This is the twenty-second in my series of posts about the five businessmen the History Channel profiled in a terribly inaccurate and un-historical TV miniseries titled The Men Who Built America. I’m writing these posts in response to several comments and e-mails from TV viewers who have expressed interest in a more accurate version of the story. (Click here to see all Al’s columns on the program and its subjects.)
Post #22: Morgan and Vanderbilt vs Carnegie and Rockefeller in 1885
American history is railroad history, at least as far as the late nineteenth century is concerned. The ability to transport goods over land in a cost-effective way was so essential to the development of the nation that virtually everything that happened in the nation’s economy in those years was railroad connected in some way.
Banks made much of their revenue financing railroad construction. For a while eighty percent of the market capitalization of the entire New York Stock Exchange was in railroad stocks. Companies made great fortunes selling their products to the railroad companies, and almost everyone depended on the railroads to get their products to market.
For commodity producers like Andrew Carnegie and John D. Rockefeller, getting low freight rates from the railroads that carried their products was of central importance. Rockefeller was a master of rate negotiations; his rivals always resented the rebates he was able to squeeze out of the three railroads that served his Cleveland refineries. For Carnegie, freight rates were sometimes problematic.
In 1872, when Carnegie chose a location for his first steel mill, he was careful to choose a site served by two different railroads. In addition to the Pennsylvania, which was the largest railroad company in the world at that time, his Edgar Thompson Steel Mill was served by the Baltimore and Ohio (B&O) Railroad. With two viable railroads competing for his business he was able to negotiate with both from a position of strength.
Within a few years, however, Carnegie and his partners faced a good news/bad news scenario. Through skillful management the Carnegie team made their mill one of the most productive in the nation. Soon they were able to buy and build additional steel mills in and around Pittsburgh, all of which continued to become more productive month by month. Sales and profits soared.
The bad news in all of this was that the B&O Railroad was not able to increase its scale of operations as fast as Carnegie Steel.
By the early 1880’s the B&O was not able to carry more than a small percentage of the raw materials and finished products that Carnegie’s mills needed to ship. The result was predictable. The Pennsylvania gradually increased the rates they charged Carnegie, knowing that he had no choice but to do business with them. The B&O management knew they could get all the business they could handle just by setting their rates a point or two lower than what the Pennsy was charging.
Carnegie was able to learn, by various means fair and foul, what most of his competitors were paying in freight rates. He knew that several competitors who couldn’t ship the volumes he did were able, nonetheless, to negotiate lower freight rates, and it galled him to no end. He cajoled and threatened the Pennsy in long strongly-worded letters, he wrote letters to the editors of newspapers, and he even tried to move the state legislature to get involved; all to no avail. Until he could get a viable second option the Pennsy would continue its policy of sending polite answers to all his letters, assuring him of its good will, and charging him sky high rates.
Carnegie’s old friends J. Edgar Thompson (after whom he had named his first mill) and Thomas Scott were both dead by this time, but it probably wouldn’t have mattered if they were still running the Pennsy. Carnegie and Scott had had a falling out in the early 1870’s, and at any rate business is business and companies that have monopolies will generally take full advantage.
Carnegie finally got a glimmer of hope in 1883. Construction of new railroad lines had slowed to a crawl after the 1873 financial panic, but by the early 80’s the roads had been operating profitably for several years, and were able to invest some of their capital in carefully-chosen expansions. The two biggest and richest railroad companies in the nation were the New York Central, controlled by William Vanderbilt and run by president Chauncey Depew, and the Pennsy, run by president George B. Roberts. By the early 1880’s the two companies were starting to look enviously into each other’s territories.
In 1883 Roberts and the Pennsy bought the assets of a small company that had been formed to build a road from Lake Erie to New York City by way of Albany; the very route that Vanderbilt’s father Cornelius had so assiduously pulled together in the mid-1850’s, and the core of the whole NY Central network. This move threatened the NY Central’s monopoly position on the most important route it owned.
Around the same time Vanderbilt’s New York Central got its hands on a thirty year old State of Pennsylvania charter for a railroad that would, if it were ever built, run west from Harrisburg, PA all the way through the city of Pittsburgh to the Monongahela River. The NY Central already connected to Harrisburg, so by building this road Vanderbilt would get access to all the businesses in the Pittsburgh area. Needless to say, Carnegie liked the idea.
It’s hard to know which of the two super-railroads actually started the poaching, and which one was retaliating. Different books on the subject give slightly different timetables. What is known for sure is that by the end of 1883 each company was making preparations to build a road deep into the other’s turf.
Vanderbilt didn’t have to put up all the funding for his Harrisburg to Pittsburgh line. The subsidiary company he set up to build and operate the road was capitalized at fifteen million dollars, and a third of the money came from Carnegie and other Pittsburgh area businessmen. Among the investors were John D. Rockefeller and his brother William. Standard Oil owned a few refineries in Pittsburgh, and the Rockefellers wanted their operations in that city to enjoy the same negotiating leverage they already had for their Cleveland plants.
By 1884 the surveying was done and crews were hard at work digging tunnels, building bridges, and cutting grades across central Pennsylvania. They hadn’t laid any track yet; that was scheduled to start in 1885. Early in ’85 Carnegie held his annual negotiations with the Pennsy over freight rates for the coming year, and even before any rails were laid on the ground the railroad gave him a deep discount from the previous year’s prices.
Carnegie was overjoyed. The most annoying problem he faced in his business was soon to be resolved. By the summer of ’85 his company had the order for the first shipment of rails for the Harrisburg line, and it’s a safe bet that the rails would have been delivered on time.
Enter JP Morgan.
Morgan and his father were big fans of monopolies, and they took a dim view of the nation’s biggest railroads poaching in each other’s territories. Their firm was connected to both roads in multiple ways. Both Morgans were shareholders in the NYC and the Pennsy, and as investment bankers they had clients with millions of dollars invested in both roads. In addition to that their bank did a lucrative business providing both roads with financing. The younger Morgan made up his mind to do something to preserve the status quo.
At 10:00 AM on a hot July morning JP Morgan’s yacht the Corsair pulled away from a dock in Jersey City and steamed out onto the Atlantic. On board with Morgan were stores of iced champaign, a gourmet lunch, a small army of servants, and the presidents of the Pennsylvania and the New York Central.
Nine hours later the boat pulled up to the dock and Morgan and the two presidents stepped off. The Harrisburg line, into which Carnegie and his collaborators had invested $5 million, now belonged to the Pennsy. The Buffalo to New York line belonged to the NY Central.
The deal Morgan had brokered left each railroad in control of its own geographical monopoly. Carnegie and his associates had paid five million dollars for a one-third interest in a railroad that would never be built. The bargaining power that Carnegie Steel had already begun to enjoy was gone.
It was almost a caricature of a high-powered business deal. Morgan, the nation’s most powerful banker, brokered a deal between Vanderbilt and his biggest rival to take negotiating power away from Andrew Carnegie and John D. Rockefeller. That the meeting took place on a very large and expensive yacht just makes the whole thing sound even more like a movie script.
Carnegie would write the epilog to this story a decade later. In 1896 he acquired the assets of a nearly-bankrupt railroad company chartered to build a road from Pittsburgh to the port town of Conneaut, Ohio on Lake Erie. A road of sorts had already been built over all but thirty miles of the projected route, and once Carnegie and his partners took over the line it took them only fifteen months to upgrade the existing line and build the last thirty miles.
With the new line in operation Carnegie finally had the leverage he’d been dreaming of. Faced with a competitive situation for the first time, the Pennsy lowered its rates dramatically.
Next week’s post will be about JP Morgan’s involvement with the development of the electric light.
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