The Mckinley Era Mega-merger

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This implied, however, that competition constituted the very marrow of advancing civilization. Carnegie said as much. But Morgan had no fondness whatever for business competition. He disliked its anarchic and wasteful side—the price wars, speculative frenzies, squandered opportunities for profit—and his major investments aimed to produce consolidations among railroads and other enterprises to promote market efficiency. As 1900 neared, his eye was on a potential steel trust that would unite the assorted wire, rod, hoop, and sheet manufacturing companies that, together with iron mines, coke ovens, and ore carriers, constituted the industry. That brought him onto a collision course with Carnegie. Morgan first organized and funded a pair of combinations called Federal Steel and National Tube. But any meaningful combination would have to include Carnegie, who appeared most unwilling to join.

Carnegie was in fact ambivalent (or perhaps simply wily) in his own expressed attitudes toward competition. He sometimes entered pools and market-sharing agreements but dropped out of them as soon as it suited him. He also took full advantage of the protective tariff. But he did seem confident that he could dominate the market himself in a free-for-all. “Carnegie Steel . . . should never in my opinion enter any Trust,” he wrote his deputy Charles Schwab in 1898. “An independent concern always has the ‘Trust’ at its mercy.” This judgment defied the actual record, but in 1899 Carnegie showed signs of true faith in it. He announced that he would build new facilities to compete with any consolidation, factory for factory. He would even create a new railroad in competition with the Pennsylvania, then under Morgan control. Morgan was aghast. “Carnegie,” he predicted, “is going to demoralize railroads just as he demoralized steel.”

Carnegie simply had to be brought into the fold. His works alone produced 85 percent as much steel as National Tube and Federal Steel put together. Morgan was, an observer said, “about to make a very fine plum pudding,” but “Mr. Carnegie had all the plums.” Luckily for the banker, Carnegie was not completely unamenable—or his go-it-alone threat was a bluff. In any case, by coincidence or design, Schwab spoke at a dinner given by some financiers in his honor in December of 1900, to which Morgan was invited. Schwab sketched a bright future for a rationalized, competitionless industry that would produce the world’s best steel at the world’s lowest prices. Presuming that Carnegie was not unaware of his lieutenant’s thinking, Morgan promptly invited Schwab to a January meeting in his Madison Avenue home to talk nuts and bolts. It ended at dawn with his saying: “If Andy wants to sell, I’ll buy. Go and find his price.”

In 1901 multimillionaire industrialists hired lawyers to perspire over the fine print of deals but did not waste their own time in haggling. Carnegie slept on it one night, then scribbled his terms in blunt pencil on a single sheet of paper: $480 million for capitalization, stock, and yet uncollected profits. Schwab took the paper to Morgan, who glanced at it and said, “I accept this price.” And U.S. Steel was born.

There were, of course, many more transactions to gather in all the plums, but by 1901’s end the incorporation papers of U.S. Steel were filed, and the chairman of its executive committee piously announced that its purpose was to “secure perfect and permanent harmony” and not at all “to . . . create any monopoly or trust.” But at a capitalization of $1.4 billion (4 percent of the entire national wealth at the time), U.S. Steel stood in a good position to impose its view of harmony on the remaining independent steelmakers.

There is an irony in the actual record, however. Some business historians echo George David Smith and Richard Sylla’s belief that U.S. Steel “struggled to remain profitable” despite “cartel-like techniques for setting prices in the early part of the century.” By 1920, in which year the Supreme Court rejected a government antitrust suit against the corporation, its market share had slipped to half what it was in 1901, and it declined to a third of that in the 1930s. In short, say these scholars, U.S. Steel was neither the ogre painted by antimonopolists nor the benign guarantor of an efficient industry as depicted by Schwab’s dinner speech.

Carnegie’s personal share of the proceeds of sale came to some $230 million, paid in gold bonds bearing 5 percent interest. He therefore took a yearly income of more than $11 million pre-income tax, high-purchasing-power dollars, into his cherished philanthropic retirement. J. P. Morgan & Company’s portion of the $57.5 million in profits to the various syndicates underwriting the necessary new securities was $11.5 million. But there would be more in future stock trades. The immediate blessings of mergers fell on their organizers rather than on the manufacturers, who still had to earn their operating profits after the contracts had been signed and the debts repaid. Which may be at least one reason why mergers continued to flourish as America rushed into the new century, still echoing, as it nears its end, the seductive music of corporate mating dances.