf Club, a little ways up the Hudson River from New York City. Over a round of golf, one of the great business deals in history was agreed to: The Carnegie Steel Company would sell out for $480 million. Schwab’s piece of the action amounted to more than $25 million.