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The great difference between the older methodspools and agreements-and the new method embodied in the holding companies is that under the first all the gain accrued to the men actually owning and managing the undertakings; there was no capitalisation of protection, and comparatively few issues of watered stock. There was obviously little or no temptation to overcapitalisation so long as a few men owned the undertakings and the profits accrued to them alone. It was the newer method-the holding company-that gave the promoter his opportunity. This method admitted of the capitalisation of protection, of the issue of much-watered stock, and of making a world-wide market for the shares. By 1900 the holding company had come into general use in the iron and steel industry. The ground was nearly ready for the promoters of the Steel Corporation; and, when that company was organised in the early months of 1901, it took over the Carnegie Company, the Federal Steel Company, the National Steel Company, the American Steel and Wire Company, the National Tube Company, the Shelby Steel Tube Company, the American Tinplate Company, the American Sheet Steel Company, the American Steel Hoop Company, the American Bridge Company, the Lake Superior Consolidated Iron Mines, and the Bessemer Steamship Company, owning a fleet of twenty-five steamers and thirty-one barges-twelve companies in all. But the companies thus taken over two
themselves aggregations, embodying over hundred companies which were originally independent concerns. These, like the Carnegie companies, had been merged or turned over to holding companies before 1900, and were now fused into the Steel Corporation, which subsequently acquired the Union Steel Company (1902), the Clairton Steel Company (1904), and the Tennessee Coal, Iron, and Railway Company, during the financial panic of 1907.*
Conditions have been described as nearly ready for the promoters of the Steel Corporation. They were not quite ready, and could not be quite ready, until the promoters were sure that they could bring the Carnegie Company into the undertaking. Its financial, industrial
* Cf. Report of Commissioner of Corporations, Part I, pp. 14, 15.
and strategic power-due to its control of ore, coal, and transport-was enormous, so enormous that without it the Steel Corporation could not have achieved all that must be put to its credit, good and bad, between 1901 and 1911. An intimation that Mr Carnegie was willing to consider an offer for his controlling interest in the Carnegie Company was the most valuable piece of information conveyed to the promoters. It gave life and definiteness to the scheme, and made it practicable in all its world-wide significance and its comprehensiveness, as regards control of raw material transport and manufacturing facilities.
Eight years before the Steel Corporation was organised it was stated before the Congressional Committee which investigated the strike at Homestead, that the Carnegie Company was capitalised at $25,000,000, and that on this capitalisation it earned a net profit of 17.2 in 1891 and of 16 per cent. in the year of the Homestead strike. At the end of December 1899, according to evidence given in an equity suit in which Mr Frick was the plaintiff, the assets of the Carnegie Steel Company were valued at $75,610,100. This was the book-value of the properties, 'the actual cost of the properties represented in the balance sheets of the association.'* To Mr Carnegie, for his controlling interest, the promoters assigned $320,000,000 (64,000,0007.).† The acquisition of all the interests in the Carnegie Company, including those of Mr Carnegie, was effected by the issue to Mr Carnegie and his associates of $303,450,000 in bonds, $98,277,120 in preferred stock, and $90,279,040 of common stock of the Steel Corporation. ‡
At its organisation in February 1901, the Steel Corporation had a total capitalisation of over $1,402,000,000 -$510,000,000 of preferred stock, $508,000,000 of common stock, $303,000,000 of bonds, and about $81,000,000 of miscellaneous obligations.
'Speaking broadly' (writes Mr H. Knox Smith, the Commissioner of Corporations, in his report of July 1, 1911), ‘such capitalisation amounted to the claim, the representation, that there was a value in this concern which would justify a fair
* Stanley Committee, Bulletin V, 295; cf. Bridge, p. 365.
business return on this capitalisation. The Bureau finds, on the contrary, that in 1901 the fair market value of its tangible property was about $700,000,000, slightly less than one-half its capitalisation. The other half, the excess of about $700,000,000, is thus separated, and stands out embodying the essential public questions raised by the Bureau's analysis of its investment. In so far as that excess represented value in 1901, it was value due either to increased earning-power from the elimination of competition, concentrated ownership of the basic natural resources-iron ore and coal-or, in some degree, integration efficiency.'*
Mr Knox Smith, elsewhere in the report, goes fully into the methods he had followed in making his estimate of the value of the Corporation's properties at the time of their acquisition, and discusses the over-capitalisation to which he had referred, as evidenced by the enormous commission assigned to the underwriting syndicate which was responsible for the promotion of the Corporation. His careful calculations give, as a result :
'That of the Steel Corporation's stock in 1901 at least $150,000,000 (this including over $40,000,000 of the preferred) was issued, either directly or indirectly, for such promotion or underwriting services, this being over and above the enormous amounts of common stock issued as a bonus for property and for cash.' (Report, Part I, p. 14.)
The material outcome to-day of the organisation of the Steel Corporation in 1901, and of its operations for the last ten years, is the most comprehensive and magnificently equipped manufacturing undertaking that the world has ever seen. The Corporation controls the supplies of nearly all the raw materials of all kinds needed at its hundreds of works in eighteen or nineteen States; and in the rare instances where it does not possess this control-as in the case of nickel-it is so powerful that, when it makes a contract, it can and does insist that the price it is to pay shall be 20 per cent. less than that charged for similar supplies to other concerns in the iron and steel industry.† Rail and lake transport of raw materials are similarly controlled; and the organisation is so complete and self-contained that apparently no man collects a cent of commission at any stage of its trans* Report of Steel Industry, Part I, Letter of Submittal, p. xx. † Stanley Committee, Bulletin XXIII, 1633.
actions, from the time ore and coal are mined until the finished products pass into the possession of the purchaser.
One man, whether he be in London, Paris, or New York, determines whether the wages of 236,000 employees shall be increased or reduced. So far, in the history of the Corporation, the general tendency of wages has been upwards. The rates for unskilled labour in 1892 were 14 cents an hour; the rate in recent years has been 16 cents. Men paid on tonnage have also had their rates increased since 1901. The Corporation has striven continuously to reduce casualties and fatalities to its workpeople by the use of safety devices in machinery. It has also made it possible for its employees, under favourable conditions, to invest their savings in its stocks. It maintains a welfare department; and among other disbursements are subscriptions to Young Men's Christian Associations and kindred bodies, regarded as coming within the scheme of its welfare work.
Since April 1907 it has been the aim of the Corporation to reduce Sunday work to a minimum. It then recommended 'that all work (except such repairs as cannot be done while operating) be suspended on Sunday at all steel-works, rolling-mills, shops, quarries and docks'; and that there should be no construction work or loading or unloading of materials. It is understood,' read this resolution of the Finance Committee, 'that it is not at present practicable to apply the recommendation to all departments, notably the blast furnaces; but it is desirable that the spirit of the recommendation be observed to the fullest extent within reason.'t The Corporation took a lead in this matter. But success in this policy has been slow; for it was reported to the Senate at Washington by the Department of Commerce and Labour, on August 1, 1911, that of over 90,000 men employed in 344 iron and steel works in the United States, 30,000 work seven days in the week; and that one-fourth of the whole, or some 23,000 men, work twelve hours a day or eighty-four hours a week. Much of the Sunday work,' the report added, 'is no more necessary than in other industries.' There was a further statement in this report, of which the Department has so far published only a summary, that
* Ib. Bulletin XX, 1424.
Fitch, op. cit. p. 325.
half of the 90,000 employees are in 1911 receiving less than 18 cents (about 9d.) an hour, while one-fourth receive between 18 and 25 cents an hour.
Through the alliance of the Steel Corporation with the independent iron and steel companies, and also through their connexions with the railway companies,* the Corporation and the Independents have been able, without any friction with the railways, to keep the price of Bessemer rails at $28 a ton for the last ten years. Other consumers of iron and steel products have had no alternative but to pay the prices fixed by the Steel Corporation and the Independents; and the net result of these conditions is that, according to the Bureau of Corporations, the average rate of profit from 1901 to 1910 on the Corporation's actual investment amounts to 12 per cent. But, great as has been the industrial and financial success of the Corporation, Mr E. H. Gary, one of the promoters and Chairman of its Finance Committee, is not yet satisfied. He is afraid that the existing social alliance with the Independents may clash with the Sherman Act, which is aimed at monopolies; and, when he appeared before the Stanley Committee, he pleaded for Government control of prices. Asked whether he meant Government control or Government regulation, he replied:
'I use the word "control" preferably, and I would distinguish that from Government management. I do not believe Government management of the ordinary business of a corporation is practical.... What we all need is something that is practical, something that is legal, something that affords protection to all interests; and that I am in favor of, because I think it is right, and we need it-because it is good policy.'
It may come to Government control; for President Taft and the Republican party have since 1908 been committed to the equally daring doctrine that it is the duty of the United States Government to levy such tariff duties as will guarantee 'a reasonable profit to American manufacturers.' +
* Cf. Stanley Committee, Bulletin VI, 316, 334, 353.
+ Report on Steel Industry, Part I, p. 1.
Since this article was in type, the Government petition for the dissolution of the U.S. Steel Corporation, a book of 93 pages, based on the Report mentioned at the head of the article, has been published.