The Farthest Fall

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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.

Named the first president of the new U.S. Steel, Schwab, at the age of thirtynine, presided over an empire that encompassed 213 steel mills, 78 blast furnaces, 41 iron-ore mines, 112 ore barges, 57,000 acres of coalfields, and almost 1,000 miles of railroad trackage. He became a national celebrity, sought after for interviews and after-dinner speeches, lauded as a self-made man who rose to the top by his own exertions. It all went straight to his head.

While working for the puritanical Carnegie, he had always lived modestly. Now Schwab bought an entire square block on New York’s Riverside Drive and built the gaudiest palace of the Gilded Age. He sailed to Europe and caused a scandal when reporters spotted him gambling heavily at Monte Carlo. (Carnegie, who loathed gambling, was outraged, but the more easy-going Morgan was unperturbed. When Schwab explained to him that he had done nothing wrong or behind closed doors, Morgan had only harrumphed, “That is what doors are for.”)

Schwab did not flourish at U.S. Steel. A born manager, he found his authority sharply circumscribed, and he profoundly disagreed with the old-fashioned management philosophy of Elbert H. Gary, who represented the Morgan interests on the board. Before long Schwab left U.S. Steel and became head of Bethlehem Steel. The public and financial press saw this as a great setback in Schwab’s career. He had, after all, been president of the two largest steel companies in the country, and now he was president of one of the smallest. As one writer put it, it was rather like the King of England abdicating to become Prince of Monaco.

Named the first president of U.S. Steel, the thirty-nine-year-old genius presided over 213 mills, 78 blast furnaces, and 41 iron-ore mines.

But Schwab personally controlled Bethlehem and was, at last, his own boss. He soon turned It into the second-largest steel company in the country. He did it by managing the company superbly, by pursuing the potential in a new process for manufacturing steel beams that he had been forced to turn down at U.S. Steel, and, of course, by being very lucky.

Bethlehem had long specialized in the manufacture of ordnance. This had been a weakness before Schwab had diversified, because it made the company very dependent on government orders. But World War I proved a bonanza almost beyond imagining. Before August 1914 the largest single deal Bethlehem Steel had ever made had been a $10 million contract signed with the Argentine navy. In October 1914 Schwab signed a contract with the Royal Navy worth $135 million.

When the United States entered the war, Schwab was appointed head of the Emergency Fleet Corporation, the government’s shipbuilding agency, and became a national hero for the speed and efficiency with which he turned out ships.

After the war Schwab retired from the active management of Bethlehem Steel. Like Andrew Carnegie, Schwab had spent a lifetime building a great fortune in the steel industry. Like Carnegie, he would spend his last years ridding himself of it. But there the resemblance stops, for when Carnegie had coined his famous maxim “The man who dies rich … dies disgraced,” he certainly did not have an end such as his beloved protegee’s in mind.

Schwab built a huge country estate in Pennsylvania, complete with a ninehole golf course and a replica of a French village he had admired. He traveled frequently and gambled constantly on roulette, cards, and stocks. Profoundly knowledgeable about the steel industry and shipbuilding, he often invested in other industries acting on tips alone, just like the rankest amateur.

When the Depression hit, Schwab changed his habits not one whit, convinced that renewed prosperity was always just around the corner. The vast wealth he had created melted away. When at last he tried to cut back, it was too late.

He tried to sell his house on Riverside Drive to the city for use as a mayor’s residence. But Fiorello La Guardia (who only reluctantly moved into the far more modest Gracie Mansion a few years later) would have none of it. He said the city preferred the $110,000 in annual property taxes to owning the property. The mayor did not know that Schwab was no longer paying the taxes because he could no longer afford to. When he died a few years later, in 1939, Schwab’s estate had a negative net worth of $338,349.