This is the eighteenth 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 #18: Andrew Carnegie Commits to Steel
Andrew Carnegie had eggs in many baskets in the late 1860’s. He invested his money, time, and considerable management and sales skills in companies that built sleeper cars, telegraph lines, and bridges. He helped found a company that made iron railroad rails and bridge parts. He also made a lot of money selling construction bonds and speculating in railroad stocks.
In 1872 Carnegie had even more career options put in his path. Carnegie’s old friend and mentor Thomas Scott had just taken control of the financially troubled Texas and Pacific Railroad and installed himself as president. He asked Carnegie to buy stock in the company, co-sign for several of the short term loans that Scott was using to keep the company afloat, and take an active management role.
Carnegie invested a quarter of a million dollars in the venture, but when Scott asked him to make an even deeper commitment he refused. Time would prove that he made the right decision, although it cost him Scott’s friendship. The Texas and Pacific ended up bankrupt.
If Carnegie’s autobiography can be believed, a more promising railroad job was also available to him in 1872. Carnegie claims that stock market shark Jay Gould was so impressed with his management skills that he approached him one morning in the Windsor Hotel and offered to take over the Pennsylvania Railroad, which was the world’s largest corporation at that time, and make Carnegie the President. His compensation for running the Pennsylvania was to be half of the total profits.
Gould was yet another rags-to riches American success story. His career started when he left his father’s small farm at age sixteen to earn a living as a surveyer. In his twenties he opened a tannery, soon after that he moved to the railroad business, and by the time he had this conversation with Carnegie he was one of the richest men in the world.
Given Gould’s proven record of large corporate take-overs, an offer of the kind that Carnegie described in his autobiography would have been worth serious consideration.
This plan, of course, would have meant that Gould would have to fire Scott and Edgar Thompson, as they were still the VP and president of the Pennsylvania. (Scott’s primary reason for taking over the Texas and Pacific was to connect it to the Pennsylvania to create a coast-to-coast system to compete with the Union Pacific.) In Carnegie’s version of the story one of the main reasons he didn’t accept Gould’s offer is that he was unwilling to do anything contrary to Scott’s interests.
It’s hard to find any evidence, other than Carnegie’s account of it, that this conversation with Jay Gould ever even took place, and in fact Gould never did take control of the Pennsylvania, so perhaps Carnegie’s account should be taken with a grain of salt.
What is known for sure is that in 1872 Carnegie made the decision to effectively resign from active management in all his other businesses, eschew Scott and Gould’s offers, and focus full time on the steel industry.
His Freedom Iron Company had deployed its first Bessemer steel furnace (and changed the company’s name) in 1868, but the cost of steel-making in ’68 was still high enough that the output of that first furnace was only used for specialty products.
Freedom’s most remunerative product was railroad rails, which were made of iron. The iron rails that made up all of America’s roads in the mid 1860’s were so brittle that they would often break with disastrous results, particularly during cold weather. They were prone to rusting, and to degradation from ordinary wear and tear.
The original purpose of Freedom’s one steel furnace was to forge steel caps to go on iron rails to increase their strength and durability. The steel-capped rails turned out to be a failure, but the Bessemer furnace continued to be used for special orders of high strength products for various customers.
The Bessemer process was patented in England in 1855, and made it possible to make large enough quantities of relatively affordable steel use in products larger than knife blades and plowshares. Initially the Bessemer process required high grade iron ore with a very low phosphorus content, and was too expensive for large scale commodity products like railroad rails, but the allure of the money to be made motivated entrepreneurs to solve these problems over time.
By 1872 a good source of low-phosporous ore had been developed in northern Michigan, and a transportation infrastructure put in place to bring the ore to market. Meanwhile engineers like Alexander Holley had been improving the efficiency of the Bessemer proces with various innovations.
Carnegie decided that the time had come for steel to replace iron in American industry. As in so many other cases, his judgement was right. He made his commitment to steel at exactly the right time in history, and almost every strategic move he made proved to be sound.
As in all his other ventures, he focused first on getting the best human resources. As his plans for a large scale steel mill took place he approached his partners in Freedom Iron and Steel; his brother Tom, an efficiency expert named Heny Phipps, and a brilliant engineer named Andrew Kloman; and asked them to help him found and run the new company. All three failed to see the potential of the new venture and refused to take active roles in the company, although they did make small financial investments in it.
Additional investment funds came from various businessmen, mostly in the Pittsbourgh area.
Denied the managerial talents of his Freedom partners, Carnegie focused all his energies on assembling a management team that would have the skills and habits he valued. First he hired Alexander Holley, America’s foremost expert on Bessemer steel-making, to be his plant manager. Holley had learned his trade directly from Henry Bessemer in England.
Holley’s chief assistant would be Captain William Jones, a typical self-made man of that era. Jones’ father was a poor minister in an unpopular denomination, who suffered from health problems. William Jones had had to go to work full time at age ten to put food on the table. His first job had been in an iron foundry, and with the exception of his service in the Union Army during the war, he made his career in iron and steel. He came to Carnegie’s company after distinguishing himself as Holley’s number two man at a new Bessemer plant Holley had just started up in Johnstown, PA.
William P. Shinn was another business manager Carnegie targeted for his team. In 1872 Shinn was vice president of the Allegheny Valley Railroad. Carnegie was so impressed with Shinn that he went to great lengths to lure him away. He flattered and cajolled Shinn while offering him ever increasing financial compensation. Shinn finally joined the team as general manager.
Carnegie compensated all his key employees with shares of stock in the company, a very unusual move at the time but something that many companies do today.
The site Carnegie choose was just south of Pittsburgh, on the banks of the Monongahela River. Trying to keep his transportation options open, he picked a site that had access to two railroads, the Pennsylvania and the Baltimore and Ohio, or B&O, although time would show that the B&O was not really a viable option. The new company was incorporated in November of 1872.
Steel railroad rails were to be the new mill’s chief product, and in choosing a name for the plant Carnegie offered some flattery to his largest prospective customer, president Edgar Thompson of the Pennsylvania. He named it the J. Edgar Thompson Works. In letters between Carnegie and his partners everyone called the plant “the E.T.”
Construction on the E.T. had barely begun when the banking house of Jay Cooke and Company started defaulting on its debts, creating a financial panic that sent the national economy spiraling down into a depression. Carnegie’s partners balked at the idea of funding a two to three year construction project in the depths of a depression, but Carnegie never lost faith.
With his usual clear foresight, he predicted that the depression would soon be over, and that construction costs would be lower during a depression than during a boom. Fortunately for Carnegie, his shares in Western Union and the Pullman Palace Car Company held their value fairly well during the crash. He sold some to help fund plant construction.
Carnegie’s past as a commissioned bond salesman was invaluable during the depression. American banks had little money to lend after the crash, but Carnegie was able to go back to London to renew his acquaintance with Junius Morgan, this time selling bonds not on a commission basis, but for his own company. His reputation stood him in good stead there, and Morgan was able to help him find buyers for the bonds in short order.
The plant opened in 1875, more or less on schedule. According to biographer Joseph Wall, Carnegie and his partners had built “the most modern and most efficient Bessemer steel plant in America” at a cost that was only “three-fourths as much as the same plant would have cost two or three years earlier or later.”
In 1875, with the nation still struggling to recover from a depression, the E.T. turned out its first batch of rails. Now it was up to Carnegie to sell them.
Next week’s post will be about the depression of the 1870’s.
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