Andrew Carnegie And The Rise Of Big Business

In the 1890s, Carnegie’s steelworks is consuming raw ore “in quantities that would have been unimaginable a decade before” (151). In order to reduce his ore costs, Carnegie becomes interested in acquiring a raw ore mine. In 1892, Henry W. Oliver, a businessman known for shady deals, approaches Henry Frick to make a deal with Mountain Iron, a new ore mine located in the Mesabi mountain range of Minnesota. Though Carnegie is at first reluctant to strike a deal due to Oliver’s reputation, Frick ultimately convinces Carnegie to join with Oliver.

John D. Rockefeller, a wealthy businessman and Carnegie’s rival, purchases the rest of the Mesabi ore deposits, as well as the railroad and docks necessary to transport any ore out of the Mesabi. Fearing competition, Carnegie strikes a deal with Rockefeller, guaranteeing to ship a minimum of 1,200,000 tons annually, as long as Rockefeller agrees that shipping charges “would not exceed an agreed-upon-maximum” (154). The deal gives Carnegie a competitive edge over other steel manufacturers, allowing Carnegie to grow his already-large company even more.

Carnegie further seeks to lower his prices by taking on the Pennsylvania Railroad Company, which he believes are overcharging him for transport of his materials and goods. Carnegie approaches the Pennsylvania State Legislature to petition them to force the railroad to lower their prices, threatening an “angry mob” if they don’t (158). Though the legislature doesn’t enforce price changes, Frick finds a solution by building the Union Railway, which connects Carnegie Steel’s various manufacturing works. Carnegie Steel can now save on prices by transporting goods between its factories without relying on the Pennsylvania Railroad.

To Carnegie’s dismay, however, he is still forced to use the Pennsylvania Railroad for shipping raw materials of coke and iron ore to his steel mills. According to Carnegie’s freight agent, Carnegie Steel is being charged vastly higher prices than its competitors for shipments of raw materials. Carnegie purchases a “deteriorated” railroad, the Pittsburgh, Bessemer, and Lake Erie Railroad, which would directly connect his supply of ore and coke with his steel mills (160). The Pennsylvania Railroad is frightened of losing Carnegie Steel, its largest customer. The Railroad is ultimately forced to make a deal with Carnegie, sharply cutting the rates of shipment.

In 1894, Carnegie attempts to combine Frick Coke with another coke company, the W.J. Rainey Company, adding Rainey next to Frick in the company name. Frick is angered by the plan, and submits his resignation to Carnegie, which Carnegie accepts, though Frick remains on the board. Carnegie replaces Frick with J. G. Leishman, only to fire Leishman soon after due to Leishman’s disloyalty. Charles Schwab becomes president of Carnegie Steel in 1897. Schwab is a steadfast advocate of “constantly revamping” Carnegie’s various steel mills with the most up-to-date technology, which results in great savings for the company (151). Carnegie Steel sees its revenues expand tremendously, growing from $4 million in profit in 1894 to $40 million in profit in 1900.

In the 1890s, several of Carnegie’s partners want to sell their shares of Carnegie Steel and leave the company. These partners, such as Henry Phipps and Henry Frick, are frustrated because Carnegie invests all of the profits back into the corporation, paying very little dividends to the partners. However, the partners are kept from selling their shares due to the “Iron Clad Agreement,” a contract drawn up in 1887. The contract stipulates that partners could only sell their shares at “book value,” which is the “partner’s percentage of ownership times the nominal capitalization figure” (172). Carnegie feels that overcapitalizing is a major problem in American corporations, so he always understates the capitalization value—for instance, declaring in 1899 that the company is worth $50 million, rather than its actual value of $250 million. As a result, if Phipps or Frick want to leave the company, the “book value” they could sell their shares at is far less than their actual worth.

As a solution, Frick and Phipps attempt to bring in an outside buyer for the corporation. They approach Carnegie with a buyer who wishes to remain anonymous, and at first Carnegie is content with the deal. However, Carnegie grows angry when he learns the buyers are the Moore brothers, two Chicago businessmen with a shady reputation for engaging in speculation and other dubious business practices. Carnegie cancels the prospective sale and begins feuding with Frick, attempting to boot him out of the company. After failed attempts to buy Frick out at the “book value,” Carnegie comes to a compromise with Frick, creating a holding corporation for Carnegie Steel and Frick Coke that increases the capitalization of both corporations. Carnegie succeeds in ousting Frick, and Frick succeeds in gaining more money for his shares.

In the late 1890s, the American steel industry becomes increasingly dominated by a variety of “manufacturing trusts,” large amalgamations of various steel corporations that were “vastly overcapitalized” and “inefficient” (182-83). The trusts begin to steal Carnegie’s contracts with manufacturers, such as National Tube and American Hoop. Carnegie is confident that his streamlined industry can take-on the overgrown trusts, and he decides to add a manufacturing plant to his industry. As soon as Carnegie begins building the plant, the trusts become frightened, knowing they can’t compete with Carnegie’s “unmatched facilities […] [and] abundance of technological know-how” (186). Schwab approaches J.P. Morgan, explaining why Carnegie Steel is set to outmatch the trusts. Morgan decides to make an offer, purchasing Carnegie Steel for $480,000,000 and making Carnegie “the richest man in the world” (188). Carnegie retires, spending his vast wealth by funding numerous public institutions for the American people.