THE LIBRARY OF THE NEW YORK STATE SCHOOL OF INDUSTRIAL AND LABOR RELATIONS AT CORNELL UNIVERSITY The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924002403917 62d Conghess, 1 HOUSE OF REPRESENTATIVES. J Report M Session. f 1 No. 1127. (. ^^ INVESTIGATION OF UNITED STATES STEEL CORPORATION^. August 2, 1912. — Referred to the House Calendar and ordered to be printed Mr. Stanley (for Messrs. Bartlett, Beall, Littleton, McGilli- CUDDT, and himself), from the Special Committee to Investigate Violations of the Antitrust Act of 1890 and other Acts, submitted the following REPORT. The undersigned members of the Committee to Investigate Viola- tions of the Aatitrust Act of 1890 and other Acts, respectfully submit the foUowihg views in answer to House resolution 148, adopted May 4, 1911, which is as follows: Resolved, That a committee of nine Members, to be elected by the House, be, and is hereby, directed to make an investigation for the purpose of ascertaimng whether there have occurred vio- lations by the United States Steel Corporation, or other corpora- tions or persons as hereinafter set out, of the antitrust act of July second, eighteen hundred and ninety, and the acts supple- mentaiy thereto, the various interstate-commerce acts, and the acts relative to the national-banking associations, which viola- tions have not been prosecuted by the executive officers of the Government; and if any such violations are disclosed, said com- mittee is directed to report the facts and circumstances to the • House. . . , _ . ,^ Said committee is also directed to mvestigate the Umted States Steel Corporation, its organization and operation, and if in con- nection therewith violations of law as aforesaid are disclosed, to report the same. said committee shall inquire whether said Steel Corporation has any relations or affiliations in violation of law with the Penn- sylvania Steel Company, the Cambria Steel Company, theLacka- wanna Steel Company, or any other iron or steel company. Also whether said Steel Corporation, through the persons own- ing its stock, its officers or agents, has or has had relations, with the Pennsylvania Railroad Company, or sluj other raUroad com- pany, or any coal companies, national-banking companies, trust 2 INVESTIGATION OF UNITED . STATES STEEL COBPOBATION. companies, insurance companies, or other corporate organiza- tions or companies, or with the stockholders, directors, or other officers or agents of said companies, or with any person or per- sons, which nave caused or have a tendency to cause any of the results following: First. The restriction or destruction of competition in produc- tion, sale, or transportation. Second. Excessive capitalization and bonding of corporations. Third. Combinations created by ownership or control by one corporation, or the stockholders or bond holders thereof, of the stock or bonds of other corporations, or combinations between the officers or agents of one corporation and the officers or agents of other corporations by dupUcation of directors or other means and devices. Fourth. Speculations in stocks and bonds by agreement among officers and agents of corporations to depress the value of the stocks and bonds of other corporations for the purpose of acquir- ing or controlling same. Fifth. Profits through such speculation to officers or agents of such corporations to the detriment of the stockholders and the pubhc. Sixth. Panics in the bond, stock, and money markets. Said committee shall in its report recommend such further legislation by Congress as in its opinion is desirable. Said committee, as a whole or by subcommittee, is authorized to sit during sessions of the House and the recess of Congress, to employ clerical and other assistance, to compel the attendance of witnesses, to send for persons and papers, and to administer oaths to witnesses. The Speaker shall have authority to sign and the Clerk to attest subpoenas during the recess of Congress. Under the original resolution, by the terms of which this committee was empowered to conduct this investigation, it was particularly charged with the duty of determining whether the organization and operation of the United States Steel Corporation was in violation of the Sherman antitrust law. The committee profceeded to diligently inquire into this question, and was ehciting evidence on that subject when the Department of Justice, stimulated by the revelations made in the hearings and relying upon much of the evidence brought out before the committee,, instituted a proceeding in the United States court seeking the dissolution of the corporation. The committee care- fully considered what, if any, effect such a proceeding would have upon the original purpose and duty of the committee to make a finding as to whether the corporation aiid its conduct was in violation of the Sherman antitrust law; and the c mmittee unanimously resolved, on the 9th day of December, 1911, as follows: The committee has had under careful consideration the objec- tions made by the United States Steel Corporation, through its counsel, to the further prosecution of this investigation. The INVESTIGATION OF UNITED STATES STEEL OOKPOBATION. 3 resolution under which this committee is proceeding directs the committee — First. To inquire into and report as to whether the United States Steel Corporation is in its organization or operations act- ing in violation of the antitrust law. Second. To inquire into and report violations of the interstate- commerce acts and amendments thereto, and to the acts relating to national-banking associations. TMrd. To inquire into the restriction or destruction of com- Setition by reason of the relations of the United States Steel orporation and its officers with other companies. Fourth. The excessive capitalization and bonding of corpora- tions. Fifth. Combinations created by holding companies, interioek- ing directorates, and other devices. Sixth. "Combinations to depress the value of stocks and bonds for the purpose of acquiring them. Seventh. Panics in the bond and stock markets. And the committee is also directed to recommend such further l^slation by Congress as in its opinion is desirable. The objection made by the counsel for the Steel Corporation to the further continuance of the investigation was based upon the ground that the Government had filed a bill in the courts of New Jersey against the, United States Steel Corporation, seeking its dissolution under the antitrust law. As to this objection, it is our unanimous opinion that the committee should continue the investigation as if no proceeding on the part of the United States Government were now pending against said corporation, but not for the purpose of determining the questions involved in the action brought by the Government against the United States Steel Corporation, and any inquiry into the subjects embraced in that action should be made for the purpose of enabling the com- mittee^to recommend such further legislation as in its opinion is desirable. Touching all other matters the committee will pro- ceed as heretofore. ■ The United States Steel Corporation is a confederation of previously existing consolidations. At the time of the organization of the Steel Corporation, the pro- duction of iron and steel by unrelated units — small, separate, and independent concerns — competing one with another in the various branches of the industry, had already been superseded by these con- solidations which had obtained a monopoly of many branches of the business, but were not large or powerful enough to control the industry as a whole. These companies were associated by banking and other connections into "groups." A syndicate organized by J. P. Morgan & Co. finally consoUdated these "groups" into the United States Steel Corpora- tion, the securities of the constituent concerns being deposited in the United States Trust Co., and upon that basis the stocks and bonds of the corporation were issued. 4 INVESTIGATION OF UNITED STATES STEEL COBPOHATION. PERIOD OP COMPETITION. For a brief period, roughly speaking, from 1892 to 1897, tiie manufacture and sale of iron and steel approached a normal, legal, and legitimate status. Prior to this time pools, gentlemen's agree- ments, and preferential contracts had been almost universal and emljraced to a greater or less extent every phase and department of the business. In describing conditions prevailing prior to the formation of the Steel Corporation one of its directors, Mr. Percival Roberts,jr.,says: "It was a case of coming together and breaking again. That, I think, was my experience from 1876 to 1900." All the rail makers in America wer? atvarious times parties to such agreements,they covered finished and semifinished steel — beams, plates, sheets, axles, structural shapes of all kinds, wire nails, bolts, cotton tie's, and articles constructed of iron in every shape and form. (Hearings, p. 431.) Such pools and agreements provided for the restraint of output by allotting a fixed percentage of capacity to each of the contracting plants, and prices were determined in schedules by which all parties covenanted to abide. Competition was restrained or prevented by an infinite variety of devices, too numerous for description here. The Carnegie Co. was at one time under contract not to engage in the bridge business. (MacRae report, 3662.) The Standard OU interests, under threat of going into the tube business, received rebates on tin plate. The New Jersey Iron & Steel Co. was paid $5,000 per month conditioned upon their making no structural steel, and the Illinois Steel Co. received $150,000 per annum to keep their hands off the manufacture of cotton ties. Steel billets were sold at so much below the market price upon condition that they should not be resold before going through some subsequent stage of manufacture, or when fabricated into finished products not to be sold in competition vsdth like products made by the vender. The parties to these agreements and the inventors of these various and ngenious devices for the artificial increase in price were per- fectly cognizant that such schemes and covenants were neither legal nor enforceable, and admit with somewhat surprising candor their thorough appreciation of the fact that they were industrially per- nicious or morally wrong. No man had a more accurate knowledge of the character and effect of such agreements than Charles M. Schwab, president of the Carnegie Co. and subsequently of the United States Steel Corporation. "No man," says he, "has a clearer appreciation than myself of the evil that lurked in the trust scheme. * * * jj ^^^ founded on mis- conception and promoted along the lines of self-destruction. Its fundamental principles were the restraint of trade, increase of price INVESTIGATION OF TTNITED STATES STEEL COEPOEATION, 5 and the throttling of competition — a trinity that would wreck any proposition, business, political, or social." Aware of the legal and ethical status of these conventions, their existence was often denied and always, as far as possible, concealed. These pools or secret agreements were enforced through a com- missioner, who was the custodian of all documents and papers con- taining the necessary statistical data for prorating allotments of production, the schedules fixing prices, and rules and regulations for setthng differences between the high contracting parties. His place of business was known only to those immediately concerned. In 1904, when, as Mr. Temple states. Judge Gary concluded that it was no longer desirable or necessary to have such agreements in the hands of even a single trusted and cautious custodian, and the com- missioner destroyed every vestige of evidence which might incrimi- nate himself or his confreres, but continued to discharge the duties of his office for several years thereafter. (Hearings, p. 1730.) "Remember," said the commissioner, of the plate and structural steel pools, " there was always present the flying off the track of any merabers of these associations; there was always present the fear that the law might be violated or something illegal done." The Chairman. A fear of that kind ? Mr. Temple. Oh, there is no question about it. I will admit freely that point, so far as I myself am concerned. (Hearings, p. 1722.) THE ADDYSTON PIPE CASE. The Associated Pipe Works does not seem to have been so success- ful in eluding the vigilance of the law. It differed from the plate and structural associatjlons in the details of its operations, but sought the same results by somewhat cruder and less effective means. In December, 1896, the tJnited States filed a biU in equity in the Eastern District of Tennessee, the complaint being based upon sections 1 and 2 of the Sherman Act, and praying for the dissolution of this concern and the seizure of its goods in transit. The legaUty of such contracts was discussed at length in an elab- orate decision rendered by Judge Taft, Justice Harlan and Judge Lurton (now Justice Lurton) concurring. This decision was unanimously affirmed by the Supreme Court in December, 1899. The legal status of such pools and associations was elaborately discussed both in the Circuit and Supreme Courts. The ingenuity of the defenders of and apologists for, monopoly seems to have been exhausted by the able counsel who appeared for the pipe pool in this case. It was urged that if there was any restraint of trade, it was con- fined to the parties to the agreement; that it was "partial," and not 6 INVESTlGAMOl? OV tTNlTEl) SIATES SIEEL COEtOftAWON. the restraint contemplated or interdicted by the statute; that it was not an unreasonable restraint; that modem business conditions rendered such agreements necessary; in effect, that it operated to "steady" prices, to prevent violent fluctuations and "ruinous competition." The answer to such excuses for the law's violation was sweeping and conclusive. "Upon this review of thelaw and the authorities," said the court, "we can have no doubt that the association of the defendants, however reasonable the prices they fixed, however great the com- petition they had to encounter, and however great the necessity for curbing themselves by joint agreement from committing financial suicide by ill-advised competition, was void at common law because in restraint of trade and tending to a monopoly." (85 Fed. R., 291.) And, again: It is certain that if the contract of association which bound the defendants was void and unenforcible at the common iaw because in restraint of trade, it is within the inhibition of the statute if the trade it restraiaed was interstate (85 Fed. R., pp. 278-279). After the decisions in the Addyston Pipe and other similar cases, there was no longer a mere "dread that the law might be violated"; there was the certainty that such associations were flagrantly illegal and it became more and more apparent that their existence could not always be successfully concealed. In the latter part of 1896 and the early part of 1897 in par- ticular, there was a rather general abandonment of such combi- nations. Thus the collapse of the wire-nail and billet pools was soon followed by the disruption of the steel-rail pool itself; a number of other similar agreements were also abandoned at least temporarily about this time. (H. K. S. Rept., p. 75.) For a brief period such agreements, it appears, were partially dis- continued or broken by the contracting parties, and many manu- facturers of iron and steel sought to conduct a successful business by the methods which generally prevail in smaller and ordinary indus- trial and coihmercial operations. It became what the engineer, Julian Kennedy, aptly calls " a buyer's market"; that is, the manu- facturer was to a degree dependent upon the preference of the con- sumer, and the excellence and cheapness of the article offered for sale. Purchasers were again able to obtain bona fide bids from actually competing concerns. (Hearings, p. 5077.) This condition was reflected ia the lessening of cost to the consumer and of profits to the producer. To avert this condition, to secure the advantages of the old pools, to prevent or at least effectually restrain competition and at the same time escape the serious pains and penalties denounced by the Sherman Act, was the delicate and difficult problem at this tbne confronting the manufacturers of steel. INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 7 This hard and intricate task involved vast expenditures and the most radical and sweeping changes in the whole commercial and cor- porate make-up of this business. Under the advice of the most astute counsel and the segis of powerful banking institutions, a scheme was finally elaborated which for the time being exceeded the expectations of the most avaricious of its inventors. Hitherto the output of many separate and distinct concerns had been limited and the price fixed by a commissioner possessing plenary powers to enforce these pooling agreements or punish their infraction. Under the new arrangement it was not necessary to resort to these covert and perilous conventions. Instead of pooling rails or plates produced by numerous plants, they pooled the plants themselves. This was accomphshed by the simple device of an "exchange of securities,^ through the organization of holding companies. CONTBOL OF OUTPUT OF SUBSIDIARIES OF UNITED STATES STEEL CORPORATION. The holders of stocks and bonds of various tube plants, claiming to control about 90 per cent of the country's capacity, turned their securities over to a syndicate formed by J. P. Morgan & Co., and in return therefor received stock in an iacorporated consolidation of all these plants, known as the "National Tube Company." (H. K. S. Kept., p. 143.) Or as stated by John W. Gates: The National Tube Co. was an acquisition of the principal tube mUls of the United States into one concern, whereby they could get a very handsome profit out of the manufacture of tubes, and that had been done by Mr. Morgan. Mr. Beall. There had been a combination of those tube mills by which competition had been largely destroyed, resulting in an increased price of their product, had there not ? Mr. Gates. I would 3ay 85 or 90 per cent of the total tube tormage in the United States was in the National Tube Co. at that time. (Hearing, p. 41.) An examination of the minutes of these companies establishes beyond doubt that the control of prices and the restraint of competi- tion was the predetermined and definite purpose for which these various and scattered tube miUs were acquired and assembled under one corporate control. On January 15, 1901, just prior to the formation of the United States Steel Corporation, Mr. Converse, then president of the National Tube Co., and afterwards a member of the board of directors of the United States Steel Corporation, declared: It is we'd Tcnown, the tendency lately so conspicuous to estab- lish a community of ownership or a unified control over great industries, as the only means of restraining destructive compe- tition, led to the incorporation of various great companies. (Healings, p. 4278.) 8 INVESTIGATION OIT UNITED STATES STEEL COEPOEATION. From 75 to 85 per cent (see Gary, hearings, p. 63, and Gates, hearings, p. 228) of all the wire rod and nail mills of the country hitherto under the control of separate and distinct corporations, and indulging in such competition as was not restrained by the various wire and nail pools, were consolidated into the American Steel & Wire Co. The American Tin Plate Co. took over the makers of tin plate and secured absolute control of about 73 per cent of the tin-plate business. The makers of sheet steel formed the American Sheet Steel Co., with 70 per cent of the entire business. Steel hoops and cotton ties were made by the American Steel Hoop Co., which managed to produce all forms of steel bands and hoops. The manufacture of bridge and structural steel of all kinds was controlled by the American Bridge Co. In a short time baling and fencing wire, horseshoes, and horseshoe nails, pipes, sheet iron, tin plate, building materials — in fact, almost every conceivable article fabricated from iron or steel — was controlled by some one of these huge consolidations, holding a more or less monopolistic position. The board of directors of one corporation, capitalized often at millions and hundreds of millions, took the place of the chosen rep- resentatives of the old concerns from which they were created, and the chairman of- the board of directors or of the finance and executive committees assumed the duties once discharged by the secret com- missioner. PooUng agreements, while still maintained, were no longer essential in dictating the price or determining the output. Their few straggling competitors who failed or refused to join these overmastering combinations, as a rule, exerted but little influence upon the industry. The effect of these compact and powerful com- binations on the markets was marked and immediate. EFFECT UPON PRICES. The American Steel & Wire Co. of New Jersey was organized in January, 1899. In 1898, prior to the formation of this concern, wire nails had been selling at from $1.25 to $1.50 per keg. By June in the same year, the price had reached $2.10 and within eight months thereafter it was raised to $3.20 per keg. The maximum price in 1898 was $1.50; in 1899, it was $2.95, and the next year $3.20. (Hearings, p. 5560.) Wire rods brought $21 per ton in 1898; in 1899 they reached $31.50, and by 1900 $50 per ton. This result is the more surprising when it appears that there was but little difference in the production and demand for nails and tods in 1898 and 1899. Wire rods, Pittsburgh: ^^ Production 1898 i q-j-^ ggj Production 1899 lioaMQO (Hearings, p. 5564.) INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 9 In three years there was a rise of $1.80 per keg in wire nails, and in 1900 there were produced 7,233,979 kegs of nails; or a profit to the con- solidation, assuming the 1898 price to have been fair, of $13,021,162.20. (Hearings, p. 5560.) Nails, fencing, and other forms of wire are made from wire rods. In 1898 there were produced in this country 1,071,683 tons of wire rods (see p. 5564). In June, 1898, the Pittsburgh price of wire rods was $20 per ton; in January, 1900, this price had risen to $50 per ton, with a total production, 1898 to 1900, of 2,954,372 tons. The American Tin Plate Co. was incorporated in December, 1898. Commercial tin plate is made by coating steel sheets (black sheets), and these in turn are rolled from sheet bars. Sheet bars and tin plate showed a like increase upon the consolidation of the sheet-steel and tin-plate miUs. In November, 1898, tin plate sold for $2.95 per box. This com- pany was organized in December of that year. By January the same plate sold for $3.34. In 30 days thereafter it reached $4.21^, and from September till the close of the year ir remained stationary at $5 per box. (Rept. Ind. Com., vol. 1, p. 868.) "MERGER VALUE " CAPITALIZED BY THE UNITED STATES STEEL CORPORATION. So well satisfied were the syndicates who had evolved tBis plan for what Mr. Converse calls "community of ownership or unified control over great industries as the only means of restraining destruc- tive competition" that they began to treat this ingenious and ille- gal device as a lawful institution, no doubt reassured in this posi- tion by the failure of the Government to proceed against them, and in their future operations they failed to discriminate between the cost of construction or the intrinsic value of these properties and earning capacity due entirely to "community of ownership and unified control," or "potential value," as James Gayley calls it. This "combination value" of the various companies since acquired by the Steel Corporation has been capitalized as a tangible asset, stocks issued and bonds sold, all based upon this new device, as a perfect and permanent evasion of all laws prohibiting combinations in restraint of trade. The earning power of the American Steel and Wire, the Tin Plate, National Tube, and other companies was enormously increased by virtue of the complete monopoly which resulted from assembling practically all of the manufacturers of such commodities, as horse- shoes, nails, fencing wire, sheet steel, and tin plate for roofing or kitchen utensils, under one control. The gains incident to the difference in the price of such things sold under competitive and monopolistic conditions were but a small part 10 IKVESTlGAttOlir Of t;»lTEt) StATfiS STEEL COEPOBATION. of the amount actually secured by these companies and by the Morgan-Moore and other sjmdicates. To illustrate: If under normal conditions these various plants acting separately could earn 10 per cent, and acting collectively they could earn 100 per cent, then by discarding any form of physical valuation, either the original cost or the cost of reproduction, and taking as their sole standard the new and artificially created earning power, due entirely to the consolidation, and for that reason aptly termed "combination value," then 10 assembled plants were worth 10 times as much with the acquired monopoly of the business as the same 10 plants would have been worth acting separately and in competition. And these immense aggregations were created and capitalized upon that principle; neither in the incorporation of the Steel Corporation nor of the subsidiaries which preceded it, now under discussion, has there been any serious attempt to deny that the greater part of the securities of these companies had any other element of value. "Everybody knows," said W. H. Moore, of the Moore syndicate, "what they are getting when they get common stock (in the Tin Plate Co.). They know they are not getting anything that repre- sents assets." (Reports Industrial Commission, vol. 1, p. 963; hearings, pt. 63.) Judge Gary, testifying before the Ways and Means Committee, "guesses" the same thing is true of the Steel Corpor-ation itself. Mr. Cochran. Of this whole sum, $1,782,000,000, was not $1,000,000,000 at least capitalized profits, as distinguished from original investment ? Mr. Gaby. I should have to guess at that; but I should guess yes, including increases in value. (See Hearings Ways and Means Committee, 1908 and 1909; see hearings, pt- 63, p. 240, Appendix.) The Commissioner of Corporations gives an interesting account of the method by which these companies "capitalized" and recapital- ized their profits : In the organization of the American Steel & Wire Co. of Illi- nois, in March, 1898, each $100 of the stock of the Consolidated Steel & Wire Co., one of the constituent concerns (and itself a consohdation of seven plants), received $175 of preferred stock and 1175 in conmion stock of the new company, or $350 of new securities for every $100 of the old. (See (Dom. Rept., p. 6.) "A few months later each $100 of the preferred stock of the American Steel & Wire Co. of Illinois received $100 in preferred stock and $60 in common stock of the American Steel & Wire Co. of New Jersey, while each $100 of the Illinois concern's common stock received $120 in common stock of the New Jersey concern. Thus each $100 stock of the old consohdated company became $490 in the stock of the INVESllGAMON Of tlMTfit) STAGES STEEL COfePOBATIOK. 11 New Jersey concern. In the final merger of the latter company mto the Steel Corporation each $100 par value of the preferred stock re- ceived $117.50 in preferred stock of the Steel Corporation, while each $100 (par value) of the coTrmnon stock received $102.50 in United States Steel common stock. In other words, every $100 par value of the stock of the Consolidated Steel & Wire Co. was finally trans- muted into $528.50 par of Steel Corporation securities. (Com. Eept., p. 176.) The reflections of the commissioner over a Uke method of capitaU- zation of ore properties applies as forcibly to operating plants. The capitalization of the appreciation in value (of ore) in the absence of competitive ownership presents a problem of far-reaching importance. Assume, for instance, for the purposes of argument, that the Steel Corporation could prove an actual appreciation in its ore property of, say, $100,000,000. This would mean that a considerable part of such appreciation must be attributed to the concentration of control of such property, since under scattered and competitive ownership there is always a tendency on the part of some holders to sell a,t a very small profit rather than carry their property without a return thereon, and thus keep down values. If it were conceded that such apprecia- tion could properly be capitalized and used as a basis for distributing profits, then there is nothing to prevent further recapitalization, at a still greater appreciation, at some time in the future when the value may be stiU more greatly influenced by the concentration of control. " In this way, it will be seen, a great concern, like the Steel Corpora- tion, might repeatedly recapitalize its natural [and one may add, other resources], and use this capitalization in such a way as to really conceal its true rate of profit." Thus, to capitalize and recapitalize this property involves, therefore, as just stated, problems of vital interest to the public." (H. K. S. Kept., p. 325.) OVERCAPITALIZATION. In some instances stocks were not "watered " in the ordinary accept- ance of that term ; they were literally deluged. The cost of construct- ing or reproducing the several plants constituting the combine was inconsequential as compared with the value of this new device for enjoying with immunity an old and hitherto forbidden privilege — an absolute monopoly in a valuable and necessary article of commerce. NATIONAL TUBE CO. "The National Tube Co. was an acquisition of the principal mills of the United States into one concern, whereby they could get a very handsome profit out of the manufacture of tubes, and that had been done by Mr. Morgan." Mr. Gates does not tell us how Mr. Morgan 12 INVESTIGATION OF TTNITED STATES STEEL COEPORATION. - managed to make this handsome profit, but it is easily ascertained from a casual inspection of the organization and operation of this concern. Before acquiring these plants Morgan & Co. employed Julian Kennedy, of Pittsburgh, a most capable engineer of long experience in the construction and operation of steel works both in America and in Europe and Asia, and instructed biTn to make a careful estimate of the value of these plants. The tubepeople wanted to get together, as I understand it [says Mr. Kennedy] . with a view to ending this condition of affairs [free and unrestricted competition], and they entered into negotiations with J. P. Morgan & Co., of New York, to combine them into a larger company. * * * iTie tariff on tubes was $40 per ton, which was practically a Chinese waU, and the tube people were small in numbers for a while and their profits got very abnormal and very fancy, and a great many other people jumped into the tube business. It is a business that is not necessarily very highly organized, and men could get in very quickly and with a small amoimt of capital, if necessary; so a great many tube plants started. Some of them were small, but all were active, and we got an overproduction, and business became very much demoralized, as I noticed. I had occasion to go around all the tube plants about that time and examine them. * * * About that time, I think 1898 or 1899 — ^I can not fix the date exactly — it was just prior to the formation of the National Tube Co., whenever that was. I visited all the works and naturally talked with aU the people and found them very much discour- aged. * * * Generally it was a buyer's market, as we call it, and the tube people were very much in the blues. * * * fhe buyer could pretty nearly dictate his own price at that time. The Chairman. At whose instance did you do that ? Mr. Kennedy. In connection with another gentleman em- ployed by Messrs. J. P. Morgan & Co., of New York. The Chaieman. To appraise the tube, works of this coxmtryl Mr. Kennedy. Not to appraise, exactly. The Chairman. To fix a valuation ? Mr. Kennedy. The works were not bought on that valuation, but to give our opinion as to valuation as a guide to it, as I under- stood it. The Chairman. WTiat was the valuation of the National Tube works at that time ? * * * Was it in excess of $19,000,000? Mr. Kennedy. I should say not. * * * i only appraised the plants, and considered them as going plants, including the expense of starting and organization, but nothing for good will or possible effects of combination. That was distinctly left out. * * * I simply took the physical value of the plants as going plants, including the cost of construction and cost of start- mg — the diseases of infancy, which are a part of the cost of construction. INTEBTIGATION OF UNITED STATES STEEL OOKPOEATION. 13 The Chaieman. Did these plants have any ore or anything of that kind you did not appraise ? Mr. Kennedy. I think not; we did not consider that, anyway. The Chairman. Do you know what per cent of the tube busi- ness was included in this organization, approximately? Mr. Kennedy. I do not know exactly, but it was nearly all. * * * I should have said 90 per cent, but I would not be positive. (Hearings, pp. 5076-5079.) The most important companies acquired were the National Tube Works Co., with plants at McKeesport and Pittsburgh, Pa.; and the Riverside Iron Works with plants at Wheeling and Benwood, W. Va., and Steubenville, Ohio. * * * The remaining plants were those of the following companies : Pennsylvania Tube Co., Pitts- burgh, Pa.; Oil City Tube Co., Oil City, Pa.; National Galvanizing Works, Versailles, Pa.; Syracuse Tube Co., Syracuse, N. Y.; Dela- ware Iron Co., New Castle, Del.; Allison Manufacturing Co., Phila- delphia, Pa.; Cohoes Tube Works, Cohoes, N. Y.; Ohio Tube Co., Warren, Ohio, and Morristown, Pa. ; American Tube & Iron Company, Middletown, Pa., and Youngstown, Ohio; Chester Pipe & Tube Co., Chester, Pa. ; Oil Well Supply Co., Pittsburgh, Pa. These smaller plants entering the consolidation had an annual capacity of about 650,000 tons of iron and steel wrought pipe. * * * The aggregate capacity of the National Tube Works and the Riverside Iron Works was about 350,000 tons. In the consolidation of these plants, all purely finishing mills, there was no opportunity for "integration" with the economies incident to it. Plants necessarily separate and distinct from their nature, one corporate control and ownership could not coordinate them, as blast furnaces, converters and rolling mills are operated together, so that the molten metal by a continuous process passes from the blast furnace into the converter and thence to the rolls, without interruption or delay, tUl still hot it emerges a finished plate or rail or other finished product. "This business," says Juhan Kennedy, "is not necessarily very highly organized and with a small amount of capital. Small or large, each mill bought its raw material cold, usually billets, and con- verted them into tubes. A small mUl could operate relatively as economically as a large one." These works were simply held together by a "community of ownership" under one corporate control. During the boom season men had gone into the business hurriedly and some of the plants were suffering from the "diseases of infancy," a great many more were afflicted by the less curable and more serious maladies of old age. Kennedy inspected these plants in 1898 or 1899; the Steel Corpora- tion acquired them in 1901, and by 1907, 6 out of the 17 works above 14 INVESTIGATION OF UNITED STATES STEEL COBS>OEiATI!Olf. enumerated were abandoned, and according to the Commissioner of Corporations, "the reconstruction of the McKeesport works of the National Tube Co. involved an expenditure of several millions of doUars." In answer to a request from the committee, the corporation has furnished it a list of its plants abandoned or dismantled. The fol- lowing brief description of six of the plants which formed the National Tube Co. and were "shut down and dismantled" — demohshed in from two to six years after they were acquired — is taken from that record: Subsidiary company owning plant. Location of plant. Date Date originally aban- built. doned. 1866 1907 1880 1907 1877 1905 1876 1907 1886 1903 1886 1907 Product made. Annual tonnage capacity at date of aban- donment. National Tube Co. . . Allison works, Fhiladelpliia, Pa. American works, Middletown, Pa. Chester works, Chester, Fa Cohoes works, Cohoes, N. Y Oil City works, Oil City, Pa Youngstown works, Yoimgs- town. Pa. Charcoal boiler tubes. Wrought pipe. . ....do ....do ....do ....do 14,000 114,000 47,000 14,700 68,900 35,000 These plants were of all of an old type of construction, and in every instance the supply of steel required for their operation had to be shipped in to them. This condition of afEairs resulted in high costs of manu- facture at these plants. To have continued the plants in operation would have necessitated their being rebuilt at an early date and equipped with modem facilities. But even to have done this would not have resulted in much economy in cost of operation, because of the isolation of these plants from the source of steel supply and the disadvantage of their location for distribution of product. Accordingly, the company in 1903 decided to and commenced the construction of extensions to its plants at McKeesport, Fa., and Lorain, Ohio, and concentrated at these 2 plants the manufacture of the tonnage previously produced at the abandoned plants. Both McKeesport and Lorain produce steel from the ore up, and so are self- contained plants. The 6 old plants were not shut down and dismantled until facilities had been folly installed at McKeesport and Lorain to care for a tonnage equivalent to that produced at the old plants. The extensions to the McKeesport and Lorain plants added 460,000 gross tons annually to the company's output, considerably more than the tonnage of the abandoned plants. ' We are not left in doubt as to the motive and the sole motive for the consolidation of these concerns; it is stated by its president, Mr. Converse, and spread upon the company's minutes. It is well known the tendency lately so conspicuous to establish a community of ownership or a unified control over great industries as the only means of restraining destructive competition led to the incorporation of various great companies. Julian Kennedy, acting for J. P. Morgan & Co., having visited and carefully inspected these plants, and after taking into consideration the physical value of the plants'as going concerns, and allowing an ad- ditional amount for the "diseases of infancy," "the valuation we made was a little higher (than a physical valuation) because anybody reproducing that plant would have to run it almost for a year in get- . ting the organization perfected and the machinery adjusted, which is part of the construction cost, although not always considered that." After including everything of actual tangible value, "but nothing for INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 15 good will or the possible effects of combination," he reported to Mr. Morgan that the actual value of these plants did not exceed $19,000,000, and that the owners were demoralized and disheartened; that it was a buyer's — a consumer's market. Undismayed by this dismal prospect, J. P. Morgan & Co., with an amazing audacity, launched this new $19,000,000 monopoly on its course with a total capitalization of $80,000,000, and for their valued services in thus restraining the previously obnoxious and "destructive competition," received as compensation securities of this concern aggregating $20,000,000, or one million more than the total value of all the 17 tube plants, 1 in need of reconstruction and 6 "old style," "isolated," and "not equipped with modern facilities," or on the verge of being "shut down and dismantled." To the uninitiated this would appear to be an utterly impossible task. Under the circumstances, the sudden and instant prosperity of the National Tube Co. is an object lesson of no little moment, illus- trating the immense power of an absolute monopoly, no matter how inferior or defective or obsolete the plants, or how incapable the management and operation. With all the essential elements of fail- ure, antiquated plants, badly located and burdened by this huge overcapitalization, nevertheless: " The National Tube Co. was one of the most successful concerns of the United States Steel Corporation, and by the time it was acquired by the latter its common stock had a high market value hecause oj the company's earning power. For the year ending June 30, 1900, the profits of this company, after deducting all expenses, exceeded $14,600,000, and after deduction for depreciation, bad debts, etc., the net earnings were $13,878,000." This, it will be seen, was at the rate of 35 per cent on the $40,000,000 of preferred stock outstanding and the rate of 17 per cent in the total capitalization of $80,000,000, or more than 73 per cent of the actual value of the entire property. In order to illustrate the purposes, methods, and effect of such con- solidations, we have described somewhat in detail the organization and operation of the National Tube Co. In discussing the other con- cerns forming the so-called "Morgan group," this is not necessary, owing to the fact that the same scheme for throwing together into one mass "of unrelated units," efficient and inefficient, new and obsolete plants under one control and into one heavily overcapitalized corpora- tion, characterized all the operations of J. P. Morgan & Co. in the steel industry. The control estabhshed by the organization of the National Tube Co. as a practical monopoly, the prohibitive duty of $40 per ton imposed by the tariff, and the enormous profits of the National Tube Co., as exhibited by its earnings for the year 1900, clearly demonstrate its power to raise or lower the price to the consumer. 16 INVESTIGATION OF UNITED STATES STEEL COKPOEATION. AMKBICAN BRIDGE CO. The American Bridge Co., through banking connections, was aflBhated with the Federal Steel and the National Tube Co., these three companies being spoken of as the Morgan companies. * * * The American Bridge Co. falls in the same general class with the American Tin Plate Co., the American Sheet Steel Co., American Steel & Wire Co. and the National Tube Co., in that it was a consolidation of previously coinfeting concerns. The plants entering the combination were unrelated units dependent upon the larger steel manufacturers for the steel which constituted tneir raw material, and the company was coTtspicuously undeveloped from the standpoint of integration of productive proc- esses. It was concerned with a specialty; that is, as the name . indicates, the erection of bridges. It also engaged extensively in the erection of steel construction for buildings. '' Its annual capacity was about 600,000 tons. It did not have as high a degree of control as some of the other consolidations here discussed. (H. K. S. Rept., pt. 2, p. 93.) The organizers of this company attempted to prevent such competi- tion as might result from a lack of "complete control," by various devices and contracts in restraint of trade. A certain Mr. Ladd seems to have secured some sort of control or option on the 27 companies which were to be consolidated in the American Bridge Co. From the minutes of this company (May 4, 1900) it is evident that one of the principal assets which he proposed to deliver to the new concern was an agreement entered into by all the formerownerswoito competewith this new concern for a period of 20 years. This agreement provides that the vendors or their agent, the party of the first part, further agrees to procure and deliver to the bridge company proper agreements in writing and in form acceptable to the bridge company * * * to the effect that — Said party of the first part and said persons, respectively, wiU not during the period of 20 years, directly or irhdirectiy, without the consent in writing of the tridge company, engage or ie interested in the business of bndpe building, or manufacturing or selling structural iron or steel, either individually or as copartners, in any firm or as agents for others, or as officers, directors, or stock- holders of any corporation or association other than ^he bridge company or its successors, in any State, district, or Territory of the United States, or any of its possesssions, except the Territory of New Mexico. * * * It was further provided that — "The $30,000,000 preferred stock issued shall represent the plant values as arrived at by audit and appraisal, and $10,000,000 cash working capital. Of the $30,000,000 common stock one half, or 115,000,000, will go with the $30,000,000 of preferred and the other half or $lB,OOOfiOO, wiU go to J. P. Morgan cfe Oo., as commission, and which they will use for the purpose of forming their syndicate for themselves and to indemnify me for my ^orts. * * * INVESTIGATION OP UNITED STATES STEEL OOKPOBATION. 17 Upon the absorption of this company the United States Steel Cor- poration was subrogated to its rights under this contract. As will be hereafter most apparent, the one thing most feared and dreaded by these various consolidations was competition by the Car-' negie Co., actual or possible, and the Carnegie Co. was in the bridge business. "Destructive competition" might reasonably be appre- hended at any time unless the "Ironmaster" was in some way satis- fied, the following recital from the report of the board of directors of the Carnegie Co., April 23, 1900, explains.the terms and conditions under which Carnegie was induced to keep out of the bridge business. Mr. L. C. Phipps. Most everyonepresent, I think, under- stands the proposition of Rolling the Keystone Bridge Works to the American Bridge Co. I think it . would be well to incor- porate in our niinutes the proposition made by the promoter, Mr. Ladd, under date of April 2, 1900. Simultaneously with the purchase of the Keystone plant an agree-, ment was entered into by the contracting parties whereby the bridge company was to purchase 51 per cent of aU materials required and "to enjoy from the Carnegie Co. at terms or rates more advantageous than the terms or rates at which the Carnegie Co. would sell similar materials to any other customer." The following colloquy between Mr. Lynch and Mr. Schwab, then president of the Carnegie Co., throws much additional hght on the transaction. Mr. Lynch. I rather favor the company retaining this depart- ment. If the matter has been carefully gone over by the other members of this board and the steel company board has approved of the sale and transfer, then I would vote for it. :|c ****** Mr. Schwab. The proposition has been considered very carefully. Mr. Cameg%e approves and also Mr. Henry Phipps. It is our opinion that we are getting a very good price for Keystone ($2,000,000 in preferred and $1,000,000 m common stock of the bridge company), and the contract which we are to make giving us 50 per cent of the steel to be purchased by the consolidated company will prove a very beneficial thing for us. If the bridge company does not take 75 per cent of the bridge works in the United States, we are then privileged to build a works of our own. If we continued in the bridge business we would most certainly have to rebuild the Keystone. (Min. board directors Carnegie Co. June 6, 1900, MacRae's Eept., p. 4101.) It appears from the records of the United States Steel Corporation, which took over this plant a few months after this statement, that Mr. Schwab by no means overstated the case. All except the Walker plant were old and very much run down. EspedaMy was this the case with the largest one — the Keystone. It was of an old and olsolete type and production cost excessively high. 64946°— H. Kept. 1127, 62-2 2 18 INVESTIGATION OF UNITED STATES STEEL OOBPOBATION. This old concern was carried on the books of the Carnegie Co. at the time at a valuation of $50,000. (MacRae's Rept., p. 2618.) The Keystone was not the only one of these bridge plants which '"would most certainly have to be rebuilt" or dismantled; the sellers and purchasers seem to have agreed on the obsolete and worthless condition of 10 out of 27 of these plants.' It then appears that 10 out of 27 of these "unrelated units" "conspicuously undeveloped from the standpoint of productive processes" were "old or obsolete," or their production cost was "excessive," or about to "fall down" and some seemed to combine several of these defects. Had they been new and up to date, no legitimate advantage could possibly have accrued to J. P. Morgan & Co., and subsequently to > Tbe following detailed and tabulated statement made by the United States Steel Corporation shows the coDditlon of these plants immediately after they were acquired: List of plants abandoned by si^sidiaTV companies of United States Steel Corporation from Apr^ 1. to July 1, 1911. 1901 Subsidiary company owning plant. Location of plant. Date originally built. Date aban- doned. ■ Product made. Annual tonnage capacity at date aban- doned. American Bridge Co. Rochester plant, Rochester, N. Y.i Keystone plant, Pittsburgh, Pittsburgh plant, Pittsburgh, Walker plant, Pittsburgh, Pa." Youngstown plant. Youngs. town, .Ohio.' Buffalo plant, Buffalo, N. Y.«.. Columbus plant, Columbus, Ohio.' I-a Fayette plant, La Fayette, Ind.» Sohultz plant, McEees Rooks, Pa.< Milwaukee plant, Milwaukee, Wi3.« 1872 1865 1878 1899 1889 1893 1886 1891 1856 1875 Apr., 1903 Feb., 1905 Dec., 1903 Apr., 1904 May, 1904 Apr., 1904 Feb., 1905 May, 1904 Feb., 1903 Jan. 1910 Fabricated structural material. do Gross tons. 6,400 48,200 Mi.OOO do do do 15,000 12,900 6,400 4,300 3,200 9,600 10,700 do do do do do • Very old and obsolete; buildings about ready to fall down. Could not operate profitably. The tonnage output of the above six plants abandoned because they were old, obsolete, and no longer profitable to opct- ate, was transferred to and taken care of by the new, modem, and up.to-date plant constructed by the company at Elmira, N. Y. These six old plants served largely central and northern New York State and New England. Elmira was chosen as the point of concentration, as nearly all raw steel from Pittsbursh tor above territory is shipped through Ehnira. The new plant at Elmira has a capacity of S4 000 erras tons annually. f j > b ' These were all Pittsburgh district plants. All except the Walker plant were old and very much run down. EspeoiaUy was this the case with the largest one. Keystone. It was of an obsolete type and oro- duotion cost excessively high. Instead of rebuilfflng any or aU of these plants it was concluded to concen- trate the output at a smgle plant In the Pittsburgh district. According^ the Ambridee plant (near Pitts- burgh) was constructed and all available equipment and facilities of the old plants removed to it. The Amtadge plant is modem in every partfoular and has an annual capacity of 200,000 gross tons of finished tobrioated material. u".ous,vi • These were small highway-bridge plante; they were poorly arranged and their costs were high An rtension was buUt to the Canton (Ohio) plant and the tonnage capacity of the two plants was bSisferred extension to and taken care of at that point. • These plants were totall; ' ' plants was transferred • ^. , ^ 'taUy destroyed by fire on Feb. 24, 19ffi, and Jan. 3, 1910, respectively. TheSchultj plant was entirely and the Milwaukee plant largely on leased ground, and it was decided, therefore not ta rebuild. Moreover, the tonnage capacity of these plants was taken care of by the new plants at Ambridcn and Gary, which were under constraotion at the tune of the respective fires. IHTTESTIGATION OP UNITED STATES STEEL COEPOEATION. 19 the Steel Corporation, by operating under a community of ownership, according to Julian Kennedy, in every way qualified to express a competent and disinterested opinion. Asked if it was necessary that a bridge plant be large or "integrated" in order to economically manufacture structural shapes, he replied : No ; it is not necessary to be extremely large. A moderate sized plant does very well within its range of sizes. It can not build as large work as larger plants, of course. * * * There is not much manufacturing in a bridge plant. There is not much chance for one works to operate cheaper than another. It is an assembUng proposition, holes to punch and rivets to drive, and one plant can do this character of work about as cheaply as another. The Chaieman. The only way in which the price of bridge and structural materials could be maintained would have been to take over these concerns whether they were dismantled or not ? Mr. Kennedy. I think so; yes. (Hearings, p. 5082.) From the nature of the business no material advantage was gained by consoMdation, and the dilapidated condition of the plants engaged in it rendered efl&cient or aggressive competition manifestly impos- sible, and therefore every effort and every sacrifice was made to restrain or placate competitors. The agreement to give $3,000,000 par value in bonds for an old and admittedly obselete and dilapidated plant, to bind themselves to purchase 51 per cent of their raw material from the Carnegie Co., upon the condition that it would keep out of the bridge business, is con- clusive- proof of the excessive price at which the bridge company was forced to buy its peace of Mr. Carnegie, notwithstanding the fact that — The American Bridge Co., through banking connections, was aflShated with the Federal Steel and National Tube Co. Morgan & Co. were, by resolution of the board of directors of the bridge company, appointed its fiscal agents and bankers. (Mm. board directors American Bridge Co., May 11, 1900, MacRae's Rept., p. 4173.) Not one pound of steel would the bridge company have purchased from Carnegie which could have been secured from the Federal Steel. Transactions between those members of the same "group" were in the nature of "intercompany profits." J. P. Morgan himself was a director in the Federal Steel Co. Robert Bacon and Charles Steele, of the firm of Morgan & Co., were directors in both companies. The similarity between the Federal Steel Co. and the Carnegie Co. extended to the character of their output, the principal products of the Federal concern being steel rails, billets, plates, structural shapes, and other heavy lines, and, like its Pittsburgh rival, many or its best customers were themselves steel manu- facturers. CB.. K. S. Rep., pt. 2, p. 88.) 20 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. And The Federal Steel Co. owned the Illinois Steel Co., which made structurals, Z's, channels, angles, blooms, billets, ingots, bars, and pretty nearly everythiag along that line. (Hearmgs, pt. 1, p. 41.) Nevertheless, these "unrelated imits," dependent upon the larger steel manufacturers for the steel which constituted their raw mate- rial, bound themselves to purchase the greater part of that material from the most dreaded rival of the Federal Co. (see Hearings, p. 220), although that company made ready for assembUng iron and steel in every conceivable form which any bridge company could require. Judge Gary admits the Federal Steel was deficient in not having sufficient finishing miUs to make it a perfectly good proposition. (Hearings, p. 204.) Finishing miUs were their most coveted custom- ers and, having alliances through stock ownership or otherwise with tube and wire mills, consumers of structural shapes were the most cov- eted of all. This company had not the monopoly possessed by the tube company; its plants were equally as antiquated and as badly located, and it was weighed and trammeled by the inexorable de- mands of the powerful Carnegie Co. This property, as we have seen, was promoted by one Giflord Ladd, and as stated by the Commissioner of Corporations— Of the $14,500,000 total cash capital provided approximately $12,690,000 was expended for plants and working capital, tlus amount including th§ $5,500 paid the promoter. This left net cash balance on nand of $1,832,000. For services rendered in assembling these plants, which were bought outright for $12,670,000, together with a covenant by the vendors not to engage in the bridge or structural steel business anywhere in the United States, outside of New Mexico, J. P. Morgan & Co. and other promoters received securities of the reorganized company of the par value of $15,000,000 or $2,130,000 more than the actual value of all the plants, good vnU included. J. P. Morgan & Co. were not the only financiers who at this time reaped a rich harvest from the consolidation of hitherto distinct or unrelated units in the steel industry. From a financial poiut of view there were four groups "Morgan," "Moore,"^ "Carnegie," and "Rockefeller.'^ (Com Kept., pt. 2, p. 10.) The National Steel, American Sheet Steel, American Tin Plate and American Steel Hoop Cos. were all "Moore " concerns (Com Kept p. 10, pt. 2.) ■ ^ ■' INVESTIGATION OF UNITED STATES STEEL OOEPOBATION. 21 THE NATIONAL STEEL CO. The National Steel Co", produced semifinished products, and owing to its close relations to the steel hoop, sheet steel, and tin-plate com- panies, all "Moore concerns" organized by the same syndicate, it found in these finishing mOls a ready market for its product and in this respect had a decided advantage ov,er the Federal Steel Co. The total cash value of the property and cash assets acquired by the company at its organization over and above its underlying bonds did not exceed the $26,000,000 preferred stock issued. In addition to the preferred this company issued $32,000,000 of common stock, all of which was admittedly pure water, $5,000,000 of which went to promoters, the balance was given as a bonus to the purchasers of preferred stock. This company subsequently acquired certain ore, steamships, and other properties. The Commissioner of Corporations estimates the total value of its tangible property on April 1, 1901, at $39,898,000. AMEBICAN STEEL HOOF CO. The organization of the (American Steel Hoop) company was con- ducted by W. H. Moore in connection with New York bankers. C. S. Gruthrie, then president of the company, in testimony before the industrial commission in October, 1899, said that the organization of the American Steel Hoop Co., the American Tia Plate Co., and the National Steel Co. was "substantially the same in every respect." This means that the promoters determined upon a cash valuation of the plants and then gave the purchasers the option of cash or taking preferred stock, up to the amount of such cash valuation of the prop- erty, with an equal amount of common stock thrown in as a bonus. All of the common stock of the company at its organization was nothing but "water — the capitaUzation of future hopes." "It will be noted that the issue of the common stock exceeded that of the pre- ferred by $5,000,000, This went to the promoters for 'organization expenses.'" (Rept. Com., pt. 2, p. 139.) It was primarily a combination of previously competing concerns, and a desire to limit competition and afford a large profit to pro- moters was undoubtedly the ruling motive in its organization. (H. K. S. Kept., pt. 1, p. 1.) This company was a consolidation of nine concerns, etc. The com- missioner of corporations places a value of $11,000,000 on these nine plants, but with the qualification that this estimate is probably too liberal (p. 185). - . The excessive overcapitalization of this and like concerns in the "Moore group" was thoroughly understood by the Steel Corporation. At a meeting of the board of dii'ectors of the Carnegie Steel Co. Judge 22 nrVBSTIGATIOlT OF ■UNITED STATES STEEL OOEPOBATION. Reed, president of one of these "Moore companies" and closely identified with the organization of all of them, made the following important observation in reply to a proposal to consolidate the Steel Hoop with other companies: Then the question came up as to the propriety of making a consolidation instead of a lease, but that involved the same difficulty, because any stockholder who was not satisfied with the consolidation could demand an appraisement; and an appraiser- ment at any time of these properties to decide what the stock is worth would be embarrassing to say the least. (McRae Kept., p. 4056.) When this company could not buy a competing plant bodily, it paid it to stay out of the business. Hoop steel, especially cotton ties, was its specialty (Com. Eept.; pt. 2, p, 3), and being unable to take over the costly Illinois Steel Co., it paid it $150,000 annually to keep out of the cotton-tie business. (McRae's Rept., p. 4056.) The consolidation of the nine constituent concerns forming the American Steel Hoop Co. at approximately 300 per cent of their actual value was simply the capitaUzation of the power to fix the price of steel hoops and cotton ties, which the promoters sought to attain by this merger. A2CEBICAN SHEET STEEL CO. The American Sheet Steel Co. was a combination of 164 sheet mills and a few open-hearth and puddling furnaces. The Commissioner of Corporation values an ordinary sheet mill at $40,000, or $6,500,000 for the mills. "The additional plants of the company could not have been worth more than a few million doUars," in the opinion of the Commissioner of Corporations. (H. K. S. Rept., pt. 2, p. 141.) He This company was virtually a counterpart of the American Tin Plate Co., in that it was organized to consolidate previously competiug concerns and in that it was engaged in tne manu- facture of practically a single product — sheets. Its annual capacity was ia the neighborhood of 500,000 tons, this repre- senting, about 70 per cent of the country's total capacity at the time of its organization. The element of integration was hardly present in its case. (Rept. Com. of Corp., pt. 1, p. 91.) These 164 "unrelated units," valued at $6,500,000, with other properties of comparatively small value — "a few millions" — were consoUdated and capitalizSd at $52,000,000. Forty-nine million dol- lars of the stock was actually issued. This company is in every respect a "counterpart" of the American Tin Plate Co., and any analysis of the motives or methods of the pro- moters of the latter concern wiU apply with equal force to the Sheet Steel Co. IJrrteSl'lGAMON 05- tJlTMEt) StAMS SfEfiL COftPOflAl'tOJJ-. 23 I AMERICAN TIN PLATE CO. Tin-plate mills are absolutely "unrelated units"; there is no pos- sible economy in either the physical or corporate consolidation of these concerns. The cost of producing tin plate remains the same whether the mills are owned or operated separately or coUectiyely. Julian Kennedy, speaking from actual experience, demonstrates the impossibility of cheapening the cost of producing tin plate by merger of the plants. The Chairman. Is there any company — can a man, for instance, operate 10 or 12 nulls — the rolls — used in the manu- facture of tin plate approximately as cheaply as he could a thousand ? Mr. KJENNEDT. Yes; there is not much difference. * * * In making tin plate you roll that plate on a mill, and if you want to make twice as much tin plate you put another mill on the side, and if you want to make 10 times as much you put on 10 mills. , You keep on adding, like looms in a woolen mill. In other words, before you get to the bar there is a long sequence of operations — melting the ore, converting in open-hearth fur- naces, casting it into ingots — and there is a big investment in mines, which is considered essential to start in with. * * * But with a tin mill a man can start in with 6 hot mills and make his product as cheaply as if he had 60, proportionately. * * * Ordinarily sheet iron would come under the same conditions; bridge work would be similar. (Hearings, pp. 5127-5128.) Notwithstanding the fact that no legitimate advantage or con- ceivable economy could possibly accrue from the consolidation of these plants, the American Tin Plate Co., in the latter part of 1898, "acquired practically every tin-plate concern in the country, giving it an almost complete monopoly of that branch of the industry." (H. K. S., Eept., pt. 2, p. 3.) The American Tin Plate Co. typifies that class of consolidations which were distinctly lacking from the standpoint of integration of productive processes and which were primarily designed to control or eliminate competition in the sale of products. (H. K. S. Kept., pt. 2, p. 90.) The promoters of this concern fail to assign any other reason for its organization than the deliberate purpose to create and secure a monopoly in the manufacture of tin plate. Judge Reid, president of the company, and now a director in the United States Steel Corporation, when testifying before the Industrial Commission, frankly admits the intention of the promoters to control prices by the merger of these nuUs. Q. What led to the organization of the American Tin Plate Co. ? — ^A. Well, the competition between the old companies had become so strong the business was fast drifting into a condition where there was Uttle, if any, profit. (Rept. Indust. Com., vol. 1, p. 866.) 24 INVESTIGATION OP UNITED STATES STEEL COBPOBATION. William GiiB&th, a manufacturer of tin plate, states: Well, they (the Tin Plate Co.) have accomplished their purpose so far as the advance of prices is concerned. There is no ques- tion but that the American Tin Plate Trust as long as they govern conditions will place prices to the fuU limit. (Report Ind. Com., vol. 1, p. 903.) The 39 plants, embracing 279 mills, were not long in demonstrating their power to "place prices to the fuU limit." The heavy tariff duties imposed by the McKinley bill relieved the tin-plate industry from aU dread of any competition from abroad, and the consolidation made it the absolute niaster of the home market. In order to retain the rich monopoly already acquired, "The policy of eliminating competition was still further manifested by negotiations undertaken by the company almost immediately after its formation to control the supply of tin-plate machinery with a view of prevent- ing the construction of independent tin-plate mills." (H. K. S. Kept., pt. 2, p. 90.) William Griffith, for 11 years a manufacturer of tin plate, and operator of one of the mills absorbed by the American Tm Plate Co., estimates the value of the constituent plants of this company as follows : Q. What was the value of the plants taking them individu- ally? — A. I presume they could be buUt for $12,000,000. They can not be built for that to-day. Q. Twelve million doUars, good wiU and all ? — ^A. Yes. (Ind. Com. Kept., vol. 1, p. 911.) Says Judge Reid: Presumably there were cases where preferred and common stock would represent, we will say, four times ihe cash vtdue of the plant itself under ordinary conditions. (Ind. Com. Kept., vol. 1, p. 884.) The syndicate. purchased these nulls from their owners for cash if the vendor so desired, or he could at his option take preferred stock at far and with each $100 of preferred stock he was given as a honus a corresponding amount of common stock. The promoters frankly admit that the common stock represented nothing hut water, and three-fifths of all its stock was common. The promoters of this concern received $10,000,000 in stock for the con- solidation of 39 plants, valued at .1512,000,000. The profits incident to an absolute monopoly enabled this concern to declare substantial dividends on its huge capitalization of $50,000,000. Its earnings in 1900 exceeded $5,750,000, and the accumulated surplus on March 21, 1901, was $6,177,537, or more than 50 per cent of the actual value of the entire property. INVESTIGATION OF UNITED STATES STEEL OOBPOEATION. 25 It is manifest from the' records of the Steel Corporation that these sheet-steel and tin-plate companies were absorbed at an increased capitalization for the purpose of securing and perpetuating the' monopoly they had hitherto obtained. The statement of Judge Reid to the directors of the Carnegie Co., July 1, 1901, "that an appraisement at any time of all these properties to decide what the, stock was worth would be embarrassing to say the least" shows the vivid appreciation of the directors of the Steel Corporation of the comparative worthlessness of many of these tin mills and the purpose of their acquisition. In the auditors' minutes of the Steel Corporation "it was stated that often the principal consideration about the purchase and later abandonment of a certain plant was the fact that by getting the plant we were enabled to eliminate its corri- petition." (MacRae Rept., p. 3925.) That the elimination of competition was the principal considera- tion in the absorption of the Sheet Steel & Tin Plate Co.'s is made stiU more evident, if further proof were required, by the subse- quent history of these plants as detailed by the corporation's own records. In 1901 the United States Steel Corporation acquired 164 sheet miUs and 39 tin-plate plants, capitalized at the time of their absorp- tion at $93,316,500, and within six years it had made junk of 13 of the 39 tin-plate plants, and sheet mills with a total annual capacity of 65,100 tons. (MacRae Rept., pp. 4362-4363.) 26 iSTTfiSTlGAMON OF tJlttMlD StATES STEEL COBPOBATION. The Steel Corporation commenced the wholesale demolition of these mills in less than 90 days after they were acquired. The complete lists of derelicts acquired is as follows: Subsidiary company owning plant. Location of plant. Date originally buUt. Date aban- doned. Product made. Annnal tonnage capacity at date aban- doned. American Sheet & Tin Plate Co. Apollo works, ApoUo, Pa.*.-. Dennison works, Dennison, Ohio." Falcon works, Niles, Ohio ' ... Chartiers works, Carnegie, Pa.» Canton works. Canton, Ohio < Canonsburg works. Canons- burg, Pa.' Atlanta works, Atlanta, Ind.*. Beaver works, Lisbon, OhiS '. Irondale works, Middletown, Ind.« Cumberland works, Cumber- land, Md.» Banfield works, Irondale, Ohio.' Reeves works. Canal Dover, Ohio.' Champion works, Muskegon, Mich.' Ellwood works, Ellwood City, Ind.' Great Western works, Joliet, Hi.' Anderson works, Anderson, Ind.' Falcon works, Niles, Ohio '. ... Star works, Pittsburgh, Pa.' . , ISSO, 1885 1897 1887 1884 1894 1882 1894 1894 1393 139.3 1868 1895 1892 1894 1892 1S95 lune. 1902 May, 1902 May, 1902 June, 1901 May, 1910 June, 1902 July, 1901 Aug., 1902 Sept., 1903 July, 1901 Jan., 1902 June, 1901 July, 1902 May, 1902 July, 1901 May, 1905 June, 1907 Deo., 1906 Sheets do do.... do.... do.... Tin plate.. do ....do ....do do Teme plate.... Tin plate do do ....do ....do .do. .do. 16,000 10,000 10,000 6,500 12,600 10,000 12,000 12,000 10,000 8,000 8,000 12,000 12,000 12,000 7,000 12,000 12,000 21,000 I This was an old and obsolete type ol plant. It was owned by the same interests which in 1896 had con- structed a new plant at Vandergrift, it being the intention of such interests to abandon this old Apollo plant when Vandergrift was completed. In fact, Apollo had already been partly dismantled when the American Sheet Steel Co. acquired it in 1900. The final dismantlement in 1902 was only the carrying out of above policy. » The machmery in both these plants was light, old, and insufficient to permit the mills to be operated economically. The units were very small and the expense of rehabilitation would have been out of pro. portion to any advantage which would have accrued to the company therefrom. Accordingly, the plants were dismantled and equipment transferred to other plants of the company whose capacities were increased. • This was a specialty mill of insufficient size to be a profitable operating proposition: the machinery was old and InefBoient. Plant was dismantled and capacity transferred to Welfsville plant, which was en- larged to take care of same. ' This plant was operated until May, 1910, when it was seriously wrecked by a boiler explosion, de- molishing the entire boiler and power plant, a large amount of the machinery, and seriously damaging the buildings. As the plant was a small one and costs high, it was not deemed advisable to rebuild as the expenditure required would have been out of proportion to the returns that could be expected. ' •These 10 plants were all small ones, poorly designed and constructed, and in many ca'ses were badly run down and in poor physical condition. The operating costs were, because of these conditions, exceedingly high, and in some of the oases prohibitive. The fixed expense for maintenance of an organization at each of these plants of such small tonnage output handicapped them greatly so far as concerned economical operation. The company, therefore, as rapidly as it could add equivalent capacity to its other and larger and modem plants located in the same territory, dismantled and abandoned these plants None of &e plants was abandoned until at least an equivalent tonnage of output had been added to some of the com- pany's other plants. t The same reason as noted above for the preceding 10 plants apply to this plant also, although in addition the location with regard to fuel supply became very bad, as with the playmg out of the natural-eas sunnlv this plant was virtually forced to close because of prohibitive fuel cost. ' The design and equipment of this plant was poor, thus forcing it to run at a high cost In 1907 it be- came apparent that the plant would have to be rebuilt if operations were to continue It was thought to available. In 1906 the company was ooofrontea with the problem of rebuilding, as costs were bBcomine prohibitive, or shutting down the plant. For the reason above noted, namely, the lack of room on whi^ to build a modem plant and the great value of the real estate (too valuable to use for manufacturine nuri poses), it was concluded to abandon the plant and transfer the equipment and tonnage outnut to nthor mills in the same district, which was dons. o ±- ™ uij«a rNTESTIGATION OF UNITED STATES STEEL OOEPOBATION. 27 FEDEBAI. STEEL CO. The Federal Steel Co., the largest of the so-caUed "Morgan group," may weU be regarded as the giant concern of J. P. Morgan & Co. prior to the formation of the United States Steel Corporation. J. Pierpont Morgan and Kobert Bacon, of J. P. Morgan & Co. ; H. H. Sogers, of the Standard Oil Co., and Norman' B. Eeam, Samuel Mather, and Nathaniel Thayer, all afterwards directors in the Steel Corporation, served first in that capacity in the Federal Steel Co., and E. H. Gary was its president. This was before the advent of its greater suc- cessor, the United States Steel Corporation, mentioned in common parlance as "the Steel Trust." In testifying before this committee, Judge Gary speaks with evident satisfaction of the early history of this holding company. Judge Gary. I would like to say that the United States Steel Corporation was fashioned after the Federal Steel. The organi- zations were very much alike. * * * j think the organiza- tion of the United States Steel Corporation is substantially like the organization of the Federal Steel Co. (Hearings, p. 67.) Before the Industrial Commission, October 19, 1899, Judge Gary gave a detailed, interesting, but somewhat misleading account of the "modus operandi" of the Morgan Syndicate in the organization of this company out of a number of operating, transportation, and ore properties, and since the evolution of the Federal Steel Co. and the Steel Corporation were practically repetitions of the same opera- tions, it is of interest here. The Federal Steel Co. made an arrangement with J. P. Morgan & Co. whereby J. P. Morgan & Co. agreed on their part to deliver to the Federal Steel Co. the stock or a majority of the capital stock of these different companies on a certain basis, and the Fed- eral Steel Co. on its part agreed when the stock was dehvered to give in exchange for it the stock of the Federal Steel Co. *= * * Mr. Stetson was the counsel of J. P. Morgan & Co., and they were the managers of a syndicate so called. * * * The Fed!- eral Steel Co. had an authorized capital stock of $200,000,000 — $100,000,000 preferred and 1100,000,000 common. The amount of capital stock actually issued is about $53,000,000 of preferred stock and about $46,000,000 of common stock, making about $99,000,000 issued, a little more than that, but not quite $100,000,000. The actual book value of the plants and proper- ties, not including the cash of these constituent companies, was about $45,000,000; the cash on hand which these companies had was about $10,000,000, making $55,000,000. There was an increase in value of these properties, being largely in lands, amounting to about $30,000,000. * * * Now, the Federal Steel Co. said to J. P. Morgan & Co. : If you win give us the stock of these'companies and with it $14,075,000 in money, making $100,000,000 in all, we wiU give you $100,000,- 000 of the capital stock of the Federal Steel Co.— $53,000,000 in preferred and $46,000,000 in common. * * * 28 INVESTIGATION OP UNITED STATES STEEL CORPORATION. In making this exchaoage and doing this business, J. P. Morgan & Co. made a profit of about $200,000; I will not be exact; they paid aU the expenses, including about $40,000 for incorporation fees to the State of New Jersey. Judge Gary is absolutely correct in that he was not "exact" m stating the compensation of J. P. Morgan & Co. If the stock of this concern was worth par, as he seems to suggest, then he missed exact accuracy by about $9,000,000. The underwriting syndicate of the Federal Steel Co. received approximately $5,680,000 preferred stock and $8,400,000 com- mon stock in return for approximately $4,800,000 cash and their services in organizing that concern. (H. R. S. Rept., pt. 1. p. 7.) A^d, adds the Commissioner of Corporations — This hberal compensation to the underwriting syndicate is very fairly to be considered as sustaining other evidence of extensive overissue of stocks of the Federal Steel Co. Every detail of this transaction was spread upon the minutes of the Federal Steel Co. on October 9 and 11, 1898, Judge Gary having been elected president of the company at the latter meeting. (See .minutes board of directors, Federal Steel Co., Hearings, pp. 4194, 4195, 4196, 4198, and 4199.) .Judge Gary, when before this, committee, in answer to an inquiry as to the character, extent, and capitalization of the various subsidiaries of the Federal Steel Co., stated: The Illinois Steel Co. was a manufacturing company. It had Slants at South Chicago, West Chicago, North Chicago, and at oliet. 111., and Milwaimee or Bay View, Wis. It was the owner of the Chicago, Lake Erie & Eastern Railroad, running from its plant at South Chicago to a point in Indiana, and also had trackage rights over the Chicago & Eastern Illinois into the coal fields of Illinois at Danville and also over the Elgin, Joliet & Eastern Railroad from Chicago to Joliet and various other ter- minal railroads, mostly termmal railroads, connected with the different plants. It was the owner of the Southwest ConneUs- ville Coke Co. at Mount Pleasant, Pa., which manufactured coke. It was also the owner of the Eureka Coal Co., which mantifac- tured coke in Pennsylvania. It was the owner of some other coal land in lUinois and other places and various quarries of stone. It was a small owner of iron ore in Michigan and the owner of considerable iron ore of an inferior grade in Wis- consin near Milwaukee. Its capital stock was $18,650,000, and $9,822,000 bonds or indentures had been issued by the companv (Hearings, pt. 2, pp. 67-68.) The nlinois Steel Co., which was organized in 1889, was itself a consolidation of three concerns — the North Chicago Rolling Mill Co. (with plants at North Chicago, South Chicago, and Mil- waukee), the Union Steel Co., and certain propertv of the Joliet Steel Co. * * * INVESTIGATION OF UNITED STATES STEEL COBPOBATION. 29 The valuation placed upon the plants by the officers of the three constituent concernjs at the organization of that company, for purposes of consolidation, was $12,750,000. * * * fn view of the usual tendency to inflate valuations in such mergers, it seems altogether probable that these plant valuations were liberal. That the company was liberally capitalized, moreover, is indi- cated by the earnings, which from tne date of its organization in May, 1889, to December 31, 1899, averaged only 3.8 per cent on the capital stock. (H. K. S. Rept., pp. 120 and 121.) The stock of this concern ranged from 82^ in 1895 to 29^ in 1897, and averaged about 56 between 1895 and 1898, indicating an actual value of less than $10,000,000. The Minnesota Iron Co. was [says Judge Gary] the owner of a very large body of iron ore, located principally on the Mesabi and Vermilion ranges, respectively, in Minnesota. It owned the capital stock of the Duluth & Iron Range Railroad. * * k* It was also the owner of the stock of the Minnesota Steamship Co.; the owner of a large number of boats on the Lakes. Its capital stock was $16,500,000. It has issued no bonds. The Duluth & Iron. Range Railroad had issued bonds to the ex,tent of $7,731,000. (Hearings, p. 68.) A statement filed with the New York Stock Exchange December 4, 1898, and incorporating a condensed balance sheet, estimated the entire assets of this company at $22,365,766.81. (Hearings, pp. 4202-4204.) The stock of this company ranged from $38 in 1897 to $91 in 1890; it averaged less than $65; $70 is an excessive estimate. This would indicate an actual value of something less than $12,000,000. (H. K. S. Rept., p. 123, note.) The Lorain Steel Co. was a manufacturing corporation, manu- facturing at Lorain, Ohio, pig iron, blooms, billets, and girder rails, and at Johnstown, Pa., railway supplies. Its capital stock was $6,000,000 of common and $3,000,000 of preferred, and it had issued bonds amounting to $1,400,000. (Gary, hearings, p. 68.) The minutes of the Federal Steel Co. show that this company was acquired November 9, 1898, by exchanging 13,222 shares of preferred stock and 10,548 shares of common stock of the Federal Steel Co. in exchange for the stock of the Lorain Co. and the payment of $264,454.70 in cash, or $2,641,454.70, estimating both the preferred and common stock of the Federal Co. at par. (Hearings, p. 4207.) Concluding Judge Gary's detailed description of the properties of the Federal Steel Co. : The Elgin, Joliet & Eastern Railroad is what is known as the outer belt line. * * * It was a line engaged in general trans- fer business, having connections with all railroads entering Chi- cago, and also served a large and growing business along its line. 30 ISrVESTIGATION' OF UNITED STATES STEEL COBPORATTOIT. * * * Its capital stock was $6,000,000, and it has issued bonds amounting to about $7,500,000. I have fully answered your question, except that I did not give the products manufactured by the Illinois Steel Co. It manu- factures pig iron, ingots, blooms, billets, plate, and rails, some rods, and some merchant steel. Those are the principal prod- ucts. (Hearings, p. 68.) The average earnings for the three years ended June 30, 1898, after deductmg all fixed charges, were equivalent to only about 1.3 per cent annually on the $6,000,000 of capital stock. The company at the time of the transfer' had outstanding about $7,417,000 of bonds. This large indebtedness taken in connec- tion with the moderate earnings above shown (even allowing for the fact that they were for years of depression) leaves Httle doubt that $70 per share for the stqck is not only liberal but probably excessive. On this basis its value would be $4,200,000, whereas for this stock, plus $1,050,000 in cash, the Federal Steel Co. issued $9,450,000 of Its securities. (H. K. S. Rep. 124.) It is established in the main by its own records and when in a few cases they are not available, by the most liberal estimate possible, measured by the market value of its stocks that the properties of this company, including all its subsidiaries, did not exceed $32,741,- 454.70, viz: Illinois Steel Co $12, 760, 000. 00 Minnesota Iron Co 12, 000, 000. 00 Lorain Steel Co 2, 641, 454. 70 Elgin, JoUet & Eastern 5, 250, 000. 00 Total 32,741,454.70 It seems almost incredible that upon this slender Ibase of less than $33,000,000 of actual tangible values Rogers, Ream, Bacon, and others, guided and sustained by the powerful house of J. P. Morgan & Co., could have erected this mountain of securities, $200,000,000 — $100,000,000 preferred and $100,000,000 common stock — $100,000,000 of which was actually issued, and for services rendered J. P. Morgan '& Co. received as commissions a block of stock equal at par to approximately 29 per cent of the actual value of the whole concern. Judge Gary in discussing the capitalization of this company says: Mr. Young. What was the joint capitalization of all those companies previous to the organization • Mj. Gaey. That I do not know; I do not remember. I do not know whether they were considered. I am inclined to think they were not. We tned to get at the value of the properties them- selves. Mr. Young. Do vou know whether the $90,000,000 was con- sidered more than the joint capitalization of all those companies ? Mr. Gary. I would not deny it was. It would be remarkable if it were not, for I am sure the properties were worth more than their capitalization at that time. I should think it was, but I do not remember. INVESTIGATION OF UNITED STATES STEEL OOKPOEATION. 3l Mr. Young. Had the Illinois Steel Co. been a very profitable concern up to that time ? Mr. Gakt. No; it had not. Mr. Young. How about the railroad ? Mr. Gakt. It had not. Mr. Young. And the Lorain Steel Co.-^you say was just building ? Mr. Gaet. Yes; it was not a completed plant. They were making some iron and some steel. I do not think any of the companies had been very profitable. I know, for instance, the Duluth & Iron Range Railroad did not pay any dividends what- ever from the time of its organization — I think about 1884 to 1899. Mr. Young. What was the strength, then, of this organiza- tion? * * * Mr. Gaet. It was the fact that it put together, as a going con- cern, a self-contained proposition, a rouiided-out proposition, from the raw material to the finished product. That was its strength. (Hearings, pp. 203 and 204.) None of these companies, so far as I know or remember, was in any respect in competition one with the other; hut it gave to the Federal Steel, which was organized to take over these d&ferent properties by the exchange of stock, the iron ore, the Duluth & Iron Range Railroad to convey the ore to the lake, a large num- ber of boats on the lake, the manufacturing concerns at South Works, Chicago, the North Works at Joliet, the Lorain Steel Co., and a large tract of coal in the Pennsylvania district, particu- larly. * * * It was a rounded-out proposition, a splendid proposition, except it did not have sufficient finishing mUls. It was defective in that respect. (Hearings, pp. 202 and 203.) Mr. Young here inquires specifically as to the organization and operation of every subsidiary of the Federal Steel Co., and Judge Gary reluctantly admits that they were overcapitalized and unproductive. "What was the strength, then, of this organization?" was an instinctive, an inevitable inquiry. Judge Gary replies with emphasis : It was in the fact that it put together, as a going concern, as a self- contained proposition, a rounded-out proposition, from the raw Tnaterial to the finished product. That was its strength. Judge Gary fully elaborates how the various subsidiaries — ore, transportation, and manufacturing companies — were "put together and rounded out" in such a way as to nlake it a splendid proposition. And we admit the force of Judge Gary's answer, and do not ques- tion the industrial advantage incident to such a common ownership. Since Judge Gary explicitly avers "None of these companies, so far as I know or remember, was in any respect in competition one with the other," we do not mean even inferentiaUy tp approve of the 32 INVESTIGATION OF UNITED STATES STEEL CORPOEATION. ownership or operation of the Duluth & Iron Range or Elgin, Joliet & Eastern Railroads; industrials should under no circumstances operate common carriers. This matter is discussed at length later in this report. The economies resulting from the consolidation of naturally coor- dinated and absolutely noncompetitive plants and processes by which iron ore is converted into finished steel are self-evident. A blast furnace having no ore must purchase it, paying a profit to the seller, but there is no competition between the ore miner and the operator of the furnace, and necessarily no competition is destroyed by the miner's erecting a blast furnace or by the ownership of ore by the operator of the furnace. When the ore is smelted the molten iron is run into sand molds and sold as "pig iron," or while still in its molten state is conveyed directly to the converter or "open-hearth furnace." There is a difference of about $1 a ton between the cost of making steel from cold pig iron and the molten metal. The nature of the business in a way necessitates the consolidation of steel and blast furnaces under a common ownership ; the profits incident to such a transaction are independent of and in no way dependent upon limitation of output or increase of price. The steel in turn is either run into ingot molds-, and these ingots — large masses, still white-hot — are rolled into blooms and slabs, plates and bars, and these in turn without interruption or delay are often, by a continuous process, converted into such finished products as rails, beams, channels, angles, T's, cotton ties, wire, nails, etc., at a decided advantage over the manufacturer of hke commodities who is dependent upon the cold steel in the form of small billets. The consoHdation and coordination of ore properties, blast and steel furnaces, and roUiag mills was clearly illustrated in the formation of the Federal Steel Co. It was ideally "integrated/' or to use Judge Gary's concise and comprehensive description, "It put together as a going concern a self-contained proposition — a rounded-out propo- sition from the raw material to the finished product * * *." It gave to the Federal Steel Co., which was organized to take over these different properties, iron ore, "the Duluth & Iron Range Railroad, to convey the ore to the lake, a large number of boats on the lake, the manufacturing concern at South Works, Chicago, the North Works at Joliet, the Lorain Steel Co., and a large tract of coal in the Pennsyl- vania district, particularly." Subsequently, such was the faith of the United States Steel Cor- poration in this apparently paradoxical proposition, that these large concerns, which had been failures when operating separately and independently, were nevertheless a "splendid proposition" if put JLN VJfiSTIGATION OF ITNTTED STATES STEEL COKPORATION. 33 together as a going concern under a single ownership and control, that they selected the site of the Federal Steel Co.'s works for the most extensive of their future operations and on it erected the most elaborate, modern, and costly steel and rail mills in the world; builded about them a great city, and gave to all the name of Gary, as a monument to the business sagacity of the man who first saw in Chicago rather than in Pittsburgh the strategical point for the future development of the steel industry in America. It would not be difl&cult to account for the future prosperity and immense profits of the Federal Steel Co. upon some other assumption than that they were the fruits of monopoly. Unhke the National Tube Co., their plants were distinctly not "unrelated units" "con- spicuously undeveloped from the staadpoint of iategration of pro- ductive processes." Their sole and exceptional "strength" was due to the fact that though in no respect "in competition one with the other," these plants had attaiaed in the highest degree the integration of pro- ductive processes. The cream of the finest "Old Range ores, trans- ported in their own cars and boats; the iron fabricated by new and improved nulls, and these mills owning the Elgia, Joliet & Eastern RaOroad — a belt line circling the city of Chicago, and having connec- tions with aU the raUroads entering the city," afforded an ideal facility for the transportation of their finished products. The purpose and "plan" as announced in its first annual report was — to own and control adequate facilities for transportation both on land and water; to manufacture and deliver fiiiished steel; and to transact all business in connection with the same with the greatest economy. This company, as described by Judge Gary, was the physical embodiment of Mr. Schwab's apocryphal description of the United States Steel Corporation before the Chicago bankers, December 21, 1901, a consohdation which — instead of restricttag trade expands trade by creating new ave- nues and reducing the price of the conamodities which it produces. * * * The chief advantage of consolidation is the ' reduction of the cost of the articles produced. And it is not contended that the Federal Steel Co. while over- capitahzed had a monopoly ia semifinished products, which formed the bulk of its output. It was the one company so far considered which, to quote Mr. Schwab — was not a trust * * * foimded on misconceptions and pro- moted along lines of self-destruction; its fmidamental principles, the restriction of trade, the increase of price, and the throttling of competition — a trinity that would wreck any proposition — business, poUtical, or social. 54946<'_H. Rept 1127, 62-2 3 34 rUTESTIGATION OF UNITED STATES STEEL COBPOKATIOIf. The Commissioner of Corporations finds that — Although a combination, the chief object of its formation ap- parently was not so much to eliminate competition as to secure an organization which should to a large extent be independently situated with respect to ore, fuel, etc. (Com. Kept., p. 88.) It had a strong, formidable rival, whose competition it could not escape, and whose presence was, by Judge Gary's own admission, the occasion of continual apprehension. (See hearings, p. 220.) The similarity between the Federal Steel Co. and the Carnegie Co. extended to the character of their output, the principal prod- ucts of the Federal concern being steel rails, billets, plates, structural shapes, and other heavy lines; and, like its Pitts- burgh rival, many of its best customers were themselves steel manufacturers. (Com. Rept., p. 88.) Here was the essence of competition. The same commodities offered for sale by rival concerns to the same consumers. Neither had anything like a monopoly of the business. The Federal Co.'s annual ingot capacity was about 15 per cent the country's total at the date of its organization (Com. Rept., p. 88), the Carnegie about 18 per cent (see p. 87, H. K. S. Rept.). So long as this competition existed this company was absolutely powerless, with all its vaunted advantages of organization and inte- gration, to control prices or to earn the inordinate profits of the American Steel & Wire Co. and the National Tube Co., both of which, as are here shown, were conspicuously lacking in these advantages. There was no sudden jump in the price of semifinished products incident to its organization, it accumulated no surplus of millions, and did not recapitaUze on account of increased earning capacity or "combination value." The only subsidiary to declare a fat dividend was the Duluth ^ Iron Range Railroad, and this railroad — which had a substantial monopoly of the ore business in a limited section of the Lake region, and which earned large profits, an average of nearly 20 per cent on the $3,000,000 capital stock from 1894 to 1898. (Com. Rept., pt. 2, p. 123.) The earnings of the constituent companies (of the Federal Steel Co.) for the nine months ending June 30, 1898, after deduct- ing interest on bonds, were officially estimated in a listing apj^li- cation to the New York Stock Exchange at not less than $3,000,000 and those for the full year 1898 at a minimum of $4,000,000. This sum, it will be seen, is equivalent to less than 8 per cent on the $53,260,000 of the preferred stock issued (Com. Rept., pt. 2, p. 126.) INVESTIGATION OF UNITED STATES STEEL CORPOEATION. 35 The following statement of the capitalization and earnings of the Federal Steel Co., American Steel & Wire Co., and the National Tube Co. for the year 1899 is interesting, and instructive: Company. Issued securi- ties, Dec. 31, 1899.1 Earnings 1899 before deduct- ing bond interest." Per cent. Federal Steel ; $126,345,000 62,000,000 90,000,000 80,000,000 $9,371,136 8,930,000 12,162,630 13,878,365 7.4 National Steel . 14.4 American Steel & Wire \ 13.5 National Tube • 17.3 ' Including underlying bonds but not other indebtedness. ' In two cases the earnings are not for the exact calendar year; thus the fiscal year of the National Steel Co. ended Feb. 28, 1900, and that of the National Tube Co. ended June 30, 1900. The contention that the earnings of the United States Steel Corpo- ration and other similar consolidations are due to changed conditions, improved facUities, and the integration of plants and processes, secured by the expenditure of vast sums, is completely answered by a careful study and a patient analysis of the organization and operation of the Federal Steel Co. This ingenious and ably elaborated theory is not consistent with the facts and the facts or the records made by the iaventors of the theory. "The United States Steel Corporation was fashioned after the Federal Steel Co. The organizations were very much alike. * * * The Federal Steel was the parent company; it preceded the United States Steel Corporation, in its essential attributes fashioned after the Federal Steel Co.," says Judge Gary, " and he was in turn president of the Federal Steel and chairman of the board of directors of the Steel Corporation." J. Pierpont Morgan, H. H. Rogers, Thayer, Ream, Samuel Mather, and Robert Bacon were in turn directors in both companies. Even the secretaries and auditors were the same — Richard Trimble and W. J. Filbert. Here were the same powerful financial and industrial institutions in close aUiance — J. P. Morgan & Co., and the Rockefeller inter- ests — the same men, the same millions; the same instrumentalities were used and employed in the same way. The "parent company," with aU its natural and artificial advan- tages, had not been up to the time of the organization of the Steel Corporation a marked financial success, and its failure was a concrete example — an object lesson to the powerful interests behind the Steel Corporation. It was manifest, without the abihty to limit produc- tion control output, and raise and establish prices, that unhmited capital, vast resources, industry, economy, and inventive genius were vain; that competition was the one impregnable barrier between the new billion-dollar consohdation and the rich and forbidden fruits of 36 INVESTIGATION OF UNITED STATES STEEL CORPORATION. extortion and monopoly. Competition eliminated, a full measure of prosperity awaited "integrated" companies and "unrelated units" — obsolete and dilapidated tube plants and the modem mills at Chicago and Lorain. CAUSES AND CONDITIONS LEADING TO THE ORGANIZATION OP THE UNITED STATES STEEL CORPORATION. These various consolidations which preceded and in" a way produced the United States Steel Corporation have been somewhat elaborately analyzed, since a knowledge of the character, extent, and purposes of these subsidiary concerns is essential t9 a definite understanding of the conditions which immediately preceded the creation of the holding company under which they were subsequently amalgamated. The fundamental causes for the formation of the United States Steel Corporation were substantially the same as those which gave rise to the earlier consolidations already described, namely, restriction or prevention of competition, integration, stock infla- tion. The same causes, though in varying degrees, were here present, and the same processes were here repeated, though in a more comprehensive manner and on a vaster scale. A striking and surprising result of the consolidation movement in the late nineties, just described, was that while several of the treat steel consoHdations aimed at and did secure a substantial agree of monopoly of their particular branches of the business, nevertheless, competition was not thereby destroyed. Instead, it soon developed tha't the formation of these great consolidations was likely to bring on an era of competition more severe than any the industry had yet seen. The reason for this is plain. At the ^ bottom snch "particular branches" were not essentially sepa- rate. In the commercial and technical development of the busi- ness they tended naturally to overlap. In other words, this linforeseen outcome of consolidation was largely due to the tendency of these great concerns to secure greater mtegration, to make themselves virtually independent in all stages of produc- tion from the ore up. (H. K. S. Kept., pt. 2, p. 7.) Mr. Temple, the commissioner of the plate structural steel and shafting associations, has aptly described the effect of this effort of the "great concerns to make themselves virtually independent in all stages of production from the ore up." Q. Would a concern like the Steel & Wire Co., which was pro- ducing finished products, instead of preserving the status quo and buying its billets from some other concern that made a profit on them, attempt to make their own billets, and in that way infringe on what the billet maker considered to be his legiti- mate business ? Mr. Temple. Certainly, as to all the concerns. For instance take the National Tube Co. When the National Tube Co. grew to the magnitude it did, one of the first things it did was to put in blast furnaces and put in steel conversion works and make its INVESTIGATIOK OP UNITED STATES STEEL OOEPOBATION. 37 own raw material. Originally in the day of the small concerns, the blast furnace was a separate community. It made pig iron. Over here was a steel works that would buy pig iron from the blast furnace and convert that pig iron into steel. They then sold billets to the tube mills, and the tube mill would buy the biUets and would roU those into tubes. ' With the growth of the business and aggregation of capital in these 6oncerns — I have said tube works, so I will contam myseK with the tube illustra- tion — the tube works, instead of buying billets from the steel mill, and the steel mill, instead of buying billets from the blast furnace, would put up its own blast fiu-nace and its own steel miU, buy its own ore lands, and turn into its own coffers the profits of every operation from the ground to the finished prod- uct. (Hearings, p. 1723.) So far as the consumer of finished materials was concerned, these subsidiary companies had obtained a practical monopoly prior to the formation of the United States Steel Corporation. Wire and nails, pipes and tubes, structural shapes, steel hoops and cotton ties, sheets, iron, and tin plate were all controlled by some one of the consohdations which had been organized for the definite purpose of controlling the output and fixing the price of some one or more of these commodities. Prior to the formation of these immense consolidations these scat- tered finishing mills, owned by individuals or small corporations, with an investment usually of a few hundred thousand dollars, had not the means — ha4 they cherished the hope — of producing steel in its cruder forms. The 279 mills of the American Tin Plate Co. were valued at an average of $40,000 each. (Kept. Indus. Com., p. 911.) To have produced the plate bars from which tin plate is made would have required an investment of not less than fifteen or twenty milHon dol- lars. (Kennedy hearings, p. 5128.) The powerful syndicates consolidating these mills had the capital, and "appetite grew with what it fed on." They determined to assimilate all the enormous profits incident to these newly created monopohes. "And the change promptly came. In particular the so-called 'secondary' concerns began to extend their business back- ward to the production of pig iron and crude steel and the mining of raw materials. This tended to lessen the market and injure the primary concerns, particularly the Carnegie Co. and to a less degree the Federal Steel Co." QI. K. S. Kept., pt. 2, p. 9.) In other words, the fruits of monopoly had been secured by the centralization under a common ownership and control of the fabri- cations of steel in nearly all forms most necessary to the needs of the consuming pubhc, but these syndicates faUed to devise any adequate plan by which the spoils of this system could be distributed to the satisfaction of the parties who had created it. They had eliminated 38 IHTESliSATiON OF tJNtTEt) STATES STEEL CORPORATION. competition between the producers of steel who sold it to the "ulti- mate consumer," and at the same time had inadvertently accentu- ated competition between themselves. Had the steel business been entirely controlled at this time by the Morgan and Moore interests, there is Uttle doubt but that they would in all probability have reached a working agreement in short order and without the friction, the dread of returning competition, or the prodigious issue of securi- ties which preceded the formation of the Steel Corporation. The National Steel Co. owned and operated all the properties, plants, and processes essential to the production of steel ingots, bars, and billets, and this semifinished steel was in turn converted into the finished product by the Steel Hoop, Sheet Steel, and Tin Plate Companies, with which it was closely allied, aU being "Moore concerns." Could the Federal Steel Co. in like manner have turned its biUets, bars, plates, and structural shapes over to the Federal Tube and the American Bridge Co. with which it had banking and financial rela- tions similar to the ties of common interest which united the Moore group, these conflicting interests might have been easily and silently adjusted. But there was Andrew Carnegie. The Carnegie Steel Co. was the lion in the path of the Morgan syndicate in every effort to adjust and establish a thorough control of its proportion of the steel business from the raw material to the finished product. CABNEGIE PBEFABES FOB WAB. The Federal Steel Co. was essentially a producer of semifinished steel. "It was," said Judge Gary, "a rounded-out proposition and a splendid proposition, except it did not have sufficient finishing nulls. It was defective in that respect." (Gary hearings, p. 203.) At length the "Morgan concerns" determined to appropriate to themselves all the profits incident to the manufacture of steel from the ground up in aU those departments of the industry over which they had acquired a greater or less control. The Federal Steel Co. prepared for the manufacture of structural material, tubes, and universal plates (H. K. S. Kept., pt. 2, p. 10), and the National Tube Co. prepared to erect additional blast furnaces and steel works (H. K. S., 1 B., p. 10). Carnegie had a contract to furnish the bridge company (a Morgan concern) 51 per cent of all its requirements, and he had hitherto suppHed the vast demand of the tube company for its raw material. The Morgan and Moore interests without material conflict were each preparing to rnake sharp inroads upon that domain of the industry hitherto preempted by the Carnegie Co. It was this apparent ignoring of the Carnegie Co. or a temporary failure to adequately estimate this factor which for a time seemed likely to produce a return INVESTIGATION OP UNITED STATES STEEL COEPOEATION, 39 of competitive conditions, or, as the directors of the Steel Corporation are pleased to characterize it — a trade war. This situation is somewhat humorously but graphically descrifeed by W. C. Temple, father confessor to many steel pools, and who possessed an intimate and accm^ate knowledge of the inside history and secret operations and purposes of all these great concerns. The interests back of the United States Steel Corporation had at that time prepared for the production by their stock company of the beautiful play, Hamlet, with the most expensive stage settings that Wall Street could produce, costuming never excelled before, and Hamlet was the Lau-d of Skibo. The cooks who were preparing this meal for themselves and their associates found they had prepared and were ready to bake the finest plum pud- ding ever concocted financially, but that Mr. Carnegie had all the plums. They had to buy the Carnegie Steel Co. Mr. Carnegie with his then plant and his organization and his natural resources was in a position where he' could dominate the entire situation, and had the United States Steel Corporation not have been formed at about the time it was — some 10 years ago — the steel business, not only of America but of the world, to-day would be dominated by Andrew Carnegie. (Temple, hearings, 1725.) Had the plans of the Moore and Morgan interests been carried to a successful conclusion, the Carnegie Co. would have lost its largest and richest consumers of plates, structural shapes, sheet bars, and other semifinished products. Mr. Carnegie acted with celerity and decision; he instantly prepared for war all along the line, making the most elaborate preparations for the production and sale in the open market, especially of those forms of finished materials of which the Morgan concerns then held a practical monopoly. He unhesitatingly entered the in- dustrial arena single handed against the combined capital and resources of the Moore and Morgan interests. These hostile interests were absolutely unlike in every particular. Carnegie was everything that the interests behind the Steel Corpora- tion were not, and he knew and cared absolutely nothing about the methods and devices by which his competitors had amassed hundreds of millions of dollars — on paper at least — and that within the brief period of less than three years. Until 1900 his concern had been a simple partnership retaining many of the old customs which had prevailed about the simple Kloman Forge with which he had started 40 years before. Its present proportions were due not to the sale of stock, but the return of profits to the working capital of the business. Thrifty blacksmiths in order to encourage promising apprentices often give them a share in the business. This custom was still fol- lowed by the Carnegie Co., and its most capable and trusted managers 40 INVESTIGATION OF UNITED STATES STEEL COEPOHATION. had started without capital upon a modest share in the business obtained on credit by the purchaser as an incentive to intelligent and eflfective service. The members of this firm, disdaining "the most expeinsive stage settings that Wall Street could produce," publicly declared " It has always been the policy of this association from its outset to regard itself as an association of individuals who have united together their fortune, their talents, and their industry to manufac- ture iron and steel in all branches in the best form, by the best processes, and at the most moderate cost, and by such attention to the true pur- pose of its organization to produce for those interested in the associa- tion the largest profits which can be made. * * * It was the policy of those whose intelligence and faith in results founded the business to associate with themselves from time to time a number of young employees, who, by becoming directly members of the asso- ciation, would be stimulated to the very best work." (Ajoswer Carne- gie et al. to H. C. Frick, hearings,' p. 2558.) . Carnegie repeatedly declared " That the personnel of its organization was worth more than all the property of the company." (lb., p. 2558.) His plants were at the highest efficiency it was possible to bring plants at that day, in every direction. In addition to that look at the organization he had. * * * With Air. Frick at the head of the Carnegie Steel Corporation, dictating its business poUcies so far as he could, without Mr. Carnegie's direct influence ; a man like Schwab in charge of manuf acturmg ; with a man Hke Peacock in charge of his sales department, he was absolutely unassailable and invincible ia the steel world. (Statement W. C. Temple, hearings, 1725 and 1726.) THE "IRONCLAD CONTRACT." Whenever any member of this association, in the opinion of a sufficient number of his partners, failed to harmoniously cooperate with his partners his connection with the concern was thereby ter- minated by the terms of an "ironclad contract" to which all were necessarily parties. Having no issue of stocks or bonds, the books of this partnership were carefully and conservatively kept so as to show the actual value of aU its properties, and by this "book value" the rights of retiring partners were determined and the estates of deceased members were settled. The books of this concern were an elaborate and accurate record of the actual cost of its properties. Says James Gayley, one of the parties to this "ironclad contract": The book value represented the amount of monej actually expended in plants and in investment for property. (Gaylev hearings, p. 309.) •^' The accuracy of this "book value" was questioned by H. C. Frick in a suit with Carnegie and others in 1900, who maintained that INVESTIGATION OF UNITED STATES STEEL COEPORATION. 41 these properties were worth $250,000,000. In an elaborate state- ment made under oath, Carnegie, Schwab, Gayley, Phipps, Singer, and others stated : It is not true that on December 31, 1899, the said association had assets or property either real or personal or tangible in any form * * * which were worth $250,000,000. These books, show that the net value on the 31st of the assets of the associa- tion was $75,610,104.06. To a large extent this book value represents the actual cost of the properties represented in the balance sheets of the asso- ciation. * * * ^^(j ^Q ^.y^gj. i^jjg^i; ^]^g valuation of the assets as shown on said books and balance sheets is a fuU, fair, and accurate valuation of the same, and that there has not been omitted from such books and balance sheets any asset which should properly find a place thereon. (Hearings, pp. 2558, 2559.) This association of expert and experienced ironmasters in charge of a concern which they valued by an accurate and detailed inventory at less than $76,000,000, confidently prepared to meet every form of "destructive competition" which the "Morgan and Moore" interests could devise with their eight colossal consohdations capitahzed at over $500,000,000. For services rendered in the organization of these com- panies the underwriting sjmdicates had received stocks of the par value of $63,306,811, which were subsequently taken over by the Steel Corporation at a valuation of $72, 122,090. In other words, these underwriting syndicates by the manipulation of securities had ac- quired ia less than five years within three and a half milhons of the total book value of the Carnegie Co. properties, which represented the result of 40 years of strenuous appUcation to their business by the most capable steel makers on the globe. Carnegie seems to have remained in bhssful ignorance of the revo- lution in methods which characterized the transfer of the seat of the steel industry from Pittsburgh to Wall Street, and unmindful of the enormous sums his competitors were amassing by the capitalization and recapitalization of their various companies. He displays a quaiat indifference even to the advantages incident to doiag business as a corporation. "If," says he, "you want to keep this country ahead in steel you can not depend upon great 'combinations. ' " (Hearings, p. 2419.) What is most remarkable, these fabulous returns from stock- jobbing operations do not seem to have abated in the least "the ironmaster's" inveterate and old-fashioned antipathy to gambling institutions generally. I made them [shares in the Carnegie Co.] as thousand-doUar shares so as net to render them gamblmg instruments in the stock exchange, * * * because I did not want to have partners that would be tempted to go into speculation. I never bought 42 INVESTlGATIOK OF UNITED STATES STEEL COEf ORATION. a share in my life in the stock exchange. I never sold a share. I have been, you might say, a monomaniac on the subject of specu- lation. I have never touched it. * * * I want to say that 1 am not a stock gambler, and I never in my life associated with stock gainblers. * * * I think that the common stock gambler is one of the worst institutions that a country can have. They are parasites feeding upon values and creating none. (Carnegie, hearings, p. 2538.) The impending conflict between the Carnegie Co. and the " interests behind the Steel Corporation," as Temple calls them, has been char- acterized as a "battle of the giants." It was nothing of the kind. It was a contest between fabricators of steel and fabricators of securi- ties; between makers of biUets and of bonds. The Carnegie interests were apparently in the best position of any of these groups to meet a pnce war. They had abundant capital and credit, and their securities did not"^ figure on the stock market, while their organization and management were unequaled. (H. K. S. Kept., pt. 2, p. 11.) This mammoth body owned its own mines, dug its ore with machines of amazing power, loaded it into its own steamers, landed at its own ports, transported it on its own railroads, , distributed it among its many blast furnaces, and smelted it with coke similarly brought from its own coal mines and ovpns and with limestone brought from its own quarries. From the moment these crude stuffs were dug out of the earth until they flowed in a stream of liquid steel into the ladles there was never a price profit or royalty paid to any outsider. Without any cessation of motion and with hardly any loss of heat this prod- uct passed with automatic precision into the multitudmous machines which pressed it into billets, rails, armor plate, bridge structures, beams, and the endless variety of shapes required m modern architecture. Finally these highly finished materials were often conveyed to consumers over the same transporta- tion systems as before, and the profit of every movement, as of every process and change of form, passed without deduction into the exchequer of which was now the Carnegie Steel Co. (Ltd.), a single organization with one mind, one purpose, one interest. ' (Bridges^ Inside History of the Carnegie Co., hearings, pp. 2593-2594.) Not content with this elaborate and powerful organization, Carne sence of accurate information, although apparently there was a large issue of stock to the promoters of this concern. Again, nothing has been Included for the Shelliy Steel Tube Co., because of the drastic reduction in capitaliza- tion efected in the acquisition of this concern. 2 The deduction of cash expenditures in arriving at the commission proper of the Steel Corporation is somewhat inconsistent with the method followed m the case of the other companies, where the commis- sions in stock, as stated, are the Eross amounts, out of which the respective syndicates had to meet some expenses In most cases, however, these expenses are believed to have been small, both actually and relatively, and, moreover, the amounts are not known. The expenditures in the case of the Steel syn- dicate however, were definitely stated in the preliminary report of the corporation, and, moreover, were large ($1 200,000 of the expenditures of $3,000,000 appears to have been used to acquire securities of the Camegie'Co.). For these reasons it seemed fairer to make an allowance for these cash expenditures in the case of the Steel Corporation syndicate. (H. K. S. Eept., pt. 1, p. 251.) 68 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. EFFECT OP OVERCAPITALIZATION UPON THE INDUSTRY. The injury to the stockholders of the Steel Corporation by this prodigal absorption of its securities by those intrusted with the man- agement and direction of its affairs was not to be compared with the greater and more far-reaching detriment to the industry itself as a result of this persistent and pernicious practice of stock manipulation and stock inflation by certain financiers who had secured the com- plete and absolute mastery of so large a part of this vast business. They had, at the beginning, secured the consolidation of a great number of steel and iron works, big and little, modern and anri- quated, not only with a view to scientific and economical coordi- nation of plants and processes, but to the curtailing of production and fixing prices. Unrelated vr^^s, located here, there, and yonder, good, bad, and indifferent, hf d been collected under a common ownership, not to so much cheapen or expedite production — in the nature of things that was impossible, since they were often widely scattered, and as a rule were not assembled with any reference to the sequence of processes and stages of manufacture through which an article of iron or steel must pass from the raw material to the finished product — ^but were constructed and intended for identical operations; that is, hundreds of tin mills were in one company, tube mills in another, wire and nail plants in another, and so on. The operation of such concerns under one ownership could not in the nature of things cheapen pro- duction. It could and did afford an effective device for the regula- tion of .that production and the "steadying of the market." These mines, mills, and furnaces, thrown together in a hurried and haphazard manner, had been capitalized at approximately 300 per cent of their actual value, and weighed and trammeled by this burden of excessive capitalization they were confessedly unable to meet impending competition from one single concern, until recently a limited partnership, which had avoided the evils of the stock exchange and the coi»trbl of the syndicate. The superiority of the Carnegie Co. was due to its superior and scientific integration, the technical skill and practical experience of its managers, and to the fact that its securities did not figure on the stock market. (H. K. S. Rept., p. 105.) It could run if necessary at a narrow margin of profit, without the fear of dividends passed or panics created; no receiver could close its doors or take charge of its operations because of the nonpayment of interest on its bonds. With the other subsidiaries and former competitors of this company the case was different, the danger point was reached long before any commodity was sold at approximately its miU cost. A failure to INVESTIGATION OP UNITED STATES STEEL COBPOKATION. 69 pay dividends meant a depression of its stocks and a disturbance of the stock market, and the interests in control had a greater interest in and derived a greater profit from their operations in the stock market than the manufacture of steel. The manifest and inherent weakness of the whole system should have suggested a policy of retrenchment and reform. The already over- burdened subsidiary corporations were immediately saddled with an apparently crushing load of ruflated capitalization and recapitah- zation of these companies by the bankers and brokers in charge of them as is manifest from an inspection of the table following. 70 INVESTIGATION OP UNITED STATES STEEL COKPOBATION. I u e I "I •s. Ob 5> !§ S Is ® OS S OS §■ o S :S 8 is • oq • o oc • 10 QC • pi" cr"" 3 8S 88 8 rH «m r-'^ 00 8 8 88 8S g SS 8 82 S2 22 20 00 00 00 00 00 o o o 00 00 00 00 00 00 00 00 o ^ 88 88 88 Wt» "^^ M30> 18 Si 00 00 00 o^ o»eo oaa^ oo oto 3U3 t~ta t-00 CQCO CO 1-t Qo o»aa *^'^ na *« '^ au noj aaat coco cQ-«t cqeo i-ioi i-ir-i oic^ cocq cn S 8 8 8 8 8 S >^ o INVESTIGATION OP UNITED STATES STEEL COKPOEATION. 71 . 8 s 8 g 8 S 1 a S mS ?3 ^ t^ CO i§ i ^ ss a g CO ""^ '"' 8 ; M ' S~ W 00* g s s 8 t i g s 3 ■*■ cT 10 c3 ■* co" — CO - — — y->^ — - — oc oqsc id 00c ft '"r 1 "s" i — ^— ' i a9 "S p, -. 0) ;.-3 |l :i : Ts :° : i ^ t>>^ i.| "O llll 8^ 1 " li 1 1 ■^_ Ph< *-l'p pSE ^ OS 1^ ! "s GO'S '3*0 p 1 > 1 1 b 1 '■2 ■ I ^ ■ c i ^ 72 INVESTIGATION OF UNITED STATES STEEL COBtOBATfON. ~ It will be seen that properties of less than $400,000,000 in value after being capitalized at over $883,000,000 were arbitrarily bur- dened with an additional incubus of $500,000,000 more without adding an additional dollar to the intrinsic value of the properties, and $303,450,000 of this amount a bonded indebtedness, bearing interest at 5 per cent, and over $500,000,000 of it preferred stock upon whiph the corporation covenanted to pay an annual dividend of not less than 7 per cent. Previously it had been exceedingly difi&cult for these concerns to overcome the heavy handicap of overcapitalization in a threatened trade war; it was manifestly impossible now. It is true that the great difference in wealth and resources between the Steel Corpora- tion and the older concerns still remaining in the steel business, and the close relations existing between them due to trade agree- ments, interlocking directorates, and other causes, gave little cause for apprehending an organized effort to cut prices on the part of the Lackawanna, the Cambria, Jones & Laughlin, and other like companies. If, however, some new association of able and ambitious steel men, similar in purpose and "personnel" to the old Carnegie Co. and pos- sessing the necessary resources and capital, should attempt to under- sell this huge and inflated concern, its fate could easily have been determined. NEW COMPETITION FORESTALLED. It became therefore the fixed and unalterable policy of the Steel Corporation from its organization to the present time to forestall this dreaded competition. A steel company producing an output in any degree comparable with that of this corporation would at the outstart demand an immense ore reserve, enough to supply it with raw materials, for a period of 15 or 20 years at least. The Steel Corporation smelts over 20,000,000 tons annually. An effective competitor would necessarily require several hundred million tons of available ore. The control of such ores as are at the present merchantable and available would preclude the formation of any new steel company, no matter what might be the possibility for profit in that business conducted upon a scale com- parable with the operations of the United States Steel Corporation. At the time of the formation of the Steel Corporation the then avail- able ore supply was confined to the Lake Superior region, and a control of the Old Range and Mesabi ores — that is, the mines of Michigan and Minnesota — meant at the time the complete mastery of the situ- ation, so far as the obtaining of a supply of raw materials by any new INVESTIGATION OF UNITED STATES STEEL OOEPORA.TION. 73 and formidable competition was concerned. Or as stated by Mr, Schwab on December 21, 1901: The steel industry to date has drawn its ores chiefly from what is Icnown as the Lake Sxiperior district in the Northwest. In fact, I believe that I may safely say that from 80 to 90 per cent of all the steel produced m the United States is made from ores in this district. It is the standard ore and one steady source of supply. * * * Geologists tell us that the possibiuties of future d^- coveries on new ranges is rather remote. (Hearings, p. 1282.) To corner and preempt all the ore in this vast region would, of course, effectively forestall future competition from other than then existing steel companies who had previously secured ore reserves in this region. This, however, was a stupendous task, both on accoimt of the extent of the properties and the character and great resources of their then owners, viz: The Rockefeller and Hill interests. The Lake Superior Consolidated Iron Mines embraced the proper- ties which were originally possessed by Wetmore and the Merritts. Says Leonidas Merritt: I think we had more iron property at the time we turned it over than they did when they turned it into the Steel Corporation. * * * I know they dropped lots of the lands that we had and bought some of them back at a higher price. (Hearings, p. 1915.) These ore bodies, procured at an outlay of $420,000, were immedi- ately capitalized by the Lake Superior Consohdated Iron Mines at $29,887,448, and when absorbed by the United States Steel Corpora- tion that concern issued $130 of its preferred stock and $130 of its common stock for every share (par value $100) of stock of the original company. The issuing to Mr. Rockefeller of stock in the Steel Corporation of the par value of over $80,000,000 for his $420,000 bargain can only be explained by the fact that the Rockefeller interests were them- selves extensively engaged in the same business as the corporation owning and operating the Troy Steel Products Co. and the Colorado Fuel & Iron Co. and that these ores were absolutely necessary to a monopoly of the supply of raw mate"rial in that district. To remove a competitor and to obtain control of this 400,000,000 tons of pre it was necessary to pay the holders their own price, and that was done. Says the Commissioner of Corporations: It is incredible that there could ha/oe heen wny such rapid increase (nearly 250 per cent) in actual market value m this short interval. * * * The chief owners of the Lake Superior Consolidated stock were Standard Oil capitalists who were under no pressure to sell, and who must have recognized the strategic position which the ownership of this ore and railroad property gave them, 74 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. and who certainly must have intended to name what they con- sidered a high price. The organizers of the Steel Corporation on their side were naturally willing to pay an extremely Dberal price for this extensive property, ■particvlarly in view of the im-portamt degree of monopolistic control over ore transportation which wets thereby secured. (H. K. S. Rapt., pt. 1, p. 30.) And again: Owing to the fact that this company not only had very ex- tensive ore reserves but also an important ore railroad, ajid more especially to its exceptionally strong financial hcbcking, it wa^ prac- tically in a position to dictate its own terms and apparently did so. , (lb., p. 175.) By the absorption of the Rockefeller interests the Steel Corporation more than doubled its previously extensive ore holdings, and it now became its fixed and avowed policy to acquire aU the available ores in the whole Lake Superior district not previously obtained by other steel concerns. The distinction between an ore from which pig iron can be made and an available ore must be kept distinctly in mind in any discussion of the policy of the Steel Corporation. At this time the richest ores high in metallic content and freest from deleterious substances could be purchased outright for not exceeding 15 cents per ton; the same ores mined and transported about 1,000 miles to lower lake ports were worth $4 or $5 a ton. (Report Rukard Hurg, p. 52.) In other words, the cost of mining and transportation was more than 25 times the original cost of the ore, and it was approx- imately as expensive to produce and ship a low as a high grade ore. For that reason, ores low in metallic content, no matter what the amount or cost, were not available in competition with the high-grade ores, or, as Judge Gary expresses it, ' 'we can afford to let our competi- tors get the low-grade ores if we have the better ones." (MacRae Rept., p. 3799.) An array of figures which fails to draw this distinction is useless and misleading in any effort to determine the extent of this corporation's control of raw materials. Ores no matter what their price or extent, whose low iron content prohibited their being mined and transported in competition with the adjacent high-grade ores, could not and did not effect a monopoly based upon the acquisition of all available ores. This distinction between the available and nonavailable ores depended not only upon the metallic content but upon the presence or absence of such deleterious substances as sulphur and phosphorus, the texture of the substance, and the cheapness and facility with which it could be mined. It is a highly technical question requiring the knowledge and experience of an expert chemist and miner. The vice president of the company, Mr. James Gayley, was detailed to the important task of securing all such ore in the Michigan, Mesabi and INVESTIGATION OF UNITED STATES STEEL OOKPOEATION. 75 Vermilion Ranges, Mr. Gayley having been for years in charge of the selection and purchase of ores for the old Carnegie Co., and being especially learned and skilled in their analysis and selection. Backed by the almost illimitable financial resources of the United States Steel Corporation, Mr. Gayley declared that if given a free hand, "he would buy every pound of ore and every piece of ore property he could get in the Northwest." (MacRae Rept., p. 3811.) The minutes of the Steel Corporation show that its directors were in complete accord with Mr. Gayley in his efforts to secure "every pound of ore and every piece of ore property in the Northwest." It appears that on November 25, 1902, the finance committee (Messrs. Gary, Perkins, Edenborn, and Gayley present) were considering the purchase of the Champion mine on the Marquette Range, Michigan. "Mr. Gayley states in substance that the property is located close to the property of our Lake Superior Co., near Ishpeming, Mich. ; that the ore is a peculiar ore and quite rich; that the property contains a large bed of ore," etc., viz, 2,000,000 tons and 20,000 acres of unex- plored land included. Mr. Gayley is especially insistent upon the purchase of this mine, because, to quote the minutes verbatim: Mr. Gayley feels satisfied that the property will he taken up iy some Clevelavd interests, or perhaps the new Sharon Union Co. in Pittsburgh, and he would much prefer to see it with this corporation rather than with ite competitors. * * * The chairman (Judge Gary) stated that that kind of ore is scarce and we have use for it, and that we do not want our com- Setitors to get it. (Minutes finance committee, Nov. 25, 1902, [acRae Rept., p. 3809.) At the next meeting of this committee: Mr. Gayley again called attention of the conunittee to the desirabihty of our acquiring the property of the Champion Iron Mining Co., and stated that President Cole has not only studied the maps of the property, but has gone down into the mines, and reports that he is satisfied that the mine ought to produce 4,000,000 tons, and agrees with Mr. Gayley that we ought to get this property. * * * In answer to Mr. Steele's inquiry as to how Mr. Gayley felt on the subject of purchases of ore land, Mr. Gayley replied that he would huy every pound of ore vrofefty he could get in the Northwest. Mr. Converse stated that he would liTce to go on record that he was of the same o^nion. Mr. Gayley called attention to the fact that the explorations west of the Mesabi and Vermilion Ranges show no ore. Mr. Perkins telieves we ougM to get the property, but not on the present terms. * * * The chairman (Judge Grary) said that he thought we ought to take in these properties at afavr price. (Minutes executive committee, Dec. 2, 1902, MacRae Rept., p. 3810.) The property was forthwith, acquired. (Minutes executive com- mittee, Dec. 9, 1903, MacRae Rept., p. 3810.) 76 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. A few weeks later these gentlemen met to consider the Kosmerl ore property, Mr. Schwab also being present. Mr. Gayley stated that there is now an opportunity to secure an option on the ore property known as the Kosmerl, lying between the Whiteside and the Wanless properties; and it seems to be the deep part of the basin of ore of these three prop- erties ; that our people believe the properties will show at least 5,000,000 tons of ore; that the basis of the lease would be 35 cents per ton with a maximum of 50,000 tons the first year, 100,000 tons the second year, and 150,000 tons thereafter; * * * that the ore averages 59 per cent iron. * * * The chairman stated that a royalty of 35 cents for non- Bessemer ore is a pretty big one. Mr. Gayley stated he believed it to be a splendid proposition, and that if we did not take it Mr. HiU wiU; that he does not think we ought to let it get away from tts. Mr. Steele (of the firm of J. P. Morgan & Co.). If we can get the ore properties on a fair basis, I think we ought to take them. On motion duly seconded it was voted that the offer be recom- mended to the finance committee. (Minutes executive committee. Mar. 24, 1902, MacRae Rept., pp. 3814-3815.) Mr. Gayley was both an enthusiast and a veteran in this business of getting the ore first, as indicated by the following extract from the minutes of the Carnegie Co. : Mr. Gayley. I would like the approval of the board of the purchase of the Rose tract, etc., cost being $100,000. * * * The terms of claimant are cash. If we had not taten the prop- erty, it would have been purchased by the Mathers people. We had to act very quickly to keep them from getting it. This ore is estimated at anywhere from two to tour iniUion tons. Mr. Clemson. I approve of the purchase iecause it is a strategic move. I am certain it is worth the money. (MacRae Rept., p. 4110.) Mr. Gayley was as alert and wise in his knowledge of men as of mines. It appears that Corrigan, McKinney & Co. were engaged on a large scale in the purchase and leasing of mines and the sale of ore to independent concerns, and had become involved in some way. The resourceful Mr. Gayley immediately negotiated a loan for the follow- ing reason: Mr. Gayley. The principal advantage, I think, is that the group of mines wiU eventually come to us. These people are always getting into financial difficulties and if it had not been that we nad stepped into the Queen groiip of mines they would have gone to the Cleveland Cliffs Co. 1 think the outlook is, and while it may not prove so, that we will eventually get that group of mines. It puts us in touch with them so that we will get the first call on their other mines. It has been their history that their mines are available for purchase. They have some very excellent mines on the Mesabi Range and are practically in control of the non-Bessemer ore market to-day. Mr. Lynch. I am perfectly willing to act on the recommenda^ tion of Messrs. Clemson and Gayley, but this occurs to me: The INVESTIGATION OF UNITED STATES STEEL OOEPOBATION. 77 collateral that they have offered is ample; why do they, as busi- ness men, come to us for this money and put themselves in our power? Mr. Gatlet. For the simple reason when they obtained that other loan, and we had to pay a bonus on it, we suggested to them that in the future, if they needed to harrow money w%th their mines as collateral, they come to us. (Board of directors' meeting, Nov. 8, 1900, MacRae Kept., p. 4105.) In a written statement urging this loan Mr. Gayley states : Outside of the Cleveland Cliffs group of mines at Ishpeming, there is no other large Old Range group not owned by us, except- ing these at Crystal Falls. This amount of money can be easily borrowed on the security offered, and it is advisable that we should loan it, as we mayj later on, secure the property at a reasonable figure and avoid paying an extra premium; and, further, it puts us in harmony with Corrigan, Mc Kinney & Co., who have good properties on other ranges, and who can he very useful to us in many ways. (MacRae's Rept., p. 4105.) With the vast holdings of the Carnegie Co. in the, Old Ranges and the Lake Superior Consolidated Co.'s still more extensive properties in the Mesabi Range, the corporation had in the beginning the greater part of the iron ores in the Northwest and practically all the best and richest properties, and this intense desire and increasing activity in an effort to obtain "every pound of ore and every piece of ore property" can only be explained upon the theory that such purchases were necessary in order to secure and maintain an absolute monopoly of the raw materials in that region. Before the executive committee in June, 1901 : Mr. Gayley stated that wenow have about 70percentofthe]cnown Old Range ores, including Bessemer and non-Bessemer, and that of the Bessemer Old Range ores we control ahout 90 per cent. (The Bessemer being much the more valuable.) At that very meeting Judge Gary declared: The chairman stated that the standard Old Range ore is very scarce, and it is something we need: * * * ^^^ chairman further stated that in making this statement he is assuming that money is scarce and that we ought not to buy any other prop- erties that we can do without at the present time; he does not think, however, that we should let a,n opportunity go hy to obtain what can be considered the very highest grade of iron ores when- ever and wherever we can buy them at a reasonable price; that we should in some way furnish money to secure ores of that hind if we are to continue in the ascendancy; * * * (Minutes execu- tive committee, June 21, 1901, MacRae Rept., pp. 3788-3789.) This pohcy of buying ore lands "whenever and wherever we can" seems to have been carried out to the letter. On January 3, 1903: Mr. Gayley presented a letter addressed to him by President Cole under date of the 3d instant, concerning an option which the 78 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. Oliver Iron Minin g Co. has on the Whiteside Forty, on the Mesabi Range. * * * Mr. Cole recommends the purchase of this lease on the best pos- sible terms and thinks we could secure it for $100,000 and a royalty of 20 cents per ton. * * * Mr. Gayley stated that the option expires January 15; that it adjoins the property owned by Mr. HUl and contains about 7,000,000 tons; that ne does not Jcnow of any ilock of ore property in the North/west outside of this and the property of Mr. Eul that they mil report; if any new ore is found they are satisfied it mil he some isolated spots on the Mesabi Range, of the line of St. Louis and Itasca lands, and that every Jfi has been drilled. * * * Upon a motion, duly seconded, it was voted that the purchase of the lease, on the terms stated by the chairman, or better, be recommended to the finance coramittee. (Minutes executive committee, Jan. 6, 1902, MacRae Rept., p. 3811.) The New Union-Sharon Co., of Pittsbm-gh, which had previously engaged in active competition for the purchase of iron ores, was acqiiired by the Steel Corporation, -with its extensive holdings, including the Sharon mines and the Donora Mining Co., with their 40,000,000 tons of ore. (H. K. S. Rept., pt." 1, p. 287.) Mr. HOI remained at this time the sole rival of the Steel Cor- poration and the only holder of any large amount of ore which could be rendered available by any new steel industry which might be organized in the future. The superior quality of the ores owned by the United States Steel Corporation and their vast extent rendered them independent of Mr. HOI so far as securing an ore reserve was concerned. This fact was patent to Judge Gary even before Mr. Gayley had succeeded in acquiring all the available ores which could be obtained outside of the HUl properties and before the absorption of the mines of the Union- Sharon Co. In May, 1902, Mr. Steele favored purchasing the Hill properties. Said he: I think we have been a little too considerative in taking lands; some we have refused have doubled in value since. I think we ought to buy Mr. Hill's ores. To which Judge Gary responded: We certainly have everything on the Vermilion. We bought everything on Mesabi that is good, that is best, that is first class, vnth perhaps one exception, which we could not get, and with the' exception of beyond Hibbing; we can not get there. Mr. Hill is not there now. The property which has been bought is low- grade ore and we have this class of ore, certainly 60,000,000 to 70,000,000, not yet opened. We can afford to let our competitors get the low-grade ores if we have the better ones. (Minutes executive committee, May 6, 1902, MacRae Rept., p. 3799.) INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 79 Thomas F. Cole, wHo knows these properties possibly better than any other living man, states : I think the United States Steel Corporation own the cream on the range. They own the very best ore produced on the range. The Chairman. How much of it (steel company's holdings) is of the second class ? Mr. Cole. Thirty per cent. (Hearings, p. 5494.) On May 20 this matter was again under discussion by the finance committee : The President (Mr. Schwab). While there I asked our people to go over the matter of our refusals of ore properties presented on short notice and see if the man around the comer, so to speaJc, took over whatever we refused, and I find in most instances he did. Every ore property we have refused has ieen taken iy others. The question is, What ought our poHcy to be in this regard? Most of our people are working very energetically for a new supply of ore, and the fact that we keep searming, then do not take, puts us in a very awkward Hght. For example, we are showing our interest by looking out for them and then manifesting indiflPer- ence by turning them down. I think we should stop explorations and wait until they come to us. Mr. EiU is a serious situation up there, and they are taking these properties and then in turn losing them to our competitors, and he is using all his efforts to have them take up these properties. Mr. Steele. I have a sort of feeling that we are in an atmo- sphere of high prices all around. I think, however, when hard times come these little fellows can't carry these ore properties. The Chairman. Have we turned down any first-class properties adjacent to our roads ? The President. No; when you say first-class propositions. However, it is pretty hard to say, how any property may develop. The Chairman. If our competitors have bought property of a low-grade ore where the analysis was not over 50 per cent in iron and high in sulphur, / think we can afford to let them have them at these high prices. I told Bering that 1 thought they made a mis- take in their purchase, for the reason that they are tied up to Hill and had a low grade of ore. I don't think that we would be attracted by such a proposition, even if it were on our railroad. We have at least 60,000,000 tons of that grade of ore, which is not worked at aU. * * * (Executive committee minutes. May 20, 1902, MacRae Ptept., p. 3800.) In approximately two years after its organization the steel cor- poration had "bought everything on the Mesabi that is good, that is best, that is first class, with perhaps one exception," and their position in the eld ranges was stUl stronger. They had everything on the Vermilion and 90 per cent of aU "the Imown old range ores" — that is, aU the ranges in Minnesota and Michigan known at that time. "Outside of the Cleveland Cliffs group of mines atIshpeming,Mich.," says Gayley, "there are no other large old range groups not owned by us, excepting those at Crystal Falls." (MacRae Rept., p. 4105.) 80 INVESTIGATION OF UNITED STATES STEEL COKPOBATION. To get "every pound" of that remainiiig 10 per cent of Bessemer ore on the old ranges, and aU that was left on the Mesabi, whether it was best or jBrst class or not, became the fixed policy of the corpo- ration, and the present holdings of the contem demonstrate their complete success ia securing almost to the last pound and the last piece of ore property, every mine in the Northwest not previously held by other steel companies, and a small amount secured by ore dealers. In 1901 the corporation estimated its ore holdings at 700,000,000 tons. Authoritative data submitted to the Senate Finance Committee in 1909 by a prominent iron manufacturer voilh the steel corvo- ration's consent showed that the corporation itself then reckoned on about 1,625,000,000 tons of LaTce ore, of which 1,258,000,000 tons was of the current commercial standard. * * * On this basis, therefore, the Steel Corporation would have had over 75 per cent of the total commercially available ore in the entire Lake Superior region. In 1907 the holdings of the Steel Corporation in Minnesota, which State includes the Mesabi and Vermihon Eanges, accord- ing to a carefully prepared schedule of the Minnesota Tax Com- mission, amountea to about 913,000,000 tons, or 76 per cent of the total ore deposits for the State. * * * (H. K. S. Rept., pt. 1, p. 58.) It appears that there was still some part of this remaining 24 per cent which was obtainable by the resourceful and tireless purchasing agents of the corporation, since " a report of the Minnesota Tax Com- mission for 1908, which, after a very careful listing of the iron-ore mines of the State and an estimate of their tonnage (evidently on a conservative basis), placed the grand total tonnage of the United States Steel Corporation m 1907 in round numbers as follows: - Grand total of all concerns in Minnesota 1, 192, 000, 000 United States Steel Corporation (Oliver Iron Mining Co.) 913, 000, 000 Per cent Steel Corporation (computed by bureau) 76. 6 WhUe this estimate covered the State of Minnesota only, in view of the fact that prior to the recent acquisitions on the Baraboo district of Wisconsiu over 80 per cent of the Steel Corporation's reserves, excluding the Hill holdings, were in Minnesota, it will be seen that these figures give a fairly complete idea of the position of the Steel Corporation in this respect." By 1909 the corporation had made further inroads into the slender supply of ores still remaiaiog in this region. Says Mr. Smith: In this connection it may be noted that the secretary of the Minnesota Tax Commission, in a letter to the Commissioner of Corporations, dated May 12, 1909, said: "They (the United States Steel Coiporation) now control at least 80 per cent of the present known tonnage ia the State " (H. K. S. Kept., pp. 378-379.) INVESTIGATION OP UNITED STATES STEEL COEPOEATION. 81 From 80 to 90 per cent of all the steel produced in the United States is made from the ores in this district. Ore must be made into pig iron before it can be converted into steel. The Steel Corporation producing less than one-half the total output of pig iron, has 80 per cent of the raw material, leaving all other concerns to make the other half out of what they can secure the remaining 20 per cent. To maintain in the face of such a condition that this overmastering control of the ore supply hx the Northwest was obtained with an eye single only toward securing an ample supply of raw material is pre- posterous. Such a position would be absolutely untenable, leaving out of consideration the fact that the Steel Corporation's holdings in the Birmingham district (the only region outside of the Lake Superior district where ore can be mined and smelted at a profit) are enormous and practically double that of all other iron and steel concerns. Ores of present standard com- merolally. Silioious and other low-grade ores. Total. Ores, United States Steel Corjwration: Or.tomi. 1,258,289,000 469,300,000 Or. tons. 365,845,000 239,000,000 6r. tons. 1,634,134,000 698,300,000 Southern ores Total 1,717,589,000 604,845,000 2,322,434,000 (H. K. S. Eept., pt. 1, p. 379.) t After every "forty" on the Mesabi Range had been explored, and Mr. Gayley was satisfied that no new ore would be found out- side of "isolated spots" and he did not Tcnow of any other block of ore property in the Northwest outside of the Whiteside forty and the prop- erty of Mr. Hni that they will report (MacRae Rept., p. 3811), it was manifest that by securing this Hill property the tremendous task of securing "every pound of ore and eveiy piece of ore property" upon the market or liable to be discovered would be practically complete. The HUl properties were the key to the whole situation; without them no control of the ores of the Northwest would be complete. These holdings were enormous. CHABACTEB AND EXTENT OF HILL PROPERTIES. In 1899 James J. Hill acquired the major portion of these prop- erties from Wright and Davis, lumbermen in that region, together with a railroad connecting with the Greia.t Northern system, for the sum of $4,300,000. (See Hill testimony, hearings, 3151-3246.) Mr. Hill , acting for the Great Northern system, continued to pick up parcels of ore property on the Mesabi region until by 1906 he had acquired in all more than 65,000 acres, containing hun- dreds of millions of tons of ore. (H. K. S. Rept., pt. 1, p. 260.) 54946°_H. Rept 3127, 62-2 6 82 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. Mr. Hill owning or controlling both these ores and the transporta- tion facilities by which they were delivered at the docks on Lake Superior was keenly alive to their strategic importance and prepared to, if advisable, hold them indefinitely, being in a position financially to deal at arms length with Mr. Morgan and the United States Steel Corporation. As early as 1902 Mr. Schawb, then president of the company, favored making some arrangement with Mr. Hill looking to the con- trol of these properties and Judge Gary expressed fears that he had been "neglected." (MacRae Kept., pp. 3800-3801.) Mr. HiU, however, did not come to terms until January 2, 1907, when the United States Steel Corporation obtained *these extensive hold- ings estimated to contain from 400,000,000 to 500,000,000 tons of ore. HILL LEASE. Under the terms of this lease the corporation agreed to mine and ship via the Great Northern a certain minimum tonnage yearly, increasing from 750,000 tons in 1907 to 8,500,000 tons in 1917, at which it was to remain during the life of the lease, the minimum for each year from 1907 to 1917 increasing as follows: Tons. 1907 750,000 1908 1,500,000 1909 2,250,000 1910 3,000,000 1911 3,750,000 1912 4,500,000 Tons. 1913 5,250,000 1914 6,000,000 1915 6,750,000 1916 7,500,000 1917 8,250,000 Dried ore containing 59 per cent metallic content is taken as a basis on which royalties were computed, and for such ore the corpo- ration agreed to pay $1.65 per ton delivered at the docks at Superior, Wis., the freight rate being 80 cents per ton for ores of this grade, the royalty increasing when the ore exceeded this standard in iron and decreasing when Below it in the f oUowing ratio : Combined Combined Combined Iron con- tent royalty and transpor- Iron con- tent royalty and transpor- Iron con- tent. royalty and transpor- tation (per tation (per tation (per ton, 1907). ton, 1907). ton, 1907). Per cent. Percent. Percent. 49 $1.1680 » SI 4572 61 $1. 7464 SO 1.2162 66 1.5054 62 1.7946 SI 1.2644 S7 1.5536 63 1.8428 52 1.3126 S8 1.6018 64 1.8910 S3 1.3608 IS9 u.eeoo 65 1.9392 54 1.4090 60 1.6982 66 1.9874 Wliere ores contained less than 49 per cent of iron, the corporation was to pay 1.10 per ton, transportation included. The royalty on the different grades of ore increases 3.4 per ton each year (4 per cent on 85 cents, the original royalty) during thf life of the lease. (See Hill ore lease hearing, pp. 3247-3252,) INVESTIGATION OF UNITED STATES STEEL COBPOBATION. 83 The Commissioiier of Corporations, as a rule exceedingly guarded and excessively conservative, in criticizing the conduct of the Steel Corporation unhesitatingly expresses the opinion that this most remarkable and extraordinary contract between the Hill interests and the Steel Corporation was made"* with the manifest intent to secure a monopoly of the ore reserves in the Northwest and of the transportation lines by which iron ores were carried from the Minne- sota ranges to Lake Superior: This base rate of royalty in the Hill lease was far in excess of the going rates for sinular ore at this time, and, taken in connec- tion with the annual increment of 3.4 cents per ton, which was a very extraordinary provision, these royalties were unprecedented. It is true that occasional leases had been made at as high as a dollar per ton, without, however, any annual increment for inter- est. But such leases were decidedly exceptional, and also ap- plied to comparatively small parcels of ore of superior quaUty or availability. The royalty rates on new leases for the Steel Cor- ijoration during the period from 1907 to 1910 were very much ower, and none of them approached that of the HiU lease. The following tabular statement shows substantially the terms of royalty for all leases of Mesabi Range properties made by the Steel Corporation from 1907 to 1910, inclusive, including renew- als of former leases. Rates of royalty stipulated in leases Tnade by the Steel Corporation (including renewals) of ore properties in the Mesabi Range, 1907-1910. Mine. Royalty. I. Kenewals or extensions of prior leases: Park Lot to. 60 Oscar Mitchell lease , .25 n. Leases made, 1907-1910, but under option previous thereto* 1 : / S.35-.60 \ •.20-. 45 .25 1 1 .36 1 .SO .25 in. other leases, 1907-1910: I .75 1 «. 35-. 45 Renublic Fortv 6.35 .75 1 .75 1 .25-. 35 1 .25 Simple average all leases ( using means where royalty takes form of a range of price) . . . .4373 1 Not designated by name of mine, but by surveying speci&cations. > Ore over 58 per cent iron and under 0.05 per cent phosphorus, advancing from 1908 to 1928. • other ore advancing from 1908 to 1928. <35 cents for first 6 years. » Taken for surface purposes and not considered valuable for ore. The average rate of royalty for these Mesabi Range properties during this period was, therefore, about 44 cents per ton. The Steel Corporation during this period entered into a few new leases or renewals of leases on the old ranges and also in the Baraboo district— less than a dozen in all. Most of the leases of old range properties provided for a shdin^-scale royalty, depend- ent on the pnce of ore at Cleveland. It is impossible, therefore. 84 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. to say what the royalty at any future time will be. Using the highest price for ore at Cleveland thus far reported — $5 per ton — the average royalty in these leases would be under 40 cents per ton. The royalties in the Baraboo leases ranged from only 10 to 20 cents per ton, the ore in this district being of a rather low grade. Since the Hill properties leased by the Steel Corporation were all on the Mesabi Range, it seems fairer to use the average for that range only for comparison with these recent leases by the cor- f)oration, although the average for this region is higher than that or all leases made by the corporation in these years in the entire Lake district. The average rate for all the leases, excluding those in the Baraboo district, as nearly as can be computed from avail- able data, would be less than 40 cents. It is believed that the average content of the ore covered by the Mesabi leases hsted in the foregoing table is not very far from 53 f)er cent — or 59 per cent when dried — the base grade tri the Hill ease. Therefore, it seems entirely fair to compare the average royalties shown by the above table with the royalty for 59 per cent dried ore, as stipulated in the Hill lease. Extensive data gathered by the bureau for the average yield of Lake ores used m blast furnaces from 1902 to 1906, inclusive, covering a larger percentage of the Lake ore sold and used in these years, show an average natural iron content of about 53.9 per cent. By far the greater part of this was Mesabi ore. It will be seen that ia only three of the leases mentioned in the foregoing table, namely, the three leases at a 75-cent royalty, do the royalties approach anywhere near the base royalties of the Hill lease for the year 1907, and when account is taken of the fact that the Hill royalties increase each year, the disparity is all the more marked. The question, therefore, arises as to why the Steel Corporation entered into this lease under the onerous conditions noted. The only reasonable explanation which the bureau has found jfor this unusual transaction is that it was designed to prevent this ore from falling into the hands of competitors of the corporation. Had this ore been sold or leased in small parcels to a large number of independ- ent producers, 'this might home tended to depress the pnce of ore as weU as to foster competition in the Toanufacture of iron a/nd steel. On the other hand, if these ore lands were simply held by the Great Northern interests without development, this would leave the oppor- tunity open for the organization of a very important rival to the Steel Corporation. At this time, however, the Steel Corporation was_ the only concern in the iron and steel business which was in a position to consider the acquisition of these HiU ore lands in a single block. By securing control of these enormous reserves the Steel Corporation obmously strengthened its control of the ore indus- try and at the same time put obstacles in the way of further competi- tion in the iron and steel industry. The Steel Corporation specihcaUy denies that this lease was intended thus to head off competition, and, instead, contends that it was desired merely in order to strengthen the corpora- tion's ore reserves. At the time this lease was entered into how- ever, the corporation had fully a 30-year supply (and perliaps a INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 85 50-year supply) of ore under its control. Had tliis Hill ore been acquired at a bargain price, an obvious reason for its acquisition would be furnished; but in view of the extraordinarily high rate \ of royalty at which this ore was taken over and the other onerous ', conditions in the lease, particularly the high minimum tonnage stipulated, the only reasonable explanation, in the opinion of the bureau-, is that the corporation chiefly desired to forestall compe- tition. The high royalty named in this lease, therefore, instead o/ being proof of a marlced appreciation of ore values, is rather an indv-/ cation of the exteni to which the Steel Corporation was ready to go in order to prevent this ore from faUing inio the hands of rival interests. In view of the exceptionally tugh royalties stipulated in this lease, it is hardly surprising that the Steel Corporation did not claim, in its appraisal of 1907 above discussed, any value for this lease in the schedule of its assets. Considering the great value which has been claimed for it by some writers upon iron and steel matters, this fact is at least interesting. Obviously, however, a lease at a royalty far above the going rate of royalty for ore of similar character has no trans- fer value and therefore no equity value which would warrant the corporation in treating it as an asset. Indped, in view of the extremely high rate of royalty and the high minimum require- ments, this lease may perhaps be regarded as an onerous burden rather than an asset. In this connection, the clause in the lease which permits the Steel Corporation on two years' notice to cancel the lease on January 1, 1915, is perhaps significant. Indeed, there have been rather definite intimations by officials of the corporation that this option may be exercised. (H. K. S. Rept., pp. 321-323.) Mr. HjU has never before or since sold ores at such a prodigious price, nor has the Steel Corporation at any time from its organization to the present time ever paid such a sum. A comparison of the royalties in Table A, "Old leases," with the rates in Table B — ^i. e., "Corporations contract" — will show the great difference between the amounts paid by the corporation and others, and this notwithstand- ing the fact that the mines enumerated in Table A contained the better ores. Nothing has been found in all Mr. Hill's 60,000 acres in any way comparable with the great Mahoning mine, either in the extent or quality of the ores, and it is now mined at a royalty of 12^ to 27i cents a ton. Table A. — Shipments and revenue under "old leases." Year. Tons mined. Average royalty. Revenue. 2,902,880 1,294,976 2,964,051 2,993,893 1,758,182 Cents. 13.9940 19.1548 14.9664 15.2002 17.3525 $406,229.56 1908 248,050.37 443,611.21 1910 -*-- 455,078.47 1911 305,089.00 11,913,982 1,858,058.61 86 INVESTIGATION OF UNITED STATES STEEL OOEPOEATION. Minimuma receivable under "old leases." Uine. Annual mininrnm tons. Royalty rate. Minimum . royalty. 300,000 200,000 100,000 75,000 37,500 Cents. 27J-12i 20 -m 20-1^ 36 25 182,500.00 40,000.00 UMea 20,000.00 27,000.00 9,375.00 712,500 178,875.00 Royalty rates under the leases on the Mahoning, Stevenson, and Utica mines are on a sliding scale, according to amount of annual shipments. The Mahoning obtains the minimum rate named on an output in any one year of 1,500,000 tons, the Stevenson and Utica on an output of 500,000 tons, respectively. The interest of "the com- panies" in the Leetonia and Sweeney mines and in 40 acres in the Stevenson mine is an undivided one-half. The annual minimum ton- nages in 4;hese mines, as above stated, show the one-half interest of "the companies " only. All of these mines have been opened and are regular shippers except the Sweeney. Table B. — Operations under Great Western Mining Co. lease. Year. Tons shipped. Average per cent iron. Average royalty.! Eoyalty re- ceived, in- cluding freight. Deficiency minimum royalty. Tons. Bate. Amount. 1907. 1908. 1909. 1910. 1910. 1911. 1911. 137,270 508 41,624 2,046,970 106,007 5,344,078 155,681 58.7641 65.1498 56.4001 56.9633 -49.0000 58.2148 -49.0000 10.838726 1. 189295 .792687 .300000 .945308 .300000 $225,020.07 1,005.95 32,994.90 2,854,379.52 110,378.95 •8,591,830.70 155,460.51 1,499,492 2,208,376 847,024 88.4 91.8 9S.2 11,325,550.97 2,027,289.07 806,366.43 » 1,325, 560. 97 n40,502.05 7,570,460 261,688 57.8769 -49.0000 . 917818 .300000 11,705,231.04 265,829.46 7,832,138.1 Interest earned on unappropnated minimums. Total royalty and Irei^t, as above. 11,971,060.50 2,693,153.50 156,184.24 11,971,060.50 Grand total receipts from Great Western Mining Co., with interest earnings.. 14,820,398.24 1 The schedule price of ore shipped by the Great Western Mining Co., when hauled by the Great Northern Railway Co. , includes deUvery at Lake Superior, the rail freight being paid by the lessor companies This freight has been 80 cents per ton, but on Dec. 1, 1911, was reduced to 60 cents per ton. No ore was shipped during the month of Decepiber, 1911. For convenience, the royalty rates above shown are net rates- thatis^ the royalty rate after deduction of freight. v >» ' This amount includes, in addition to payments at the regular schedule rates for the required minimum shipments for the year 1911, the entire amount of the 1908 deficiency minimum and a imrtion of the lOOH defloienoy minimum payments, which were absorbed by shipments of the Great Western Mining Co. dvi- mg 1911, as shown by (») and (<), together with J154,187.49 interest earned thereon. « 1908 deficiency minimum, absorbed by shipments. < I^ortion of 1909 deficiency minimum, absorbed by shipments. (Hearinge, pp. 3254-3255.) It was manifest at the time that the immense sum paid Rockefeller was intended to satisfy or eliminate a potential competition, as weU as to secure a reserve of raw material, yet after paying $200 par value IKVESTIGATION OF UNITED STATES STEEL COKPOBATION. 87 n stocks of the Steel Corporation for every dollar expended on the original purchase of these properties, the ore, estimating it at 400,000,000 tons, cost the corporation something less than 20 cents per ton, and putting it on a cash basis estimated at the market value of these stocks at that time, it did not amount to 10 cents per ton. The Rockefeller mines together with other properties acquired by Mr. Gayley contained "everything on the Messabe that is good, that is best, that is first class, with possibly one exception," and all the HiU holdings were on the Mesabi Range. The Old Range ores are stiU more rare and costly, yet Mr. Gayley, in June, 1901, acquired a one-third interest in the Nagaunee mine, thought to contain 5,000,000 tons of ore, for $500,000 cash. Mr. Gayley beheves this ore is just as good as the celebrated Narril fithest oj Old Range. * * * That it is the best piece of property on the Marquette Range he loiows of. (MacRae Rept., p. 3788.) On December 6, 1902, this concern secured the Champion mine at Marquette, Mich., together with 20,000 acres of unexplored land, at approximately $1,000,000. (MacRae Rept., p. 3809.) The Whiteside forty containing 7,000,000 tons upon a royalty basis of not exceeding 25 cents per ton. (MacRae Rept., p. 3811.) On May 12, 1903, the Monroe ore property with its 25,000,000 tons of ore was taken over at 30 cents per ton, together with a traffic contract that made it practically /ree ore to the corporation. (Mac- Rae's Rept., p. 3818.) The American Steel & Wire Co., as has been stated, purchased the Sauntry mine in 1899, containing from 40,000,000 to 45,000,000 tons, at $700,000 cash. In 1900 the Sharon Steel Co. purchased the fee to the Sharon mine for $150,000 (this mine had 20,000,000 tons of ore). (H. K. S. Rept., p. 208.) In December, 1910 (three years after the HjU lease), the corporation purchased a certain Walker tract, containing 1,400,000 tons, at 10 cents per ton. (Minutes finance committee, Dec. 20, 1910, MacRae Rept., p. 3879.) Some idea of the proportions of this unusual lease may be gained by comparing its royalties with the price at which ores were then and are now selling; wherever ore is foimd in that region, in "some iso- lated spot" overlooked by Mr. Gayley. In this connection the following excerpt from a brief filed against a tonnage tax biU in the House of Representatives of the Minnesota Legislature in 1909 by the delegation from St. Louis County (a large number of the mines of the Mesabi Range being in this county) may be noted: The cheapest sales of fee ore we ever knew were for less than 1 cent per ton. The highest that we ever knew were for 15 cents per ton. There may have been sales at a higher price, lut we have never Tcnown of one, and upon inquiry can learn of none. 88 INVESTIGATION OF UNITED STATES STEEL CORPORATION. This positive and deliberate statement, coming from a delega- tion of men representing the richest iron-ore mining section of the country, is certamly entitled to much consideration, even though it may not be an exact indication of maximum ore values. Furthermore, this statement was made in 1909, or eight years after the organization of the Steel Corporation, during which interval there had been a considerable appreciation iv values of ore property. (H. K. S. Rept., pt. 1, p. 208.) And later still, in 1912, Messrs. C!ole and Sellwood were before this committee, the former for years in charge of the corporation's ore properties in the Northwest and the latter one of the best informed and most experienced of ore dealers and expert in determining the value of such properties in the opinion of Mr. James J. Hill and the representatives of the Steel Corporation. Neither of these gentlemen, after having their attention called to this statement, could recall a sale of ore where a greater sum than 15 cents per ton had been paid for an absolute title in fee simple for iron ores in that region. Mr. Sellwood further states : The Chaikman. Did you not have the question up (in the district courts) as to the value of these iron ores in the ground % * * * Mr. Sellwood. I think I did. The Chaeeman. I will refresh your memory and ask you if you did not place the value of the ore in the ground, before it is stripped or anything of that sort, at from 4 to 5 cents ? Mr. Sellwood. I think I did; now that I come to think of it, it was before the court in Duluth ? Mr. Gakdner. What year was that ? Mr. Sellwood. I would say that was fully 10 or 12 years ago. It was at the time we changed from the tonnage tax to a real estate valuation. * * * The Chaikman. What I would like to know is, was that val- uation placed upon the Bessemer or non-Bessemer — the 4 or 5 cents ? Mr. Sellwood. Well, that was placed on the Bessemer, and the non-Bessemer was less. Mr. Gaednee. That was the fee value ? Mr. Sellwood. Yes, sir. Mr. Gaednee. Do you know what year that was in 1 Mr. Sellwood. It was fully 10 or 12 years ago. (Hearings, pp. 5464-5465.) Mr. P. H. Nelson, who now lives on the Mesabi Range at Hibbing, for 18 years engaged in the purchase and operation of iron mines, and for a good part of that time in the employ of Mr. James J. Hill, himself states : Mr. Gaednee. But what is iron ore worth in the ground? Well, we will say an average of 55 or 60 per cent metallic content \ Mr. Nelson. I think 10 cents a ton for iron ore in the ground is a good price, and I have iron ore myself. Mr. Gaednee. That is, high metallic or Mesabi ore ? INVESTIGATION OP UNITED STATES STEEL COBPOBATION. 89 Mr. Nelson. Fifty-eight per cent, yes. Of course it depends on the mining conditions. If you have property that is easily stripped, and so on, that makes a difference. i:r. Gardner. But suppose you had a great quantity of prop- erty spread all over the Mesabi Range and elsewhere. You think 10 cents a ton would be a fair valuation for that ore in the ground ? ilr. Nelson. I think so. Mr. Gardner. At present, say ? Mr. Nelson. Yes, sir. Mr. Gardner. And it ought to have been the case 10 years ago, or do you know ? Were you in the business 10 years ago ? Mr. Nelson. I started in about 12 years ago exploring. Mr. Gardner. Should you ' say they are more valuable now than they were 12 years ago ? 3klr. Nelson. Oh, yes. Mr. Gardnese. Therefore 10 cents a ton would have been an excessive valuation ? IMr. Nelson. In the ground, you understand. Mr. Gardner. * * * Suppose you found in examining the books of some concern that they had valued their ore in the ground at 50 cents a ton. Would you think that was excessive, in calculating and making that statement of their assets? If you found they valued their ore at 50 cents a ton in the ground, would you consider that excessive ? JAt. Nelson. I would. Mr. Gardner. Should you consider 25 cents excessive ? Mr. Nelson. Yes, sir. Mr. Gardner. Should you consider 15 cents excessive? Mr. Nelson. Well, that is getting around Mr. Gardner. To about where you think it ought to be? Mr. Nelson. Yes. (Hearings, pp. 1945-1946.) Ordinarily one leasing ore has the benefit of the interest on the deferred payments for the various amounts of ore (minima) taken out each year during the life of the lease, usually about 30 years. And the actual cost of the ore is ascertained by calculating the present worth of these various sums payable usually during the life of the lease. For instance, purchases under a 30-year lease, at a royalty of 25 cents per ton (the usual royalty for Messabe ores) is about equiva- lent to fee ore at 1 1 cents per ton. But no such rule can be applied to this extraordinary lease, the ore rising ia value each year 3.4 cents. Thit is, interest on the royalty was calculated in favor of the lessor at the rate of 4 per cent per annum. In other words, in 1915 Mr. Hill would have been collecting annually, by virtue of this provision, an amount equivalent to the interest on $140,000,000 invested at 4 per cent, a sum sufficient to have purchased the whole 400,000,000 tons of ore at 35 cents per ton. This lease could not be canceled prior to 1915; by its terms the cor- poration agreed to receive at Superior 750,000 tons in 1907, the ton- nage and cost per ton increasing annually until 1917, upon reaching 90 INVESTIGATION OF UNITED STATES STEEL COBPORATION. maximum of 8,250,000 tons, at $1.99 per ton, making in all a total of 49,500,000 tons, at an average cost of $1,881 per ton, amounting in all to $92,875,000. Year. Tons. Rate. Amount. 1907 760,000 1,500,000 2,260,000 3,000,000 3,760,000 4,600,000 5,250,000 6,000,000 6,760,000 7,600,000 8,260,000 1.65 1.684 1.718 1.752 1.786 1.844 1.864 1.888 1.922 1.956 1.99 tl,237,600 1908 2,526,000 1909 3,865,500 1910 5,256,000 1911 6,697,600 1912 8,190,000 1913 9,733,500 1914 11,328,000 1916 12,973,600 1916 14,670,000 1917 16,417,600 49,600,000 92,895,000 At the time this lease was made neither Mr. Hill nor the Steel Cor- poration had any definite idea of the amount of ore in his holdings. They had no idea whether they were leasing 250,000,000 or 500,000,000 tons. Thomas F. Cole, for years in charge of all the corporation's ore properties, states : The Chairman. You spoke of the difference of opinion be- tween various engineers as to the .probable amount of ore ia the Hill ore properties, running from two hundred and fifty to five hundred million. How did this vast difference of opinion occur where you had a flat body of ore, easily reached by drill- ing? * * * Had Mr. Hill's engineers made their estimates from actual drills ? Mr. Cole. OTi, tio, indeed. The major portion of those lands was entirely unexplored. The Chairman. Unexplored? Mr. Cole. Yes, sir. The Chairman. His estimates, then, were made practically upon the drilhngs in adjacent lands. Mr. Cole. Some exploratory work that had been conducted on their lands and undoubtedly examinations that his men had conducted on other lands. The Chairman. How much of the entire Hill ore properties were stripped at the time the Steel Corporation acquired them? Mr. Cole. Nat to exceed SO acres. Thiat is, those lands that were turned over to the Steel Corporation. (Hearings, pp 5498-5499.) The Chairman. How much of the HUl ores would have to be concentrated of the 250,000,000 tons that is in there ? Mr. Cole. I am utterly unfamiliar with the nature of the ores as shown up by the development work that has been conducted since I left the corporation; but as a rough guess I should say 60 per cent probabfy wUl have to be concentrated. 'The Chairman. What is the cost of concentration ? Mr. Cole. The cost is very low. I should place it under 10 cents per ton. (Hearings, p. 5504.) INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 91 These lands had not even been explored. Hill estimated at his own holdings by the character of the properties adjoining him. The cor- poration was compelled at its own expense to find this ore. After the drills had located it and the overburden of earth was removed 60 per cent of it was so mixed with sand, gravel, and other deleterious or worthless substances that it had to be "concentrated"; that is, the gravel, sand, etc., washed out of it, and the amount of this stuff ehminated by the concentrator usually equaled in bulk the ore that was left when the process was completed. The Steel Corporation constructed a "concentrator" at a cost of about $1,500,218. The following letter received from Mr. Filbert, auditor of the Steel Corporation, details the other items of expense incident to the mining of this ore as follows: For the ye"ar 1907 the average cost of stripping per yard of overburden removed was 33.1 cents. The cost per ton of ore uncovered necessarily varies materially on different properties according to the depth of the stripping removed and the tonnage of ore thus uncovei*ed. No data has been recorded showing the ore tonnage uncovered by the 1907 stripping. From general knowledge of the subject, however, it is estimated that the strip- ping cost in that year was equal to about 14 cents per ton of ore. To December 31, 1911, there had been expended for stripping as above $4,406,478.21. To the same date there had been uncov- ered ore tonnage of approximately 37,865,000 tons. (Hearings, p. 5285.) This leaves 11,635,000 tons net to be stripped, taking the "base" 59 per cent as the average, or an additional expenditure of $11,635,000, making a total for stripping alone of $6,035,378.21, to say nothing of the cost of exploration and drilling. This vast project of exploring and developing an area of over 29,000 acres, only 30 acres of which had ever been "stripped," was undertaken at a time when this corporation had, at an expenditure of multipUed milHons and the performance of an engineering feat sec- ond in magnitude on this continent only to the digging of the Panama Canal, removed the earth and rock from a depth of from 50 to 150 feet from the cream of the Mesabi Eange, exposing ore over areas which can be adequately expressed not in terms of cubic yards or feet, but in acres and square miles. And into these "open pits" were extended the tracks of the Great Northern, the Duluth & Iron Range, and the Duluth, Missabe & Northern Railroads. The only additional expense incident to the mining of these ores was the transferring of the loose gravel-like substances by a steam shovel from the mine to an adjacent car, five or six scoops of these huge machines filling a 50-ton car, and handling the material at the rate of a thousand tons an hour at a cost of not exceeding 10 or 15 cents per ton. 92 INVESTIGATION OP tTNITED STATES STEEL COEPOEATION. These mines were stripped almost without exception before the Hill lease was made; but the heavy minima, 8,500,000 tons contained in the inexorable contract, forced the corporation to leave these devel- oped mines and to go upon a costly exploring" expedition in search of the 200,000,000 or 500,000,000 tons of ore, no man knew, which were buried somewhere in this 30,000 acres of wilderness. The real disparity between the cost to the corporation of the Hill ores and their own can only be accurately determined by comparing the actual cost of a ton of each delivered on the docks at Duluth or Superior. This year [1912] the corporation will pay $1.84 per ton for 4,500,000 tons of ore (59 per cent iron), with the additional expense of not less than 10 cents per ton for concentrating 60 per cent, say 5 cents per ton, leaving out of consideration the extra cost for explpration, drilling, and stripping, or 11.89. Now, the Steel Corporation owns its own roads, and it costs this concern, by its own admission, not exceeding 45 cents per ton to ship this ore. In fact, it costs a great deal less; but for the purposes of illustration the estimate of Mr. Gayley as to the cost of transportation will be taken in this instance rather than our own. On May 12, 1903, the executive committee were considering the purchase of the Monoe mine, which involved the cancellation of a trafl&c contract with the Great Northern RaUroad and the shipping of the ore over the corporation's rails. Mr. Gayley said: The securing of the property, therefore, on this basis would not cost more than on the present basis, and we will he sure of the traffic contract on the ore, which wiU net us S5 cents per ton. Jn other words, by securing the traffic contract we secure the ore in this property free of royalty, the profit on the traffic contract more than compensating for the royalty. (Minutes executive com- mittee, May 2, 1903, MacRae Rept., p. 3818.) Estimating the cost of mining to be the same in both instances, and the royalty on the ore in the corporation's mines at the usual rate, 25 cents per ton (much more than the actual cost to the Steel Corporation), ore delivered from its own mines at Duluth involved an actual outlay of not exceeding 70 cents, less the cost of stripping and mining. Under the Hill lease the cost of the same ore deUvered at the same point (a lake port) was $1.89 Qess cost of mining and strippmg), maldng the actual cost to the corporation of this ore $1.19 per ton at the present time. No such sum would ever have been paid for the purpose of securing as an ore reserve only "every pound of ore and every piece of ore property" ia the Northwest. INVESTIGATION OF UNITED STATES STEEL COBPOEATION. 93 It must be remembered that these Hill properties involved more than a mere reserve for future new and competing steel companies. They were an actual menace. This the corporation knew, and so did Mr. Hill. Astute as Mr. Gary, with a breadth of vision equal perhaps to Morgan's, the "empire builder" saw at an early date the possibility of this new and unex- ampled iron range, as did Rockefeller, and while the latter was assimilating the Merritl^ holdings, he secured a region only less extensive from the lumbermen, Wright and Davis, at a little greater expense. Hill was more than an owner of iron ores. He was essentially a shipper, to such an extent that at one time the corporation hoped to secure these ores simply by giving all the traffic contracts for their shipment to the Great Northern lines. Mr. Schwab, then president of the Steel Corporation, stating — The President. I beheve we must make some arrangement with HUl * * *. I think Mr. Hill ought to give us the leases of all his properties, subject to a contract with him iy which we wovM guarantee him, a certain m,inimum, of traffic over his road. AU he wanted was ihe traffic. He does not want any royalty. The Chairman. I think you will have to pay a small royalty. (Minutes executive committee. May 20, 1902, MacRae's Kept., p. 3801.) These ores in the ground were worth about 10 or 15 cents a ton; on the cars of the Great Northern Railroad they paid the excessive rate of 80 cents per ton for a haul of about 100 mUes, and one engine could pull from 105 to 120 50-ton cars down the gradual incline from the range to Superior, netting the Hill roads four or five hundred per cent of the value of the unmined ore. Hill could seU and deliver ore, and to realize on his extensive invest- ment and valuable ore, railroad, and dock properties he must sell and deliver. The old steel companies under the now firmly established policy of integration had secured ore reserves many years ahead. It was probable that Hill, failing to find a market, would malce one. The millions spent in "organizing," "consolidating," and "syndi- cating" the steel industry were imperiled so long as this immense reserve of ore and the superb means for transporting it remained in the hands of James J. Hill. Should he find some new Carnegie with his "young partners," the overcapitaHzed corporation would find itself once again face to face with that ever-dreaded industrial "force" of which Mr. Temple speaks — "destructive competition." With the Hill ores under its control, even by complying with the hard conditions of Mr. Hill's inexorable demand, "destructive com- petition" was at last eliminated, and the Corporation could feel assured that practically "every poimd of ore and every piece of ore property in the Northwest" was out of the market so far as any new 94 rNVBSTIGATION OF UNITED STATES STEEL OOKPORATION. rival in the steel business was concerned. It paid the inconoeivable price, and secured the absolute and long-coveted monopoly for which it had unceasingly labored for over five years. That this deal put the steel industry on a new basis, revolutionizing conditions so far as competition from other than existing companies was concerned is imiversally and unequivocally admitted by men familiar with exist- ing conditions, and especially by those best quali&ed to judge them. Mr. Schwab discusses both the cause ai^^ the effect of this vital and basic change at some length ia the following colloquy: The Chairman. That was one of the thiags which made Mr, Andrew Carnegie persona non grata with the older steel concerns, was it not — that he would sell and keep his mills running ? Mr. Schwab. That is true; and I want to say that the policy of the Carnegie Co. for many years was to have nothing to do with any agreements of that sort, but the conditions were some- what different. We had a position to win in the steel trade then. There were older companies than the Carnegie Co. and longer established, like the Pennsylvania Steel, Federal Steel, Lacka- wanna Steel, Cambria Steel, and Jones & Laugh lin. Those were all older concerns. The policy of the Carnegie Co. was to demonstrate its position and to win a position for itself. And it is my belief if Itu-. Carnegie were in business now with his plant established, and his position established, and with the possi- bihty that there is not Ukely to be any more great steel plants any more than there is likely to be any other great trunk-line raUroad, that there will be development and extension of the present businesses, it is my opinion his pohcy would have been somewhat different, and that he would not have made the great' sacrifice in prices he then made. * * * The Chairman. Now, Mr. Schwab, you say that these con- cerns we have with us, like the United States Steel Corporation, the Cambria, and the Pennsylvania, and the rest of them, will abide with us, but there will be no new concerns in the field ? Mr. Schwab. I do not believe there will be any great develop- ment in iron and steel by new companies, but rather development by the companies now m business. The Chairman. Now explain that to us. Mr. Schwab. For the reason that the possibility of a new company getting a sufficiently large supply of raw materials would make it exceedingly difficult, if not impossible. The Chairman. In other words, a great concern like the Lackawanna or the Cambria or the Umted States Steel Corpo- ration must own vast ore reserves in order to justify the expen- diture of an enormous amoimt of capital 1 Mr. Schwab. Quite so. The Chairman. And those ores which are now on this conti- nent are owned or leased by the existing operating companies? Mr. Schwab. Not all, but the great part of them. The Chairman. There is not a sufecient quantity outstanding to justify anyone else going in the business ? Mr. Schwab. I do not think it is possible to-day, with the known ores, for anyone to get a sufficiently large reserve to DTVESTIGATION OP UNITED STAGES STEEL COBPOBATIOIT. 95 justify the very great expenditure of capital necessary to suc- cessly manufacture. (Hearings, pp. 1289-1291.) Before the Ways and Means Conunittee, on December 15, 1908, Mr. Schwab stated: ^ Mr. Crumpacker. The Mesabi deposits are almost owned en- tirely now by the large manufacturers ? Mj. Schwab. They are. Mr. Crtjmpacker. The small independent manufacturer has to buy his pig iron or his ore from competitors ? Mr. ScHWA^. That is true. Mr. Crumpacker. The Mesabi deposits are the chief source of iron ore for northern producers ? Mr. Schwab. Not the Mesabi alone, but the Northwest. Mr. Crumpacker. Lake Superior ? Mr. Schwab. The Lake Superior district is the chief source of supply. (Tariff hearings, 1908-9, pt. 2, p. 1673.) Judge Gary, before the Ways and Means Committee, evidently hesi- tated to admit and yet could not deny that the corporation held aj least an "ultimate" monopoly of raw materials: Mr. CocKRAN. Now, among the conditions that contribute to that situation, an important element is your ownership and con- trol of the ore supply? Mr. Gary. Yes; of course it is. Mr. CocKRAN. You practically do control the ore supply of the country ? Mr. Gary. No; not now. Not for the immediate future. Mr. CocKRAN. Well, the ultimate supply ? Mr. Gary. Yes; I think so — that is, pretty nearly. It is not absolute control. (Hearings, Ways and Means Committee, 1908-9, Dec. 18, 1908, pt. 2, p. 1752.) Mr. Carnegie, out of the business, and void of bias or interest, is more emphatic in his statement of a condition with which he is perfectly familiar and of which he is thoroughly qualified to speak: Mr. Carnegie. My view, Mr. Chairman, in regard to steel is that an element has come in which does not affect any other industry of which I have knowledge. Gentlemen, you can not organize new steel companies in tms country now. Mark that. The Chairman. Why not ? Mr. Carnegie. Because they could not buy ore. The Chairman. They could not buy ore ? Mr. Carnegie. They could not buy ore at a price The Chairman. Are there not millions of tons of ore in Tennes- see and West Virginia and Pennsylvania which no great concern has yet preempted and that are available at a small cost? I have heard that. Mr. Carnegie. If no man has ever thought that he could buy these ores and go into the manufacture successfully, that is venr significant. There have been hundreds of men in search of such a treasure. Do not run away with the idea that the ores of Tennessee can well compete with the ores tJiey are getting from Lake Superior. 96 INVESTIGATION OF TJNI^D STATES STEEL COEPOEATION. The Chairman. Wliy not ? Mr. Carnegie. Because the elements are not there. The ores are not the same. The expenses are higher. They are in the wrong place for manuf acturmg. The consumer is not near there. Believe me, the search for ore in this country has been very, very keen for many years. * * * The Chairman. * * * Mr. Schwab claims that all of these ores, and Mr. Perrin and the rest of them say the same thing, are now held by the companies in operation, and that there is no more of it in the market available. Is that true ? Mr. Reed. Mr. Schwab did not testify to that. Mr. Perrin did and Mr. Moore and Mr. The Chairman. Mr. Schwab said, if I remember correctly, that there would be' no more new great iron concerns, because there was no ore available. Mr. Carnegie. Yes; he did. Schwab is an authority on that. I think Schwab's statement is correct. Mr. Chairman, you would be amazed at the price it would bring if there were new fields, of ore discovered to-day. The end of the Lake Superior region is not far away, and what we are going to do I do not know. If there would be some further dis- coveries, possibly that would help the situation. The Chairman. Are there ores in the Lake Superior region now in sufficient quantities that could be secured and smelted at such a cost, by independents, as to make them available for the purpose of utilizing those ores as the basis of new competing concerns with the existing concerns ? Mr. Carnegie. The best evidence of that is that there has been no attempt of any competing concerns for many, many years. (Hearings, pp. 2490-2491, 2492.) The momentous statement of Mr. Carnegie that " an element has come into the steel industry which does not effect any other" — i. e., its absolute ownership and control of the sole supply of its raw material — should command the most earnest and serious attention of legislators. No monopoly can be absolutely secure or for any length of time inordinately oppressive which is dependent upon another industry for its subsistence, which it does not control or can not successfully exploit. It, in the nature of things, must meet resistance from two directions continually, from the producer of its raw materials on the one hand and the consumer of its finished product on the other. The American Tobacco Co., while destroying its competitors and controlling the price s>i its products to consumers, was in many instances successfully resisted by the organized and determined action of the planters who produced its raw materials. Cattle growers by the cooperative establishment of abattoirs and the encouragement of the local butcher can to a degree escape the exactions of the great packing houses. Every monopoly formed by the consolidation and control of any number of mills or shops and factories is to a greater or less degree INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 97 dependent upon economy and efficiency in the operation of its plants, the skill of its workmen, and the excellence or cheapness of its prod- uct. Too inordinate a charge, too wanton ah oppression, or too incapable a management of its business may encourage others to invade the preempted industry, and to contend for the lucrative profits enjoyed by a b^dly managed business. But no amount of capital, no economy, no industry, no inventive genius can create the raw material, can reproduce an ore deposit. Intrenched in such an ownership, it becomes as impregnable as the metallic ranges upon which it rests. All rivalry, all opportunity to enter the business, thus secure in its exclusive control of a natural resource, which can neither be purchased by the expenditure of cap- ital nor created by labor, is forever precluded. Such a monopoly, while reducing the wage of the laborer and enhancing the cost of the consumer, may contemplate with unconcern the inflation of its securi- ties, and the inefficiency of its plants, or wastefulness and incompe- tence in the conduct of its affairs. The prosperity or the power of the Steel Corporation is not determined, however, by the extent of its control of any single branch of the industry. This company was designed to comprehend within one corporate own- ership every phase and every department of the industry, and to con- trol every process and every agency incident to its operation. The acquiring of the ore reserves of the Northwest was but a single one of a long and coordinated series of carefully prepared plans by which the corporation proposed to dominate this business, in all its vast and varied ranufications, throughout the whole domain of mining, manufacture, transportation, and sale of its product. CONTROL OF PIG IBON. The molten metal is either converted immediately into steel or conveyed into sand molds and cooled. In this, its first and crudest stage, the metal is called pig iron. All forms of iron and steel are made by the subsequent manu- facture of this pig metal. It is the basis of the industry, and by an almost universal custom, the price of pig iron determines the value of steel in many of its finished and semifinished stages. To regu- late the price of pig iron was in a great measure to control the industry, and to manipulate that price was to exploit it. As has been shown, the old and established concerns had acquired extensive ore holdings prior to the formation of the corporation and could not be affected by its activities on the ranges of the Northwest. Almost without exception, the so-called ore dealers were furnace men, selUng pig iron rather than ore. Pig iron was produced in a limited amount in the South and the Steel Corporation until 1907 had failed to secure large holdings in that region. 54946°— H. Kept. 1127, 62-2 1 98 INVESTIGATION OF UNITED STATES STEEL COKPOEATION. When it is remembered that semifinished steel, billets and bars, plates, and the Uke, are usually sold for future delivery and the price is determined by the value of pig iron at that time, the full significance of any manipulation of the market in this commodity is apparent.^ An extract from a contract between the Carnegie and the Pitts- burgh Steel Cos. will fully illustrate the way in which the price of billets sold for future deUvery were automatically determiued by the price of pig iron: The price f . o. b. cars buyers' works, Monessen, Pa., and Glass- port, Pa., contemplated under this contract for Bessemer and open-hearth steel billets 4 inches square and under shall be fixed for each three months' period beginning with the third quarter July 1, 1905, and shall be determined according to the table given hereafter frOm the average selling price f. o. b. Pittsburgh of standard Bessemer pig iron for the next preceding three months. The average market price of standard Bessemer pig iron shall be agreed upon within one week from the end of each month, and the average price for the three months, within one week from the end of the third month. The amount to be added to the price of pig When the average price of pig iron is— iron to deter- mine the price ofbilietsshail be— $10.99 and under S6.00 $11.00 to tll.99 6.26 $12.00 to $12.99 S.50 $13.00 to $13.99 5 75 $14.00 to $14.99 6 00 $16.00 to $16.99 $16.00 to $16.99 $17.00 to $17.99 (') I At the same ratio untii the price of billets 4 Inches square and under to the buyers shaii be $24 per gross ton, but in no event shaii the price to the buyers for billets 4 incOies square exceed $24 per gross ton at any time during the life of tliis contract. (Hearings, p. 4378.) The control of the pig-iron market was in effect a mighty lever by which the price of semifinished steel through the whole industry could be raised or lowered at wUl. The officials of the Steel Corporation determined to secure this coveted and imperial power by a method startling in its naked simplicity whenever the exigencies of the occasion demanded it. TJiey bought all the pig iron on the market. "We have bought," says Mr. Dinkey, president of the Carnegie Steel Co., "22,000 tons of pig iron for April delivery at $15.50, 22,000 tons from the association, 9,000 from Rogers, Brown & Co., and the remainder from Cherry Valley. That is all the iron on the market. (Minutes Carnegie Steel Co. board directors Apr. 5, 1905, MacRae Rapt., p. 4074.) INVESTIGATION OF UNITED STATES STEEL COEPOKATION. 99 Mr. Corey, ex-president United States Steel Corporation, describes another one of these big transactions. There is understood to be about 65,000 tons in the market for third-quarter dehvery and if we buy at this time, it will ie largely for the purpose of preventing the furnace people from offering it arownd and thus demoralizing the marlcei. The price would be around S18, valley. After discussion it was agreed that the iron for the third quarter should be purchased on assurances from the furnace people that 65,000 tons was all the available iron for that quarter and that no more should be put on the marJcet. (Minutes Carnegie Steel Co. directors, May 11, 1903, MacRae Kept., p. 4065.) Sometimes the job was a little too big even for the corporation; then it called in some of its powerful neighbors, who were manufac- turers of semifinished steel and would therefore share in the profits of the "corner." Mr. Dickson. We have another option (a rather indefinite option, good for several days at least), all the surplus iron of the Valley Association for the third quarter, amounting to about 55,000 tons, at $19 Valley. We also have an option from W.P. Snyder on 30,000 tons, same period, same price. I think if we should insist on $18.50 Valley both would agree to it ; but of course we want to pay them as much as the finished material wiU stand. I talked with Mr. Willis Eang, of Jones & Laughlin, this morning and he thinks $18.50 Valley would be sufficiently high to maintain finished material. He says they expect to be purchasers to the extent of 10,000 tons during the fall. * * * Mr. Cokey. Are you sure they will take up all the available iron? Mr. Dickson. As sure as we ever are. * * * However, they have agreed to guarantee the' price against themselves. I understand the matter will be discussed in the committee at New Yorlc to-morrow. (Minutes board directors Carnegie Steel Co., May 18, 1903, MacRae Rept., p. 4065.) Mr. Schwab explains in some detail just why it is advisable to keep the price just as "high as the finished material uiiU stand." The president (Mr. Schwab) stated that he would like to obtain the views of the committee (Messrs. Gary, Perkins, Converse, Edenborn, Reed, and Gary) in regard to the advisability of the purchase of 30,000 tons of pig iron at $18.50 for the third quarter of 1903, and for which we would exchange coke at the rate of $3 per ton; that we will require about 100,000 tons in that quarter; that he believes we ought to always be buyers of some pig iron; that it would be better to even shut down some of our high-priced furnaces and be purchasers; that the price of our fin- ished steel products being regulated by the price of pig iron, we ought not to be endeavoring to get the cheapest iron; that we ought to maintain the price by little purchases; that $1 a ton is such a little thing compared with the advantages we receive in the finished produdts; that if we had purchased pig iron there would not have been the present downward tendency in it. 100 INVESTIGATION OF UNITED STATES STEEL COKPORATION. Mr. Gatlet. * * * I think we ought to hold the price of pig iron at $18.50, and that it is important for us to stay in the market and buy at $18.50 rather than miss the deal. (Executive committee minutes, May 5, 1903, MacRae Kept., p. 3817.) Some of Mr. Schwab's "little purchases" are recorded in the min- utes of the committee on finance, of which Mr. George W. Perkins was then chairman. Question of purchase by subsidiary companies, 2,500 to 5,000 tons of pig iron, was referred to the president with power. Purchase by the subsidiary companies of 2,560,000 tons of pig iron referred to chairman and president with power. (Extract Finance Committee minutes Feb. 24, 1910, and Feb. 24, 1911, MacRae Rept., pp. 3875, 3912.) The minutes of the corporation tell in few words the immediate and effective result of buying pig iron in quantities varying from 2,000 to 2,000,000 tons. On February 1, 1905, this brief entry is found on the minutes of the board of directors of the Carnegie Steel Co. It was the unanimous conclusion of the board that the price should be $13.75 per gross ton. (MacRae Rept., p. 4056.) And it was: On September 24, 1901— Pig-iron price ^xe^ $14.50. On November 10, 1901 — Pig-Lron price fixed at $15 a ton. (MacRae Rept., p. 4056.) While buying pig iron in million-ton lots, if necessary, in order that they might not only control but "fix" the price to the cent, the cor- poration did not overlook the meanest dealer in the metal or the most remote avenue by which it might reach the market. "Scrap iron" can be used as a substitute for pig iron in open-hearth steel furnaces, and the collector of broken or discarded machinery and the humble broker crying "rags and old iron" in the street at one time utilized this debris from the factory and the Idtchen, and through this means worn-out rails, broken implements, old kettles, pots, and stoves again found their way into the channels of commerce. The utilization of this waste material conserved the ore supply and added in an humble but material way to the small savings of the artisan and the housewife. The utiHzation of scrap iron in this way was summarily stopped by the corporation, using in this case as a weapon for the quick de- struction of the dealer in "old iron" an inordinate control of trans- poration rates on its own and other roads. The story is briefly told in the records of the United States Steel Corporation's TraSic Association: Mr. Bbntly. The question of revision of scrap-iron rates in the Central Freight Association was up at a meeting last week in INVESTIGATION OP UNITED STATES STEEL CORPORATION. 101 Chicago and referred to a special committee. Our position has been that our meanest competition has been from the scrap-iron corir- sumers; and if we can get those low rates up, we will take some advarv- tage for ourselves. (Minutes TraflELc Association, Apr. 21, 1909, MacRae Kept., p. 3988.) It appears that the corporation had no trouble in inducing the rail- roads of the country to put the rates on scrap iron "up." In this instance it seems that a Mr. Bihier was enabled to report in exactly 30 days that the rates on scrap iron had been duly adjusted to meet the convenience and serve the purposes, of the Steel Corporation. On the 21st of May Mr. Bihier advised his employers that: The Central Freight Association special committee held a con- ference on May 12 with the traffic representatives of the various iron and steel producing concerns in Pittsburgh Valley, Wheehng and Chicago districts to consider the requests of a number of inde- pendents for the establishment of pig-iron rates on scrap. A detailed analysis of the situation showed that from a corporation standpoint where a ton of new steel, either for new light-steel rails or new angles or light channels or shapes was displaced by a ton of the same kind of material rolled from scrap rails the corpora- tion would lose the profit on the ore, the steamship company on the transportation, limestone, coke, as well as the profit in con- version of the raw material into steel, and the carriers would lose the revenue on the ore, coke, and limestone. While each indi- vidual subsidiary company receives more or less scrap at their open-hearth plants, on which outside transportation charges are paid, yet the gain this way is more than o^set hy hoping to meet the competition of reroUers for light rails and light shapes. The corpo- ration's views were stated to the railroad people; the Jones & Laughlin Steel Co. were of the same view as the corporation interests. The other independents argue that the scrap for remelting in open hearth furnaces should be entitled to pig-iron rates, because of the price, etc.; hut it is stated that they aid n^t make out a sufficiently strong case, and their petition for the application of pig-iron rates will not he granted. (Minutes Traffic Association, May 21, 1909, MacRae Rept., p. 3990.) The argument here is certainly, as stated, from "a corporation standpoint" only. The arbitrary raising of the rates upon scrap iron from Pittsburgh to Chicago, the resultant waste of millions of tons of material which up to this time was and would have been util- ized, in order that those in charge of the- Steel Corporation might "take some advantage to ourselves" displays a lamentable lack of that breadth of vision which would ordinarily be attributed to those in charge of so colossal a concern as the United States Steel Corpora- tion. A question affecting so closely the industrial operations and domestic economy of the whole country demands consideration, from great corporations and common carriers especially, from some other angle than an immediate and in this case a mean and unfair advan- tage for a single corporation. 102 INVESTIGATION OP tTNITED STATES STEEL COEPOEATIOIT, COST TO STEEL CORPORATION OF MANIPULATING PIG IRON MARKET. This power to write upon its minutes and ledgers "pig iron price fixed at SI 5. 60 a ton" was purchased at an immense cost in money and by the total abandonment of any claims to consistency in the reiterated boast that the Steel Corporation, by virtue of its illimit- able resources and immense financial strength, could render the whole industry "symmetrical," make it an "integrated," a "rounded out," proposition, and by so doing cheapen production, and in cheapening production lessen the cost to the ultimate consumer, thus making ' the whole community sharers in its prosperity and its profits. Upon this theme Judge Gary, Mr. George W. Perkins, and others, both before this comanittee and on divers ,and sundry other occasions, have dilated continually and at great length. In its successful efforts to absolutely "fix" the price of pig metal, arbitrarily and at any time, this corporation has abandoned all the advantages incident to inte- gration in order to secure the profits of combination, but which have no force or effect ia the actual conduct of its operations. Now all steel is originally pig metal, but all pig iron is not converted into steel. The total production of pig iron in 1910 was 27,303,567 tons (hearings, p. 5555), the production of steel ingots and castings (from which all finished steel is made) was 25,917,281 tons (H. K. S. Rept., pt. 1, p. 363), leaving an excess of 1,386,286 tons of pig iron to be put to other uses. In addition-to that it requires 1.1 tons of pig metal to make 1 ton of steel. (Tariff Hearings, 1908-9, vol. 2, p. 1635.) Now, the veriest tyro in the business would see at a glance that a concern immeasurably rich in its mineral reserve and admittedly in a class by itself, in the ownership of transportation facUities, both by land and water, to convey that ore to its blast furnaces, many of them located almost in the midst of the finest coldng-coal in the country, would of course produce more pig iron than steel ; that is, if it made any valid claim to being "symmetrical" or "rounded out" or "integrated," or was making sincere endeavor to secure those economic advantages incident to ' ' the linking up of productive processes through acquisition under one control of raw materials and manufacturing plants (and in some cases transportation facilities) and through extensions and coordination of manufacturing processes." The coordinate operation of the blast and the steel furnace is the most perfect and striking example of the economy of integration ; there is a saving of a doUar a ton in the use of molten pig metal from an adjacent furnace over cold pig iron from a distant one. Yet, in order that it might continue to be a purchaser of pig iron, as suggested by its first president, Mr. Schj^ab, and by that means fix the price of pig iron, this corporation in 1910, with a pig-iron capacity INVESTIGATION OF tTNITED STATES STEEL COEPORATION. 103 of 16,240,700 tons (H. K. S. Kept., p. 269), shut down its furnaces or refused to start them and actually produced only 11,831,398 tons (H. K. S. Kept., p. 370) of pig iron, and what is more surprising, it pursues this policy notwithstanding the fact that in 1910 it forced it to procure from sources other than its own blast furnaces 2,582,768.1 tons of pig iron. Its ingot production for that year exceeded its pig- iron production by 2,347,971 tons, and it requires 1.1 tons of pig iron to produce a ton of steel ingots (H. K. S. Kept., pt. 1, p. 370).* Since its organization this company has procured from other sources than its own blast furnaces on a market which was deliber- ately "buUed" over 19,831,582.1 tons of pig iron. As will be demonstrated in another part of this report, the cost of assembhng the raw materials (ore, coke, and limestone) at a furnace in Pittsburgh, for example, is approximately $3 less to the corporation than to its competitors, as a result of the former's control of trans- portation facilities, estimating no other element of profit to the corporation than that due to this ownership of carriei-s and power over freight rates, and assuming the furnaces at Pittsbugrh to be representative of a like advantage elsewhere, then this corporation was forced to forego a profit on pig iron which it could easUy have produced in the last 10 years in the prodigious sum of $59,494,746.30 in order to "fix" the price of pig iron "ad libitum." This is not the only element of waste involved in this transaction. A Bessemer converter is emptied every few minutes, an open-hearth furnace every few hours; either can be started or stopped at short intervals without great loss. The same is true of rolling mills. But these huge and costly structures (blast furnaces), great towers often nearly a hundred feet in height and erected at a cost of exceeding a ' The last year lias been taken for the purpose of Illustrating the fixed policy of the corporation. It differs In no material respect from others since the formation of this company, as will be seen from the following condensed statement: Comparison of pig-iron prodiLction of Steel Corporation with its crude-steel production, 1901-1910. Year Production of pig iron, Spiegel, etc. Production of ingots and castings. EkceiiS of crude steel over pig-iron production. Tons. 6,855,731 7,975,530 7,279,241 7,369,421 10, 172, 148 11,267,377 10,819,968 6,934,408 11,618,350 11.831.398 Tons. 8,854,820 9,743,918 9, 167, 960 8,406.378 11,995,239 13.511,149 13,099,548 7,838,713 13,355.189 14.179.369 Tons. 1, 999, 0R9 1902 1, 768, 388 1,888,719 1904 1, 036, 957 1, 823, 091 2,243,772 2,279,580 904, 305 1907 1909 1,736,839 2,347,971 Total 9^,123,672 110,152,283 18,028,711 104 INVESTIGATION OP UNITED STATES STEEL CORPORATION. million each, stuffed with their big "burden" of tens of thousands of tons of ore, coke, and limestone, and emitting, at intervals of every three or four hours, a sputtering stream of molten metal, five hundred to a thousand tons a day, must go all the time or not at all, day and night, during the week and on the Sabbath, the blast furnace must be kept in operation. To start or to stop it is an expensive operation, and the most technically learned in the steel industry can find no more inexcusable instance of extravagance, so far as the actual economy of production is concerned, than in the deliberate closing of a blast furnace, and the substitution of cold pig iron for the hot metal from adjacent steel works. No man is better qualified to speak with authority on this subject than Julian Kennedy, having been for 20 years engaged in the construction and operation of blast furnaces, and no man has less interest or bias, for or against the Steel Corporation, as is manifest from his testimony before this committee. The Chairman. Did you design or construct any of the blast furnaces now owned and operated by the United States Steel Corporation ? Mr. Kennedy. Yes. Some at Braddock, the Edgar Thomp- son Works, some at Donara, some of the Ohio Works at Youngs- town. I have also consulted and advised on many other plants which now belong to the Steel Corporation, in connection with the construction * * *. The Chairman. Have you ever constructed a blast furnace in India or China ? Mr. Kennedy. In India, but not in China. The Chairman. In Russia ? Mr. Kennedy. Yes. * * * The Chairman. I called your attention this morning to the fact that the pig-iron capacity of the Steel Corporation was 16,000,000 tons, and that its pig-iron production was 11,000,000 tons; that its steel-ingot production exceeded its pig-iron pro- duction by, say, approximately 2,000,000 tons. * * * Now, is it economy to close blast furnaces, where they can run and you can utilize their output, and open up again — run them mtermittently ? Mr. Kennedy. It would not be economy to close them for a short time and start them up often. It la easy to shut them down if you want to stop for a month or two, and then start up again. The Chairman. Why should a blast furnace to be run econom- ically be run regularly ? Explain that to the committee. Mr. Kennedy. It would not be good policy to shut down a blast furnace once a week, because it always disorganizes it and ■ puts it out of condition, and it takes two or three days to get it straightened around again. But I take it that would be different if you wanted to stop for a month and then start up again. The Chairman. I oelieve that is the reason given for running blast furnaces on Sunday ? Mr. Kennedy. Yes. INVESTIGATION OF UNITED STATES STEEL CORPORATION. 105 The Chairman. That it is a metallurgical necessity to keep running them after they are started. Mr. Kennedy. Yes. The Chairman. The continued shutting down and opening up and starting the blast furnaces is an expensive operation ? Mr. Kennedy. If you stop blast furnaces often and start til em up again they do not work very well for the next 24 hours. The Chairman. I find this statement by Mr. Gary. He states : "It would be better to even shut down some of our high- priced furnaces and be purchasers ; that the price of our finished steel products being regulated by the price oi pig iron, we ought not to be endeavoring to get the cheapest iron; that we ought to maintain the price by little purchases; that $1 a ton is such a little thing compared with the advantages we receive in the finished products ; that if we had purchased pig iron there would not have been the present downward tendency in it." Now, as a practical steel man, I will ask you to tell me what advantage it is to the Steel Corporation to pay a dollar more for pig iron than the market price and to so conduct their business as to have it raised a dollar a ton. Mr. Kennedy. Well, steel companies often sell semifinished materials, such as billets, based on Iron Age quotations for pig metal. Of course, if the price of pig metal becomes demoralized it would lower the price of their billets, and it might be good policy to try and steady that price and prevent it from dropping. The Chairman. That is, prices of the finished steel products or semifinished products sold for future delivery are not sold at a fixed arbitrary price, but upon a sliding scale based upon the price of pig iron at the time of delivery of the consignment. Mr. Kennedy. In some cases billets are sold for a year ahead. If one company should sell for another company, their require- ments for billets for finishing steel a year ahead is often predi- cated upon the price of pig iron from month to month, taken from the Iron Age. Mr. Bartlett. The market for manufacturing pig iron is liable to go down, and to steady the market you buy for the purpose of keeping it up — that would be like the man on the race track or in the stock market hedging his bet. Mr. Kennedy. Possibly, somewhat, on general principles. The Chairman. As I understand you, the purchase is made for, say, a year ahead, and the price is fixed at the time of delivery. Mr. Kennedy. Yes. The Chairman. If they can, bv buying or selling pig iron, regulate the price, they can in tnat way fix the price of this material? Mr. Kjennedy. Yes; if they can prevent a slump in the price of pig iron they will prevent a slump in the price of bOlets. The Chairman. Do you know of any other reason why the Steel Corporation should purchase pig iron, if it had the capacity to produce it in the blast furnaces, except to regulate the price ? Mr. Kennedy. Not unless they could huj some cheaper than some of their furnaces could make it. (Hearings, pp. 5073, 5124- 5126.) 106 INVESMGATlOlir OF tTNITED STATES STEEL COEPOEATION. , EFFECT OF MANIPULATION OP PKICE OP SEMIFINISHED STEEL UPON COMPETITORS. The corporation was quick to perceive the infinite possibilities for exploiting a market it absolutely controlled, and the results of some of its operations are recounted by the sales agents of this concern, Mr. Bope, general sales manager, thus describes the effect of a "made market" on the purchasers of steel billets: Mr. BoPE. The average price of pig iron for November was $22.81, coveriag sales of about 36,000 tons, which is enough to make a market. This will have the effect of advancing the price on our raw material contracts over the third^guarter price nearly iS per ton. It will make the majority of our billet contracts, cruci- ble, for instance, pretty nearly $29 per ton, and Oliver wiU pay $30. When you consider that the price of finished material to-day is only $3 to $4. per ton above this figure, and considerable finished material is sold on old contracts at a much lower price than that of to-day, how these people can pay this price for their raw material is a pretty hard problem. I can not but feel the price of pig iron is too high, yet it is legitimate because the demand is here. (Minutes, board directors Carnegie Steel Co., Dec. 3, 1906, Mac- Rae Kept., p. 4079.) The far-reaching effect of this manipulation of a "sliding scale" upon consumers of this "raw material" is not measured by the one-fourth of 1,096,727 tons of blooms billets, slabs, sheet and tin plate bars, sold by the corporation to outside concerns (see Annual Report United States Steel Corporation 1906, p. 18), but by its blighting effect upon the steel industry in all its subsequent stages. From $3 to $4 per ton was added to the price of all semifinished steel, and in that year the production of rolled iron and steel prod- ucts amounted to 19,588,468 tons. The corporation by this increasing of the price of its product between the dates of purchase and delivery appropriated to itself profits out of all proportion to the capital expended on the labor performed. The rewards of the industry free from this inter- ference would have been distributed equitably along the whole sequence of process incident to the manufacture from the ore to the finished product. Under this regime and by a single speculation in pig iron the Steel Corporation added to the gains previously obtained by the production of pig iron an unearned iocrement greater than the entire profits yet to be distributed in all the subsequent stages of manufacture through which blooms and billets and bars must pass in the hands of the small or so-called independent operator who had not sufl&cient capital to operate costly blast furnaces and hold stUl more costly ore reserves. For the small manufacturer to pay the price "fixed" by his more powerful competitor was indeed "a pretty hard problem." Hard as INVESTIGATIOK- OF UNITED STATES STEEL COBPOBATION. 107 it was, the corporation determined to make it still harder, and follow- ing up the advantage already obtained, prepared to control not only the price, but the supply. The control of hoth would put the independent producer absolutely at its mercy. The rich rewards of the busin^ess could thus be continued in the production of steel in its cruder forms, to be distributed among the few immensely rich holders of ore reserves and operators of blast furnaces and steel converters, who as will be seen hereafter maintained an excel- lent understanding among themselves, and a modicum of the profit remaining could be doled out to the "little fellows" forced to purchase their bars and billets in a market forever "cornered" by this all- powerful consolidation. If they were inclined to be tractable and obey the now "golden rule" proclaimed by Judge Gary and accept without question the gospel of "cooperation and price regulation" as "suggested" at his dinners, and their modest business was not especially coveted by their big competitor, they were not disturbed, but in the event they displayed any disposition to compete, or they possessed some valuable and coveted patent or process, the supply ' even at an inordinate price was summarily cut ofiF, and the objec- tionable competitor unless sustained by exceptionable natural ad- vantages or great financial strength or credit went to the wall. The whole industrial field was roughly divided into three parts. (1) Old and established concerns sustained by immense reserves of ore and coal, or especially formidable by reason of their financial backing or the close relations between their directors and operators and the officers of the corporation. With these it formed close alliances by means of pooling agree- ments, through its subsidiaries preferential contracts, interlocking directorates and other similar devices, or purchased their plants at an inordinate price. (2) "Good customers" who were not in actual competition with any of the subsidiary companies of the corporation, or who did not cut prices or fail to "cooperate." These were furnished their due quota of raw material. (3) Smsfller competing concerns, dependent upon the great "pri- mary" companies for raw material, who did compete with the sub- sidiary companies of the corporation. These were to be absorbed or went out of business. SALE OF SEMIFINISHED STEEL TO COMPETITORS. It was at one time the purpose of the corporation to refuse to sell to all competitors of its finishing mills, who had hitherto depended on the National, Federal, and Carnegie Steel Cos. for raw materials. And since the corporation at this time produced over 65 per cent of 108 INVESTJGATIO^r OV tTNlTfit) STATES STEEL CORPOllATlON. the total output of steel ingots and castings, and the greater part of it had hitherto been marketed in a semifinished state by these com- panies, this sudden shutting off of supplies was calculated to produce profound disturbance in the steel business, and in the event the few old and established concerns having the plants and the ore reserves necessary to the production of large quantities of crude steel "coop- erated with the United States Steel Corporation" in this policy, or were unable to meet the sudden and increased demand in either event, it meant the inevitable ruin of the companies thus summarily cut off from their base of supplies. That such a plan was discussed and approved by the presidents of the subsidiary companies and indorsed by the president of the corpo- ration and that it was deliberately designed to produce "more shut- downs in the future than in the past" is indisputably established by the corporation's own records. On July 1, 1902, Mr. Corey, then president of the Carnegie Steel Co., stated: Mr. Corey. The only item of interest I have to-day is to state that at the last meeting of the presidents it was decided by a majority, and approved by the president of the Steel Corporation,' that Carnegie and National Steel Co. are not to sell unfinished material on scale contracts to any companies comjpeting with constituent companies of the corporation; and such scale contracts with such competing parties are to be discontinued at as early a date as possible. Any excess tonnage we may have over and above amounts required to keep the constituent companies in operation we will sell as we find it necessary, iut at such a figure as will he above that at which we sell the constituent companies. That will mean more shutdowns in the future than in the past. (Minutes board of directors Carnegie Steel Co., July, 1902, MacRae Kept., p. 4059.) On April 5, 1904, the finance committee made the following recommendation : v George W. Perldns in chair. Recommended that subsidiary companies who are manufac- turing semifinished products do not sell same to outsiders in competition with subsidiary companies who are manufacturing finished products from such semifinished products Without the consent of the subsidiary company interested, (Slinutes finance cpmmittee, Apr. 5, 1904, MacRae Rept., p. 3857.) This plan for the elimination of competitors seems to have been in part abandoned and a more scientific and elaborate device substituted, by which such a material could be sold at a maximum price, "all the traffic would bear" especially to "good customers," but the margin between the cost of the raw material and the sellii^ price of the finished product was so adjusted as to make the existence INVESTIGATION OF UNITED STATES STEEL COEPORATION. 109 of these concerns who were permitted to buy "on probation" exceedingly precarious. Referring to the change of policy decided on by the corpora- tion, that we are not in future to sell any raw material than that which we can not use in our own finishing mills, the chairman stated that, so far as the Carnegie Steel Co. ,is concerned, they can not at the present get out of the market because of some long-term contracts, but they are limiting their sales of billets and sheet bars. * * * There was a full discussion of the matter, each member ex- pressing his views, and while it was the consensus of opinion that the ideal condition would be to use all the steel produced in their own finishing mills, it was the feeling that the production should always be at the point where certain good customers who are entirely dependent upon us for their steel supply, and who are'not in compe- titwn with any of the finishing lines manufactured hy the corpora- tion, should always he taken ■care of. Replying to this view of the matter, the chairman stated that in cases like the kind mentioned it is the intention to supply them as far as possible without limiting our own mills, but he referred generally to making sales among the regular trade. (General sales managers minutes, Apr. 21, 1906, MacRae Rept., pp. 3951-3952.) At times the officers of the corporation hesitated where there was a semblance of competition to "take care of" a "good customer," who bought all his raw material from them. It appears that the corporation had calculated just a little too closely on the margin of profit at which a certain firm — the Dill worth Porter Co. — could buy billets from the corporation and make them into "bolts and tie plates," and Mr. Schwab brought this "troublesome" question be- fore the executive committee of the Steel Corporation. Present: Gary (chairman), Schwab, Perkins, Steele, Roberts, Converse, Edenborn, Reed. PURCHASE OP PLANT OF DILLWORTH-PORTER CO. Mr. Schwab stated that he wished to lay before the committee a question that had been a troublesome one in relation to a firm in Pittsburgh, known as the Dillworth-Porter Co. This company manufactures spikes, bolts, and tie-plates in competition with our worlis in Chicago and other works. That there are only two firms, ourselves and the Dillworth-Porter Co. who make any considerable quantity of this material. That in the past we have been selling these spikes and bolts with the rails. That usually contracts with the railroad companies are made thLs way. We have been turning over the spike? and bolts to the Dillworth- Porter Co. because they purchase all their steel from the United States Steel Corporation. That a condition has arisen which makes it impossible for the Dillworth-Porter Co. to run their works except at a loss with billets we are furnishing them at the present price, and that we must either furnish them steel at 110 INVESTIGATION OF UNITED STATES STEEL COKPOKATION. some price to enable them to run their works or they will be com- pelled, to contract for the steel elsewhere or make it themselves. That Mr. Dillworth had recently called on him and stated that one of two things must be done — either a sliding-scale arrange- ment must be made with the Dillworth-Porter Co. by which the United States Steel Corporation will sell them steel dependent upon the price the Dillworth-Porter Co. receives for their materials, or they must provide themselves from other sources. This firm has been taking 65,000 tons of steel from us the past three years and we have made over $1,000,000 profit from tneir contracts. Mr. Schwab submitted the question whether it would hp desirable to make an offer or consider an oifer for the purchase of these works, and the committee was unanimous in con elusion against the purchase. (Minutes executive committee, MacRae Kept., p. 3797.) This is the only recorded instance where the inability of competitors to purchase raw materials and sell the finished product at the measure of profit predetermined by the corporation ever seems to have "troubled" anybody connected with this concern, though it often caused surprise and occasionally considerable satisfaction, as indicated by the following entry on the minutes of the board of directors, Carnegie Steel Co.: There is nothing much new in the market except the ex- traordinary competition for axles. Some of the prices made are simply astounding, especially considering the fact that our com- petitors have to iuy their MUets at a figure that does not 'permit of more than $2 per ton for conversion. (MacRae Rept., p. 4073.) There was "a little competition" on forgings, but that did not puzzle Mr. Bope quite so much since'the makers of forgings did not manage to do quite so well between the upper and nether miUstone of high-priced billets and low-priced finished material. "Then," said Mr.Bope, " on forgings, the mills which are in this business are holding up the price of hillets and pulling down the price of finished forgings, which is practically putting the inde- Eendent forge malcers out of the marlcet. And on Rafting, Jones & ailghhn are seUing at a price which their competitors can not afford to meet after paying the marlcet price of SI .Jfi for hars. This is the condition now almost right through the whole market. There is a little competition, too, by peculiar arrange- ments which are being made." (Minutes directors Carnegie Steel Co., Feb. 8, 1909; MacRae Rept., p. 4088.) The disaster which followed this corner of raw materials, the eager, futile search for high-priced supplies, and the inevitable crash which followed the failure to secure billets and merchant bars, and the like anywhere or at any price, is told by the men who looked with indif- ference upon the increasing discomfort of their competitors. Mr. Bope. We have served notice on a lot of contracts ex- piring January 1, that we will not renew them. As a matter of fact we need hardly sell a pound of raw steel now to out- INVESTIGATION OF UNITED STATES STEEL COBPOKATION. Ill siders. At Duquesne, for instance, the new lined mill is now taking 65 tons of steel per day, and before long we wiU be taking 100 tons per day, and as every bit of this is taken from the trade, the situation is growing worse all the time. There is, of course, an element of strength in the fact that other peo'ple are ievng crowded for steel, and while they can not get it it vnU make the situation that much stronger until soTnebody gets in with an entirely new plant. Somebody will have to prepare to take care of these people we are turning down, and it means a new steel plant somewhere. (Minutes Carnegie Steel Co. board of directors, July 16, 1906, MacKae Kept., p. 4079.) And again: Reporting on the raw-material situation, Mr. Bope stated it is worse to-day than he has ever seen it before, avd he did not Tcnow where it is going to end. A number of their customers are practically shut down now for want of steel, and some of them have gone into the market trying to buy tonnage, but have not so far been very successful. (Minutes general manager of sales. May 20, 1907, MacRae Rept., p. 3955.) StiU the general manager of sales, Mr. Bope, was not content. There still remained a few concerns which managed to do business under existing conditions, although "shaky" or in the hands of receivers, he records the cause of his "worry" over the matter in the minutes of the Carnegie Steel Co. on November 9, 1908, as follows: Mr. Bope. * * * What Worries us more than anything else in the situation is the growth of competition. For instance, I was told this morning that Milliken Bros, are going right ahead on two blast furnaces and billet and bar mills. They are figuring on using * * * ore and eastern limestone, but wUl, of course, have to figure on getting their coke out of this region somewhere. These people have located on Staten Island, and this will mean formidable competition in the export business at least. They are still iu the hands of receivers, but I understand are ready to be taken out. (MacRae Rept., p. 4086.) Milliken Bros., the constructors of the Singer tower and other like structures in New York, were at one time formidable competitors, but under jexisting conditions Mr. Bope's fears were groundless. Milhken Bros, do not appear to have gotten out, due to the fact, as he (Bope) tells us, that "raw materials have gone so high that people who have to buy heavily are simply down and out." Mr. Bope. There are some things in the situation which are go- ing to have an effect upon the raw end. Milliken Bros, have gone into the hands of a receiver and shut down their rolling mills. For the present at least it is the intention to operate only their structural plant, and they are now in the market to buy the ton- nage required to fill their contracts, amounting to 45,000 tons, to be placed and taken out within the next six or eight months, be- sides any additional steel they will need on new contracts the re- ceivers may make. This is tonnage which they had figured on 112 INVESTIGATION OF UNITED STATES STEEL CORPOKATION. making themselves but which wUl now come into the market. It may not come to us, hut in any event it means that much capacity shut down. (MacE ae Kept . , pp . 4080-4081 , 4086 ) At last the work was done, all new competition was eliminated except Bethlehem, and the Steel Corporation has as yet not shown any dispo- sition to put Mr. Schwab's company "out of business." Mr. Bope hurriedly reviews the steel companies which have been put down and out — thrown into the hands of a receiver or "reported not in a very good shape financially" — finding no "pessimistic feeling anywhere," and characterizing "our position" as "on the whole difficult." COMPETITION ELIMINATED. Mr. Bope. I can not find any pessimistic feeling anywhere. Take our own situation, as I reported it to the president on Sat- urday. On open-hearth billets we wiU have an accumulated deficit for the next 6 months of 40,000 tons per month, in addi- tion to what we are back as of the 1st of this month. This situation has been changed by the Milhken Bros, and Basic shut- ting down their roUing miUs; they wiU hereafter be purchasers instead of manufacturers. MiUiken Bros, will have something like 25,000 to 50,000 tons of steel to buy to complete their con- tracts with the new work which the receivers wUl undoubtedly figure on. The Eastern Steel Co., it is reported, is not in very good shape financially, and it is possible they will also shut down. This will eliminate all of our new competition outside of Bethlehem and wiU make our proposition, on the whole, difficult. (Minutes board of directors Carnegie Steel Co., July 1, 1907, MacRae Rept., p. 4081.) The power to make and manipulate the price of semifinished steel was vigilantly guarded and favored purchasers of such material were compelled to agree in advance not to resell any part of the material so obtained without putting it through some subsequent process of manufacture. In its contracts for billets, with the Crucible Steel Co., April 30, 1904, and the Pittsburgh Steel Co., June 28, 1905, it is specifically provided that "It is made a condition of this contract that the buyers shall not resell any of the material furnished hereunder without having first put the same through a process of manufacture at their works." (MacRae Rept., pp. 3661, 4399.) ABSORPTION OF COMPETING CONCERNS. Shelby Tube Co. — The multifarious uses to which the control of raw material could be put is illustrated in the negotiations which preceded the absorption of the Shelby Tube Co. The possibilities of this concern seem to have attracted the atten- tion of Mr. Schwab shortly after the firganization of the Steel Corporation. INVESTIGATION OF UNITED STATES STEEL COEPORATION, 113 Upon the question of the acquisition of the property of that company, the president (Mr. Schwab) stated that the stock out- standing amounted to $8,000,000 of common and $5,000,000 pre- ferred stock. He also gave figures showing the business trans- acted by the Shelby Co. He is impressed with its earning capa- city, and believes that under our control it would net about 50 per cent. He rather thinks that the whole property could be purchased for about $3,000,000. Mr. Converse stated that it is the only real live competitor the National Tube Co. has, and that between the two companies all the patents for seamless tubing manufacture kre owned. (MacKae Kept., p. 3784.) Why a company capitalized at $13,000,000, whose earning capa- city impressed a veteran in the steel business like Mr. Schwab to such an extent that be beheved it could be made to net 50 per cent could at the same time be purchased for $3,000,000, would at first appear inexplicable. The president of the Steel Corporaticm, how- ever, knew whereof he spoke. The president stated that the Carnegie Steel Co. had a contract with the Shelby Tube Co. to supply it with steel, that it was very favorable to the Carnegie Co., masmuch as the latter could so' arrange the price of steel that it would be rather difficult for the Shelby Co. to continue in business. The chairman expressed the opinion that he would a great deal rather have that company ui business under our control than to absorb them. (MacRae Rept., p. 3780.) Notwithstanding the fact that this company was the sole com- petitor of the Steel Corporation in the making of seamless tubes and was the sole owner of the only effective patent for their manufacture, it was absorbed by the corporation by an exchange of securities, 1 share of the preferred stock of the corporation being exchanged for 2f 'shares of the tube company and 1 share of the corporation's common stock for 4 shares of the common stock of the tube company. That the control of prices was the governing motive in this trans- action is evidenced by the character of negotiations which preceded it. It was suggested that some arrangement could be made with Mr. Miller (fli the Shelby Co.) with the view of maintaining prices, and that some prices now could be advanced by both companies. (Minutes executive committee, Apr. 24, 1901, MacRae Rept., p. 3782.) UNION STEEL COMPANY. Among the sharp competitors of the Steel Corporation for ores upon the Mesabi Range was the Union' Steel Co. Among other influential interests back of the concern was H. C. Frick. Mr. Frick at this time was also a director in the United States Steel Corporation. Merger of Union and Sharon concerns. — The strong backing of the Union Steel Co., together with its extensive operations, made it an important competitor of the United States Steel Corpora- 54946.»— H. Rept. 1127, 62-2 8. 114 INVESTIGATION OP UNITED STATES STEEL COEPOKATION. tion. Its operations assumed still greater significance when, toward the end of November, 1902, announcement was made of the merger of the company aild the Sharon Steel Co., under the nameOf theUnionSteelCo., to be.capitalized at about $50,000,000, thus forming the largest consolidation in the steel industry proper which had been effected since the organization of the United States Steel Corporation itself. The two concerns, together, had at this time a pig-iron capacity of about 750,000 tons yearly, and an ingot capacity of about 850,000 tons — as against a capacity for the Steel Corporation at this time of about 10,000,000 tons — while they had greatly increased their outputs of finished prod- ucts. (See Table 29, p. 269.) With this announcement were coupled intimations that plans were already projected for the con- struction of still further unportant works, as well as the acqui- sition of one or two other concerns then engaged in the manu- facture of rods, wire products, sheets, and pipe. Moreover, there were rumors thttt the new concern might cqpstruct a rail- road of its own' from Lake Erie to the ConneUsviUe coke region, with connections to the company's manufacturing plants. The impression was very general m steel circles that the consolidated company would assume a position of rapidly increasing import- ance in the industry. (H. K. S. Rept., pt. 2, p. 254.) The aggressive attitude of this company and the capacity and long experience in the businiess of Mr. Frick and others associated with him, caused the Steel Corporation grave concern. The methods which had either destroyed or rendered tractable smaller companies could not be-rendered effective in any effort to eliminate the Union-Sharon Steel Co. On November 4, 1902, Mr. Corey declared: I am strongly in favor of pushing the Union Steel Co. as hard as we can. There is nothing we can do to smooth matters over with them, as they are determined to do all they can against us. (MacRae Kept., p. 3640.) It soon became manifest, however, that this company would not "push." Located in the midst of the corporation's great plants, it was" in a position to render any competition especially troublesome in the event it was determined by those in charge to increase the sphere of its activities by competition rather than cooperation. There remained but one solution — to pay such price as those in charge might demand for an agreement not to further disturb the industrial conditions which the Steel Corporation sought to establish or compete with them for the business. The corporation determined to pay, and instead of the usual exchange of securities the corpora- tion agreed to imderwrite the bonds of this company. But the com- pany had no bonds to underwrite, and its capitalization was entirely out of proportion to the immense sum demanded for its properties. The inflation of its securities just prior to its absorption is another instance of the great difference in the amount actually necessary to operate a large steel plant and the huge sums at which the same IKVESTIGATION OF UNITED STATES STEEL COKPOKATION. 115 concerns are often capitalized when taken under tlie control of a syndicate. In the minutes of the board of directors of the Union Steel Co. the whole transaction is epitomized in a few brief entries, as follows : "Resolved, That a stockholders' meeting be had to increase the indebtedness of the company from nothing to $4^,000,000." Stockholders' meeting. Action of board of directors in accepting proposition of T. Mellon & Sons for sale of capital stocks of certain companies, lands, etw., approved. Capital stock increased from $1,000,000 to 120,000,000. Authorized increase of indebtedness to 145,000,000. (MacRae Kept., p. 4225.) In December, 1902, this company was absorbed by the Steel Cor- poration. It was agreed among other things that — Ninth. Upon the organization of Union, as herein provided, the vendors agree to sell and transfer unto the steel company, and the steel company agrees to buy all of said $20,000,000 of the capital stock of Union. In consideration thereof, and con- temporaneously with the said transfer, the steel company hereby agrees that it wiU duly and legally guarantee the pay- ment of the principal and interest of all of said $45,000,000 of bonds of Union as the same shall respectively become or be made due and payable according to the terms of said bonds. (MacRae Rept., p. 3641. See also Document K, MacRae Rept., p. 4350.) This sudden increase in its capitalization by the Union Steel Co. just prior to its being taken over by the Steel Corporation indicates that the price paid was excessive. The character and extent of its plants and ore holdings, as stated by Mr. Kennedy, did not justify the expenditure of any such sum. In its answer to the suit of the Government the corporation admits that the production of the Sharon Steel Co. was small and that the capacity of the Union Steel Co. after the merger of the Sharon Steel Co. in November, 1902, was 180,000 tons of pig iron (as aginst 7,802,812 tons of the corporation in 1902). It produced 350,000 tons of steel ingots in 1902. Says the Commissioner of Corporations : There can be no question that the prices paid by the Steel Corporation for both the coal and iron-ore properties were con- siderably in excess of a fair valuation at the time of the transfer. The real significance of the transaction seems to be that the Steel Corporation desired to eliminate the competition of certain influential interests back of the Union concern, particularly that of Mx. Frick, and that the amount necessary to induce these owners to retire from such competition was, in effect, charged against the ore and coal. (H. K. S. Rept., p. 286.) The truth of this is corroborated by the fact that since the United States Steel Corporation has held this property and for a number of years it has not paid the interest on its bonds, the 116 INVESTIGATION OF UNITED STATES STEEL COKPOBATION. deficit being from $500,000 to $2,000,000 in some years and aggregating over $9,000,000 in nine years (see Exhibit 18c); and this failure to pay, it seems, was not upon the whole $45,000,000, but considerably less (see p. 282, Report of Commissioner or Corporations on Steel Industry, pt. i, July 1, 1911), the published reports of the United States Steel Corporation showing that only about 136,000,000 of these bonds were ever outstanding in the hands of the public, although it also appears that in 1905 (Union Steel Co., minutes of board of directors, Sept. 26, 1905) that the Union Steel Co. issued $3,874,000 of bonds in addition to those theretofore issued. (Macllae Kept., p. 3642.) . A comparison of this amount of $75,860,501 paid and guar- anteed for the Union-Sharon properties, with the valuation of the property of the seven large so-called independent steel con- cerns four years later, in 1907, is illuminating. These were as follows : Bethlehem $44,450,881 Cambria 45, 281, 892 Colorado. 41,919,448 Jones & Laughlin (capital and bonds) 45, 000, 000 Lackawanna w 65, 647, 388 Pennsylvania 25, 377, 147 Republic , •. 53,092,153 (MacRae Rept., p. 3643.) Every circumstance attending the absorption of this company, which the Steel Corporation admits was its only active and aggressive competitor, indicates a clearly defined purpose to prevent competi- tion and strengthen its grasp upon production and prices. The Sharon Steel Co. was under contract to furnish raw materials to the Crucible Steel Co. A reduction iu the price of this material was made upon the express condition that the "leading interests are- not to engage in competitive business." The materials sold the Crucible Co. at a reduced rate were obtained only upon condition that it would not be resold without having pre- viously passed through some stage of manufactui'e in the Crucible Co.'s works, and above aU it was stipulated that — Tenth. The vendors severally agree with the steel company that they, respectively, will not, withbi the United States or Dominion of Canada, for a period of 10 years from December 1, 1902, engage directly or indirectly in the manufacture of iron or steel, or articles made therefrom, now manufactured by the steel company, the production of furnace coke, or the mining or pro- duction of iron ore, except in the Territory of Arizona arid State of Florida, excepting, however, from the terms hereof the enter- prises, if any, in which such parties may now, respectively, be engaged. (MacRae Rept., pp. 3641-3642.) The purchase of the Troy Steel Products Co. by the United States Steel Corporation illustrates more forcibly than any abstract argu- ment the pernicious effect of interlocking directorates and its tend- ency to favor and willingness to placate powerful interests at any price upon the first show of hostility or threat of competition. INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 117 TROY STEEL PRODUCTS CO. This Troy Steel Prpducts Co. was a Rockefeller concern, known by the officers of the Steel Corporation to be worthless, and after a thor- ough investigation of the plant as a manufacturing concern it was unanimously determined by the officers of the Steel Corporation that its acquisition was not advisable. On November 18 the execu- tive committee determined — On the question as to whether or not the Ownership of this property, would be advantageous to the United States Steel Cor- poration, tlie president stated that he does not believe.it is of any value to us. Mr. Converse said that the Carnegie people can deliver material on the wharf of the Troy Co. not only cheaper than it can be made there, but at a good profit. On motion, duly seconded, it was unanimously voted that the president be requested to decline to entertain the proposition concerning the Troy property. (MacRae Rept., p. '3649.) At the time the executive committee unanimously declined even to entertain a proposition to purchase this plant which had not been operated for years, for the reasons stated by Mr. Converse, who was president of the tube company and thoroughly understood its worth- lessness, John D. Rockefeller and H. H. Rogers were directors ia the United States Steel Corporation. Finding that the corporation would not entertain the proposition of pajdng over a naillion dollars for a property which was valueless. Mr. Rogers stated: His company would construct its own pipe mills if arrange- ments satisfactory to his company could not be made with us. (See minutes executive committee July 15, 1902, MacRae Rept., p. 3648.) Immediately the Steel Corporation changed its attitude with refer- ence to the value of this Troy plant, as evidenced by the following entry in the minutes of the board of directors, January 6, 1903: A memorandum agreement was approved dated December 24, 1902, with A. C. Bedford, representing John D. Rockefeller, H. H. Rogers, and others, being the owners of a majority of the securi- ties of the Troy Steel Products Co., which company is the owner of the plant known as the Troy steel plant, not less than a majority interest to be purchased for the sum of 11,100,000, pay- ' able either in cash or ia the proposed second mortgage 5 per cent bonds. (MacRae Rept.,^ p, 3646.) After its purchase this plant was never operated, and is not totally dismantled and abandoned. The purchase of this company in no way added to the efficiency of the Steel Corporation, and the directors knew it at the time the purchase was made. There could have been no intention to have operated this plant, and the amount paid forr it was necessarily either a bonus taken from the assets of the Steel Cor- poration and presented to Messrs. Rogers, Rockefeller, and others without valid consideration, or it was with no other conceivable con- sideration, than to prevent this company from carrying out the threat 118 INVESTIGATION OF UNITED STATES STEEL COKPOKATION. previously made "to go into the tube business," vhich seems to have been the vuhierable point of attack in the opinion of Carnegie, Rocke- feller, and others when contemplating competition in any form with the Steel Corporation. TBADE AGREEMENTS. Many of the old and estabhshed : companies remaining after this process of elimination was completed entered into secret and iron-clad agreements by which the output of all the contracting parties was determined and each company's proportion of that output fixed and allotted, and such output was to be sold only according to a schedule of prices binding upon the contracting parties, and to carry out the agreement a commissioner was appointed and empowered to examine the books and ascertain the most intimate details of the business of these companies. To him they made regular and frequent reports, stating the amount of iron and steel produced and the price at which it was sold. This commissioner was authorized to imipose heavy fines and penalties in case of violations of any part of this agreement. In the event any of the contracting parties exceeded the specified allot- ment the profits on such sale were distributed among the other parties to the agreement. These agreements covered plates, structural shapes, shafting, wire, naUs, steel rails, and almost all other products. Copies of agreements entered into at various times between the Carnegie Steel Co., Jones & Laughlin, the Crucible Steel Co. of America, the Cambria SteelCo., the A. & P. Roberts Co., and other steel concerns will be found as Appendix B to this report. It is said by Judge Gary that he had no knowledge of any such conventions by subcompanies of the Steel Corporation. The com- missioner, however, asserts that these agreements were discontinued after a suggestion by Judge Gary that they were no longer advisable or necessary, but that he still continued to act as commissioner for several years afterwards. Houston and others of the Lukins Iron & Steel Co. testified before this committee to the same effect Such contracts could not, of course, have been entered into without the full knowledge and ap- proval of the presidents of the various companies manufacturing articles sold under them, and the organization of the Steel Corporation was such as to make it highly improbable that any arrangement of this kind could have been entered into without the consent and approval of the governing powers of the Steel Corporation. The authority and discretion of the presidents of the subsidiary companies was, in fact, exceedingly limited. No expenditure of over $10,000 cotlld be made by the head of any subsidiary company without the approval of the executive committee in New York. The directors of the Steel Corporation have at all times nossesscd the most intimate and accurate knowledge of the actions of the sub- INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 119 sidiary companies, and the presidents of these companies are required to report to the president of the United States Steel Corporation and to the board of directors all transactions affecting large expenditures of money or any change in policy whatever. The nature and extent of the control of the corporation over the affairs of the subsidiary concerns and the.duties of the presidents of these companies are set out in detail in the minutes of the United Stq.tes Steel Corporation. ' These companies, respectively, have complete organizations, including working committees composed of the presidents, vice presidents, managers, mill sup erintendeijts, etc., who are always m close touch with the affairs of the corporation with which they are connected, and .the presidents of the different companies fre- quently meet for interchange of views. The conclusions of the officers of subsidiary companies are reported to" different depart- ments of the United States Steel Corporation and recommenda- tions (but not instructions) frequently made by the latter to the former. This corporation, actmg through one or more of its managing officials, is in frequent communication ynth the presi- dents of subsidiary companies, respectively, concerning the busi- ness and business methods of aU subsidiary companies. If any question arises which involves a departure in any respect from general lines of pohcy which have been adopted, the same is brought before the executive committee of 'this corporation for consideration, determination, and advice. If any question of finance is involved, the action and determination of the execu- tive committee is referred to the finance coinmittee of this cor- poration for consideration, determination, and advice. If the executive committee is not in session at any time, the chairman of the executive committee possesses the powers of the committee. If the finance committee is not in session at any time, the chair- man of the finance committee possesses the powers of the com- mittee. It is very seldom that the chairman of either comipittee exercises the powers of the committee without action of the com- mittees, respectively, or at least the advice of a majority of the committee, except as to certain matters which have been particu- larly placed in charge of the chairman of the executive committee by this board. As an illustration of the method of transacting business, let it be supposed that one of the subsidiary companies is desirous of making a substantial expenditure for improvements, or of enter- ing into a contract of sale or purchase involving large sums of money, or of making some important change in poUcy, the officer, or manager, or superintendent who first suggests the proposed action will make recommendation to his superior officer, giving his reasons in detail. This will reach the president of the par- ticular company and be considered by his committee. After decision the subject is submitted to the president, or a vice presi- dent, or other officer, of the United States St^el Corpo;ration, and is brought before its executive committe^e for consideration. After the question has been considered by the executive com- mittee, if a question of money is involved (and generally if a question of policy is involved) the subject is taken by the chair- man of the executive committee (who is, ex officio, a member of 120 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. the finance committee) to the finance committee, and there con- sidered. Eecommendations which are decided upon by the executive committee or finance committee, or both, are reported to the president of this corporation, who in turn conveys intelli- gence of the same to the president of the company directly inter- ested. . Besides, the president and vice presidents and chairman of the executive committee and chairman of the finance com- mittee are in daily communication with one another concerning the various matters of business which are under consideration from day to day. (Minutes of the board of directors, Oct. 7, 1907, MacRae Kept., pp. 4330-4331.) After operating for several years under these agreements each coinpany acquired such an intimate knowledge of the business of its alleged competitors that it became unnecessary to enforce heavy penalties or to require any drastic regulation to compel the remaining companies to cooperate either by limiting the output or selling at a fixed price. Temple, the commissioner of the plate pool, describes the change of attitude by the partners of these companies to one another as a result of intimate association and the disciphne pre- viously enforced by the contracts under which they had been operating: Mr. Temple. As I said, at the beginning of those associations practically everybody wore a knife and tomahawk whenever they came to me. Every man's hand was against every other man. They had lived tlirough this period of intensive, not only destruc- tive but annihilative, competition, and some of them scarcely knew each other by sight. They had been led to believe they were pirates and thieves, and the fact they were all human beings merely endeavoring to make an honest living and run a success- ful business had not seemed to occur to them at all. After a very few meetings they commenced to get acquainted with each other, found they were all human, and the suspicion, the intense suspicion, amounting to almost certainty of intended fraud, ceased to be so apparent. So that at the end of the first year they were all good friends. Then they began exchanging actual information with each other. There was scarcely any question that one maker would ask another that he would not answer, even about the most intimate secrets of his business, his costsj and things of that sort. It made the steel business, so far as the people associated with those associations were concerned, rather a f amUy affair than one of destructive warfare. They had con- fidence in each other and confidence in the stability of the business. The Chairman. They began to practice what might be termed the golden rule among themselves. Mt. Temple. As I think any business concern will when they find that their competitors are men, and the greatest rascal I ever knew certainly appreciates a square deal from the other /ellow. The Chaibman. Who was the apostle of this new industrial re- ligion among these contracting parties ? INVESTIGATION OP UNITED STATES STEEL COEPOKATION. 121 Mr. Temple. I think at the beginning of the greatest harmon- izing influence in the whole lot was Mr. Schwab, who was presi-, dent of the Carijegie Steel Co. The Chairman. Those contracts were abrogated, were they not? Mr. Temple. In 1904 the contracts were all abrogated. Mr. Young. That is, the structural steel contract. Mr. Temple. And the plate. They were all abrogated in De- cember, 1904, and the whole thing wiped out. The Chairman. At whose suggestion ? Mr. Temple. We were informed at Mr. Gary's suggestion. The Chairman. Gary's ? Mr. Temple. Yes. ^ :t! if Hf ill it: Ht The Chairman. Could they maintain, by these gentlemen's agreements, that level of prices and prevent that destructive competition of which you spoke in the Carnegie regime ? Mr. Temple. They say the leopard can not change his spots nor the Ethiopian his skin; but the leopard does move from place to place, which, in one figure of speech, is a changing of spots. I would not presume to say how closely they could fol- low the rules they have learned under the bitter warfare preced- ing 1907 and, the different conditions from. 1897 to 1904, but I have not heard of any destructive competition since that time. (Hearings, pp. 1717-1719.) THE GABY DINNERS. Prior to 1907 the methods employed in restraint of trade were undergoing an evolutionary process. The old pooling agreements were annojdng in their requirements and dangerous in their opera- tion. As originally formed they exacted severe penalties for viola- tion of any of their terms; but a few years' experience showed that these agreements could be kept without imposing penalties. They were originally organized and conducted in direct violation of the law, with the consequent danger of prosecution and punishment. By 1905 the understanding between the members of these associa- tions had become so. perfect, confidence in each other so estabhshed, and observance of these agreements so habitual that it was deter- mined that it was no longer necessary to have written agreements as to what their respective shares of the business should be. Dur- ing 1905 and 1906, while they operated under the supervision of the same paid commissioner, they reHed upon frequent meetings, inti- mate acquaintanceship, frank interchange of opinions, and assur- ances to bring about the harmonious cooperation so much desired and to avoid the dangers of actual and active competition on the one side and -a plain and palpable violation of the law upon the other. In accomplishing these results, trade conditions during 1905, 1906, and the first nine months of 1907 were extremely favorable. AH 122 INVESTIGATION OF UNITED STATES STEEL COBPOKATIOJ)). sections of tlie country seemed to be enjoying a high degree of .prosperity, with a flattering prospect for its continuance; and this condition was reflected in the steel trade in an active demand for steel products, and the maintenance of steady prices was easy. In October, 1907, the panic came with its threatened paralysis of business and demorahzation of prices. It was Judge E. H. Gary who conceived the idea of extending to the entire steel industry the system of cooperation that had been so successful among the various groups remaining after the dissolution of the structural steel, steel plate, and other associations, and the Gary dinner was the agency devised. The first Gary dinner was given November 20, 1907 and. they con- tinued" at varyiag intervals until after this investigation was author- ized in 1911. Judge Gaxy before this committee gave an account of their origin and purpose as follows: Now, the question was how to get between the two extremes of securing a monopoly by driving out competition, however good-naturedly, in a bitter, destructive competition or without making any agreement, express or impHed, tacit or otherwise, which should result in the maintenance of prices j and so, gentle- men, I invited a large percentage of the steel interests of the country to meet me at dinner and then presented these views to them and, so far as I could, the results of our becoming demoralized and extreme decreases in prices like those which obtained under the old regime. Then, I said that it seemed to me the only way we could lawfully prevent such demoralization and maintaia a reasonable steadiness in business, whether we lowered the prices from time to time or not, whether depending upon circum- stances we were willing to make concessions or reductions after the jobbers had reheved themselves of the large lots, so as to prevept demorahzation, was for the steel people to come to- f ether occasionally and to tell one to the others exactly what his usiness was. In other words, a disclosure by each one to all others of all the circumstances surrounding his particular busi- ness. In other words, to state it simply, if three men, gentlemen on this committee, were practicing law in a certain town and each "one knew that the customary fee for services in court was $50 a day and a gentleman from another part of the country should locate in that town and make a totally different price, very much lower, he would immediately get up some sort of competition amongst tiiese professional men. If those three men, however, on this committee, were in daily conference and each one knew that the others did not propose to change the fees, probably this outsider would not make very much headway in creating a demoralization. (Hearings, p. 77.) At one of these dinners more than 90 per cent of the entire .iron and steel industry of the United States was represented. (HearingSj p. 1776.) At these dinners representatives of the press, except three trade papers, were excluded. (Hearings, p. 75.) INVESTIGATION OF UNITED STATES STEEL COEPOKATION. 123 The remarks of Judge Gary at the dinner given in December, 1908, and the various speeches made at the dinner' given in January, 1911, and at the luncheon of May 4, 1911, are given in the record of this committee. (Hearings, pp. 1773-1812.) Consideration of these remarks, keeping in mind the conditions under which they were made and what had gone before, leads us to the conclusion that the Gary dinners were devised to circumvent the Sherman antitrust law by avoiding direct and positive agreements in restraint of trade and yet to secure all the benefits involved in a restriction upon output and a maintenance of prices. For justification of this conclusion we submit the following excerpts from these remarks : At this particular time there is not in this country a demand for more than 50 per cent of the total producing capacity in our lines. It is obvious from this statement of fact that there is not enough business to go around, and that there ig no possible way of protecting one another and thereby protecting oneself except to submit ourselves to the conditions as they exist and to take and be satisfied with our fair proportion of the business which is ofl^ered. [Applause.] (Judge Gary, hearings, p. 1776.) In the following quotation Judge Gary explains the dilTiculties and dangers involved in any direct arrangement to interfere with the laws of trade and then stresses the fact that "we have something better to guide and control us in our business methods than a contract which depends upon written or verbal promises with a penalty attached." Now, in view of the fact that we have no right legally to enter into any arrangement by direct or indirect means which enables us to maintain prices, to divide territory, to restrict output, or in any way to interfere with the laws of trade or to stifle com- petition; in view of the fact that we can not legally, directly or mdirectly, do anything which may be construed to be in restraint of trade, and therefore are relegated to the one position of treat- ing each other on the basis of fair, just, and equitable treatment, it behooves us to use the greatest care in the exercise of our rights and in the transaction of our business, so as to make it. absolutely certain that day by day, and with reference to every transaction we are certain to recognize the rights of our competitors, otu- friends, and the obligations which we are under toward them. I say in this presence, to men who know by long experience — ■ men who know to a demonstration that what I speak is true and logical — that we have something better to guide and control us in our business methods than a contract which depends upon written or verbal promises with a penalty attached. We as men, as gentlemen, as friends, as neighbors, having been in close communication and contact during the last few years, have reached a point where we entertain for one another respect and affectionate regard. We have reached a position so high in our lines of activity that we are bound to protect one another; and when a man reaches a position where his honor is at stake, where even more than life itself is concerned, where he can not act or 124 INVESTIGATION OF TTNITED STATES STEEL COEPOEATION. fail to act except with a distinct and clear understanding that his honor is involved, then he has reached a position that is more binding on him than any written or verbal contract. [Applause.] (Hearings, pp. 1776-1777.) In the following quotation Judge Gary pays tribute to the spirit of mutual confidence among manufacturers of steel that had been developed, and rejoices that the point had been reached where each was willing to lay his business down upon the table for the inspection of his neighbors : Is it any wonder that such as I, coming a few years ago from another profession, having spent his time in other Unes of activ- ity, commg into this business without knowledge of the business or acquaintance with those connected with it, groping along in more or less imcertain paths, but eventually reaching the posi- tion which we have reached in our travels, so that we can nave and do havcabsolute confidence in one another, willing to lay our business down upon the table for the inspection of our neigh- bors — is it any wonder that I should be elated, that I should be happy, that I should be proud of the fact that I am associated with such as you; that in representing the interests of a large corporation I can do business with so many men of prominence, education, experience, high standing, and repute in the commu- nity, feeling all the time that I and the interests I represent are absolutely safe in your hands ? (Hearings, p. 1777.) Throughout the remarks of Judge Gary, as we interpret them, there is a skillful and ingenious effort to impress upon his guests that it was the purpose of the United States Steel Corporation, to maintain prices and that they were expected to do likewise. At the present time the question of maintaining or changing the prices of the commodities in which we deal is uppermost in our minds, because we read and hear about this question every day and almost every hour. I have been pained, I admit, from time to time, to read in the newspapers that the United States Steel Corporation carried a big stick, and was in the habit of inviting tne Independents, so called, to come together for the purpose of lecturing them, or, worse than that, of threatening them in case they proposed to reduce prices. I call upon you as witnesses to refute these insinuations. ****** * Now, my opinion is that it would be a mistake to reduce prices at this time; that it would do more harm than good; that instead of getting more business we would get less business; that the average purchaser, perhaps without exception, is not so much in favor of the reduction of prices as he is in favor of making it absolutely certain his prices are the same prices that another has to pay for the same commodity. * * * * * * ^. It is argued in some of the newspapers that we are making a . mistake in maintaining prices because we are keeping large numbers of our employees from work. 1 do not think the claim INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 125 is logical or reasonaBle. I doubt if we would get more business if we should reduce prices. (Hearings, pp. 1776-1777.) Those who followed Judge Gary at this dinner responded most generously to his protest against reductiofi of prices as shown by the following: WilUs L. King, general manager Jones & Laughlin Steel Co., and former treasurer of Steel Plate Association and Structural Association, said: I think, therefore, to talk of reducing the prices ought not to be considered for a moment. As Judge Gary has very properly said, it would not result in good to anyone, it would not result in more business to us, it would not do the public any good; there- fojre I hope it will be the consensus of opinion here to-night that we will maintain the present prices, which are fair and reasonable, and await with patielice the inevitable result which wiU, of course, be better business, and I think in the very near future. (Hearings, p. 1783.) E. C. Felton, president Pennsylvania Steel Co., said: Now, I think we have all had our eyes opened since the first meetings that were held here, and I hope we are going to keep our eyes opened, and are not going to shut them up to the situa- tion. If there is anybody who thinks the present business situa- tion win be improved, stimulated, by cuttmg prices he ought to consider just ojie branch of our business; he should look at the facts and argue from those facts. Let him look at the pig-iron situation. (Hearings, p. 1784.) John A. Topping, chairman RepubHc Iron & Steel Co., said: I am more convinced than ever that any efforts at this time to reduce prices with a view to stimulating consumption will be met in about the manner that Mr. Felton has illustrated. The price line will go down much faster than the production line will go up. (Hearings, p. 1784.) E. A. S. Clark, president Lackawanna Steel Co., said: While I think it is well to coach salesmen, we must put into . them the very same spirit I think we aU have here, that we are in honor bound not to change our prices without letting the' other man know it, because then the salesman knows that he has an answer to give to that proposition. (Hearings, p. 1785.) C. S. Price, president Cambria Steel Co., said: I will only speak of the business situation, and indorse the fact- that I consider it very inopportune at this time to make any change in prices. (Hearings, p. 1786.) A. F. Huston, president Lukens Iron & Steel Co., said: We are aU of the same opinion about the maintenance of {)rices. I heard the remark made by a prominent steel man ast month. He said he had never seen a genuine bujong move- ment without first a decided drop in prices to stimulate it. I have been thinking of that a good deal since. He probably 126 INVESTIGATION OP UNITED STATES STEEL COKPOKATION. never saw anything else in the past. I do not remember at any time when a genuine buying movement started when there was not a drop in the price, before we stood together. (Hearings, p. 1791.) L. A. Kelly, president Ashland Steel Co., said: I heartily cooperate in everything that has been said here to-night, and so far as our company is concerned we are ready and w illin g to still cooperate to do what we can to maintain prices. (Hearings, p. 1795.) Accepting this dinner of January, 1911, as fairly typical of the rest and the things said and done there as fairly representative of the things said and done at the others, we think the conclusion is irre- sistible that the Gary dinners were instituted as a means of conveying to the entire steel and iron industry information as to what the attitude of the United States Steel Corporation was upon the ques- tions of output and prices and of impressing upon aU engaged in the industry that it was the part 'of wisdom and prudence to govern themselves accordingly. We further believe that by this means prices were maintained, output restricted, competition stifled, and trade restrained, just as certainly, just as effectively, and just as unlawfully as had been doneunder the discarded pooling agreements of former years. LABOR. The evidence submitted to the committee on the matter of labor is instructive and impressive. A most important economic fact brought out and too often over- looked is that the true measure of a man's work is the tonnage pro- duced per man per day, and not the mere amount of wage paid. The true economic unit is the tonnage produced per man, and not the wage paid per man. This is a most important fact, never to be lost sight of in the all-important question of cost production. A most muminating piece of reliable information on this point is the report of the secretary of internal affairs of the State of Pennsyl- vania on the production and cost of fig iron, which we quote for the years 1902 and 1909, in order that comparison may be made: Pig iron in Pennsylvania. [Beport of secretary of Internal aflairs, 1902, p. 403; 1909, pp. 255-2S6.| 1909 Production (gross tons) Keallzcd value Average realized value per ton Value of baalc material; ore, scrap ore, cinder only (fuel, limestone, and other expenses not considered) Same per ton Average number of days in operation in 1902 Total number of workmen employed Aggregate wages paid Average earnings per year for each man Average dally wage Cost of labor per ton Tonnage per man per day 8,111,642 $126,857,231.00 SIS. 64 J61,634,972.00 J7.60 314 17,101 $10,191,759.00 $595. 97 $1.89 $1.26 1.51 10,721,024 $186,963,842.00 $17.44 $89,144,483.00 $8.31 300 14,921 $8,762,304.00 $627.20 $2.09 $0.82 2.3'.) INVESTIGATION OF UNITED STATES STEEL COKPOBATION. 127 It will be seen from the above report that in 1909, 14,921 men pro- duced 10,721,024 tons of pig iron, as against 8,111,642 tons produced in 1902 by 17,101 men. Who got the benefit of this enormous increase in production ? True, there was some increase in the wages. In 1902 the average earnings per year for each man was $595.97, while in 1909 the average earnings per year for each man was $627.20, an increase per man per year of $31.23. Or, to put it in daily wages, an increase of from $1.89 m 1902 to $2.09 in 1909 — an increase of $0.20 per day. But, observe the increase in production, and the decrease in cost of labor per ton, ' ' the true measure," according to Mr. Schwab. In 1902 the cost of labor per ton was $1.25, while in 1909 it was only 82 cents. Again, observe the tonnage produced per man in 1902 and 1909. In 1902 the tonnage per man was 1.51 tons, while in 1909 it was increased to 2.39 tons per man. In other words, not only was the cost of labor per ton reduced from $1.25 to $0.82, but at the same time the tonnage per man produced was increased from 1.51 tons to 2.39 tons.' In 1902 the manufacturers produced 8,111,642 tons of pig iron at a cost of labor per ton of $1.25; while in 1909 they produced 10,721,024 tons of pig iron at a cost of labor per ton of $0.82. In 1902 the aggregate wages paid to produce 8,111,642 tons of pig iron was $10,191,757, while in 1909 the aggregate wages paid to pro- duce 10,721,024 tons was $8,762,304, a saving to the manufacturers in labor cost of $1,429,455. Furthermore, the realized value of the 8,111,642 tons produced in 1902 was $126,857,231; while the realized value of the 10,721,024 tons produced in 1909 was $186,963,842, an increase- for the manu- facturers of $60,106,611 in realized value. On the other hand, what did labor get in the same period ? In 1902 the average earnings per year for each man was $595.97, while in 1909 it was $627.20, an increase per man of $31.23 per year, and as the table shows, an increase in average daily wage from $1.89 to $2.09, or $0.20 per day. This shows a slight increase per man in wages between 1902 and 1909. But how about the total? In 1902 there were employed 17,101 men; in 1909, 14,921 men, a decrease of 2,180. men employed. In 1902 the aggregate wages paid were $10,191,759; in 1909 the aggregate wages paid were $8,762,304, a decrease in wages paid of $1,429,455. That these statistics of the report of the secretary of internal affairs are correct is corroborated by Mr. Schwab, former president of the Steel Corporation, by his sworn testimony, on page 1356, as follows: The Chairman. The average daily wage in 1902 was $1.89. Is that about the rate for men working around pig iron ? Mr. Schwab. Yes ; I think so. The Chairman. In 1909 it was $2.09 ? Mr. Schwab. Yes. The Chairman. Is that about your average wage ? Mr. Schwab. I think so. The Chairman. The cost of labor per ton, then, in 1902 was $1.25. Is that about right? Mr. Schwab. Yes, sir. 128 INVESTIGATION OF UNITED STATES STEEL COKPOKATION. The Chairman. And in 1909 it was 82 cents. Is that about right? Mr. Schwab. I should imagine that was about right. The Chaieman. The tonnage per man per da,j, which you say is a true measure of the value of a man's work, m 1902 produced 1.51 tons of pig iron, atnd in 1909, 2.39 tons of pig iron. Is that about right 1 Mr. Schwab. I should judge that was about right. LABOR tTNIONS. The attitude of the United States Steel Corporation toward organ- ized labor was early determined. On June 17, 1901, six weeks after the Steel Corporation was organized and began operations, a meeting of the executive committee was held in New York City. At this meeting Mr. Charles Steele, then a member of the firm of J. P. Mor- gan & Co., and also a member of the executive committee of the Steel Corporation, was present. The question of the attitude of the corporation toward organized labor was extensively discussed at this meeting. As a final result of the deliberations of the executive committee, Mr. Steele brought forward the following proposition, which the records show was finally voted upon, and the president of the Steel Corporation instructed to convey it to the presidents of the subsidiary companies, to wit : That we are unalterably opposed to any extension of union labor and advise subsidiary companies to take firm position when these questions come up and say that they are not going to recog- nize it, that is, any extension of unions in mills where they do not now exist; that great care should be used to prevent trouble and that they promptly report and confer with this corporation. Following that declaration, the evidence clearly shows how Amer- ican laborers felt. Justly or unjustly, they considered themselves persona non grata in the works of the United States Steel Corpora- tion. Thereafter the great bulk of American union laboring men in the iron and steel industry understood they were not wanted at the works of the United States Steel Corporation. The process of fillin g the places of these union laborers is interesting and important to observe. American laborers loyal to their unions could not be had. Something had to be done to get laborers. Southern Europe was appealed to. Hordes of laborers from Southern Europe poured into the United States. They were almost entirely from the agricultural classes, knew absolutely nothing about iron and steel manufacture, but were sufficient to fight the labor unions. They were absolutely unskilled, but they could work, especially as common laborers. In times of special necessity even advertisements for foreign help of this class were spread broadcast. A sample of these advertisements, which the evidence shows were caused to be circulated by subsidiary companies of the Steel Corporation, is as follows: INTESTIGATION OF UNITED STATES STEEL CORPORATION. 129 Wanted. — Sixty tin house men, tinners, catchers, and helpers to work in open shops; Syrians, Poles, and Roumanians preferred; steady employment and good wages to men willing to work; fare paid and no fees charged for this work. Central Employ- ment Bureau, 628 Pennsylvania Avenue. This advertisement appeared, as the evidence shows, in the Pitts- burgh Gazette-Times of July 14, 1909. (See page 3074 of hearings.) The result is that about 80 per cent of the unsldlled laborers in the steel and iron business are foreigners of these classes. With the benefit of a skilled American foreman such a crew can work out results in unskilled labor production. The profits of this system of labor employment go to the Steel Corporation, while the displaced American workman shifted as best he could. Following the elimination of union labor, and the introduction of the above-described foreign laborers, an investigation was made as to the conditions of laborers, hours of labor, home life, etc. As to the hours of labor, the evidence before the committee was conclusive that long hours of labor prevailed in the iron and steel industry, espe- cially in the unskilled departments. Under the direction of the United States Commissioner of Labor, a very careful and thorough investigation as to the hours of labor in thg steel industry has been made. From this oflBicial report we quote without comment: During May, 1910, the period covered by this investigation into the steel industry, 50,000 persons, or 20 per cent of the 153,000 employees of the blast furnaces, steel works, and rolling mills covered by this report, customarily worked seven days per week, and 20 per cent of them worked 84 hours or more a week, which, in effect, means a 12-hour working day every day in the week, including Sunday. This hardship of 12-hour days and a 7-day week is still further increased by the fact that every week or two weeks, as the case may be, when the employees on the day shift are transferred to the night shift, and vice versa, employees remain on duty with- out relief either 18 or 24 consecutive hours, according to the practice adopted for the change of shifts. The most common plan to effect this change of shift is to work one shift of employees on the day of change through the entire 24 hours, the succeeding shift working the regular 12 hours when it comes on duty. (See page 2837, hearings.) While we deem it unnecessary to quote the testimony of other wit- nesses it is true, as the testimony shows, that they fully corroborate these statements of the United States commissioner, and, m fact, some of the witnesses are much stronger in their statements. As to the daily lives and conditions of living of these laborers, the testimony taken is voluminous, far too extensive to even summarize in this report. The testimony certainly shows conditions undesirable, and far below what is ordinarily understood to be the American stand- ard of living among laborers in our country. Some of the details are 54940°— H. Kept. 1127, 62-2 9 130 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. revolting, both as to sanitary and moral conditions. Taking the ordinary family as a unit, the wages paid, even if the head of the family is constantly employed, are barely enough to provide sub- sistence. THE COMPANY SUPPLY STORE. As bearing on the question of employes, the policy of the Steel Corporation in regard to the establishment of the company supply stores is important. The evidence before the committee shows that it is the custom of the company where steel and iron plants are estab- lished and towns and villages grow up around the company's plants, through a subsidiary company known as the Union Supply Co., to open stores to supply its employees with groceries, provisions, and almost every article of household necessity, together with powder, , fuse, and other supplies — in fact everything the employees need, either to live or conduct their operations as employees of the company. . The local grocer, baker, meat and fish dealer, apothecary, black- smith, carpenter, coal, wood, and other dealers are thus brought into direct competition with the Steel Corporation stores. It may be said that this is only the application of fair and free competition. But this is not wholly so. The company stores have great advan- tages. They deal with tteir own employees, who constitute 90 per cent of their custom. To be sure the employees are not obliged by any law or rule of the company to buy at the company store, but it is undoubtedly true that they aU understand they wiU be the better considered for doing so. The company supply store knows just what is coming in wages every day and week to each employee who deals at the company store. No other local competitor has the benefit of this information. This enables the company's supply store to extend credit only to the extent of wages actually due or earned. The result is practically an actual cash business, with no losses in bad debts. The fact that the Steel Corporation does not attempt to maintain these supply stores except where it deals with its own employees, shows pretty conclusively that it has no desire to engage in such trade under ordinary conditions in ordinary competition. It limits its stores to places where it deals almost wholly with its own employees. The profits made and dividends declared to the Steel Corporation by this system of supply stores we think are pertinent and suflacient to show a prosperity entirely out of the ordinary. This supply company was organized in March, 1902, about a year after the Steel Corporation itself. Its capital stock is $500,000. Its corporate name is Union Supply Co., and it is one of the subsidiary companies of the United States Steel Corporation. INVESTIGATION OF UNITED STATES STEEL OOKPOKATION. 131 In 1903, this $500,000 subsidiary corporation declared a dividend of $250,000, and in subsequent years as f oUows : 1904 $250, 000 1905 405, 000 1906 '. ■ 805, 000 1907 _. : 500, 000 1908 '. 320, 000 1909 440, 000 1910 520, 000 It will thus be seen that this corporation earned and paid its parent company, the United States Steel Corporation, in dividends a total of $3,490,000 in eight years on retail supplies sold almost whoUy to its own employees. The following table shows these dividends in detail: Dividends declared hy Union Supply Co. ^ Date of meeting when declared. Per cent. Amount for divi- dends. Date of meeting when declared. Per cent. Amount for divi- dends. 1. May 27, 1903.. 2. Sept. 23, 1903. 3. Dec. 28,1903.. 4. Uar. 23, 1904.. 6. June 22, 1904.. 6. Aug. 24, 1904. 7. Oct. 26,1904.. 8. Dec. 28, 1904.. 9. Feb. 22, 1905.. 10. May 24, 1905.. 11 July 26, 1905.. 12. Aug. 23, 1905.. 13. Sept. 27, 1905. 14. Oct. 28,1905.. 16. Nov. 18, 1905.. 16. Jan. 22,1906.. 17. Feb. 21,1906. 18. Mar. 21,1906. 19. Apr. 18,1906. 20. Ifayie, 1906.. 21. June 20, 1906. t50,000 100,000 100,000 250,000 50,000 50,000 50,000 60,000 50,000 38. Jan. 15, 1908... 39. Feb. 19,1908.. 40. Apr. 15, 1908.. 41_May 20, 1908.. 42. July 15, 1908.. «. Sept. 16, 1908.. 44. Nov. 18, 1908.. $40,000 40,000 40,000 40,000 40,000 80,000 40,000 320,000 250,000 .50,000 75,000 75,000 100,000 35,000 35,000 35,000 405,000 35,000 35,000 35,000 35,000 75,000 40,000 265,000 22. July 18, 1906.. 23. Aug. 15, 1906.. 24. Sept 19, 1906. 25. Sept. 27, 1906. 26. Nov. 21, 1906.. 27. Dee. 20, 1906.. 28. Jan. 9, 1907... 29. Feb. 20,1907.. 30. Mar. 20, 1907.. 31. May 15, 1907.. 32. June 19, 1907.. 33. July 17, 1907.. 34. Aug. 21, 1907.. 35. Sept. 18,1907. 36. Nov. 20, 1907. 37. Dec. 18,1907.. 80,000 40,000 40,000 60,000 40,000 45,000 47. Jan. 13, 1909.. Feb. 17,1909.. Apr. 21, 1909.. May 19, 1909.. June 16, 1909.. July 21, 1909.. Aug. 18,1909.. Sept. 16, 1909. Got. 20,1909.. Nov. 17, 1909.. Dec. 15, 1909.. 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 440,000 Jan. 12, 1910. . Feb. 16,1910.. Mar. 16, 1910.. Apr. 20, 1910.. May 18, 1910.. June 15, 1910.. July 19, 1910.. Aug. 17, 1910.. Sept. 21, 1910. Ool 19,1910.. Nov. 16, 1910.. Dec. 21,1910.. 550,000 40,000 40,000 40,000 80,000 40,000 80,000 40,000 40,000 40,000 60,000 600,000 68. Jan. 24, 1911.. 69. Mar. 15,1911.. 70. Apr. 19,1911.. 71. May 17, 1911.. 72. June 21, 1911.. 73. July 18, 1911.. 74. Aug. 16,1911.. 76. Sept. 20,1911. 40,000 40,000 40,000 80,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 520,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 320,000 132 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. OWNERSHIP OF COMMON CARBIEBS. The Steel Corporation, in the conduct of its business, has obtained control of various railway and steamship lines by which its raw material is transported from the ore beds of the Northwest to the plants of the corporation. Much of the ore consumed by the com- petitors of the corporation is carried over these various lines of transportation. These transportation facilities are of three classes, viz, raUroads, lake vessels, and docks for the transshipment of ore from vessels to railways. The corporation owns two railroads operating in the lake ore-min- ing district, known as the Mesabi Range, viz, The Duluth, Missabe & Northern Railway and the Duluth & Iron Range Railroad. It likewise owns the largest fleet of ore-carrying vessels of the Great Lakes, which is operated under the name of the Pittsburgh Steam- ship Co. At the ports upon Lake Ejie it owns or operates docks for the transshipment of ore destined for points beyond, the more im- portant of vhich, perhaps, is the Pittsburgh & Conneaut Harbor. This dock handles all the ore moved over the Bessemer & Lake Erie, likewise owned by the corporation, which railroad furnishes the means of carrying the ore from the lake port to the Pittsburgh district, where it is turned over to the Union Railroad, a belt line and another subsidiary of the Steel Corporation, which serves its various plants in that district. In addition to the lines of railway the corporation has other im- portant railway properties which are useful in transporting ore, par- ticularly in the Chicago district where it owns the Elgin, Joliet & Eastern, which railroad has absorbed and now operates what was formerly known as the Chicago, Lake Shore & Eastern, forming the connection with the docks and plants of the corporation in the vicinity of Chicago and with trunk lines east and west. The corporation also owns several terminal lines at other points, viz. The Newburgh & South Shore at Cleveland, Ohio, the Lake Terminal at Lorain, Ohio, and the Birmingham Southern at Bir- mingham, Ala. Through these various lines the corporation is able to transport its ore, or the great bulk of it, from the mines to the blast furnaces. For instance, taking the year 1910, there were transported that year 45,000,000 tons of ore from the Northwest or lake region of which the corporation, by its two railroads in the ore territory moved 28,000,000 tons, or 67 per cent. During that same year the corpora- tion carried over its water line about 50 per cent of the ore. In the Pittsburgh district practically all the ore used by the corporation is hauled over its own line of railway— Bessemer & Lake Erie — from Conneaut Harbor. The making of rates upon ore is by agreement among the railroads, and though a denial has been entered that the corporation rail lines INVESTIGATION OF UNITED STATES STEEL COKPORATION. 133 have been parties to the making of such rates, the fact remains that they have been beneficiaries of high rates which have been maintained upon ore, both in the initial haul to the docks at Dtiluth and in the final transportation from the docks on Lake Erie. There has been no consistency in these rates as, for example, the Pittsburgh territory is charged 96 cents for an approximate haul of 135 miles while Wheeling, distant 160 miles, is charged, via the same lines, but 60 cents per ton. Of course to the extent that an unreasonable and highly profitable charge is made upon ore by the various carriers to that extent is the Steel Corporation benefited when it transports its own ore, thereby reaping the profit which accrues upon the rail or water movement. Various estimates have been made as to the actual benefit, as reflected in the cost of producing a ton of pig iron, which the Steel Corporation has profited by reason of its ownership of transportation lines. Just what the actual figures may be as to the advantage of the corporation in this regard is not so important as is, the iindisputed fact that it does have a conceded advantage over its competitors by reason of its ownership of these lines of transpor- tation. As illustrating this fact it may be said that the rates for' transporting ore by rail from the mines to upper lake ports were, until June, 1911, 80 cents and $1 per gross ton over the respective lines of railroad owned by the corporation. These rates have since been reduced and leveled to 60 cents per gross ton, which is a plain confession of the fact that these rates have been exorbitant in the past. It is fairly deducible from the pubhc reports of these lines that the 60-cent rate is still excessive. The profits of the steamship line and the dock company at Conneaut are shown by the record to be excessive. Particularly is this true of the profit on the dock, which is grossly out of proportion to the cost of conducting the business and a fair return upon the value of the property used therefor. Likewise we may say that the profits for the carriage of this ore over the Bessemer & Lake Erie and its terminal, the Union Railroad, are unjustifiable. The benefits due to the owner- ship and operation of these transportation lines is clearly reflected in the earnings of the corporation and may be traced through all its operations until it finally reaches the form of a dividend. Independent competitors of the Steel Corporation have complained bitterly against the corporation's operation of transportation lines, and have made it clear that the advantage which is derived by the corporation as a result of such ownership is a serious handicap to them in the competitive market. There is no question that public interest requires a segregation of railroads and the Steel Corporation. The control of such public agencies by an industrial corporation carries with it, on addition to the advantages which this record discloses, possibilities of even greater abuses. 134 INVESTIGATION OF UNITED STATES STEEL C0EP0R4.TI0N. By reason of the ownership of the Union Raihoad in the Pittsburgh district the corporation derives an allowance out of the rate on all coBomodities inbound and outbound from the mills of the corporation. Upon raw materials for use at the plants of the corporation the Union Railroad receives 10 cents per ton and on all finished materials out- bound from the mills the railroad receives 15 cents per ton. By substituting the Bessemer & Lake Erie for the Union Railroad, as convenience or interest may suggest, that railroad company receives a percentage of the rate on outbound shipments from the corporation's mUls, amounting, in some instances, to a very substantial part of the rate. The Elgin, Joliet & Eastern also receives rate divisions on raw materials destined for the Steel Corporation far in excess of what the Interstate Commerce Commission has, after investigation, said is fair an J just compensation, and much greater than is received by the Indiana Harbor Belt, a raUroad-owned termiaal, for an identical service. The record suggests many devices and practices which, while they may not all be strictly in violation of the Federal act to regulate commerce, nevertheless result in unfair advantages to the corporation. It is only fair to say that the ofl&cials of the trunk lines are not willing parties to these practices, but are either induced by self-interest or fear of loss of traffic to concede advantages or else are forced by reason of competitive conditions to make these concessions. With respect to the strictly terminal lines owned by the corporation, a reference to the statistics in the record of these terminal lines will show that their business is almost entirely the business of the industry owning them, and they derive an immense revenue for handling their own traffic, which must necessarily yield to the owner a profit entirely out of proportion to the cost of performing the service. Here again the carriers have been struggling with the proposition of how to curtail the terminal road in its demand for divisions of rates. Efforts have been made to ascertain from the various viewpoints as to how industrial-owned terminals should be treated. There is in the record the opinions of shippers, traffic experts, high railway officials and of the Interstate Commerce Commission, all of whom condemn the practice of making allowances to industrial-owned terminal roads and each of them suggest a separation of such in- terests. It seems that there is necessity for a more definite rule of law to guide the Interstate Commerce Commission in determining how these roads shall be regarded and how they shall be treated. Necessarily in this report it is impossible to set forth all the specilic examples of the benefits derived by the corporation from its owner- ship and operation of transportation lines, or to point out all the possibilities for mischief which might accrue by reason of such con- INVESTIGATIOK OF UNITED STATES STEEL CORPORATION . 135 trol of lines, in view of its ability under the statute to control the routing of its shipments. The immense tonnages of the corporation running high into the millions and meaning vast sums of money to carriers, taken in connection with the power of the corporation to route such shipments and the fact that it owns railroads which may be beneficiaries of the power of the corporation to demand and receive percentages of rates, and through various other devices, is sufficient to indicate the great importance of this subject. The record is replete with positive affirmations of this character, as well as with suggestions from which inferences may be easily drawn. It was also developed in the record that when Congress inserted the "commodities clause" in the act to regulate commerce it aimed only at one feature of the proposition. Though the statute seems to have miscarried, as it was formed it only forbade railroads from owning industrials. The record of this investigation suggests that when that statute is reconstructed it should likewise forbid an indus- trial from owning a railroad as far as Congress has power. The two branches of business are clearly distinct and, for the common good, should be entirely divorced each from the other. If there is any economic reason why an industrial should own a rail line, the bene- fits of which come to the industry by reason of such economy will be sufficient without making it allowances out of the rates of the regular carriers. This suggests that the difficulty has been in determining just what duty the carrier owes and, therefore, what it might be required to perform in connection with making dehveries to or receiving shipments from industrial plants. As far as it is possible under the Constitution this ought to be obviated by an amendment to the statute forbidding any industrial from receiving any part of a rate as compensation for any services performed by it. The suggestions herein are but another step toward the eradi- cation of the evils which have grown up in transportation and as a result of our remarkable industrial development. That it is an evil seems to admit of no denial. The practice is complained against by all parties except the immediate beneficiaries thereof. The evil effect of the ownership, operation, and manipulation of common carriers by industrial corporations has attracted the atten- tion of the Interstate Commerce Commission. The fact that so many of the practices the commission unequivocally condemns are not at present specifically prohibited by law is in itself abundant proof that the laws regulating the operation of railroads by such concerns need immediate and radical revision. Says the commission: The evils most difficult to detect and to prove to-day are those arising out of the community of interest of certain carriers and industrial corporations. The ownership of industrial corpora- tions by earners and of carrier corporations by industrials is frequently taken advantage of to defeat that equality between shippers which the act contemplates. This is accomplished by 136 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. imreasonable diTision of joint rates forced upon the carrier by powerful shippers who control industrial railroads. Such ar- rangements may be legal in form, although certainly illegal in effect. We find that a certain number of large industrial con- cerns control tracks and terminal facilities nominally owned by small railroad corporations which do not rise to the dignity of common carriers, but which are treated as such by the connect- ing carriers. As a result the connecting carriers make a switch- ing allowance or a division of the joint rates to such terminal lines, which practice unquestionably results in the discrimina- tion and places the industrial at an advantage in the market. Another form of discrimination is found in the leasing of prop- erty by carriers to shippers for a nominal consideration with a further agreement that all shipments made by the lessee shall be routed over the lines of the lessor, etc. A thorough understanding of the inequitable advantages which accrue from industrials owning or operating common carriers over less fortunate competitors can be best understood by a study of concrete instances. As has been shown, the great mass of available ore is found in the Lake Superior district and the greater part of this ore is taken from the Mesabi and Vermihon Ranges. The only outlet for this ore is over the Great Northern, the Duluth & Iron Range, and the Duluth &Missabe Railroads. The Duluth & Iron Range and the Duluth & Missabe are both the property of the United States Steel Cor- poration. The close relation previously existing between the Hill interests and the United States Steel Corporation has already been discussed at length. Until very recently the rate over all of these roads was 80 cents a ton. This ore is shipped from the docks at Superior, Two Harbors, and Duluth. The bulk of this ore is then transported from these docks by water to points commonly known as the lower lake ports — Conneaut, Erie, and Ashtabula. The ore destined for the Steel Corporation's miUs is in the main trans- ported by the Bessemer & Lake Erie. It will be seen that the corporation owns facihties for the transportation of its ore from the time it leaves the mine until it reaches the blast furnace. The cost of transporting this ore over its own roads and steam- ships is, of course, not measured by any freight rate but by the actual expense incident to the operation, and where the corporation handles a like traffic for its competitors, an excessive charge is essentially a tribute levied upon those who are forced to make use of the trans- portation facihties of the Steel Corporation. The capitalization, operation, and profits of these roads are given in detail in statements made to the Interstate Commerce Commission. An inspection of these statements reveals the immense profits earned by these ore roads during the last ten years. These statements showing the Capi- talization, operating expenses, revenues, and income of the Duluth & Missabe, the Duluth & Iron Range, and the Pittsburg, Besse- mer & Lake Erie Railroads are as follows : IN\rESTIGATION OF UNITED STATES STEEL COKPORATION. 137 • Statement compiled from annual reports of Duluth, Missabe & Northern Ry. Co., 1911 to 190t. Item. Capital stock outstanding at end of year Funded debt outstanding at end of year Single-traok mileage owned at end of year, mam line _^^_ Single-track mneageowned'at'end of "jw, branches and spurs Total single-track mileage operated at end of Total operating revenues'!!!!]] Total operating expenses Total net revenue Net corporate income !.!.!!!...!.!!!!! Other disbursements from net corporate mcome _ Balance for year carried forwaid to credit of pront and loss Dividends declared from surplus !!!'!! Bate per cent of dividend. t4,112,S0O J13,101,000 186.84 139.60 328.34 (10,233,143.45 t4, 158,871. 72 ta, 074, 271. 73 14,594,876.48 $4,594,876.48 $5,140,625.00 125 1910 $4,112,500 $13,101,000 168.86 127.05 297.81 $14,055,994.68 $4,231,965.54 $9,824,029.14 $8,494,097.56 $8,494,097.56 $9,870,000.00 1909 $4,112,500 $13,101,000 168.86 118.17 $10,124,856.82 $3,399,481.69 $6,725,375.13 $5,814,212.59 $90,845.34 $5,723,367.25 $5,963,125.00 145 Item. Capital stock outstand- ing at end of year Funded debt outstand- ing at end of year Single-track mileage owned at end of year, main line Single-track mileage owned at end of year, branches and spurs... Total single-track mile- age operated at end of year Total gross earnings from operation. Total operating e x - Income from operation . Net income Dividends Rata per cent of divi- dend Surplus from opera- tions of year $4,112,500 $9,043,000 168.86 102.39 273.15 $9,389,135.93 $3,542,634.40 $5,846,501.63 $5,023,286.30 $5,023,286.30 $4,523,750.00 110 1907 $4,112,500 $9,043,000 48.62 195.95 246.47 $10,981,893.61 $4,215,170.34 $6, 766, 723. 27 $5,738,686.17 $5,738,686.17 $4,112,500 $9,043,000 48.62 190.19 187.71 $8,368,489.01 $2,977,746.83 $5,390,742.18 $4,291,706." $3,403,750.00 110 40 $887,956.36 1905 $2,512,500 $8,323,000 48.62 132.35 182.87 $6,333,817.49 $2,2S3,'146.2g $4,050,671.20 $3,194,934.09 $3,194,934.09 $2,512,500 $8,323,000 48.62 120.94 171.46 1,701,416.85 ,836,484.51 ,864,932.34 ,142,431.66 1,768,750.00 150.00 $2,626,318.34 $2,512,500 $8,323,000 48.62 112.71 163.23 $5,116,530.01 $1,901,284.33 $3,215,245. $2,396,655.00 $2,396,655.00 1902 $2,512,500 $8,323,000 48.62 102.33 152.85 $3,755,416.21 $1,476,525.30 $2,278,890.91 $1,489,283.44 $1,507,500.00 60.00 $18,216.56 Statement compiled from annual reports of the Duluth & Iron Range R. R., 1911 to 1902. Item. 1911 1910^ 1908 Capital stock outstanding at end of year Funded debt outstanding at end of year Single-track mileage owned at end of year, main line Single-track mileage owned at end of year, branches and spurs Total single-track mileage operated at end of year Total operating revenues Total operating expenses .» — Total net revenue Net corporate income Other disbursements from net corporate income. Balance for year carried forward to credit of profit and loss Dividends declared from surplus Rate per cent of dividend $3,000,000 $13,151,000 190.88 71.73 263.41 $7,430,835.08 $3,211,358.42 $4,219,476. $3,098,558.81 $3,000,000 $13,151,000 168.45 63.02 232.27 $9,597,773.83 $3,540,742.42 $6,057,031.41 $4,438,651.04 $3,098,558.81 $4,050,000.00 135 $4,438,651.04 $3,000,000.00 100 $3,000,000 $13,151,000 167.78 56.03 224.61 $6,915,368.92 $2,695,276.24 $4,220,092.68 $2,864,028.04 $76,051.41 $2,788,876.63 $4,350,000.00 145 $3,000,000 $13,151,000 167.78 < 61.51 230.09 $6,267,821.48 $2,765,252.10 $3,502,569.38 $2,284,645.42 $217,182.98 $2,067,462.44 $3,600,000.00 120 138 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. Statement compiled from annual reports of the Duluth & Iron Range R. R., 1911 to i902— Continued. Item. 1906 1904 1903 Capital stock outstand- ing at end of year Funded debt outstand- ing at end of year Single - track mileage owned at end of year, mainline Single - traidc mileage owned at end of year, branches and spurs Total single-track mile- age operated at end of year Total gross earnings from operation Total operating expenses Income from operation. . New income Dividends Rate per cent of divi- dend Surplus from operations of year 13,000,000 {11,232,000 161.06 49.20 $3,000,000 lU, 232, 000 161.00 13,000,000 $11,232,000 161.06 $3,000,000 $11,232,000 161.06 $3,000,000 $11,232,000 161.06 211.06 $8,171,484.00 $3,274,320.66 $4,897,163.34 $3,435,897." 50.63 212.49 $3,435,897.33 $7,757,635.88 $2,575,317.07 $5,182,318.81 $3,778,038.09 $3,150,000.00 105 $628,038.09 211.63 $6,710,681.84 $2,224,444.97 $4,486,236.87 $3,169,333.11 $3,169,333.11 211.63 $4,033,215.83 $1,839,014.81 $2,164,201.02 $1,032,047.75 $4,500,000.00 150 $3,467,952.25 210.34 $6,031,878.90 $2,252,635.07 $3,779,243.83 $2,566,170.55 $3,000,000 $11,232,000 152. S6 57.39 210.75 12,566,170.55 $5,934,868.25 $2,155,234.49 $3,779,633.76 $2,613,403.67 11,800,000.00 $813,403.67 Statement compiled from annual reports of the Bessemer & Lake Erie R. R. Co., 1911 to 1902. Item. 1911 1910 Capital stock outstanding at end of year Fimded debt outstanding at end of year Single-txack mileage owned at end of year — main line. Total single-track mileage operated at end of year Total operating revenues Total operating expenses Total net revenue Net corporate income Other disbursements from net corporate income. Balance for year carried forward to credit of profit and loss : Dividends declared from surplus Rate per cent of dividend , $500,000 $4,540,000 8.87 212.64 $7, .IIS, 628. 00 $4,839,321.26 82,679,306.74 $499,590.95 $600,000 $4,030,000 8.87 213.41 $7,888,021.31 $4,159,663.80 $3,728,357.51 $1,672,529.99 $500,000 $4,070,000 8.87 210.05 $6,060,454.16 $3,640,958.59 $2,519,495.57 $779,339.31 $499,590.95 $760,000.00 150 $1,672,529.99 $760,000.00 150 $779,339.31 $250,000.00 SO $500,000 $3,530,000 8.87 210.05 $5,352,043.36 $3,223,926.93 $2,128,116.48 $404,189.53 $630,000.00 $225,810.42 Item. 1907 1906 1905 1903 1902 Capital stock outstand- ing at end of year Funded debt outstand- ing at end of year Single-track mileage owned at end of year — mainline Total single-track mile- age operated at end of Total gross earnings from operation Totel operating expenses Income from operation. . Net income Dividends Rate per cent of divi- dend Surplus from operations of year $500,000 $3,530,000 8.87 210.05 $6,399,323.16 $3,341,622.80 $3,057,700.36 $500,903.03 $200,000.00 40 $300,903.03 $500,000 $2,430,000 8.87 210.50 $5,908,039.39 $2,812,493.44 $2,895,545.95 $839,318.60 $839,318.60 $500,000 $1,395,000 8.87 212.90 $5,123,951.28 $2,438,376.88 $2,685,574.40 $948,474.81 $250,000.00 60 $698,472.81 $500,000 $1,370,000 8.87 , 244.2S $3,560,613,29 $2,047,622.89 $1,512,990.40 $256,203.61 $500,000.00 100 $243,796.39 $500,000 $1,370,000 8.87 240.94 $4,273,064.88 $2,479,976.56 $1,793,088.32 $252,242.41 $500,000 $1,000,000 8.87 $3,414,220.78 $1,745,857.17 $1,668,363.61 $323,556.30 $252,242.41 $323,556.30 INVESTIGATION OF UNITED STATES STEEL COEPOKATION. 139 It requires 2 tons of ore to make 1 ton of pig iron. Assuming that an independent concern located near Pittsburgh or compelled to ship its ore as far as Pittsburgh required 2 tons of ore from the Messabe Range, it would be compelled to pay for the transportation of that ore, first, 60 cents per ton from the mine to the dock. The cost of transporting this ore is 24 cents a ton (see Hearings, p. 4814). The difference between the cost of transporting the 2 tons of ore used by the Steel Corporation and the same amount by an independ- ent concern would be 72 cents. This 72 cents is paid out of the pocket of the independent concern and into that of the Steel Corporation, and, as explained by Mr. Kennedy, an independent must for that reason, competing sharply with the Steel Corporation, produce his pig iron at $1.14 less per ton in order to equalize this difference in the freight rate. For transporting this ore over its steamship lines, the Steel Corpora- tion charges 60 cents per ton. The steamship company's profit on the transportation of this ore is 24^ cents per ton (Heariags, p. 4834), or 49 cents for the 2 tons. At the lower lake ports there is a docking charge of from 17 to 25 cents, 12.7 of which is profit (see pp. 4841-4842 of Hearings)." The bulk of this charge, however, is absorbed in other rates. The rate on ore from Conneaut to Pittsburgh is 96 cents per ton. The cost of transporting this ore, according to the testimony of Senator Oliver, who is thoroughly acquaiated with the operations of this road, is 26 cents per ton. By a report made by the general manager of the Bessemer & Lake Erie for the year 1910 the average cost of transport- ing a ton of freight over that road was 30.94 cents (and over 60 per cent of all the freight on this road is ore transported from Conneaut to Pittsburgh), and the cost of transporting ore on the whole is much less than that of other freight. (See testimony' of Freer, p. 4854.) Thus it will be seen that there is a difference of not less than $3 per ton in the actual cost of assembling the ore required for one ton of pig iron at a blast furnace in Pittsburgh to the Steel Corporation and its competitor, to say nothing of any advantage that the Steel Corporation might possess by virtue of similar advantages in assem- bling the coke and limestone necessary to convert this ore into pig iron. This difference in the cost of transportation gives to the Steel Corporation a mastery over competitors who are not in the railroad and steamship business and the Steel Corporation is to-day the only manufacturer of iron and steel products which owns and operates an extensive railroad system. An advantage of $3 a ton in the assembling of raw material is equal in many instances to the entire profit to the independent from 140 INVESTIGATION OP UNITED STATES STEEL COBPOEATION. the manufacture of steel in all its processes from the raw material to the finished product. For the last 10 years the net profits per ton of steel produeed by the Steel Corporation have ranged between $10 and $16 per ton, the latter figure having been reached in the first few years of the company's existence. For the last year the net profit per ton has not been much over $12. On the basis of present prices the net is close to $11. While the net earnings per ton of steel produced by the Steel Corporation has ranged between $10 and $16 per ton, the independent steel companies have not fared so well. Several of the independents have not been able to show much over $4 per ton. The highest was approximately $7 per ton^ by a small western independent company, whose properties represent actual cash paid in. It is not maintained that the Steel Corporation should be required to transport freight for its competitors at actual cost. It is, however, of vital interest to know just what is the difference in the cost of trans- portation of raw material to this concern and to its competitors. That the rate is excessive there can be no doubt. The ratio of the operating expenses of the Duluth, Missabe & Northern in 1910 was 30 per cent; as against 66 per cent for all other roads, and that of the Duluth & Iron Range was only 26.5 per cent. There is nothing in the physical conditions attending this traffic or in the character of the freight hauled to justify the rate charged. The Mesabi Range extends along a ridge or elevation about 900 feet above the level of Lake Superior, and on an average of 75 or 80 diUes from it. The intervening territory forms a gradual incline to within a short distance of Lake Superior, where the fall becomes more abrupt, to within a few miles of the lake the grade is almost entirely with the load from the mines to the docks at Duluth, Two Harbors, and Superior, one engine hauling from 60 or 70 to as much as 120 cars. The great density of the traffic on these roads is the more extra- ordinary since they are operated only about six months in the year, approximately, during the season of open navigation on the lakes. In 1910, the year mentioned by Mr. Freer in his testimony, the Duluth, Missabe & Northern Railroad transported 17,292,112 tons of ore (see Hearings, p-. 4795) ; the Duluth & Iron Range transported 11,317,260 tons. (See Hearings, p. 4805.) As will be seen from the accompanying table the cost of transport- ing this freight over the Duluth, Missabe & Northern was a little over $4,000,000, whUe the net revenue derived from the operation was exceeding $9,800,000, the road declaring a dividend of 240 per cent. " On the Duluth & Iron Range, the cost of transporting freight in 1910 was a little over $3,540,000, and the net revenue received from the operation over $6,000,000. This road declared dividends of 145, INVESTIGATION OF UNITED STATES STEEL COBPOEATION. 141 100, and 135 per cent in the years 1909, 1910, and 1911, respectively. (Hearings, p. 4801.) It is claimed that these roads are not capitahzed at their actual value. The greater part of the Duluth, Missabe & Northern was con- structed by the Merritt Bros, at a cost of a httle over $600,000. Subsequently when owned and operated by the Lake Superior Con- solidated Iron Mines, the cost of reconstructing it was estimated at $5,000,000. In the Hodge suit it was valued by Judge Reed at $8,000,000. It is not material to this discussion whether the road be worth $4,000,000, $8,000,000 or $20,000,000. In any case, the rates charged are manifestly exorbitant and the ratio of its earnings to its operating expenses is inordinately excessive. The value which the United States Steel Corporation places upon its monopoly of transportation facihties between the Mesabi Range and lower Lake ports can to a degree be measured by the remark- able exchange of "securities by which a one-sixth interest in the Ohver Iron Mining Co. was absorbed by the United States Steel Corporation. It will be remembered that the Carnegie Co. through this OHver Iron Mining Co. had secured a 40-year contract with the Duluth & Iron Range Railroad by which it was to allow a rebate of 40 cents a ton on ores transported in certain amounts on its roads. Upon seUing the five-sixths interest in this company, he (Mr. OHver) took care to safeguard his own interest by a contract under which the Ohver fur- naces were entitled to a one-sixth interest in all ore mined by the company. At this time the capital of the OUver Iron Mining Co. was $1,200,000. (MacRae Rept., p. 2596.) The Ohver Iron Mining Co. was the only concern in the United States entitled to ship vast quantities of ore from the Mesabi and Vermihon Ranges and to escape this tribute levied by the' Steel Corporation upon all other carriers. It was entitled to one-sixth of an the ore mined by this company, and the Ohver Iron Mining Co. was only induced to abstain from the exercise of this precious privi- lege of sharing in the rich booty which the corporation anticipated from the control of this traffic by receiving $18,500,000 for securities of the par value of $421,700. (MacRae Rept., Exhibit 27.) The advantage enjoyed by the steel corporation in assembling its raw materials is due in a great measure to its ownership of extended railroad systems and steamship lines, that in the delivery of its fin- ished products is obtained both from its own roads and from other lines with which they make physical connection. It is the custom among carriers to allow the road originating the freight a division pf the amount charged for the through haul, out of all proportion to services rendered. Where the carrier and shipper have no interest in common and the through rate is reasonable, the manner of its division may be left to the discretion of the parties mak- 142 INVESTIGATION OP UNITED STATES STEEL COBPOEATION. ing it without detriment to the shipper or the public, but where the nominal carrier is the actual shipper, any injustice in the division of the rate operates as a discrimination in favor of the concern receiv- ing it. A terminal allowance is an arbitrary amount usually so much per ton, or car, paid the road handling freight at the point to which it was originally consigned. The United States Steel Corporation has in- corporated the switches and rolling stock, used almost entirely for the transportation of its own freight and placed these roads upon the footing of common carriers. Such roads are aptly called "plant facilities," since their real function is to facilitate the delivery or the assembling of materials for the company operating them. The Union Railroad of Pittsburgh, the Lorrain Terminal, the old Chicago, Lake Shore & Eastern, and the Birmingham Southern, are all in fact "plant facihties." These roads connecting with the trunk lines and the shipper having the routing of immense tonnages over them, can, by means of such a device, play one road against another obtaining in- equitable divisions of rates which are in effect rebates, and excessive terminal allowances in such amounts as to render competition impos- sible on the part of other concerns having no such devices for the evasion of the law or against the unjust discrimination in the making of freight rates. Under ordinary conditions it is to the interest of the manufacturer to assemble his raw materials and to distribute his finished products at the lowest possible cost, and where he is not both the shipper and the carrier he will necessarily obtain this end by securing the lowest possible freight rate. Where, however, he is both the carrier and the shipper, the higher the rate the greater his profit, and since freight rates are never fixed by any one railroad and are, as established by evidence before this committee, the residt of conferences between all the railroads in a given territory, the representative of a road owned by an industrial concern will always throw his moral influence, if not his vote, in favor of the highest rate obtainable. Such is the fixed policy of the United States Steel Corporation. Attention has already been called to the successful effort of the Steel Corporation to prevent any reduction in the rates upon scrap iron in a territory extending from New York to Chicago. On April 10, 1901, Mr. Schwab, then president of the United States Steel Corporation, clearly stated the policy of the United States Steel Corporation in the matter of freight rates : The president (Mr. Schwab) in introducing this question made the following statements : •'The raihoad people are to have a meeting to decide the rate that they shall charge on ores from the Lake to the Valley and Pi-ttsburgh and that the question is, ought we to insist upon t£e railroads giving us the lowest rate that we can get out of them INVESTIGATION OF UNITED STATES STEEL GOEPORATION. 143 or what ought to be our poHcy. The president thinks that we ought to consent to any ore rate that they may name for the • benefit of the railroads provided they will give om* companies equivalent values in the shipment on any other product. Mr. Converse is of the opinion that it is far better to have a high rate, just as high as %t can oe, if they will give us some definite and distinct rebate or preference in some other way. (Min. Ex. Com., AprU 10, 1901, MacRae Report, p. 3779.) Through the ownership of the Elgin, Joliet & Eastern Railway the United States Steel Corporation enjoys a decided advantage over its competitors in the Chicago district. It gets liberal divisions of freight rates on aU shipments originating in the mills at Gary, South Chicago, Joliet, and Waukegan, and is enabled because of the fact that this railroad is a recognized common carrier to make certain arrangements which are in effect rebates, and clearly devices for evading the law. For instance, on shipments originating in the Steel Corporation's mills located at Gary, South Chicago, and Waukegan, and biUed to Missouri River points such as Kansas City and Omaha, the Elgin, Joliet & Eastern receives 20 per cent on the through rate; on business from these points to St. Louis, St. Paul, Minneapolis, and other Missis- sippi River points north of the Ohio River, it receives 25 per cent of the through rate and 15 per cent of the through rate on business from these points to New Orleans and Mobile (see Hearings, p. 4884) . By reason of the tremendous volume of business handled by the Elgin, Joliet & Eastern and its enormous net earnings on the capital invested, this road is both the source of rich revenue and a powerful instru- ment for the oppression of competitors of the Steel Corporation in Chicago and western markets. In other words (see pp. 4857 to 4872, inclusive) the annual reports of the Elgin, Joliet &■ Eastern and its subsidiary, the Chicago Lake Shore & Eastern, show that the inde- pendent business of this road has increased to such an enormous extent since the formation of the Steel Corporation in 1901 that the business of the Steel Corporation, after the usual deduction for divi- dends, sinking fund, etc., is handled at a surprisingly small expense. The Steel Corporation being the originator of tremendous tonnage causes railroads, large and small, to seek its favor. Therefore these lines gladly throw business, such as switching, transfer, etc., to the Elgin, Joliet & Eastern m the hope of getting Steel Corporation business in return. The rate quoted on shipments of rails from South Chicago to Jaudon Mo., is a striking example of the method employed in secur- ing concessions which are in fact rebates (see Hearings, p. 4905). Jaudon is a flag station located on the Kansas City Southern about 30 miles south of Kansas City. It is in no sense a-delivery point. Rails shipped to Jaudon would not break bulk there but would be either returned to KftRsas City or sent to some general distributing point. 144 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. The I. C. C. tariff No. 2527, effective June 10, 1911 (see Hearings, p. •4905), shows that on shipments of steel raOs, steel crossties, and track fastenings, the rate of $2.75 is divided as follows: The Elgin, Joliet & Eastern 10.40 Chicago & Alton 1. 10 I City Southern 1.25 Mr. Freer (see Hearings, p. 4903) explains as follows: Mr. Fkeer. Tne regular divisions from South Chicago to Jaudon allow the Kansas City Southern 30 per • cent of the through rate, which would be 82J cents, and the balance up to Missouri River or Kansas City divides on the regular Kansas City percentages, which would .allow the Elgin, Joliet & Eastern 25 per cent or 48 and a fraction cents. The Chicago & Alton would receive under the regular division $1.54 and a fraction. Now, under this special division basis, the Elgin, Joliet & Eastern receives 8 cents less than its regular division and the- Chicago & Alton receives 44.4 cents less. The Kansas City Southern receives 42.5 cents in excess of its ordinary divisions. The Chairman. In the event that the Kansas City Southern were the consignee of its own rails, how much would it receive for hauling its raUs the distance from Kansas City to Jaudon, Mo.? Mr. Feeer. $1.25. The Chairman. It would receive $1.25 for hauling its own rails over its own track 33 miles ? Mr. Freer. Yes, sir. (Hearings, p. 4903.) * * * * * it * Mr. Freer. There is nothing unusual at all about the rate. The only thing unusual is the fact that they have provided special divisions for it. On other traffic going into Jaudon, the Kansas City Southern would take 30 per cent of the rate from Chicago. * * * * if if ifi The Chairman. The effect of it is to give the rail maker at Gary a rate on rails, and have his r;uls shipped into Jaudon, Mo., at cost to the receiving carrier, with nothing else. He gets the benefit of it. The advantage of so much a ton tb the con- suming carrier, to the railroad tliat uses these rails to that rail- road by this of 40 or 50 cents a ton. ******* Mr. Bartlett. Taking it for granted that the steel corporation is the sole maker of rails at Joliet and Chicago and Gary, would that enable them to sell rails cheaper to the railroad 1 Mr. Freer. By the reduction of the price to the railroad it would, of course, induce the railroad to place the order there. Mr. Bartlett. Why? Mr. Freer. Provided they could not get a similar advantage from other shipping points. Mr. Bartlett. In what way would the purchaser of the rails get the advantage of such an arrangement as that ? INVESTIGATION OF UNITED STATES STEEL CORPORATION. 146 Mr. Freer. Simply hj a reduction in the cost of the rails delivered to it at Kansas City.' Of course, the rate to Kansas City is $2.75 Mr. Bartlett. Yes. Mr. Freer. Now, this $2.75 rate from the mill applies to a point 30 miles beyond Kansas City. Mr. Bartlett. Yes. Mr. Freer. Now, to the extent that they can get a proportion of that $2.75, the greater proportion that they canget out of that $2.75, the less the cost of delivery to them at Elansas City is. (Hearings, pp. 4906-4907.) The real significance of this Jaudon rate in special division of course is that no other railroad could possibly receive rails at Jaudon except the Kansas City Southern, -that the regular rate on rails, fastenings, etc., for Kansas City is $2.75 per ton. If rails, fasten- ings, etc., were billed to the Kansas City Southern at Kansas City, a 30-mile shorter haul than to Jaudon, that road would have had to pay the full $2.75 rate, which would have been divided exclusively between the Chicago & Alton and the Elgin, Joliet & Eastern. Under the special division, the Elgin, Joliet & Eastern (United States Steel Corporation road) forfeited only 15 cents of its usual division of 55 cents a ton, whereas the Chicago & Alton was forced to take $1.10 instead of $2.20, which it would have been entitled to on the shipment to the bona fide point, Kansas City. A glaring instance of the advantage enjoyed by the United States Steel Corporation through the ownership of the Elgin, Joliet & Eastern and its subsidiary, the Chicago, Lake Shore & Eastern, is to be found in the allowance made by railroads over which coke and coal shipped from the Connellsville district to mills at Gary and South Chicago. Until a few years ago this allowance was 70 cents per ton (see hearings, p. 4883), and upon investigation by the Inter- state Commerce Commission in 1903-4 this allowance was reduced to 40 cents per ton. Mr. Freer explains this as follows: Mr. Freer. At the time of this 70-cent allowance the rate on coke from the Connellsville district to South Chicago was $2.65, out of which the Chicago, Lake Shore & Eastern was allowed 70 cents, giving a net rate to the trunk line railroad of $1.95. Following this report of the commission the allowance to the Chicago, Lake Shore & Eastern was reduced to 40 cents, and the rate on furnace coke was reduced from $2.65 to $2.35; so that the $2.35, less the 40 cents reduced allowance, still left the trunk line with $1.95 per net ton on coke, the same as it had formerly received. (Hearings, p. 4883.) It is significant that no complaint was filed in this case, and the investigation was made by the Interstate Commerce Commission upon its own initiative. For identically the same service, from the same points to the same points, and over identically the same number oi 54946°— H. Kept. 1127, 62-2 10 146 INVESTIGATION OF uiirr7i7n''ST^r77S~HrEirc~cui;:rT7:;srirrcrj.,. miles of road, the Indiana itarbor Belt Railway Co. is allowed by the same railroads 10 cents per ton instead of 40 cents per ton allowed the corporation's road. The Interstate Commerce Commission has justly complained of the great difficulty -in solving the many intricate questions and preventing the continual injustice which arises from the cunning manipulation of terminal allowances and divisions of rates. As long as great manu- facturing concerns are permitted to put a mere switch or system of switches, in many cases a few miles of railroad, located entirely upon their own property, on the footing of a common carrier, the abuses arising from the granting of division of rates and terminal allowances to mere plant facilities can never be adequately remedied. A steel plant or any other manufacturing concern transporting its freight for a few miles over its own lines and by the use of its own engines and cars should put that freight into the channels of com- merce upon the same footing identically as the man who tenders a single car of similar material, and the specific prohibition of any such allowances to a road owned by an industrial concern for freight of which it is the shipper as well as the carrier, is, in our opinion, the only adequate remedy for existing evils. In the ownership and operation of common carriers is to be found the secret of both the Steel Corporation's profi.ts and its power. This record abundantly establishes the fact that the actual cost of produc- tion between the United States Steel Corporation and other large concerns is practically the same, and yet the profits of the Steel Corporation infinitely exceed those of its competitors. The differ- ence between these profits is in the main obtained by advantageous freight rates. This is, in fact, admitted by Judge Gary, and so capa- ble a judge as Julian Kennedy expresses the opinion that the owner- ship of common carriers gives to the Steel Corporation the power of life and death over all its competitors. The Chaieman. Mr. Kennedy, have you anything further to say? Mr. Kennedy. There was one statement I wanted to make as bearing on this matter of transportation, that occurs to me in looking over the history of the case. There is a statement here of Mr. Gary having testified December 18, 1908, and in answer to the questiori as to whether he could put the price down and put other people out of business, Mr. Gary said: " Quite likely; that may be true. I will not say that it is not true. I will not say that in the competition we could not drive a good many of our competitors out of the business. ^' Mr. Claek. Now, another thing. "Mr. Gary. It is not because of a hold on the market "Mr. Clark. What is it, then? "Mr. Gary. It is because of our ability to produce cheaper and because of our ownership in the independent concerns, such as INVESTIGATION OF UNITED STATES STEEL COKPOliATION. 147 the railroadsj the steamship luies, etc., which gives a large credit from the Umted States Steel Corporation's standpoint." Showing that transportation Imes, in Mr. Gary's opinion, are important factors. Mr. Bartlett. That is from the tariff hearings in 1908 ? Mr. EIennedt. Yes, sir: The Chairman. As I understand it, you are of the opinion, if by any method we could force the common carriers of the country to treat all industrials exactly alike, the advantage of the Steel Corporation over its competitors would be practicafly eliminated? Mr. Kennedy. To a great extent. I think Mr. Gary has always been very reasonable and very honest to his competitors, but some other man in the future, some other king might rise who knew not Joseph, and it would really be better that no one company has as large an inside hold on the others. The Chairman. If the Steel Corporation chose to do it, with its present weapons, could it destroy its competitors ? Mr. KJENNEDT. I think it comd; yes. (Hearings, pp. 5176- 5177.) POIiITICAL ACTIVITIES OP THE UNITED STATES STEEL CORPORATION. An import duty imposed primarily for the purpose of protection has hitherto been defended either on the ground that it fosters infant industries or protects American labor. The United States Steel Corporation is not entitled to the imposition of any such duties for either reason. As has been shown, this corporation has rendered infant or new industry in the steel business impossible by its control of ore-producing and transportation facilities, and the bulk of its labor is essentially foreign in every respect except that it temporarily abides in this country while in the employ of the Steel Corporation. The corporation, nevertheless, has been keenly alive to the advantages ac'cruing from the elimination of foreign competition by high or pro- hibitive duties, and it has been generous in its assistance and ardent in its encouragement of those whom it believed most inclined to impose or to maintain such duties, as is evidenced by the following correspwidence : Philadelphia, Pa., September 19, 1904. United States Steel Corporation. Mt Dear Sirs: I inclose herewith the Republican national committee's receipt for your subscription to the campaign fund. Respectfully, yours, E. T. Stotesburt, Chairman. 148 INVESIIGATION OF UNITED STATES STEEL COKPOKATION. [InclosuieJ Republican National Committee, Madison Square, New York, September 17, 1904.. Received from United States Steel, $10,000. C. H. Duel, Assistant Treasurer. (Press of 40 Nassau Street.) Note. — E. T. Stotesbury is a member of the firm of J. P. Morgan & Co. (MacRae's report, p. 3733.) On September 17, 1911, at a meeting of the finance committee, at which J. P. Morgan, jr., George W. Perkins, and other members of the finance committee were present — The chairman presented a letter addressed to him by James M. Swank, under date of January 12, urging the contribution of $4,000 toward the $9,000 to pay the expenses of a second edition of a book entitled "Protection and Prosperity," written by Hon. George B. Curtiss, Binghamton, N. Y. On motion and by an affirmative vote of all present, the ques- tion was referred to the chairman, with power. (Minutes, finance committee, Jan. 17, 1911, MacRae's report, p. 3879). The letter referred to was written by Mr. James M. Swank to Judge Gary, and is as follows : Philadelphia, January 12, 1911. Hon. E. H. Gaet, Chairman United States Steel Corporation, 71 Broadway, New YorTc. Dear Judge: I have waited until you could have your meet^ ing with the steel manufacturers off your mind before writing to you about an important matter which has been on my mind for several weeks. In November last, after the election was, over, I received a call from the Hon. George B. Curtiss, of Binghamton, N. Y., a lawyer, like yourself. United States district attorney, and the author of Protection and Prosperity, the most valuable contribution to the world's tariff history that has ever been written. I send you a copy of the book by express to-day and hope that you can find time to examine it. Mr. Curtiss called to urge our association to assist him in pubhshing a second edition of his book; this time in two volumes. He said, which I myself also firmly beheve, that our protective policy, upon which the whole prosperity of the country rests,' is in danger of going down to defeat if extraordinary efforts are not now made to educate the people to sustain it, and particularly the leaders of the Repubhcan Party. This can be done only through the liberal use of printer's mk in books, newspapers, and magazines, the lack of which hberal use in recent years is one leadmg cause of the demoralized state of the pubhc mind to-day on the tariff question, another cause being the evil influence of men who have been elected or appointed to high office as protectionists, but who are at heart free traders so far as free trade is possible in this country. INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 149 Mr. Curtiss said that he has ah-eady revised Protection and Prosperity, which was published in 1896, bringing down to the present time all essential details of tariff legislation in Great Britain, Germany, and the United States, particularly in our own country. As his book is really a cyclopedia, his thought was that the new edition should be placed in the hands of everv Senator and Representative in the new Congress and as a boot of reference for professors and students in our colleges and univer- sities; also in the offices of leading newspapers. Ap. estimate of the cost of a new edition of 3,000 sets (in two volumes) will be found in a letter to me, which I requested him to write, and a copy of which you will find inclosed. Please notice that Mr. Curtiss asks and expects no reward for the labor he has expended or may expend in the preparation of a new edition. His work upon it would be a labor of love entirely. He could have everything in readiness for the publication of a new edition early in the coming summer. In my interview with Mr. Curtiss in November I frankly told him that I could not guarantee the payment of the $8,000 that would be necessary to pubHsh the 3,000 copies of his book; that we had no fund that we ceuld draw upon for this purpose. He suggested that I submit the matter to a few of the leading mem- bers of our association, which I promised to do, but I said that I could not do this immediately- It So happened that Mr. Curtiss was again in town last week on professional business and called to see me. He is a gentleman of very great abihty. I wish that you could see him. The history of this association from the beginning has always embraced the care of our tariff interests. Until the death of Mr. Wharton and my own hospital experience we both gave our per sonal attention to Washington affairs. For many years we com- piled and printed tracts which were systematically distributed m all States that were doubtful on the tariff question. We en- couraged the preparation of textbooks dealing with the doctrine of protection and riave paid for their publication — books by Henry C. Carey, Judge Kelley, Dr. William Elder, Prof. Van Buren Denslow, Prof. R. E. Thompson, David H. Mason, Giles B. Stebbins, and Gov. Henry M. Hoyt. These books we placed in libraries and sent to Congress. Of course, all the work I have mentioned costs many thousands of dollars, but this work, in conjunction with that done by other trade organizations, has kept our protective policy practically unharmed to the present time. We had in our association for many years what was called a tariff fund. We have had no such fund for a number of years, else I would not have brought to your attention the special work done for me by Speaker Reed and the needs of the Home Market Club. A protective tariff or a virtual free-trade tariff is the issue to be settled in 1912. I suppose it is useless to take any steps to prevent the present Tariff Board from being made a permanent tariff commission, but we do not want its recommendations or conclusions looking toward free trade to be approved by Con- gress or to be embodied in the Republican national platform of 150 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. 1912. Even if the duties on iron and steel could be further re- duced without serious injury to our iron and steel industries so far as prices and foreign competition are concerned, the iron trade of the country could not be prosperous if serious injury should be done to other industries through tariff reductions. Our iron and steel manufacturers must have a prosperous country to insure them an active home market for their products. Of course, you all know this. I mention this partly because in 38 years spent in this office I have many times witnessed the disas- trous etfects upon the iron trade of low duties or the efforts of our enemies to enact them. This is already a longer letter than I intended to write. What I would like to have you do is to ask your finance committee to approve a contribution of $4,000 toward the publication of Mr. Curtiss's two volumes. If the committee will do this, I will ask the following companies to contribute $1,000 each: RepubUc, Pennsylvania, LacKawanna, Jones & Laughlin, and Cambria, making altogether $9,000. This is $1,000 more than the $8,000 mentioned, but the packing, expressage, etc., on 3,000 sets of two volumes each would cost a large sum, all to be accounted for, of course. All checks to Mr. Curtiss when the books are ready for distribution. There is no immediate hurry for an early reply, but an early reply would be appreciated. Very truly, yours, James M. Swank. (MacRae's report, p. 4388.) Mr. George B. Curtiss, the author of this pubhcation, describes its character and purport as follows: BiNGHAMTON, N. Y., November 21, 1910. I propose to bring out a new edition in two volumes of about 700 pages each of Protection and Prosperity, volume 1 to be devoted to the tari^ question of the United Kingdom and other foreign countries; volume 2 to a discussion and history of the tariff question in the United States from the beginning of the colonial period to the present time. The present edition, which was published in the spring of 1896, brought the history of the question down to about the 1st of January, 1895. In the new edition I propose bringing the history of England and other for- eign countries down to the present time. My treatment of the question so far as it relates to the United States begins at* page 564 and was made very brief for several reasons, the principal one being lack of time, m order to get the book on the market in the spring of 1896. This part I have revised, beginning with the colonial settlements, thoroughly treating our industrial developments from the earUest time to the formation of the Government, which will be a new and valuable contribution to the literature on the subject. I have entirely rewritten the sub- ject from the formation of the Government to 1860. This will give a new and, I think, the most valuable exposition of the early tariff history of this country to be found anywhere. I propose bringing the treatment of the subject from 1895 down to the present time, completing the discussion with the disastrous effects of the Gorman- Wilson bill and amplifying very INVESTIGATION OP UNITED STATES STEEL COEPOEATION. 151 fully our amazing industrial growth and prosperity under the Dingley bill, and also explain fully the Dingley and Payne- Aldrich bills, and conclude with a specific answer to the criti- cisms which are now being urged agamst our tariff policy, and a specific defense of the principal industries of the country which are now threatened witn attack. I believe that the new edition when completed will be in every respect more satisfactory than the old one and will be approved by the manufacturing interests of the country. The present edition occupied my time and thought for more than 16 years — as much of it as I could spare from the necessary demands of my profession. I believe that the country is now confronted with a reopening of the question, and a campaign of education after the old fashion must be instituted to save the country from the disasters which are sure to follow a downward revision of the tariff. Since talking with you I have had a rough estimate made of what it will cost in cash to bring out a new edition of 3,000 sets of two volumes each, and find that it will probably require an expenditure of about $8,000. I think this sum would safely cover it. This, of course, means good binding and a handsome edition. My idea is that the pai-ties who advance the money to get out this edition are to take the edition and present it to libraries and such persons as they believe would do the most good with the book. The plates and copyright are to belong to me. Very respectfully, Geo. B. Cuktiss. (MacRae's Report, p. 4389.) This policy of encouraging the advocates of a highly protective policy is reflected in the attitude of Mr. Bope, the general manager of sales and the successor of Mr. Charles M. Schwab in the arrange- ment of prices with the various pooling associations. The efforts to reduce the schedule of the Payne-Aldrich tariff bill' seem to have caused the corporation considerable concern, as indicated in the following statement taken from the minutes of the Carnegie Steel Co. under date of June 7, 1909. June 7, 1909. aldrich bill. Mr. BopE. I found in discussing matters with various people during the week that one unsettling condition is the action of the Senate in pushing through the Aldrich bill, because the people have been expecting some reasonable reductions. The so-called reformers undoubtedly have had the best of the argu- ment right along, but the supporters of the bill have had the strength to go right ahead, ana they have done so regardless of protest, and this is beginning to leave a sort of bad taste in the mouth of the people. While no changes could be made in the bill if put through in its present shape for practically three years, it is felt that if this is done and the Democrats have a majority next year, they will make a start for revising the tariff again. All that is wanted is such reductions as will keep the 152 INVESTIGATION OJ? UNITED STATES STEEL CORPORATION. (Question of the tariff out of the way for several years, because it is beheved that once we get fairly started in this buying move- ment it is going to last several years, and we do not want such influence as another revision of the tariff to come up during this time. (MacRae's Rept., p. 4092.) On December 7, 1909, Bope, the sales agent of the Steel Cor- poration, seems to have still been in close touch with the tariff situation.- "I had a talk on Friday last," said Mr. Bope, "with * a party who had just returned from Washington and who is in pretty close touch with the tariff situation, and he said he has no doubt but that there will be some reduction made in the steel schedules, and it is possible it will be as much as 50 per cent, although on accotint of the harm this would- do the independent manufacturers, and this feature has been strongly placed before the committee, it may not be so great." (Min- utes, Cam,egie Steel Co., Dec. 7, 1908, MacRae's Rept., p. 4087.) It appears that other large concerns were in thorough accord with the United States Steel Corporation in its attitude in this matter, since Mr. Bope says that after a study of the " drift," he finds " other interests of the country" were demanding the same thing. The employees of the Steel Corporation were thoroughly canvassed to ascertain their attitude in the matter. October 12, 1908. political situation. Mr. Bope. With regard to the poUtical situation, after talking with our agents, who were aU here during the week, I can not help but feel that the drift has now set in steadily for Taf t, not on his own account, but simply because business men are begin- ning not only to think but to talk, that the interests of the coun- try demand his election, and that if the tariff must be revised it had better be done by the Republican than the Democratic Party. When in New York last week, those whom I talked with seemed very confident that Taft wiU carry the State by at least V 50,000, but thought that Hughes is going to be defeated. A canvass made of our own works in this district last week shows a Uttle better condition than I had really expected would be found; that on an average about 75 per cent of the men in our employ are for Taft, although at some of the TnillH as much as 50 per cent of the men are talking bhnd. There is no question but that he is stronger among the workingmen this year than in any of his previous campaigns; but b!e is not so strong among the conservative business men. I figure, however, that if other wage-employing localities are affected to the same extent as we find conditions here, it will likely result in some of the doubtful States going Democratic. But with the efforts that are making now for a strong finish to the campaign I beUeve that Taft is going to win out. (MacRae's Report, p. 4086.) Mr. Bope. * * * The nolitical situation is holding matters a Uttle; people waiting not because they have any doubt about Bryan's nomination, but to see what the Democratic platform is going to be. If very radical, it will stop things perhaps for a INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 153 couple of weeks until it can be digested; but people will not hold off everything, because they are anxious to go ahead. After this is out of the way and the campaign really begins, I believe that the sentiment will be so strongly in favor of Taft that it vnll carry business along with it just as it did in 1896. (Minutes, Carnegie Steel Co., July 6, 1908, MacRae's Report, pp. 4084- 4085.) Mr. BoPE. * * * The political situation, I believe, is going to settle itself reasonably quick if we can get the mills in opera- tion, for this is necessary. I think it is going to be put before the people in the light that the Presidency is the biggest j ob in the coun- try for which two men have apphed, and from a business standpoint the one best equipped to do it should be elected, and if looked upon in this way the drift will be toward Taft very early in the campaign. (Minutes Carnegie Steel Co., July 13, 1908, Mac- Rae^s Report, p. 4085). Efforts to enforce the Sherman Antitrust Act appear to have caused equal solicitude with the reduction of the tariff. On January 4, 1909, at a meeting of the board of directors of the Carnegie Steel Co., Mr. Bope said: Mr. Bope. * * * The whole outlook, in fact, appears to us to be distinctly better. The only two clouds that we can see now are the tariff^ and the Sherman Antitrust Act. The passage of the emergency currency bni last spring, while not used, is a safe- guard to this extent and has strengthened the financial situation, but this question ought to be put in such shape that it will not be possible a,'j;ain to liave a condition similar to that which ob- tained in the fall of 1907, and I have no doubt this will be done. Other drawbacks have been disappearing until there is left only the two mentioned, and we are in shape now to go ahead. There is getting to be a feeling among the trade, though I do not know where it emanated, that the reduction in the steel schedules in the new tariff is not going to be as great as some people have anticipated and, furthermore, that the business situation is going to be strong enough by the middle of the year to overcome any- thing that might occur in this direction. (Minutes Carnegie Steel Co., MacRae's Report, p. 4087.) In the event of any investigation following the enforcement of this act the general sales agent of the Steel Corporation expressed a decided preference among investigators. Mr. Bope. * * * ^ number of other very important mat- ters came up during the week, which developed later, so there does not seem to be a great deal of lack of confidence in the future among the buyers. They seem to feel that things will come out all ri^t in the end, and with the adjournment of Congress I beHeve business will go right along. These investigations have naturally caused a little doubt in the minds of men as to just what is going to happen. We are going into a new era, and, like every case of that sort where men can not see what is ahead of them, they hesitate a little. The same conditions prevailed six or seven years ago, when the large combina,tions of capital began to be formed which marked a new era in the industrial world. 154 INVESTIGATION OF UNITED STATES STEEL COKPOKATION. These things were a benefit at the time and are a benefit to-day, yet on account of the abuses which some of them have undoubt- edly been guilty of we will have to figiu-e that there will have to be some sort of control or regulation, and we will have to take it and make the best of it, and I do not know but what it will be better to have these things done by Republicans than by Demo- crats. A great many people fear this agitation may cause the election of a Democratic Cfongress this fall, and I believe legisla- tion of this kind would have a worse effect upon business if enacted by a Democratic than by a Eepublican Congress. I wanted to mention these things because they are actually occur- ring and are having some effect upon conamercial conditions. (Minutes Carnegie Steel Co., MacRae's Report, p. 4078.) It appears that with the exception of rails and armor plate, steel manufacturer's have not yet been able to render effective any agree- ment international in its scope, limiting output or fixing prices. No such contracts affecting the operations of American steel mills alone and raising the price to the domestic consumer above the cost to the foreign purchaser could be made effective without the aid of the Fed- eral Government in excluding foreign competition or penalizing it by heavy import duties. By agreement among themselves steel manufacturers have often been able to establish and to increase the price in the home market. Such agreements would have been to a great extent abortive had the consumer of such articles been permitted to procure them in an open and competitive market where the price was not determined either by agreement between a number of small manufacturers or by the inordinate power of a single monopoly. In such cases the producer is clearly entitled to the benefit of competition from abroad, com- petition at home having been restrained or destroyed by the wrong- ful act of the domestic manufacturer, and any legislation which renders effective the making of such combinations in restraint of trade or the creation of such monopoHes is manifestly indefensible. No monopoly and no combination or conspiracy between monopolies limiting output or fixing prices not international in scope could ever seriously affect consumers if the opportunity was still left open to procure at a fair price in some other market not thus manipulated or controlled the commodities affected by such combinations among domestic producers. In such a case the power of a domestic monopoly to practice extor^ tion upon the public is directly dependent upon ancillary legislation excluding competition from abroad after it has been successfully destroyed at home. The difference between the cost of such com- modities in the domestic and foreign market is the measure of the injury inflicted upon the consumer and of the advantage obtained by the domestic monopoly. On page 1770 of the hearings are produced tables furnished by the corporation showing the price of the various articles manufactured INVESTIGATION OF UNITED STATES STEEL GOBPOEATION. 155 by it and intended for foreign consumption. By a comparison of the prices given in this list with the cost of the same articles offered for sale at the mills of the corporation it can easily be ascertained to what extent the cost of steel and iron products sold in the home markets have been enhanced by highly protective or prohibitive duties. It has been pretty well known in steel circles that the Steel Corporation's export prices have been almost uniformly lower than the domestic prices, but some of the concessions made to foreign consumers shown in the comparison are surprisingly large. In 1906j for instance, there was a spread between the average domestic f. o. b. price of structural snapes and the cor- poration's f. 0. b. export price of nearly $9. In 1908 there was a spread in the case of plates of $7, and in 1909 rails were sold aproad on an average of $4 a ton less than at home. The biggest difference is in tin plates, in which the Steel Corporation has been for years in sharp competition with the Welsh makers. There was in 1906 a difference of nearly $19 a ton, and in 1910 there was a difference of about S12.50 a ton. A possible expla- nation of this is that the duty on tin plates is very high, now amounting to 1.2*cents per pound, or $26.88 per gross ton, as compared with $3.92 for steel rails. The differences referred to above are shown in the following tables, which compare the average mill prices f . o. b. of some of the principal products exported by the tjnited States Steel Cor- poration smce 1906 with the average f. o. b. Pennsylvania mill domestic prices, as reported by the American Iron & Steel Association. Average domestic price per gross ton. Average United States steel export price par gross ton. Diflerence per gross ton.' Rails: 1906 • 128.00 28.00 28.00 28.00 28.00 35.84 38.08 36.84 31.70 32.97 38.48 38.48 36.74 31.58 32.92 37.20 40.20 39.80 36.40 35.00 3.69 3.00 3.70 3.50 3.60 $24.42 28.29 25.80 23.94 24.16 29.84 33.17 29.84 27.50 29.04 29.58 32.48 29.50 27.37 28.42 39.10 45.46 40.26 37.92 37.37 2.85 3.40 2.98 2.85 3.04 -S3. 58 1907 + .29 - 2.20 1909 . ■ - 4.06 1910 - 3.84 Plates: 1906 - 6.00 1907 ; - 4.91 1908 - 7.00 1909 - 4.20 — 3.93 Structural sliapes: - 8.90 1907 - 6.00 - 7.34 - 4.21 1910 - 4.60 Wire nails: • 1906 + 1.90 + 5.26 1908 , + .46 1909' - V + 1.52 + 2.37 Tin plates: ' 1906 -18.91 1907 -11.29 ions -- -16.12 1909 -14.66 lOin -12.66 1 — «deczB8se; -t-^increase. ' Per net ton. •Per 100- pound bo] c 156 INTESTIGATION OF UNITED STATES STEEL OOEPOKATION. The United States Steel Corporation's export tonnage in 1910 was the largest on record, amounting to 1,216,057 tons, and the value, as calculated from the corporation's statement, was over $41,500,000. The following table, for the year 1910 only, shows the export shipments and the total f. o. b. mill price received by the Steel Corporation, with the exception of 46,096 tons of miscellaneous products for which prices were not given: Tons Total price received. Steelrails 271,233 92,043 105,875 93,325 88,966 13,344 ■ 046 103, J3 393,012 116, 622 23,029 18,667 67, 178 62,466 78,869 5,551 S6, 688, 606 Billets, blooms, slabs, sheet, bars, and skelp Plates... do.... ....do.... 2,040,593 3,074,610 structural shapes Merchant bars, bands, etc Hoops and cotton ties ; Spliced bars, rail joints, etc do.... do.... do.... do.... do.... 2,652,268 2,707,235 457,432 589,691 5,674,997 IMn plate 1,194,639 Sheets 6,706,931 Rods do 669,914 Coarse wire nf't fon" , . 617,504 Wire nails and staples Wire, tinned and coated Wire, barbed and galvanized, twisted Wire fence and netting do.... do.... do.... .....do.... 2,136,642 2,443,045 , 3,643,537 290,206 Total 1,169,961 41,586,950 (Hearings, p. 5135-5136.) ABSOKPTIOKT TENNESSEE COAL & IRON CO. After acquiring the control of the Lake Superior ores, the Steel Corporation made extended researches and explorations of the ore deposits of Cuba, North and South America. Mr. Reed. May I suggest a question at that point ? Mr. Young. Certainly. Mr. Reed. In regard to these ores in Utah, Cuba, and Brazil, perhaps Mr. Cole could tell us whether the Steel Corporation ever made any effort to acquire ores or to control or get a large part of those ore beds. , Mr. Young. Yes. Do you know anything about that, Mr. Cole? Mr. Cole. The Steel Corporation through its subsidiary, the Oliver Iron Mining Co., had examinations of ore beds in Utah made, but did not feel justified at this time in buying any at that point. They also had made an examination of the ore beds in BrazU, but did not make any investments there at the time. They have secured some ore in Cuba, but just what tonnage I am unable to say. Mr. Reed. Relatively small, is it not ? (Hearings, pp. 5483- 6484.) * ****** The Chairman. You spoke of having your engineers go over the coxmtry and make a thorough survey of the various ore de- posits of New Mexico, Utah, Texas, New York, in the Appala- chian region, and elsewhere, and in California. How much ore INVESTIGATION OF UNITED STATES STEEL COBPOKATION. 157 did they lease or purchase outright after these investigations for the Steel Corporation ? How much ore did it obtain as a result of these investigations ? Mr. Cole. They did not secure any ore in the districts referred to. The Chairman. Why was it the;^ did not ? Mr. Cole. I presume they felt it would be some time in the future before those ores would be available for manufacture. The Chairman. Those ores, as I understand, as Mr. Sellwood has said, either by virtue of their low degree of ore, the presence of silica, the absence of a market, or the remoteness of the mate- rials to flux them rendered them unavailable at the present time ? Mr. Cole. Yes, sir. The Chairman. Or in the immediate future ? Mr. Cole. In the immediate future. (Hearings, p. 5494.) The only large deposits of ore at present available for the making and marketing of pig iron and steel in large quantities and at a profit are found in the Lake Superior and Birmingham districts. The Chairman. Where are the principal ore bodies, workable ores, in the United States? * * * Such ores as can be worked at a profit ? Mr. Perin. The two great ore bodies, of course, are those in the Mesabi Range, and in the Gogebic and the Marquette and Menominee Ranges, and next in importance in volume of ton- nage would be those in the Alabama district, directly in prox- imity to Birmingham. The Chairman. The two great ore bodies are those of the Lake Superior region Mr. Perin (interposing). And the Birmingham (Ala.) region. The Chairman. Are there any other large ore bodies which are or can be worked, from which pig iron can be made at a profit in competition with these two ore bodies which you have men- tioned ? Mr. Perin. Which can be marketed ? I do not think so. At a higher market and as the metallurgic art advances the ores of the Adirondack and other regions wUl become important factors in the production of pig iron. (Hearings, p. 972.) At the formation of the Steel Corporation the ores of this region seem to have been disregarded, since they were all non-Bessemer, that is, contained exceeding 4 per cent of phosphorus, which pre- vented their use in a Bessemer converter, and prior to 1906 steel rails were made from Bessemer steel only. It is only in recent years that the use of steel made from non- Bessemer ores has approached Bessemer steel either ia the quantity produced or in the variety of finished materials for which it could be rendered available. A brief review of the two processes by which pig iron is converted into steel is necessary to a clear apprehension of the vast and vital change which the gradual substitution of the "basic" or "open- 158 INVESTIGATION OP UNlTJii) STATES S'J'JSKL UOKJb-OKSTlOJN . hearth process" for the old "Bessemer process" has wrought in the whole status of the steel industry and the relative value of iron ores in this country. Mr. Roberts. The Bessemer process as known and called such is by blowing compressed air through molten pig iron in what is known as a converter. By the blowing through of that air the carbon is eliminated by the o:^gen of the air and forms carbon oxide, which burns to carbomc-acid gas. That then becomes steel and is poured into the ingots. The open-hearth process was known as the Seaman's furnace, a reverberatory furnace with gas fuel. The coal is charred in a producer, which forms gas, is then carried to the furnace, which is on regenerative principles, and the flame passes over the bed of the furnace, the open hearth of the furnace, on which either hquid pig iron or cold pig iron is put, melted, and the carbon removed from the pig iron by the contact of the oxygen with the flame passing over it. The lining of the furnace, what is known as the basic furnace, is composed of bases instead of acids. The original form of the open-hearth process was acid and was made in a furnace Uned with sand or silica, whereas the basic furnace is lined with a base such as alum or magnesia. This enable^ the introduction of basic material, such as limestone, which has an aflSnity for phosphorus, and eliminates the phosphorus from the pig iron, whereas in the • Bessemer process by simply passing air through the pig iron in an acid-lined converter you do not eliminate the phosphorus. I would say that it is a more expensive process to operate an open hearth than it is a Bessemer, due to the fact that in one case your fuel is air and in the other case your fuel is coal. You can not make open-hearth steel as cheaply as you can make Bessemer steel. Mr. Baetlett. What is the advantage of the one over the other, if any ? Mr. Roberts. You have the opportunity of using all grades of ore in the open hearth, whereas m the Bessemer you are limited to certain special ores which contain a small content of phos- phorus. (Hearings, p. 360.) ******* Mr. Roberts. * * * Basic open-hearth steel admits of the use of any quahty of ore irrespective of its phosphorous content, whereas Bessemer steel requires an ore witn a low phosphorous content, probably not over 0.04, due to the fact that phosphorus in the Bessemer process is not eliminated; but in the basic open- hearth process it makes no difference how much phosphorus you have, because you e limin ate it in the process of making your steel. Consequently these plants which originally produced Bessemer steel, due to the fact that the basic opertr-hearth process was not hnown at that time am, not operated, have now gradually, due to the gradual extension of the Bessemer, or low-phosphorus ores, been compelled to turn over to the manufacture of open-hearth basic rails. The plant at Gary is arranged as an openAearth basic plant entirely. They have no Bessemer plant. And some of the Pitts- burgh plants are using the basic open-hearth process. The others are using both, as they see fit. INVESTIGATION OF UNITED STATES STEEL OOKPOKATION. 159 Mr. Gardner. Has it been an expensive matter to convert the Elants of those companies so that they can use this basic open- earth process instead of the Bessemer process ? Mr. Roberts. Yes. It means the abandonment of their Bes- semer plant, putting it in the scrap heap. The value of all the capital invested in the Bessemer plant disappears and whatever the cost of the open-hearth plant is must be added to their capital charges. (Hearings, pp. 359-360.) By the partial locking up of the ore reserves of Lake Superior and by the exaction of an onerous tribute for their transportation, the Steel Corporation unwittingly stimulated the development of the open-hearth process and offered a strong inducement to the bold capitahst and the inventive genius to discover new forms and uses to which it could be applied. "The growth of basic steel," says Mr. Topping, president of the Republic Iron & Steel Co., "is not necessarily all due to the superior quality of that steel for certain purposes over Bessemer, but is due more largely, in my judgment, to the limited supply of Bessemer ores and to the constantly increasing demands for sted in various forms; and the basic-steel process has made available a large amount of ore that otherwise would not have been avail- able, and which, had it not been for the basic process, would not have enabled us to meet this great demand for steel everywhere. There is also, in addition to the reason I have just cited, a demand for a quantity which calls for basic exclusively, on account of specifications and restrictions placed by certain engineers for roads and structural material, that is all basic necessarily for quality reasons." The Chairman. What are the advantages of this steel made by the open-hearth process ? Mr. Topping. WeD, the general advantage is in this, that you can not reduce by the Bessemer process phosphorus below the percentage at which you start in on the ore; m fact, you pick up added quantities of phosphorus in the process of manufac- turing with limestone and coKe, whereas in the basic process it is only a question of time when you can eliminate substantially all the phosphorus; and by the basic process you get a more regular steel and better quality, due to the fact that phosphorus is not an element that adds to the quality, but the reverse of that in its general influence. It makes it brittle. (Hearings, p. 1234.) Mr. Roberts, a learned and skillful engineer, speaks of the manu- facture of rails from Bessemer steel by the corporation to within the last two or three years as "due to the fact that the basic open-hearth process was not known at the time and not operated." Strictly speaking, while known, it was not developed until recent years to such an extent as to enable steel made by this process to compete with the product of the Bessemer converter. This gradual revolu- tion in the process of manufacture has been due to the rise in price of the corporation's Bessemer ores, the development of the open- .160 INVESTIGATION OF UNITED STATES STEEL CORPORATION. hearth furnace, and the consequent cheapening of steel produced by that process. Statistics compiled by the American Iron & Steel Association show that a small amount of open-hearth ingots and- castings were made as far back as 1869. In recent years the substitution of basic for Bessemer steel has been phenomenal. In 1894 there were produced in the United States 3,571,313 tons of Bessemer ingots and castings, as against 784,936 tons of open hearth. Two years later, the pro- duction of Bessemer steel showing no material change, open-hearth ingots and castings increased nearly 200 per cent, viz, 1,298,700 tons, and by 1898 this amount had again been practically doubled — 2,230,292 tons. At the time of the formation of the Steel Corporation the total production of Bessemer and open-hearth steel, from the date of the introduction of the basic process into this country (1869), was 75,366,329 tons and 18,029,741 tons, respectively, while from the time of the formation of the Steel Corporation (1901) to the absorption of the Tennessee Coal & Iron Co. the production of open-hearth steel amounted to 53,583,640 tons, as against 69,188,388 tons of Bessemer steel. In the three years immediately succeeding the absorption of this company, 1908 to 1910, inclusive, the production of open-hearth steel has exceeded that of Bessemer by approximately 12,000,000 tons, or 38,835,174 tons open-hearth to 24,860,310 tons of Bessemer. At present the open-hearth process for general purposes bids fair to practically supersede the old Bessemer converter except in a few localities where the scarcer and more costly Bessemer ores can be obtained under especially favorable circumstances. In 1910 the pro- duction of open-hearth steel reached a grand total of 16,504,509 tons, as against 9,412,772 tons of Bessemer. The production of Bessemer steel is actually as well as relatively on the decline, being 2,863,058 tons less in 1910 than in 1906. Attention is called to table in the appendix to this report, giving the relative annual production of both kinds from 1869 to 1910. The Steel Corporation, at the time of its organization, seems to have accepted without question the saying among steel makers that "phosphorus is to iron what the devil is to religion," and to have regarded as imavailable for general purposes the vast ore deposits of the Birmingham district. As has been shown, the corporation constructed the immense and costly fabric of its ore, crude steel, and transportation monopoly upon the control of Superior ore as a basis, and the strength and per- petuity of that foundation rested upon the continuing supremacy of the Bessemer converter. When open-hearth steel, produced as cheaply as the Bessemer and in vast quantities, could be placed upon the market by manufac- INVESTIGATION OF UNITED STATES STEEL CORPORATION. 161 turers owing their own ore and coal reserves, and assembling their raw material without the use of the corporation's roads and steam- ship lines, then and then only was the perfect and hitherto seemingly invincible control of the manufacture of steel products seriously menaced. As has been demonstrated, the absolute power to "fix" the price of pig iron enabled the corporation to make and manipulate the price of semifinished steel. It is true these "sliding-scale" contracts were usually predicated upon the price of Bessemer pig iron, but in the event the corporation arbitrarily raised the price of Bessemer pig iron above the basic, it would by that means still further stimulate the production of the latter metal by its competitor, since under changed conditions it could be used interchangeably with the Besse- mer pig iron. It is evident that the production of pig iron in large quantities and at a cost no greater than that of the corporation, notwithstanding its advantages derived from the ownership and control of common car- riers, meant the certain destruction of the cunning and costly device by which it had caused so many "shut downs" among its former competitors, dependent upon it for raw material. Personnel Tennessee Coal & Iron Syndicate. Expert ore and steel men were not slow to see the infinite possibili- ties which the development of this process opened to non-Bessemer ores, and grasped the opportunity to obtain control of vast ore and coal deposits in the southern Appalachian region. In October, 1905, a syndicate was formed which acquired the prop- erties of the Tennessee Coal, Iron & Railroad Co., the largest concern in the Birmingham district, the members of the original syndicate and their individual shares being as follows : Shares. O. H. Payne 10,300 L. C. Hanna 10,300 G. B. Schley 10, 300 J. B. Duke 10,300 E. J. Berwind 10, 300 J. W. Gates 10,300 A. N. Brady 10, 300 G. A. Kessler 10,300 O. Thome 10, 300 E. W. Oglebay 5, 150 H. S. Black 5, 150 F. D. Stout 5, 150 J. W. Simpson 5,150 G. W. French 2,500 S. G. Cooper 1,500 J. A. Topping 1, 000 Total 118, 300 (Hearings, pp. 1124-1125.) 54946°— H. Kept. 1127, C2_2 11 162 INVESTIGATION OP UNITED STATES STEEL COBPOKATION. This syndicate was formed for the purpose of developing not exphU- ing the steel industry, as evidenced by the fact that not one single dollar was ever paid to the syndicate or any individual in it for pro- moting the scheme or underwriting its securities. The immense financial resources of its members assured the capital necessary for the great undertaking, and among its members were men of skill and experience in every department of the businsss. Oglebay and Hanna had large holdings in the Lake Superior ore fields, long experience in the value and handling of ores, and in the manufacture of pig iron. Topping, the chairman of its board of directors, was expert in every detail of manufacture from the ore up, and John W. Gates, the organizer of the American Steel & Wire Co., was equally familiar with the industrial and financial operations of such concerns on the most extensive scale. The Chairman. How, many practical steel men were in the syndicate — men who understood the business of making steel ? Mr. Hanna. Well, I do not know exactly what you mean ^hen you say "making steel." The Chairman. I mean handling ore or making pig iron, for instance. Mr. Hanna. I do not know of any who were not familiar with the iron and steel industry, but as to those actually connected with it I do not know. I should have to look at a list, Mr. Chairman. I should say five or six or seven, perhaps, who had been, and were then, identified with the steel mdustry. The Chairman. You had been interested in it ? Mr. Hanna. Yes, sir. The Chairman. Mr. Berwind ? Mr. Hanna. No, sir; I do not think so. The Chairman. Mr. Gates ? Mr. Hanna. Yes, sir. The Chairman. Mr. Oglebay ? ' Mr. Hanna. Yes, sir. The Chairman. And Mr. Stout, Mr. Black, Mr. Simpson, Mr. French, Mr. Cooper, and Mr. Topping ? Mr. Hanna. Mr. French had been interested in the steel busi- ness and Mr. Cooper had been identified with the steel business. The Chairman. What experience had Mr. Topping had 1 Mr. Hanna. Mr. Topping had been aU his life m the iron and steel business, actively. The Ghaieman. So that from the personnel of this syndicate, I judge you were well equipped, not only as to your financial resources, but you had men in the syndicate who understood from experience — the best school in which to learn things, prac- tical experience, long experience — just how to develop economi- cally and effectively the great business you contemplated estab- lishing in that region. Mr. Hanna. Yes, sir; I would say so. (Hearings, pp. 886- 887.) INVESTIGATION OP UNITED STATES STEEL CORPORATION. 163 The properties of the Tennessee Coal & Iron Co. were located in a region absolutely unparalleled in the close proximity of vast quan- tities of all the materials essential to the manufacture of iron. The ore, limestone, dolomite, and coal are assembled by nature within a radius of a few miles. "I think," says Mr. Gates, "that in the Birmingham district it is possible to assemble a ton of material and make a ton of pig iron cheaper than any other place in the world." (Hearings, p. 7.) Mr. Perin, the engineer who had prepared a careful survey cover- ing practically every foot of this district, states : The Chairman. You did not complete your answer as to the Woodward Co. I want to know the number of miles they haul their limestone, coke, and iron ? Mr. Perin. I think the coke is hauled somewhere between 3 and 4 miles and the limestone an average distance of 2^ miles. The Chairman. Se, as a rule, it is the same haul and the same freight within that radius of 25 miles. Mr. Perin. Yes. The Chairman. Does that spring from the fact that in the whole region they find within that radius those three essentials in the making of pig iron ? Mr. Perin. Practically so, and so as not to give any one cor- poration any particular advantage over the other. The rates were established so as to equalize competition in the district. The Chairman. Now, you have spoken of your experience in locating ore regions in this country and in India. Is there any place on the habitable globe known to the iron industry where that physical condition exists or anything approximating it? Mr. Perin. The only possible parallel conditions, where the juxtaposition of the raw material is such as exists in the Birming- ham district, are in Middlesboro, England. There the iron ores are of a lower grade, and they bring their fuel a distance vary- ing from 10 to 25 miles. That is almost a parallel with the con- ditions that obtain in Birmingham, but there are no such large single deposits as exist in the Birmingham district. (Hearings, p. 982.) Mr. Schwab has made practically the same statement to the Ways and Means Committee in 1908: For example, I know that pig iron can be produced in different parts of Germany at from $9.50 to $12 a ton to-day, depending upon the location and character of the pig. The CHAIRMAN. Against $14 here ? Mr. Schwab. About $14 to $14.50 here. :(: !(i ♦ !fc 5j^ ♦ ♦ The Chairman. That is in Germany. How about England? Mr. Schwab. England is probably a little cheaper, though it is not widely different. The Chairman. What is the main reason for the additional cost of the pig iron here ? 164 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. Mr. Schwab. Raw material and freights being higher. The Chaieman. Their iron is nearer the coal mines ? Mr. Schwab. Yes. They assemble it cheaper than we do. The Chaieman. I do not suppose they do it any cheaper than we can at Birmingham ? Mr. Schwab. No; we do it cheaper in Birmijigham, than they do in England. The Chairman. You think the cost of pig iron in Birmingham would be less than the cost in England ? Mr. Schwab. I know it would he. The Chairman. The cost of converting the steel is about the same ? Mr. Schwab. In Birmingham it is about the same. (Hear- ings, p. 1133.) The Tennessee Coal, Iron & Railroad Co. acquired the greater part of all the available ores in this region according to Mr. Perrin, who spent months on these properties in a careful survey intended to determine both the quantity of ore in that district which was economically avail- able and the relative amount held by this and other large concerns. "Estimating," says Mr. Perin, "the tonnage of the Wood- ward Co. and of the Birmingham Coal & Iron Co. and the Bir- mingham Iron Ore Co., I would say that the Tennessee Coal, * Iron & Railroad Co. possesses about 70 per cent of Red Ore Mountain. The Chairman. That is, of the ore-bearing district ? Mr. Perin. The range which is tributary to the fuel at the present time, the area of low-assembling cost. The Chairman. If the Tennessee Coal & Iron Co. has 70 per cent of the entire region, what per cent of the region is now marketable and can be purchased by any man who goes down tliere and opens a blast furnace and buys his own coal on the ground 1 Mr. Perin. I suppose, outside of the Birmingham Iron Ore Co., there is no merchantable ore for sale in the Birmingham district. The Chairman. How much have they at their disposal ? Mr. Perin. I have no accurate knowledge. The Chairman. Wliat per cent * Mr. Perin. Very small ; possibly 2 J per cent to 5 per cent. The Chairman. Of the whole region ? Mr. Perin. Yes, sir. (Hearings, p. 980.) * * * * * * * Mr. Perin. I should consider this as one of the greatest -properties I know of anywhere in the world, take it by and large; that is, considering the proximity of the iron ores to the coal. (Healings, p. 984.) On December 31, 1906, Mr. Topping made the following statement to the board of directors of the Tennessee Coal & Iron Co. The knowledge that your executive committee has acquired as to the tonnage and character of the iron ore, coal, and limestone owned in fee simple by your company satisfies them that, in INVESTIGATION 0^ UNITED STATES STEEL COKPOEATION. 165 wealth of raw materials required for the manufacture of iron and steel, your company ranks as second to only one in the world, and is far in advance of any other iron or steel producer in cost of assembling its raw materials for manufacture. The mineral reserves of coal and iron contained in your lands, as computed by competent authorities, are estimated to be 700,000,000 tons of iron ore and 2,000,000,000 of coal. Ap- proximately, one-half of your coal supply is of a superior coldng quality, and your iron ore is largely of a self-fluxing character, analyzing approximately 38 per cent metallic iron. This ore is well suited to the manufacture of high-grade foundry pig iron, and to the production of basic iron pig for use in the manufacture of ba;sic open-hearth steel. (Hearings, p. 1232.) When before this committee he was interrogated in regard to this report as follows: Is that the statement prepared by you at the time as the chair- man of the board ? Mr. Topping. That is the statement I made to the stock- holders. The Chairman. Is that a correct statement ? Mr. Topping. So I believe. It was the report of our engineers, and based on their own estimate. I might say in that connec- tion that that estimate was not based on complete drilling records — the property was not entirely drilled, and is not as yet to-day, so far as I know — but based on the tonnage produced per acre and from the opened-up properties. Our own engineermg or mining department believed that that was a cotiservative state- ment, and I accepted that statement for my report to the stock- holders. (Hearings, p. 1232.) The New York Sun, November 7, 1907, said: "The acquisition of the [Tennessee] company is particularly advantageous to the Steel Corporation, because of the iron ore and coal properties that go with it. With the Great Northern and Northern Pacific ore lands acquired last year, together with the previous holdings, the Steel Corporation now has iron-ore deposits estimated at approximatelv 2,400,000,000 tons, of which approximately 700,000,000 tons come with T. C. & I." (Hearings, p. 1129.) , John Moody, in an article in Moody's Magazine for January, 1909, said: But the most fortunate business stroke of the Steel Corpora- tion, from the viewpoint of its owners, since its organization in 1901, was the acqmsition last year of the Tennessee Coal, Iron & Railroad property. The acquisition of this organization has added great potential value to the steel organization and has increased the tangible equity of its common-stock issue to a far greater extent than is commonly realized. The Tennessee coal and iron properties embrace, besides important manufacturing plants, nearly 450,000 acres of mineral lands in the Birmingham section of Alabama. As shown in the report of the Tennessee company in 1904, when an appraisal was made by outside parties, these lands contain approximately 400,000,000 tons of 166 INVESTIGATION OF V Ul±i^u oxaxji^p a±i^r.i^ first-class low-grade ore, and more than 1,200,000,000 tons of coal, of which about one-half is coking coal. This estimate indicates that the deposits enibraced are even in excess of those of the great Lake Superior properties controlled by the cor- poration, including the Great Northern ore bodies. This entire property was acquired, as is well known, on very favorable terms for the Steel Corporation, and of course puts it in a posi- tion where now it need have no concern regarding a possible future shortage of supply of either iron ore, coal, or coke. Added to this is the fact that the deposits are more favorably located than those of the Lake Superior district and will enable the com- pany to carry on in the years to come a vast economic develop- ment of production and manufacture in this section of the country. The Tennessee ore is of a grade which is better for the making of ordinary pig iron than that of any other known deposits in this country. (Hearings, pp. 1129-1130.) The incalculable advantage of securing coal, ore, and limestone from adjacent hiUs wiUbe more fully appreciated when it is consid- ered that the ore deposits of the Steel Corporation were located at the head of Lake Superior and its principal coal measures in West Virginia and Pennsylvania, and it is a thousand miles by the course of the traffic from the MesaM Range to the Connellsville coal fields. This facility in assembling the raw materials enabled operators to produce pig iron at from three to four dollars per ton less than any other manufacturer in the United States. In other words, an opera- tor at Birmingham can make pig iron for sale in the vicinity of his furnace at a living profit for less than the actual cost of production to his competitor in Pittsburgh. Mr. Perin states : The Chairman. Have you ever had any practical experience in the construction or operation of blast furnaces and other plants for the manufacture of steel ? Mr. Pekin. I have held every position at a blast furnace from fireman, with a negro partner, to proprietor. The Chaieman. Have you ever constructed any blast furnaces ? Mr. Peein. I have built one and I have reconstructed about eight. Mr. Young. Which one ? Mr. Pekin. I built the Ashland No. 2 blast furnace. I was superintendent of the Norton furnace, the two Middlesboro fur- naces, the two furnaces of the Londonderry Iron Co . I remodeled their No. 2 furnace. I have held other positions of a subordinate capacity, as well as superintendent and general manager. (Hearings, p. 971.) * * * * ifi il: ^ Mr. Peein. Based on to-day's selling prices, which I presume would be a fair approximation of their cost price, there is nearly $4 difference in the cost of production between the two districts. Pittsburgh is able to produce at a very low figure, by reason of INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 167 its large plants, and large production and excellent equipment. (Hearings, p. 971.) * :): 4: 4: 4: 4= ^ The Chairman. I wish to show you extracts from this report prepared for the Geological Survey by Mr. Phillips showing the cost of manufacture of pig iron in 1894, 1895, and 1896. This report shows the average cost to manufacture pig iron per ton, as follows: $6,457 for the year 1894, $6.65 for 1895, and $6,464 for the year 1896. Is it a fact that this is the lowest cost of pro- duction that pig iron could be manufactured for in the known world ? Mr. Peein. I do not think there is anybody to-day who could come within $3 of that cost. (Hearings, p. 984.) John W. Gates states: A ton of pig iron, under the most modern practice, in what is known as the Birminghain district can be produced to-day for less than $9 a ton. There is no other part of the United States that I am acquainted with, however, where it can be produced at less than $1 1 a ton, based on the freight rates for assembling the raw material. As an illustration, the freight rate on dolomite, which is used for the flux, is perhaps 12^ cents a ton, in some cases possibly 15 cents a ton, freight to the furnace. The freight on the coke in some instances is nothing; the coke is made at the furnaces. The freight on the ore varies, I think, from 10 cents a ton to about a maximum of 25 cents a ton on anything^directly in -the Birmingham district. When you get out of the Birming- ham district and get to use a richer brown ore, the freight rate runs up to 35 cents and 40 cents, and, I think, 50 cents, a ton; but in the close proximity of Birmingham you can assemble the material and make a ton of pig iron cheaper, in my opinion, than anywhere in the world. (Hearings, pp. 7, 8.) Mr. Given. * * * I do not laiow of any place on God's green earth — if there is any such place I have never read of it — where they can get the material for making pig iron together as quickly, as cheaply, and as continuously as they can in Birmingham. (Hearings, p. 1011.) This new and powerful concern prepared to make the most of its unique advantage in the production of pig iron and entered aggres- sively into its manufacture into steel in its more finished forms, having secured with this huge ore and coal reserve, the Birmingham Southern Railroad and a plant described by the Steel Corporation as follows : The Steel Corporation, in its corporate capacity, is on record as to this property. In the Sixth Annual Report of the United States Steel Corporation for the year ending December 31, 1907, the holdings of the Tennessee Co. which were acquired are given asfoUows (pp. 26, 27): "Surface and mineral rights acreage of iron ore, coal, and limestone property, owned in fee, 447,423, distributed as follows: In Alabama, 340,263 acres; in Tennessee, 105,740 acres; in 168 INVESTIGATION OF UNITED STATES STEEL COEPOEATIQN. Georgia, 1,420 acres. Upon this property there were in opera- tion m the State of Alabama, near Birmingham, 13 active iron- ore mines, with 2 under construction and at Greeley 3 active iron-ore mines. In Georgia there were 2 active iron-ore mines in operation. "In Alabama there were in operation 22 active coal mines and 2,800 coke ovens; in Tennessee, 1 coal mioe and 174 coke ovens. "There were 2 active quarries, 1 inactive, and 1 in course of development, all in Alabama. "There were 14 active blast furnaces in Alabama; 2 in Ten- nessee. "All mills, foundries, machine shops, etc., were located at Ensley and Bessemer, Ala., near Birmmgham. "The Tennessee Co. owned the capitsd stock of the Birming- ham Southern Railway Co., a terminal railroad connecting the various mines and plants of the company in the Birmingham district, consisting of 31.16 miles of main and branch lines, 1 mile second track, 67.78 miles yard and siding tracks, 35 locomo- tives, and 725 cars of all descriptions. "The Tennessee Co. owned the entire issued capital stock of the Tennessee Land Co., the Booker Land Co., and a control- ling interest in the stock of the Ensley Land Co. — these com- panies owning various tracts of land adjoining the several prop- erties of the Tennessee Co. "The net profits of the Tennessee Co. for the year 1907, after charging ofi $437,666.84 for depreciation and extraordinary replacements, and $885,552.31 for net interest charge on bonded and floating debt, were 11,426,684.58 (a httle more than 4J per cent on the capital stock). "The company spent during 1907 for extensions, additions, and betterments the sum of $6,589,116.99." (Hearings, p. 1132.) Mr. Schley, the syndicate manager, in speaking of the personnel of the owners of this company and the character of the improvements which were being made up to the very hour it was absorbed, says: The Chairman. This property that you men had taken hold of had already been improved, as I understand, by the expendi- tures of six or seven million dollars, and that expenditure had been made under the supervision of Mr. -Topping, had it not ? Mr. Schley. Yes ; and a half a dozen other most capable men. The Chairman. And every dollar they put into that business was put where it would "burn," to use a slang expression, was it not? Mr. Schley. Yes. The Chairman. And where you would get the best results ? Mr. Schley. Yes. The Chairman. Was there a steel plant on the continent more skillfully constructed, more capable of bringing to the men who constructed it ample returns, than the steel plant at Ensley ? Mr. Schley. I do not think there is any better. The Steel Co. carried it out on exactly that same plan. They could not improve on it. (Hearings, pp. 1114-1115.) INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 169 The character of improvements, completed and in contemplation, ia taken from the last report made by this company and reproduced in the Sixth Annual Report of the United States Steel Corporation: ACTUAL AND PROPOSED INCKEASE OF OUTPUT. "As compared with previous years, your earnings may be favorably regarded with operating profits in excess of 20 per cent on your volume of business. This result, considering the almost unlimited tonnage of your mineral reserves and their great poten- tial value, should suggest no delay in providing the necessary facilities to meet your income opportunity. Your executive committee, recognizing the inadequacy of your present facilities, has authorized substantial expenditures to increase your volume of business and income ; but further expenditures could be advan- tageously made" (p. 7). "But, as heretofore stated, the maximum possibilities with your present manufacturing and mining facilities are not suffi- cient for the most favorable results. The extensive improve- ments now under way, both in your mining and manufacturing departments, will greatly strengthen your operations when com- pleted and in running order" (p. 18). "The physical condition of your mills during the past year (steel works and rolling mills) has been improved by liberal expend- itures" (p. 28). "While a general rehabilitation of old equipment has been taken care of by liberal maintenance, your executive committee have -realized the necessity of increased steel and rail productive capacity and have authorized the construction of a modern steel works and rail mill. These extensive improvements are expected to Double Your Steel Output and Rail Capacity (capitals and italic in text) and radically reduce your cost of production. The bene- fits expected from these additions to plant will not be operative until the last half of 1907" (p. 28). "The same policy as applied to your steel works and rolling mills, m respect to betterments and maintenance, has also been applied in building up your blast-furnace department" (p. 29). "These extensions (iron mines and quarries) are all under way and substantially increased production will be realized during the year 1907" (p. 30). (Hearmgs, pp. 1127-1128.) And this was the work of a real competitor. John W. Gates, the active and controlling spirit of both the Tennessee and the Republic Iron & Steel Cos., did not subscribe to the doctrine of "coopera- tion" and displayed no fear of "destructive competition." Before this committee he stated: Mr. Gates. * * * My theory is that I would rather have an open market and be able to run full and not be hampered by any competitors saying: "You are selling goods too low, tTian to Tiave a fictitious marlcet where I could only run 40 or 50 or 60 per cent. That Aos always heen my idea. (Hearings, p. 43.) 170 INVESTIGATION OF UNITED STATES STEEL CORPOEATION. As a result of the putting into actual practice of this wholesome theory the business of the Tennessee Co. advanced by leaps and bounds as evidenced by its minutes during the last year of its industrial independence: On May 21, 1907— Meeting of board of directors. The chairman presented condensed comparative statement of earnings and of all products for four months ending April 30, 1907, as compared with the same period in 1906. Net earnings above all fixed charges, interest, and depreciation amounted to $611,247.17, a gain of 35 per cent over last year, and surplus, after paying dividends, interest on common stock, subscriptions, and all special charges, amounted to $335,638.61, a gain of 37^ per cent. Production showed the following percentages of increase over last year: Ingots, 4 per cent; pig iron, 11 per cent; merchants' steel, 18 per cent; coal, 24 per cent; coke, 5 per cent; iron ore, 12 per cent; limestone and dolomite, 2 per cent. Price for iron, $20 to $21 per ton Birmingham. Sales thereof for first quarter 1908, at $18.50. The chairman reported on the subject of a revaluation of the mineral properties of the company that the chartered account- ants had agreed to the proposition that it would be in line_ with f)roper procedure to establish a higher valuation in view of the arge appreciation which has taken place in the value of raw materials during the past few years; the purpose of such revalua- tion being in the present instance the creation of a surplus value sufiicient to cover the depreciation which must inevitably be provided for in carrying out the policy established of rebui ding our manufacturing department. The chairman presented a statement showing a condition of rail sales for 1906-7 indicating a tonnage booked for delivery to January 1, 1908, of 327,199 tons. The chairman stated that the extension to the steel works, if promptly authorized along the lines suggested by detail plans to be submitted by the next meeting of the board, on June 12, and which, if adopted and authorized, it was thought would enable the management to bring into service the new equipment of the steel works exten- sion by the 1st of May, 1907, would add an increase in the output to our present capacity estimated at from 15,000 to 20,000 tons per month. Based on this estimate, he further stated that the estimated output of rails prior to January 1, 1908, would be ap- proximately 425,000 tons. He desired to know whether it would be advisable, in the judgment of the board, to sell the sur- plus rail output of approximately 100,000 tons. After discus- sion, it was, on motion — "(27) Resolved, That the management be authorized to sell 100,000 tons of steel rails at the present market for such deliver- ing in 1907 as the company can make." (Mn. board of dir. T. CJ. & R. R. Co., May 23, 1908; MacRae Rept., p. 4290.) I ^ » . INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 171 The chairman presented a complete monthly statement of operations for the month of August, showing net earnings of $72,241.50, iiflprovement over preceding month of approxi- mately $40,000 ; also showing a material increase in the produc- tion and shipments in aU departments. (Min. board of dar. T. C, I. & R. E. Co., Sept. 18, 1906; MacRae Kept., p. 4293.) The chairman presented the regular statements covering the operations of the company for the month of December and the 12 months ending December 31, 1906, comprising the following individual reports: (1) Income account; (2) analysis of earn- ings; (3) orders on hand, pig iron and steel; (4) production cost, shipments and prices, December; (5) production cost, ship- ments and prices, year; (6) general balance sheet; available assets. Income account showed net earnings after interest charges and depreciation of $95,241.89 for the month and $1,145,006.81 for the year; dividends of 4 per cent on common stock and 8 per cent on preferred stock amounted to $912,080; sinking fund on general mortgage bonds to $47,760; interest on subscriptions to new common stock to $48,376.21. I The chairman also presented a letter from Mr. L, Hoover, treasurer, accompanying the statements, summarizing the results for the year in comparative form with those of the previous year, together with a statement which is filed with the executive record papers of this meeting. "Resolved, That the investment of this company in the stock of the Potter Ore Co. be valued at $400,000, same representing the cash investment of $50,000 plus the liability of the company to its proportion of $700,000 of guaranteed bonds." Attention was called by the chairman to the fact that this valua- tion was equivalent to 10 cents per ton on 40,000,000 tons of ore, which our mterest in the tract is estimated to contain, and that based upon a 5 per cent royalty the operation of the sinking fund will retire the bonded debt and vest absolute title to the prop- erty in, the company upon the payment of a less sum in the aggre- gate as interest than would have been paid to the owner of the property upon the same toimage as royalty based upon an aver- age price of pig iron. The chairman presented statements of sales and production, both for the period ending December 31, 1906, and for the month of January to date. From the former it appeared t^at the orders for pig iron on the books amounted to 142,000 tons of foundry grades and 62,000 of basic, which, allowing for our own require- ments, indicated that upon our estimated output the company was sold up on all grades for the first half of 1907 and for aoout 25 per cent of its make on the last half. (Min. ex. com., Jan. 30, 1907; MacRae Kept., p. 4296.) The chairman submitted the customary statements, showing all operations for the month of April and for the four months ending April 30. Net earnings for the month amounted to $191,147.84, a gain over the preceding month and the best record since 1904, and for the four months amounted to $611,247.17, a gain of 35 per cent over the corresponding period last year. The 172 INVESTIGATION OP UNITED STATES STEEL COEPOKATION. chairman stated that on pig iron the company was sold up prac- tically for the year 1907, the surplus of unsold iron being esti- mated at only about 30,000 tons. (Min. ex. com., May 21, 1907; MacRae Kept., p. 4299.) Income account showed balance above aU charges and depre- ciation amounting to $221,998.58, a gain of nearly $31,000, as compared with April, and the best month recorded since 1903; surplus for the five months ending May 31 amounted to $838,- 245.75, as compared with $558,513.28 for the same period in 1906. The report was ordered on file. As a matter of information, the chairman presented a com- parison of earnings with the Sloss-Sheffield Steel & Iron Co. for the quarter comprising the months of March, April, May, 1907 and 1906, showing an increase in net earnings for the Tennessee Co. of 65 per cent, as compared with 56 per cent for Sloss. (Min. ex. com., June 25, 1907, p. 4302.) REPORT OF, RAIL SALES AND AVERAGE PRICES. Total tonnage on the books June 1, 416,846 tons, average price, $28.93, including both first and second quality. Based on the estimated production to the end of the year 1908, an apparent surplus is available for sale of upward of $30,000. The chairman stated that it might be safe to consider we had from 40,000 to 50,000 tons to sell for 1908 delivery. He advised that we are holding the price of rails at $30 for standard sections to trunk lines, and at $32 for street car use. (Min. ex. com., June 25, 1907, p. 4304.) The Sixth Annual Report of the Steel Corporation summarized the phenomenal development of this company as follows : THE TENNESSEE COAL, IRON & RAILROAD CO. Comparative statement of income (p. SO). Gross profits — • For 1904 $1,862,631.21 For 1905 2,484,139.26 For 1906. 2, 753, 159. 85 For 1907 (p. 27, U. S. S. C. llept.) 2,749,903.73 Gross sales and earnings (p. 19) For 1904 9,607,578.74 For 1905 10, 951, 979. 02 For 1906 13,265,970.66 New construction and development of land {pp. S4, 25). For 1906 $1,355,632.28 For 1907 (p. 27, U. S. S. C, 6th Ann. Rep.) 6,- 589, 116. 99 In this connection note that the total costs of the plants of the Tennessee Co., excluding land, was, on the date of this report (p. 21), $11,211,872.30, and that of the $6,589,116.99 expended for new construction in 1907 only about $72,000 was expended for land, leaving the balance of over $6,500,000 ex- INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 173 pended for enlargement of its manufacturing capacity, or an mcrease of about 60 per cent. * 4: * :•: * * 4: UNFILLED ORDERS. "The unfilled orders now on your books represent the largest tonnage in the history of your company. The business is well distributed and indicates broadening markets for all products. This is particularly true of coal and coke. The prospects for the future, as suggested by business on hand, shows no sign of business recession, and the outlook for the year 1907 is most encouraging" (p. 37). Memorandum of unfilled orders as of January 1, 1907. Tons. Manufactured iron and steel products 467, 114 Coal 1,200,000 Coke 201,000 (p. 37.) COMPARATIVE PRODUCTION. Rails, billets, steel bars, and plates (p. 28): Tons. For 1904 ; 155,266 For 1905 402, 318 For 1906 401, 882 For 1907 (p. 27, U. S. S. C, 6tli Ann. R.) 477,624 Pig iron fp. 29): For 1904 475,314 For 1905 529, 036 For 1906 641,887 For 1907 (p. 27, U. S. S. C, 6th Ann. R.) 602,827 Iron ore (p. 30): For 1904 1,208,038 For 1905 1, 436, 282 For 1906 1, 483, 476 For 1907 (p. 27, U. S. S. C, 6th Ann. R.) 1,576,757 POTENTIAL CAPACITY. (P. 32.) "The knowledge that your executive committee has acquired as to the tonnage and character of the iron ore, coal, and lime- stone owned in fee simple by your company satisfies them that, in wealth of raw materials required for the manufacture of iron and steel, your company ranks as second to only one in the world, and is far in advance of any other iron or steel producer in cost of assembling its raw materials for manufacture. "The mineral reserves of coal and iron contained in your lands, as computed by competent authorities, are estimated to be 700,- 000,000 tons of iron ore and 2,000,000,000 tons of coal. Approxi- mately one-half of your coal supply is of a superior coking quality, and your iron ore is largely of a self-fluxing character, analyzing approximately 38 per cent metallic iron. This ore is well suited to the manufacture of high-grade foundry pig and to the production of basic pig iron for use in the manufacture of basic open-hearth steel" (p. 32). "The financial statement shows your company to be in a sound financial condition, with current assets of $3,004,4,80.09 in excess of your current, habilities" (p. 9). (Hearings, pp. 1126-28-29.) 174 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. No product in a steel mill promises a more certain or lucrative return than steel rails. The close relations existing between the makers of steel rails and the users of them have maintained the price without change for more than 10 years at $28 a ton. At the time this syndicate secured control of the Teimessee Coal & Iron Co. steel rails were made from Bessemer pig iron. The only open-hearth rails produced up to that time had been practically for experimental purposes. "I think," said Mr. Roberts, "other rail makers had rolled from time to time open-hearth steel raUs in an experimental way — ^not very large orders. But the Tennessee Co. were not a manufac- turer of Bessemer steel, due to the fact that the ores in Alabama were not Bessemer ores; it was therefore necessary for them to enter into the manufacture of open-hearth steel rails when they built their rail plant, as they were unable to make Bessemer steel. They, therefore, were one of the earliest, or the earliest, of open- hearth steel-rail plants in the country." (Hearings, p. 359.) "Whatever steel rails were made prior to the time Gates and his associates took charge of the Tennessee Co.'s property were certainly, as Mr. Roberts says, "in an experimental way." The total produc- tion of Bessemer steel rails between 1897 and 1905 was 22.,358,729 tons, and of open-hearth rails 385,899 tons. (Annual Statistical Report American Iron & Steel Association, 1906, p. 67.) Gates testifies that his company erected and operated the first and only open-hearth steel-rail mill in the United States, and so successful was this concern in the manufacture of rails from its cheap materia that it soon became manifest that their product was superior to the rails made by the Steel Corporation from its high-priced Bessemer ore. As stated in the New York Press of November 7, 1907: "The Teimessee is one of the two steel companies in the United States which manufacture open-hearth rails, now so greatly in favor with the railroads. When Harriman bought 160,000 tons of rails of the Tennessee Co. a few months ago it brought the steel company to a realization that it had a strong competitor in the steel-rail field." (Hearings, p. 1129.) This was due in great measure to the toughness and ductility of the open-hearth steel. Referring to the time just prior to the absorption of this company by the Steel Corporation, Mr. Gates says, "Why, we had just taken a very large order for rails — I think 150,000 tons of rails^from Mr. E. H. Harriman, at $2 per ton advance over the price of Bessemer steel rails." Mr. Beall. What kind of rail were you making ? Mr. Gates. We were making a Bessemer open-hearth rail. We took the contract, I think, for the Southern Pacific and the Union Pacific roads for an open-hearth raU. Whether they were actually making the rails at the time the company was taken INVESTIGATION OF UNITED STATES STEEL COEPOBATION. 175 over by the corporation I do, not remember, but we were prepar- ing to make the open-hearth rail and had sold 150,000 tons. The Chairman. What was the reason for this excess in the price of your rail over the Bessemer rail ? Mr. Gates. We thought it was a better rail and we con- vinced Mr. Harriman. (Hearings, p. 8.) Mr. Harriman was not the only great railroad official who was convinced that steel rails could be made from the product of open- hearth furnaces which were in every way superior to the Bessemer rails of the Steel Corporation, and it was evident from the records of the Steel Corporation that they fully appreciated the eflFect of the entry of this newly organized company into the rail business. The superior excellence of this rail had been impressed upon the superin- tendent of the Pittsburgh & Lake Erie Railroad. Mr. Morgan himself was a director in this great railroad. It had terminals in Pittsburgh and was bound to the Steel Corporation by the closest financial rela- tions. Ml-. Bope, the general sales agent of the Steel Corporation, on March 19, 1906, states: The general superintendent of the Pittsburgh & Lake Erie told us the other day that after testing open-hearth rails furnished them by the Tennessee Coal & Iron Co. and our Bessemer rails they have decided that open-Jiearth are twice as good as Bessemer rails. He wanted to know when we would be able to make open- hearth rails and said they would be willing to pay a little more for open-hearth than for Bessemer. The same th%ng has come to us from two or three other people, indicating that the railroads are paying a little atteniion to the matter. At the time when they were buying rails we could not make open hearth, and of course they took Bessemer, and they ^vill not be able to get open hearth ' anywhere in this country for the next year and a half; but I imagine that when the demand for rails falls off, which wiU prob- ably be in 1907, on account of the heavy purchases made last year and this, then we will be up against the opevr-hearth proposition good and hard. (Hearings, p. 4077.) This statement by the man best qualified to know, the general sales agent of the Steel Corporation, shows that it was the opinion of this great railroad, of which J. Pierpont Morgan was a director and closely allied with the New York Central Railroad system, that this open- hearth rail was twice as good by actual test as the Bessemer rail of the Steel Corporation, and other railroads were of the same opinion, that the Steel Corporation was not prepared to make these rails, and thai by 1907 they would be up against the open-hearth proposition "good and strong." The apprehension of the Steel Corporation that the Teimessee Coal & Iron Co.'s rail, superior in quality, manufactured at a less cost, and sold at a higher price than' their own, would in a short time supersede the Bessemer, was indeed well founded, as is evident from the subsequent history of the development and growth of the iKiaoufactixre of open-hearth rails. In 1908 of all rails manufactured 176 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. in the United States 1,349,153 tons, were rolled from Bessemer steel, while 571,791 tons were the product of open-hearth furnaces. In 1909 the production of Bessemer and open-hearth steel rails was 1,767,171 tons and 1,256,674 tons, respectively. By 1910 the pro- duction of Bessemer and open-hearth rails was 1,884,442 tons and 1,751,359 tons, respectively. (Herbert Knox Smith, Pt. I, pp. 362- 363.) It is also apparent from the records of the Teimessee Coal & Iron Co. that this syndicate, backed by great wealth and controlled by practical steel men, who, without regard to cost, were working with feverish energy and the most sanguine hopes to meet this growing demand and to enter boldly into this most coveted and lucrative department of the steel business. The Steel Corporation was indeed "up against it good and strong." Nothing since the threat of Car- negie to build a tube mill at Conneaut had put them "up against it" to the same extent or in the same way, and this company could not be reached by any of the methods which the Steel Corporation had hitherto used so successfully against competitors. There were no interlocking directorates, and for that reason it was impossible to make those secret arrangements so mutually beneficial which for years had characterized transactions between the Steel Corporation and the Standard Oil and similar interests. It appears that, absolutely secure in the ownership of vast ore reserves, in no way dependent upon the Steel Corporation for facil- ities either to assemble its ores or to sell its finished product, ia no way affected by any manipulation in the price of raw materials, it was apparently impregnable. More than that, the strength of the Teimessee Coal & Iron Co. can not be measured by its wealth or by its resources, natural and financial, immense as they are. The Re- public Iron & Steel Co., located in the same region, and holding 50,000,000 tons of iron ore and over 173,000,000 tons of coal (hear- ings, p. 1040), was closely aUied with the Teimessee Coal & Iron Co. In fact, the two properties were owned practically by the same men, who had placed their holdings in two separate corporations. The board of directors of both companies was identical and both were operating in perfect harmony with other steel and iron companies in that region. The Steel Corporation had no hold whatever in southern territory. From Ashland, Ky., to El Paso, Tex., it was unable to sell one pound of pig iron in competition with the Birming- ham furnaces. With this vast and rapidly developing region secure to it by virtue of its natural advantages, the Tennessee Coal & Iron Co. was prepared and preparing to invade the domain and to con- tend for a share in the markets hitherto preempted by the Steel Corporation and other northern markets in their own territory. INVESTIGATION OF UNITED STATES STEEL COEPOBATION. 177 Since it was impossible to cajole or coerce the men ia charge of this new and virile competitor, the only remaining means of eliminating it was by securing in some way the control of its stock. It appears that the directors of the Tennessee Coal & Iron Co. realized that the nature of their operations would render the securities of this com- pany a coveted morsel to their great competitor, and for that reason they took every precaution to retaia their control by locking up in their own strong boxes a safe majority of the stock. The peril to the Tennessee Coal, Iron & Railroad Co. was not open competition in the markets, but secret operations in the stock exchange. Car- negie, it will be remembered, put the stock of his company ia shares of a thousand dollars each to prevent speculation in them. The directors of the Tennessee Co. took even more effective nleasures. Utterly indifferent to the quotations on the stock market and de- termined not to sell it, they ' dehberately destroyed its value for speculative purposes by "pegging" it. That is, they entered into an agreement not to sell this stock except under certain circum- stances, and then it could only be marketed under certain conditions by the syndicate managers, Messrs. Schley and Hanna. "There was probably," said Mr. Gates, "no floating stock; it was so closely held by the people who had bought it for an in- vestment. There was practically no stock in the hands of brokers." (Hearings, p. 16.) "I thought," says Mr. Schley, "that by bringing the company out to its earning capacity, that the future of it would be one of considerable prosperity, something to hang on to." (Hearings, p. 1047.) Mr. Bartlett. Mr. Schley, talking about the value of the Tennessee Coal & Iron Co. with reference to its property in Alabama, it was valuable as a manufacturing plant and much more valuable after you had spent $5,000,000 or $6,000,000 in improvements on it ? Mr. Schley. Indeed it was. We had great hopes for it. Mr. Bartlett. As a promoter of the scheme to buy stock and put it into this syndicate you had the idea that it was very valuable, and you promoted it for the purpose not of selling the securities upon the market, but of increasing its value by im- provement, as a permanent irmestmentf Mr. Schley. Yes, sir. Mr. Bartlett. You had no idea of organizing the company for speculative purposes ? Mr. Schley. No, sir; not at aU. (Hearings, p. 1104.) The Chairman. When you spoke of these men putting their stock in strong boxes, is it not true that Mr. Gates and Mr. Top- ping and Mr. Oglebay and Mr. Hanna — is it not true that the weSth, the power, the effectiveness, the future of this property was in the hands of strong men who had conducted a productive and not a speculative business, and who were comparatively indifferent, imtil this sudden hour of disaster, as to the market price of the stock of the Tennessee Coal & Iron Co. ? 54946°— H. Kept. 1127, 62-2 12 178 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. Mr. Schley. They were entirely indifferent as to its market value. • The Chairman. They did not care whether it was current or uncurrent, iecause they were not selling; is not that true ? Mr. SoHLET. That is true. (Hearings, pp. 1113-1114.) The chairman of the board oiP directors, Mr. Topping, states: The stock was tied up by a so-called syndicate agreement, which in itself "pegged" the stock. It withdrew it from the market as a speculative security and left a very small amount, as you know from previous witnesses, of so-called free stock. The Chairman. In its general provisions did this agreement prevent a sale of a majority of the stock without the concurrence of both the syndicate managers, Mr. Schley and Mr. Hanna ? Mr. Topping. It did. So far as my stock was concerned, I felt I was under a moral obligation not to seU, and I did not seU; and so aU the 'others felt who were in that syndicate. It was simply an agreement, substantially, based on honor, with gentle- men who were in it, to keep out of the market. Mr. Bartlett. That was one of the purposes of the agreement, to keep it out of the market ? Mr. Topping. The purpose was to Jceep it out of the marlcet so as to maintain the control of it, naturally. The Chairman. You were indifferent about what they did with that stock so long as a clear majority of it was locked up in the strong boxes of the men operating this property 1 , Mr. Topping. That was the purpose of the syndicate, Mr. Chairman, as I understood it. The Chairman. Did you desire to have Schley sell this stock ? Mr. Topping. I did not. (Hearings, pp. 1237, 1238, 1239.) Mr. Lewis Cass Ledyard, the attorney through whom Schley nego- tiated with Morgan, and who thoroughly understood the attitude of the syndicate, says: • I do not think the syndicate had any idea, as a syndicate, of getting this stock,together and selling it out to the United States Steel Corporation, if that is in the question. Mr. Hanna, when he came on here, and his brother,, who I think had some interest in the stock, both were very much disturbed by the idea that this thing which they had huiM up and were going to make a great company of should have to he sold out for other people's necessities. Mr. Gardner. In other words, those members of the syndicate who did not find themselves in financial difficulties, did not want to sell the stock ? Mr. Ledyard. No; and Col. Payne, who had a lot of this stock did not want to sell it Mr. Gardner. They did not want the control to go out of their hands ? Mr. Ledyard. No; they did not; I think you are right about that. (Hearings, p. 963.) It appears that in spite of the precaution and the vigilance exer- cised by the directors of the Tennessee Co. that the syndicate manager, Mr, Schley, and a New York wine merchant by the name of Keasler, INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 179 who had secured control of about 40,000 or 50,000 shares of the "free" stock in this company, did speculate in these securities as well as other stock which was "pegged" and could be sold by Schley alone. In 1907 the syndicate manager, Grant B. Schley, became seriously in- volved; and in order to secure loans from various banks in New York, aggregating about $38,000,000, he hypothecated large blocks of this stock. No one loan was secured in this way nor could it have been, on account of the fact that those in control of it had "pegged" it for the purpose of destroying its value for speculative purposes and had rendered it to a certain extent "uncurrent," notwithstanding the great intrinsic value which it represented. About 90 days before the acquisition of this company, and while in the midst of his pressing needs, the manager of the syndicate ap- pUed to Messrs. Frick, Ream, and Gary for financial aid, and suggested that they examine his securities — he had stocks of all kinds, "cur- rent" and "imcurrent," $40,000,000 up as collateral at that time — and he offered these gentlemen their choice in all this mass of securi- ties in order to obtain the funds for which he had such urgent neces- sity at that time. What they did, in the light of what subsequently transpired, is significant. Mr. ScHXEY. Mr. Frick and Mr. Ream and Mr. Gary some time before that saw me, or I saw those three gentlemen, and told them I would like to have them examine some securities that I had. I had a fist of securities. They picked the Tennessee. I said if they would take it for 60 I would take their bonds in exchange, for six months. That was an exchange of securities. It was an agreement, absolutely, that if they were not paid for at the end of six months it would be a sale. Mr. Littleton. If not paid for at the end of six months, it would become a sale of the stock ? Mr. Schley. Yes. Mr. Littleton. What securities did they pick out ? Mr. Schley. Tennessee Coal & Iron. Mr. Littleton. Did they take all of the security in Tennessee Coal & Iron? Mr. Schley. Nothing hut Tennessee Goal <& Iron; and I took their bonds. Mr. Littleton. $1,200,000 ? Mr. Schley. Yes, sir. Mr. Littleton. Did you put up any other collateral except Tennessee Coal & Iron ? Mr. Schley. That is all. Mr. Littleton. Did you offer them other collateral ? Mr. Schley. / gave them their choice and they accepted that. Mr. Littleton. You gave them their choice between what stocks? Mr. Schley. Tobacco was on the hst, and Guggenheim Ex- ploration, and perhaps four or five others. I have forgotten. There was quite a list of them. 180 INVESTIGATION OF UNITED STATES STEEL COKPOEATION. Mr. Littleton. And having their choice of the securities which .they woul3 take for tnat loan, they picked out whoUy Tennessee Coal & Iron? Mr. Schley. Yes. Mr. Littleton. And they took it Mr. Schley. At 60. (Hiearings, pp. 1090-1091.) In the course of this transaction it was apparent that Schley, the syndicate manager of the Tennessee Coal & Iron Co., holding large amounts of its\tock, was willing to dispose of it to meet his urgent necessities — stock which he had hitherto prized so dearly, "some- thing to hoid on to," and which his associates in the enterprise had locked in their strong boxes. It might reasonably be apprehended thai; as his financial condition grewjmore desperate his hold upon the stock would be loosened. To save himself from ruia Schley might be induced to disregard his agreement as syndicate manager, or to appeal to his associates to permit him to disregard it, and when he did the Steel Corporation was necessarily the only purchaser of this immense property. Be that as it may, one thing is certain : From the day the three directors of the Steel Corporation discovered his condition and his control of this stock, his troubles multipUed, and the only ray of hope ever held out to this broker on the verge of bankruptcy was the release to the Steel Corporation of his control of the stock of the Tennessee Coal & Iron Co. In the event the stock of this company became "uncurrenf — not desirable as a collateral upon which to borrow money — at a time when Schley had to have money, then the only possible way he could get it would be to sell the stock outright. It is not clear that the financial interests back of the. Steel Corporation made a deliberate "drive" at this stock for that purpose. It seems more probable that they simply took advantage of the financial distress of Moore & Schley. Before the Senate committee investigating this merger, Mr. Schley said: Senator Overman. So you approached Mr. Ledyard, who was attorney for Morgan, was he not? Mr. Schley. I don't know that he was attorney for him; he was a friend. Senator Overman. I want to ask you whether or not you had any interest in the United States Steel Co. yourself ? Mr. Schley. Not a dollar. Senator Overman. Did any of the gentlemen named here ? Mr. Schley. I don't think so. They may have. Senator Overman. Were they interested as stockholders or otherwise; do you know? Mr. Schley. I doubt it. I don't think so. Senator Culberson. Mr. Schley, I understand you to say that although calls had been made upon your firm, you had always responded up to the 4th of November, 1907 ? INVESTIGATION OF UNITED STATES STEEL COBPOEATION. 181 Mr. Schley. Yes. When it develoj)ed everyone I talked to in connection with his holdings was willing, under the pressure that was brought upon all, to sell that stock at par, and when 1 went to Mr. Ledyard and asked him to make these negotiations, it began. Then Mr. Frick and Mr. Gary came to me in the course of it, and it developed so that in the^following days it was known to the public. I can't teU what would have ha|>pehed to Moore & Schley or to anybody else in that street, because^we were oppressed by rumors, some of them untrue, but Moore & Schley were the subject of attack, serious attack, and their credit, which is the life of the business, was being idestroycd. "It was a matter of serious import. It had to b^ disposed of if it could be. I don't mean for Moore & Schley, but.for peaple about them, others interested, not those particular individuals of great wealth. Senator Dillingham. What was the effect of the purchase of the stock by the^teel Co. upon the market? Mr. Schley. It relieved the situation mos^ decidedly, not only with M. & S.,, but with everybody about. The rumors were flying tremendously about, and nobody can escape those, you know. They may be true or untrue, and they affect the credit of this institution or that. It was especially so with us at that time, after this negotiation started, and it took a week. Why, there was $7,000,000 of loans called on us in three days. Senator Culbehson. W'as i't generally known on the Street, as you call it, that your firm, in the relationship that you have sug- gested, was dealmg in the Tennessee Coal & Iron ? Mr. Schley. Yes; for some time it had been talked that Moore & Schley were holding that stock — a wrongly based'riimor, be- cause these facts I tell you are absolutely true. But the pressure was there, and I don't know of any panic in a great many years when they have not been pounded a little, and other houses that have real basis behind them. Senator Culberson. You say your relationship to this stock was generally known in the Street ? Mr. Schley. Yes. Senator Culberson. And you. say there was special pressure, as I remember your testimony, on your firm ? Mr. Schley. Yes. (Hearings, p. 1126.) Before the same committee, George W. Perkins testified as follows: Senator Overman. Why were these special securities men- tioned? That was only a drop in the bucket. There were a tremendous amount of securities up. Mr. Perkins. Yes, sir. Senator Overman. Why were those securities mentioned ? Mr. Perkins. Why does a man call "fire" in a theater? Senator Overman. I do not know any special reaibn why these stocks were mentioned. Mr. Perkins. I have not' the slightest idea. You can never teU why such things occur. Senator Overman. Were these specially mentioned more than any others ? Mr. Perkins. At this period of the panic ? 182 INVESTIGATION OP UNITED STATES STEEL COKPOBATION. Senator Overman. Yes; these particular stocks. Mr. Pekkins. Yes; it became centered at that particular stage of the panic, which covered three weeks. (Hearings, pp. 1126-1127.) John W. Gates accounts for his loss of control of this property as follows: The Chairman. To what extent was this sale forced, and if you know anything about who did the forcing, I vnsh you would let me know. it: Hi it: * * * * Mr. Gates. I regarded it as a forced sale. I had no accounts myself with Moore & Schley's office. He was not borrowing any money for me on any securities that he was holding as agent for me ; I had no account with him. I had taken up my securities at the time the transaction took place. The Chairman. What ^influences, what financial power was it, that forced this sale or that necessitated it? I wiQ not say "forced it." Mr. Gates. I do not know the facts, but my surmise would be, that the finding of a large amount of Tennessee Coal & Iron as collateral in one of the banks or trust companies. The Chairman. Did Mr. Morgan have any decided influence over the attitude of this bank and trust company toward the ' Tennessee Coal cS; Iron Co. stock ? Mr. Gates. I do not know. It is pretty hard to tell where a man's influence starts or ends on Wall Street. Mr. McGillicuddy. At the time this deal was consummated, in November, 1907, whereby the stock of the Tennessee Coal & Iron Works was transferred in exchange for the steel seconds, what, in your opinion, was the total value of the property of the Tennessee Coal & Iron Works ? Mr. Gates. I think I stated that that was problematical. Mr. McGiLLiouDDT. I want your opinion on it. Mr. Gates. My opinion is that it was bought at a bargain sale; it was a forced sale on the part of the owners of the Ten- nessee. (Hearings, pp. 12, 13.) Mr. Young. And it was true also, was it not, that during the panic the stock of the Tennessee Coal & Iron Co. greatly depre- ciated because of the situation ? Mr. Gates. Well, I think the stock of the Tennessee Coal & Iron Co., if it had not been unduly depressed, would not have gone down much, because it was held hy a syvdicate of men who I thought, and we all thought, covM go through any panic and carry their securities. Mr. Young. Unless you were mistaken about that, why did they not carry it through instead of seUing it at a loss ? Mr. Gates. They discovered a lot of it up as collateral in a bank or trust company. Mr. Young. What bank was it? I forget the name; it is a matter of public knowledge. Mr. Gates. The Trust Co. of America. Mr. Thome was one of the syndicate. The bank is solvent, strong, and the stock selling at $300 or $400 a share. INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 183 Mr. Young. But you say this bank had made application to the clearing house for help ? Mr. Gates. There was a run on them then by the brokers. (Hearings, p. 15.) The "run" on the trust company of which Mr. Gates speaks, was the result of the activities of Mr. George W. Perkins, at that time a member of the finance conmaittee of the United States Steel Corpora- tion and a member of the firm of J. P. Morgan & Co. On the morning of October 23, 1907, there appeared in the New York Times an article headed "Aid to the Trust Co. of America." This article recites that — It has twelve millions, and as much as may be needed is pledged. J. P. Morgan is to help. With other financiers he acts at night meeting with Secretary Cortelyou. The situation clearing. Government aid pledged, and Cortelyou will super- vise for the Treasury. At a conference between Secretary Cortelyou, who came on from Washington in response to a hurry call, and the chief bankers of the city, headed by J. P. Morgaij, at the Hotel Man- hattan last night, it was formally decided that the point needing buttressing now is the Trust Co. of America, the third largest , institution of its kind in the city, and of which Oakleigh Thorne is president. Earnest attention was given to this new problem, and the result was the formation of a powerful syndicate to stand by the company at its opening to-day. This determination was announced at 1 a. m. in the following official statement, after Mr. Perkins and President Thorne had been in conference at the Union League Club subsequent to the Hotel Manhattan gathering: "the OFFICIA-L STATEMENT. "The chief sore point is the Trust Co. of America. The con- ferees feel that the situation there is such that the company is sound. Provision has been made to supply all the cash needed this morning. The conferees feel sure the company will be able to pull through. The company has $12,000,000 cash and as much more as needed has been pledged for this purpose. It is safe to assume that J. P. Morgan & Co. will be leaders in this movement to furnish funds. "A committee has been named, including a representative of Morgan & Co. and others, to look over the accounts of the Trust Co. of America with the idea of definitely determining its posi- tion. "The guaranties of cash made last night are for the purpose of meeting any demands upon the Trust Co. of America, pending the completion of this examination." After the close of the Manhattan conference one of the chief conferees, a clearing-house committeeman, said : " I think it safe to say now that no other financial institution of the least importance will have to undergo the experiences of 184 INVESTIGATION OF UNITED STATES STEEL COKPOKATION. the Knickerbocker Trust Co. I feel optimistic for the first time since these troubles began." It was also said there was no thought that the Trust Co. of America was in anything hke the position of the Knickerbocker Trust Co., but these steps were taken with the intention of mak- ing an authoritative statement before noon to-day that the Trust Co. will be taken care of in any eventuality, providing conditions are found as sound as there is every reason to believe them to be. That these interests have agreed, pending final examination of its. accounts, to supply the Trust Co. of America with any cash needed was pointed to as proving the confidence of aU interests in the soundness of the cornpany. Those who were at the Hotel Manhattan conference with Mr. Cortetyou were- J. P. Morgan, George F. Baker, George W. Per- kins, Frank A. Vanderlip, A. B. Hepburn, of the Chase National Bank; President StUlman, of the City National Bank; J. G. Cannon, vice president of the Fourth National Bank, and State Comptroller Glynn. Most of them stayed an hour or more, and Mr. Perkins was the last to leave, not getting away until nearly 12 o'clock. (Hear- ings, pp. 1663, 1664.) In a letter to Mr. Thorne of date of March 18, 1907, Mr. Chas. H. Boynton gives a detailed account of how and by whom the Trust Co. of America was declared to be "the chief sore point" among New York's financial institutions. The letter is as follows : Charles H. Boynton, 7 WaM Street, New Yorlc, November 18, 1907. Oakleigh Thoene, Esq., President Trust Co. of America, 35 WaU Street, New Yorh My Deab Mb. Thorne : My recollection as to the statement given out in the early morning hours of Wednesday, October 23, is quite distinct. About 1 a. m. I went to the Hotel Manhattan for the purpose of having a word with Secretary Cortelyou. The Secretary was standing at one side of the corridor, and I started toward him, but at that instant one of the newspaper men said "Mr. Perkins is about to give out a statement." The newspaper men had gathered about a gentleman who began to dictate to them the announcement which began: "Attention had been directed mainly on Mr. Oakleigh Thome's Trust Co. of America." This gentleman I afterwards learned was Mr. Phillips, of the Times. As he began one of the reporters asked, "Is this state- ment to be credited to Mr. Perkms?" Mr. Phillips replied, "Don't put it that way, say it comes from one oif those who was present at to-night's conference." Ejiowing that Mr. Stanley, whom I had left at the Lotos Club, was extremely interested in the outcome of the conference, I copied the statement as it was given out for my own purposes, and upon its completion hastened to the Lotos Club, where I met Mr. Stanley, and he asked me if I would be good enough to read the statement to you over the telephone. You were unable to INVESTIGATION OF UNITED STATES STEEL COEPORATION. 185 come to the telephone, and in your place I read the announce- ment to Mr. Perry. As I came out of the booth Mr. Stanley awaited me, and I started to read the statement to hiqi. I*had just begun it when Mr. Perkins came down the stairway, at the foot of which I was standing. I greeted him and renewed the reading of the state- ment, saying to Mr. Perkins: "You will not be interested in hearing this." He replied: "Yes; read it to me, I wish to see if I can recognize it." Mr. Perkins listened to my reading and made no dissent or correction. Let me add that I was distinctly of the impression, and I think the newspaper men present also felt, that the statement given out by Mr. Phillips to the newspaper men emanated from Mr. George W. Perkins. Yours, very truly, Chas. H. Boynton. (Hearings, p. 1700.) Mr. Thorne has stated to this committee that this injurious state- ment was utterly without any foundation in fact and has described its immediate effect upon his bank, the Trust Co. of America. Mr. Littleton. Were you at the conference at the Manhattan Hotel ? Mr. Thorne. I was not. Mr. Littleton. Were you invited ? Mr. Thorne. No, sir. Mr. Littleton. Did you know there was such a conference 1 Mr. Thorne.- No, sir. Mr. Littleton. Did you know that the Trust Co. of America was being discussed there 1 Mr. Thorne. No, sir. Mr. Littleton. Had you been told that the Trust Co. of America would be discussed there ? Mr. Thorne. No, sir. Mr. Littleton. Had anybody suggested to you that its con- dition was regarded as critical ? Mr. Thorne. No. Mr. Littleton. You say you saw this at half past 8 on the morning of the 23d, when it was brought to your attention by Mr. Hilton. How soon after that was it that you opened the doors ? Mr. Thorne. An hour and a half. We opened at 10 o'clock. Mr. Littleton. On ordinary days, what provision had you ' for the paying out of money? That is, what physical conven- ience did you have in the shape of windows — how many? Mr. Thokne. One. Mr. Littleton. A pajr window and a Mr. Thokne. A receiving window. Mr. Littleton. What happened when you opened the Trust Co. at 10 o'clock? Mr. Thorne. Prior to opening the Trust Co. on that morning a line had formed; and the moment we opened, of course, there was a rush to the window. Mr. Littleton. A line had formed on Wall Street ? 186 INYESTIGATION OP T7NITED STATES STEEL COEPOEATION. Mr. Thorne. Yes, sir. Mr. Littleton. Reaching in what direction — toward Broad Street ? Mr. Thoene. No ; as I remember, it was turned down toward WUliam Street. Mr. Littleton. Down toward the river ? Mr. Thorne. Yes, sir. Mr. Littleton. Did you see the formation of the line before the company opened ? Mr. Thoene. I saw the line. Mr. Littleton. How extensive was it ? Mr. Thorne. I should think there were two or three or four hundred people there. Mr. Littleton. And they were in the order in which people are who must follow one the other ? Mr. Thoene. Yes; they were in line. Mr. Littleton. Having seen the formation of this line prior to the opening, did you make any provision to accommodate themi Mr. Thorne. I do not remember whether we made provision prior to the opening or not — that is, prior to 10 o'clock; but by 11 o'clock or half past 10 we had seven paying windows open. Mr. Littleton. In other words you increased sevenfold the physical conveniences of paying out money in order to accom- modate this line? Mr. Thoene. Endeavoring to get rid of them. Mr. Littleton. Yes. Mr. Thoene. Knowing what a line meant, we were endeavor- ing to get rid of the line. Mr. Littleton. In other words, if you could have melted up the line, absorbed it once, you felt that the alarm which is infec- tious and more or less unreasoning would not be likely to spread to other people and draw attention to the company ? Mr. Thoene. Exactly. Mr. Littleton. What happened in the shape of the absorption or diminution of the line? Mr. Thorne. It increased. Mr. Littleton. It increased; and by 12 o'clock what had it amounted to? Mr. Thorne. It is impossible to say. It extended away down the street. The street was full of people. Mr. Littleton. It was besieging the doors for payment? Mr. Thoene. Surely. Mr. Littleton. How much money did you pay out that fore- noon ? Mr. Thoene. I could not divide it between noon and 3 o'clock. We paid out $13,500,000. (Hearings, pp. 1664-1666.) It is not proposed to analyze the motives of Mr. Perkins in giving currency in the midst of a panic to the statement which ended in a disastrous run on this bank, which was, and even under this strain proved to be, absolutely sound and solvent. There can be no doubt, however, as to one of the effects of j, successful run upon the Trust Co. of America and the bankruptcy INVESTIGATION OF UNITED STATES STEEL COKPOBATION. 187 of Oakleigh Thome. His assets would have passed into the hands of his creditors, and among these assets was a large block of the securities of the Tennessee Coal & Iron Co. It is scarcely credible that Per- kins could have intended the ruin of the trust company, and yet we can not surely interpret his meaning. We leave it where the record leave it — unexplained. Thome weathered the storm without the surrender of .the stock. Schley at last consented to throw overboard his securities in this company and with them his associates in the syndicate as the last and only hope of saving his financial craft. After considerable negotiation through Lewis Cass Ledyard with J. P. Morgan, H. -C. Frick, Judge Gary, and George W. Perkins, the Steel Corporation agreed to exchange its second-mortgage bonds for the stock of the Tennessee Coal & Iron Co., giving $11,904.76 par value of said bonds for each 100 shares of stock of the par value of $10,000 so dehvered. No money changed hands — the bonds aggregating $34,648,977.64. (Hearings, pp. 1123, MacKae Rept., p. 4308.) It is not surprising that the gentlemen who engineered this deal and who reaped a rich harvest "from the strained condition then ex- isting in financial circles in New York, whether they produced that condition or not, did not feel absolutely secxu-e or certain about the ultimate action of those intrusted with the enforcement of the law against combinations in restraint of trade. This, under the circumstances, most natural apprehension is evi- denced by the hurried and unheralded journey from New York to Washington of Judge Gary and Mr. Frick for the purpose of inter- viewing the President of the United States and ascertaining the probable action of the Department of Justice with reference to the contemplated merger before its final consummation. Mr. Perkins describes the circumstances attending this "hurry caU" upon the President: Mr. Baetlett. He left New York at midnight on Sunday night? Mr. Perkins. I got the telephone to the White House opened about 9.30 o'clock on Monday morning, and talked with Mr. Loeb, and found that Judge Gary had just come in, and that he and Mr. Frick were with the President. I asked him if he could not find out before time for the trust companies to open and the exchange opened what the President's view was likely to be. Judge Gary came on the phone about a quarter of 10 and said that the President was considering it, and that he would call me again in a few minutes. At five minutes of 10, as I remember it, he came back to the phone and said that the President felt that under all the circumstances he had no right to interfere, and that therefore he and Mr. Frick were willing to report to us that they would come back to New York and vote with the committee to acquire that stock. I immediately let that be known— it was 188 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. just three or four minutes of 10 o'clock — for the effect that was to have on the trust companies opening and on Moore & Schley's loans. I simply state that to show you how close, to almost minutes, this thing had resolved itself to. _ Mr. Baktlett. You got into communication with the Execu- tive Office at about 9.30 a. m. ? Mr. Perkins. Yes, sir. Mr. Baetlett. And you were informed that Judge Gary and Mr. Frick were in conference with the President ? Mr. Perkins. Had just come in to see him. Mr. Bartlett. And about 10 minutes to 10, 20 minutes there- after, you got this message that loosened up this whole matter ? Mr. Perkins. It was very close to 10 o'clock. How long they had been with the President at that time I do not know. Mr. Bartlett. This question, which had troubled your law- yers and emiaent counsel, was decided by the Chief Executive m less than 20 minutes ? (Hearings, pp. 1605, 1606.) After 20 minutes' consultation with Messrs. Gary and Frick, the President penned the following communication to the Attorney General: The White House, , WasMngton, November 4, 1907. My Dear Mr. Attorney General: Judge E. H. Gary and Mr. H. C. Frick, on behalf of the Steel Corporation, have just called upon me. They state that there is a certain business firm (the names of which I have not been told, but which is of real importance in New York business circles) which will undoubtedly fail this week if help is not given. Among its assets are a ma- jority of the securities of the Tennessee Coal Co. Application has been urgently made to the Steel Corporation to purchase this stock as the only means of avoiding a failure. Judge Gary and Mr. Frick inform. me that as a mere business transaction they do not care to purchase the stock; that under ordinary circumstances they would not consider purchasing the stock, because but little benefit wUl come to the Steel Corporation from the purchase; that they are aware that the purchase will be used as a handle for attack upon them on the ground that they are striving to secure a monopoly of the business and pre- vent competition — not that this would represent what could honestly be said, but what might recklessly and untruthfully be said. They further inform me that as a matter of fact the policy of the company has been to decline to acquire more than 60 per cent of the steel properties, and that this purpose has been persevered in for several years past, with the object of preventing these accusations, and as a matter of fact their proportion of steel properties has slightly decreased, so that it is below this 60 per cent, and the acquisition of the property in question will not raise it above 60 per cent. But they feel that it is immensely to their interest, as to the interest of every responsible business man, to try to prevent a panic and general inmistrial smash up at this time, and that they are wiUing to go into this transaction, which they would not otherwise go into, because it seems the INVESTIGATION OF* UNITED STATES STEEL COEPOBATION. 189 opinion of those best fitted to express judgment in New York that it will be an important factor ia preventing a break that might be ruinous; and that this has been urged upon them by the combination of the most responsible bankers m New York who are now thus engaged in endeavoring to save the situation. But they asserted they did not wish to do this if I stated that it ought not to be done. I answered that while of course I could not advise them to take the action proposed, I felt it no public duty of mine to interpose any objection. Sincerely, yours, Theodore Eoosevelt. Hon. Charles J. Bonaparte, Attorney General. After sending this letter I was advised orally by the Attorney General that, m his opinion, no suflBcient ground existed for legal proceedings against the Steel Corporation, and that the situation had been m no way changed by its acquisition of the Tennessee Coal & Iron Co. I have thus given to the Senate all the information in the ^ possession of the executive department which appears to me to be material or relevant on the subject of the resolution. I feel bound, however, to add that I have instructed the Attorney General not to respond to that portion of the resolution which calls for a statement of his reasons for nonaction. I have done so because I do not conceive it to be within the authority of the Senate to give directions of this character to the head of an exe- cutive department or demand from him reasons for his action. Heads of the executive departments are subject to the Constitu- tion and to the laws passed by the Congress in pursuance of the Constitution and to the directions of the President of the United States, but to no other direction whatever. Theodore Roosevelt. The White House, January 6, 1909. (Hearings, p. 1122.) This letter contains the following alleged statements of fact: (1) A certain business firm of real importance in New York, having among its assets a majority of the stock of the Tennessee Coal & Iron Co., was about to fail if help was not forthcoming from the Steel Corporation, (2) Some unknown concern was urgently pressing the Steel Corpo- ration to takp over its assets. (3) The Steel Corporation hesitated to take this stock, since it would derive no benefit from the purchase and would be unjustly attacked if it did so and accused of endeavoring to secure a monopoly as a result of the purchase, which accusation is untrue and unwar- , ranted. (4) That the corporation had been for years refusing to acquire any more steel property for fear it might get more than 60 per cent of the business. 190 INVESTIGATION OP UNITED STATES STEEL CX)EPOEATION. (5) That the responsible bankers of New York, acting in concert, were imploring the Steel Corporation to take over this property even at a loss to prevent a "general industrial smash up." Such were the representations -made by Messrs. Frick and Gary to the President of the United States during this brief 20-imnute interview. As to the existence of this unknown business of great importance which was alleged to have had a majority of the assets of the Temiessee Coal & Iron Co. : There was no concern in the city of New York of any importance which had among its assets a majority of the stock of the Tennessee Coal & Iron Co. or which would in any way have been affected by the exchange of such stock as it did have for any other stock. The President was evidently laboring under the impression that some great financial institution burdened with its load of Tennessee Coal & Iron securities was tottering to its ruin and about to "smash up" other concerns by its f aU. Now the evidence before this committee shows that the majority of this stock was locked up in the strong boxes of Oglebay, Hanna, Gates, and others, no one of whom was in any way involved. "There was probably no floating stock," says Gates, "it was so closely held by the people who had bought it for an invest- ment. There was practically no stock in the hands of the bro- kers." (Hearings, p. 16.) Out of over 300,000 shares, Kessler and Schley held only about 40,000 or 50,000 shares that had not been "pegged" by the men who were eagerly and vainly endeavoriag to keep it out of the hands of specu- lators and. jobbers whose misfortunes or greed might render them a prey to the Steel Corporation or some other concern bent on securing control of a property which the syndicate considered almost invalu- able. Even the firm of Moore & Schley which was the only concern affected by this deal, never owned a share of this stock. Mr. Littleton. Did Kessler or any other customer who had bought stock through Moore & Schley so default in the payment of tfceir margins or the caUs made on them that Moore & Schley had to take the stock ? Mr. SoHLET. Moare & Schley never owned any. Mr. Littleton. Just prior to the panic, how much stock did you have of the Teimessee Coal & Iron Co. ? Mr. Schley. In 1907 ? Mr. Littleton. Yes. I understand Moore & Schley never had any stock of the Tennessee Coal & Iron Co. Mr. SoHLET. Moore & Schley never owned any stock of the Tennessee Coal & Iron Co. Mr. Littleton. I say I understand that to be the fact. Mr. Sohlet. Moore & Schley are not speculators. They do not own securities. (Hearings, p. 1059.) INVESTIGATION OP UNITED STATES STEEL COBPORATION. 191 ■ Schley as an individual speculator in stocks had become involved, and having $6,000,000 or $7,000,000 of current securities, the property of O. H. Payne, in his possession, had hypothecated them to save his imperiled credit, and had afterwards given Payne "uncurrent" securi- ties in their stead. He had also a large amount of the stock of the Tennessee Coal & Iron Co. which he was obligated not to dispose of ex- cept under the terms of a syndicate agreement designed to keep those stocks from becoming a speculative security. The Trust Co. of America did not then and never did hold a inajority of the securities of the Tennessee Coal & Iron Co., and was in no way, directly or indi- rectly, affected by this proposed merger, except that the president of the company had obtained 12,500 shares of stock which he had pur- chased as an investment and which he was not attempting to sell to the Steel Corporation or anybody else. Mr. Littleton. Did you pay for your stock ? Mr. Thorne. I did. « Mr. Littleton. Did you take it away from Moore & Schley ? Mr. Thoene. I did. Mr. Littleton. And put it among your securities ? Mr. Thorne. I distributed it — practically 7,000 shares — and kept the balance — distributed it among the people who took it and paid for it. Mr. Littleton. But so far as Moore & Schley were concerned the transaction was clean-cut, was it not ? Mr. Thorne. Yes, sir. Mr. Littleton. You owed them nothing, and they owed you nothing? Mr. Thorne. That is correct. The stock had been delivered and paid for. Mr. Littleton. The purchase of that stock was entirely a personal matter of your own ? Mr. Thorne. Absolutely. Mr. Littleton. And the Trust Co. of America had nothing to do with it ? Mr. Thorne. It never owned a share. Mr. Littleton. At the time of or a little before the panic of 1907, did Moore & Schley owe the Trust Co. of America a loan of some sort ? Mr. Thorne. Yes — in 1906, if I remember correctly; and their loan was paid in 1907. Mr. Littleton. Do you know the amount of their loan in 1907? Mr. Thorne. I do not. It was either $250,000 or $500,000; I do not remember which. Mr. Littleton. Do you know in what way their loan was secured? Mr. Thorne. Yes; it was secured principally by American Tobacco securities. I do not know whether there was any Tennessee Coal &' Iron in it or not. 192 INVESTIGATION OF UNITED STATES STEEL COKPORATION. Mr. Littleton. Just prior to the panic, was there a loan with your Trust Co. to support which there were put up a considerable number of shares of the Tennessee Coal & Iron Co. ? Mr. Thokne. May I ask you this — do you mean whether there was a loan with the Trust Co. that additional collaterals were put up to strengthen ? Mr. Littleton. Ygs; any way in which the Tennessee Coal & Iron steck was concerned. Mr. Thorne. That is not correct. The loan that we made to Moore & Schley was made and was paid off, and there never was any change in the collateral during the time we held it. In other words, we never asked them for any additional collateral, and never needed any additional collateral. Mr. Littleton. To clear up that question finally, was there any obligation of Moore & Schley to your Trust Co. prior to the panic, or prior to your difiiculties, in which you either acquired or demanded additional secxiri ties ? Mr. Thorne. No, sir. Mr. Littleton. Was there among your loans, prior to the panic, some of the Tennessee Coal & Iron stock ? Mr. Thokne. There was. Mr. Littleton. Were those loans of Moore & Schley ? Mr. Thorne. No, sir. Mr. Littleton. They were other loans 1 Mr. Thokne. Other loans. Mr. Littleton. How much of the Tennessee Coal & Iron stock was there among the collaterals of your Trust Co. ? ]VIr. Thorne. There was no Tennessee Coal & Iron stock among the collaterals of the Trust Co., other than as collaterals to loans. Mr. Littleton. That is what I mean. Mr. Thokne. I testified to that in detail before the Senate com- mittee, and I have forgotten the exact figures. Mr. Ga:^dner. Your testimony was that $482,700 was loaned to six indi-viduals. Mr. TJhorne. That is correct. (Hearings, pp. 1654 and 1655.) Schley states he could not borrow money on this "pegged" stock as a sole collateral and that it was simply used as the "sweetener" in some of his loans aggregating $38,000,000 on stocks of every description. He used other industrials in the same way and at this time had up about as much American Tobacco Co. stock as Tennessee Coal & Iron. Mr. Littleton. Do you think that in those loans that Moore & Schley had with the various banks there was any more Ten- nessee Coal & Iron up than there was Tobacco ? Mr. ScHLET. I do not think there was as much in the total. Yes; there was more. I shguld think about the same, or per- haps a little more T^ennessee than Tobacco. Mr. Littleton. Substantially the same ? Mr. SoHLET. Yes. (Hearings, p. 1088.) Out of an indebtedness of $38,000,000 he had secured not to exceed $6,000,000 or $7,000,000 on this Tennessee Coal & Iron. "I calcu- lated," says Schley, "^50 per cent; 50 per cent was about all that we could average." (Hearings, p. 1054.) INVESTIGATION OF UNITED STATES STEEL COEPOKATION. 193 Even such loans as were "sweetened" with Tennessee Coal & Iron stock at the rate of 50 cents on the dollar had not endangered to any extent the stability of the Trust Co. of America. Neither the solvency of the Trust Co. of America nor of any other bank in New York was in anyway affected by the presence of Tennessee Coal & Iron stock, sprinkled through its collateral as a sort of "sweet- ener." It appears from the testimony of Schley, the only man who was using this stock as a basis of credit, that it was in no instance the sole security for a single loan in all his thirty-eight or forty million dollars of indebtedness. Yet the President of the United States was led to beheve that a great bank, its assets gorged with these indi- gestible securities, was about to collapse if the steel company did not immediately exchange them for its bonds. "Mr. Frick and Judge Gary both spoke to me," says Col. Roosevelt, "I can not of course remember who it was that made any given statement, and I can not pretend at this time, the events being nearly four years in the past, to give with verbal accuracy what they said — to this effect: That they were urged by various representatives of the big business interests in New York to acquire the Tennessee Coal & Iron propertj^, because the Tennessee Coal & Iron securities were assets in, I think they only told me, one big trust company — but I had previously been in- formed that there were two such trust companies, but that the Tennessee Coal & Iron properties were assets, and a very large proportion of the assets, of a certain big company which was threatened with failure — and they were firmly convinced that it would fail if nothing were done, because those securities had no market value at the moment." (Hearings, p. 1373.) The run on the Trust Co. of America had occurred in October, and at the time Judge Gary and Mr. Frick visited the President was, as is testified by Mr. Thome, in no danger or trouble whatever. The President was advised that some unknown concern was urgently pressing the Steel Corporation to take over its assets. After the most thorough and exhaustive examination of every witness thought to be cognizant of the details of this transaction subject to the subpoena of this conmaittee, it has been unable to ascertain any bank or trust company in the city of New York which ever urged the Steel Corporation to take over the Teimesspe Coal & Iron Co. as its only salvation or that was embarrassed by the presence of the Ten- nessee Coal & Iron Co. securities among its assets. Thorne expressly stated that his bank was neither helped nor hurt by this merger. It was neither a bank nor a firm, but a single individual, a stock broker in New York who had become involved by using in the stocks of O. H. Payne which had been purchased outright and left in his keeping, and in the stocks of the Tennessee Coal & Iron Co., which had been "pegged" and tied up for the purpose of preventing the very speculation in which he was indulging. 54946°— H. Kept 1127, 62-2 13 194 INVESTIGATIOIf OP UNITED STATES STBEt OOEPOEATION. It appears that Schley had never borrowed a dollar upon this stock as the sole security and that he could not borrow one dollar. Mr. Littleton. In 1905 and 1906 was there any loan wholly supported by Tennessee Coal & Iron ? Mr. SoHLET. With Moore & Schley ? Mr. Littleton. Yes. Mr. Schlet. I do not know of any. Mr. Littleton. You do not know of any ? Mr. Schley. No. Mr. Littleton. And was it your practice in 1905 and. 1906 to put in the Termessee Coal & Iron stock substantially in the manner you have described already, as a part of the 30 per cent of industrial stock ? Mr. Schlet. Yes. Mr. Littleton. That was true long before the panic ever came on? Mr. Schlet. That was true of all our industrials. (Hearings, pp. 1063-1064.) Even if it had been necessary for Mr. Schley to reahze immediately upon the Tennessee Coal & Iron stock which he had hypothecated, his financial distress could easily have been relieved by the United States Steel Corporation without the absorption of the Teimessee Coal & Iron Co. This Schley unequivocally admits. What Mr. Schley needed was not the removal of Tennessee Coal & Iron stock from Ms loans, but money to pay Tiis debts. He states, that he had other stocks, American Tobacco Co. stocks. Republic Iron & Steel, and any number of other industrials which were to a greater or less degree unsalable, just as the Tennessee Coal & Iron stocks were, and the exchange of the steel company's bonds for any of these stocks would have served the purpose just as weU. Mr. Littleton. Why was it any more necessary to exchange the stock of the Tennessee Coal & Iron Co. for the sinking-fund bonds of the Steel Corporation than it was to exchange the stock of the Republic Co. or any other of the industrials which formed the 30 per cent of these loans, and get in exchange something like the United States sinking-fund bonds, as you did to nego- tiate the sale of the Tennessee Coal & Iron stock for those bonds ? Mr. Schlet. It was not. (Hearings, p. 1073.) The Steel Corporation had already loaned Schley over a million dollars on these very same stocks, and they had the same authority to exchange six for seven millions as they had to exchange for one. The loan of four or five millions of the steel company's bonds, says Mr. Schley, would have served the purpose quite as well as the merger of the company of which he was syndicate manager. Mr. LrnLETON. If the steel company would lend you the $5,000,000 or $6,000,000 which it is said in the record they would have loaned, and which you said would have made you happy; thai would have made you happy? Mr. Schlet. Yes, sir. (Heanngs, p. 1089.) INVESTIGATION OF UNITED STATES STEEL OORPOKATION. 195 Judge Gary admits this could be done, and, what is more, admits it could have been done without embarrassment to the Steel Corpora- tion. It is easy to understand how little embarrassment it would have caused the Steel Corporation since the second-mortgage bonds which were exchanged for Tennessee Coal & Iron stock were treasury stock in the vaults of the Steel Corporation, and by the exchange of these securities the Steel Corporation was out not a single dollar by this transaction. Mr. Littleton. You could have loaned the bonds without any embarrassment to the Steel Corporation, could you not? Mr. Gakt. We could. Mr. Littleton. And if the bonds when exchanged were the means of saving Moore & Schley they would have been just as efficient means when loaned, would they not? Mr. Gary. They would. Mr. Littleton. .And therefore the purchase of the Tennessee Coal & Iron Co. would have been whoUy unnecessary in that particular view of it ? Mr. Gary. I should think so. (Hearings, p. 170.) Ifj as Mr. Frick maintained, Tennessee Coal & Iron stock was not worth more than 60, it is inconceivable that the United States Steel Corporation wotild exchange its bonds for over three hundred thousand shares of Tennessee Coal & Iron stock at par, incurriag loss to their stockholders of over twelve millions of dollars, when the same result could have been obtained by a loan of five million, secured by the same stock, especially in view of the fact that Judge Gary said they had the authority to make this loan and that they could have made it without embarrassment, and that they had already turned over to Schley over a million dollars of bonds, and had selected these securities out of all the stocks of Schley as the most desirable indem- nity against any loss resulting from the exchange. Judge Gary main- tains that the steel company, in the hope of staying a disastrous panic and securing the return of confidence and peace to the community, incurred a financial loss and submitted to unjust persecution, which they anticipated as a result of this merger. The value of the Tennessee Coal & Iron Co.'s stock is the crux of the whole controversy. If the securities of this company were not •worth more than thirty-five or forty millions of dollars to the Steel Corporation, then it had no motive in refusing to relieve the necessi- ties of Schley without the surrender of his stock in this company; and it might reasonably be maiatained that the "hammering" of his firm in the street and that the run on the bank of Oakleigh Thome were in no way inspired or encouraged by the powerful interests behind the Steel Corporation. If, however, this concern was a formidable com- petitor, if its existence threatened the supremacy of the Steel Corpora- tion in the South, and if its vast holdings were infinitely more valuable 196 INVESTIGATION OF UNITED STATES STEEL COBPOKATION. than the second mortgage bonds by ■which they were obtained, then the Steel Corporation was the immediate beneficiary of Schley's embarrassment and would have been an eager bidder had the securities of Oakleigh Thome gone under the hammer. Nobody knew better than the directors of the Steel Corporation the actual value of these properties to the Steel Corporation. In a state- ment to their stockholders they frankly admit the great value of this property. At page 29 of this report the following is foimd: In November, 1907, the corporation acquired a majority of the common stock of the Tennessee Coal, Iron & Railroad Co., as is set forth in detail on page 25 of this report. The purchase was made during the financial panic of October, 1907. The parties owning or controlling a majority of the Tennessee Co.'s stock offered the same to the corporation on terms which were satisfactory both as to price and* manner of payment. The purchase of the property promises benefit to the corpo- ration and also aided promptly and materially in reheving £he financial stress at the time existing. The Tennessee prop- erty is very valuable. Its mineral resources are large. The location of the iron-ore and coal deposits in the immediate proximity of the manufacturing plants enables the production of iron at reasonable cost. It is believed the Hnes of business of the Tennessee Co. can be materially extended. (Hearings, p. 1133.) At the time of this transaction Mr. Gates in a pubUshed interview said: As to the purchase of the Tennessee Coal, Iron & Railroad Co. by the United States Steel Corporation, the steel men got the best property in the country, and at a bargain price. I regard it as a sacrifice of stock worth a great deal more than the pur- ' chase price. I did not want to sell my stock, but had to follow the crowd. Had Tennessee stock been thrown on the market, I would have been better off, as I could have u^creased my hold- ings at a low price. The iron-ore and coal deposits of the Ten- nessee Co. are worth many times more than the entire cost of the property to the Steel Corporation. (Hearings, p. 10.) When questioned as to the accuracy of this statement, Mr. Gates repUed: That I would be willing to make an affidavit to to-day, in my opinion; it is purely an opinion. If Col. Roosevelt believed that this property was purchased at a loss to the Steel Corporation, it could only have been due to an abso- lute lack of any accurate information with reference to the extent or value of the Tennessee Coal & Iron Co.'s holdings. The New York Sun, on November 7, 1907, said: The acquisition of the (Tennessee) company is particularly advantageous to the Steel Corporation, because of the iron ore and coal properties that go with it. With the Great Northern INVESTIGATION OF UNITED STATES STEEL COBPOEATION. 197 and Northern Pacific ore lands acquired last year, together with the previous holdings, the Steel Corporation now has iron-ore deposits estimated at approximately 2,400,000,000 tons, of which approximately 700,000,000 tons come with T. C. & I. (Hearmgs, p. 1129.) Mr. John Moody, writing for Public Opinion, October 16, 1908, said: The possibilities of the Teimessee property and the value of its raw materials are so gigantic that even if it were producing nothing at the present time it would have been the best bargain at S45,000,000 that the Steel Corporation or any other concern or individual ever made in the purchase of a piece of property. The Steel Corporation, 15 months ago, entered into a lease with the Great Northern Railway interests whereby it has the right to mine at so much per tori the vast ore deposits of the Great Northern properties. The Steel Corporation agreed to pay to the Great Northern people $1.65 per ton for this ore, and transport a portion of the ore over the Great Northern tracks at a specified rate. The Great Northern ore bodies are estimated to contain about 500,000,000 tons of good ore, which, if all mined and taken by the Steel Corporation at $1.65 per ton. would make an ultimate cost to the Steel Corporation of about $850,000,000, without considering cost of transportation, etc, As stated in the Steel Corporation report for the year 1906, this contract was looked upon as a good one from the standpoint of the Steel Corporation. The object in giving the foregoing details is to bring out a vivid comparison of the Great Northern deal with that made last winter in the acquisition of the Teimessee Coal & Iron Co. The Great Northern properties, containing probably 500,000,000 tons of ore, will ultimately cost the Steel Corporation about $850,000,000; but the Tennessee Coal & Iron properties, which are of far more value than the Great Northern properties prob- ably ever can be, cost the Steel Corporation only $45,000,000. To demonstrate the foregoing statements, let reference be had to the following from the annual report of the Tennessee Coal & Iron Co. for the year ending December 31, 1904. In that report Mr. Bacon, the chairman of the board, said : "Early in the summer of 1904 a committee of appraisers was appointed, representing the Sloss-Sheffield Steel & iron Co., the Repubhc Iron & Steel Co., and this company, to estimate the amount and quahty of the coal and iron ore owned by each com- pany. An examination covering several months was conducted, as the result of which a report signed by every member of the committee was submitted, showing that this company owns in fee over 395,000,000 tons of red ore, of which 381,000,000 tons are graded as first class, 10,177,000 tons of brown ore, and over 1,623,000,000 tons of coal, of which 809,112,000 tons are coking coal. In the coking coal is included 300,000,000 tons of Cahaba coal, which is unexcelled in the South for steam and domestic purposes, and commands the highest market price of any grade of coal in the district. The men in charge of our iron mines esti- mate the holdings of iron ore of the company to be still larger, viz, of first-class red ore, over 450,000,000 tons; of second-class red ore. over 95,000,000 tons; and of brown ore, 16,900,000 tons." 198 INTESTIGA-TION OF tJNITBD STATES STEEL COEPOEATION. From the above it will be seen, figuriag the first-class ore at as low an amount as $1 per ton, that the valuation for that alone is $395,000,000. If we disregard the aggregate estimate of coal and simply take the estimate for coking coal at as low a figure as 50 cents per ton, we get a valuation of $400,000,000 more. A very conservative estimate of the values of the ore and coal deposits of the Tennessee Coal & Steel Co. at the present time is hardly less, in all probability, than $1,000,000,000. Now, as far back as 1901 Mr. Schwab made the statement that the coking coal deposits of the Steel Corporation were of vast value, because of the fact that coking coal of the kind needed for blast furnaces was rapidly growing scarce, and that in a few years there would probably be no more. He disregarded the Tennessee properties, undoubtedly, but by this great acquisition the Steel Corporation has been put in a position where it need have no concern for the future as far as coking coal is concerned. In fact, the acquisition of the Tennessee Coal & Iron Co., aside from being a business stroke of enormous direct profit, has had the effect of rounding out and completing the control by the cor- poration of the ore and coking-coal supplies of the country. That acquisition is of more value to the Steel Trust, and wiU be in the future in many wajs, than its holdings of Lake Superior ores, both because of location and because of general character and quality of the deposits. It is well known that the Tennessee iron-ore deposits are the best in the world for making pig iron; and the cost of produc- tion and manufacture of iron products in that section is consider- ably less than is the case in the Great Northern ore bodies. Therefore it can be easily demonstrated that the acquisition of this property for $45,000,000 added an almost unheard of value to the equity back of the Steel Corporation stocks. Many people have wondered and are still wondering why, in the face of temporarily poor earnings and in the face of tariff agitation, the Steel Corporation stocks, both common and pre- ferred, have been steadily rising since last December, and are now almost at the highest figures of their history. The fore- going demonstration certainly accounts for it. If it were not for the danger involved in tariff agitation, the Steel Corporation common stock would probably be selling to-day at nearly double its present value. In other words, instead of having a market price of $45 per share, a total market value of about $220,000,000, it would be selling in the neighborhood of $90 per share, with a total market vSue of $450,000,000. It could easily reach this point in spite of the fact that the corpora- tion may not pay any larger dividends for several years to come. The appraised value in 1904 of the Tennessee company's prop- erties, as quoted above, was that of a thoroughly impartial and unanimous board. This appraisal must have been known to Mr. Morgan and the rest or his party when the property was taken over by the Steel Trust at the absurdly low price they paid. If they checked the panic by this transaction, tiiey did it by taking a few doUars out of one pocket and putting millions into another. (Hearings, pp. 1130-1131.) INVESTIGATION OF UNITED STATES STEEL OOEPOEATlON. 199 It appears that the Steel Corporation was anxious, not without cause, that the public should know the extent to which the actual values of its own inflated stocks had been increased by the acquisi- tion of its great competitor. Mr. Frank A. Munsey, editor of Munsey's Magazine, was given access to the records of the Steel Corporation, in order that he might publish a full and accurate inventory of its vast properties. When before the Ways and Means Committee Judge Gary was questioned as to the accuracy of this article. Judge Gary said: This is the result of an independent examination by Mr. Munsey concerning the value of our properties. He gives the properties in detail, and his valuation, and if anything I would say that it is a little too high, but it is not very much too high, and certainly properties could not be reproduced for anything like that; in fact, it would be impossible to reproduce them at any price, perhaps some of them. (Hearings, p. 1132.) " The Tennessee Coal & Iron Co.," says Mr. Munsey, " is entered as a separate item in this inventory. Its ore and coal and mills and furnaces and other properties are not included in the other classifications. This company is put in at an estimated value of $50,000,000, which is somewhat more than the Steel Corporation paid for it, but probably a much smaller sum than it is worth to the Steel Corporation. Its chief value lies in its coal and ore Eroperties. its ore is estimated at 700,000,000 tons. It is not as ign-grade ore as the northern ore; but assuming that it is worth 15 cents per ton, it alone would amount to $105,000,000. Its coal is estimated at about a billion tons, which at 10 cents a ton would be $100,000,000. From the fact that the known supply of ore in the country is limited, it may be worth two or three times this price. There is no way of telling just what it is worth. But as a guide to the value of ores, we may take the price fixed upon for the Great Northern ores between James J. Hill and the Steel Corporation. The Great Northern Rail- road and the Northern Pacific had vast holdings of iron ore in the Messabe Range, and after many months of negotiation the Steel Corporation entered into a contract a year ago to take all this ore at a certain price per ton, the price to be advanced each year over the preceding year 3.4 cents. The first year's price, which covered the year 1907, was 85 cents a ton. This year it is 88.4 cents a ton. On this basis the price will soon be over a dollar a ton, and the average cost for the entire supply will be consider- ably in excess of that figure. And this ore is supposed to be of a lower grade, as a whole, than the ore owned by the United States Steel Corporation, which in this inventory has been conserva- tively — ultraconservatively— figured at 60 cents a ton. If the HUl ore is worth over a dollar a ton, the ore of the Steel Corpora- tion is worth quite as much, and even more, as it is of a better grade. And these prices of this Northern Pacific ore have an miportant bearing on the ore properties of the Tennessee Coal & Iron Co. I should think that Mr. Charles M. Schwab is as good an authority as there is in the world on the value of iron ore. He said to me two or three days ago that the ore holdings of the Steel 200 INVESTIGATION OF TJKITED STATES STEEL COKPOEATION. Corporation were easily worth a dollar a ton, and, in fact, might safely and conservatively be regarded as worth still more, for the reason that they can not be duplicated. (Hearings, pp. 1131 and 1132.) It is the opinion of a majority of the Senate committee, to which reference has previously been made, that — To sum the matter up briefly, we think the property is very valuable, worth probably several hundred million dollars, and that among the larger benefits which the Steel Corporation derives from the merger are the control of the open-hearth output of steel rails, the ultimate control of the iron-ore supply of the countiy, the practical monopoly of the iron and steel trade of the South, and the elimination of a strong and growing competitor. (Hear- ings, p. 1134). Judge Gary maintains that the ores in the Birmingham region are incomparably less valuable than the ores of the Lake Superior region. It is true that the Lake Superior ores contain a much higher percent- age of iron than the southern ores, Superior ores running from 50 to 60 per cent of iron. The value of iron ores, however, can not be determined arbitrarily by the per cent of iron which they contaia. The facihty for assembling them and the percentage of lime in the ores is as essential a factqr in determining value as the iron content. An expert knowledge of the subject is not necessary to an understand- ing of the uselessness of such an arbitrary classification. Ores have no other value than the production of iron, and that ore is most valuable, of course, which can be most easily and cheaply converted into pig iron at some point where there is a market for it. All Lake Superior ores must be mixed with limestone before they can be smelted. Roughly speaking, 25 parts of limestone must be quarried and transported to the blast furnace and there mixed with each 100 parts of iron ore before the same can be "fluxed" properly. The percentage of iron in this "fluxable mixture" is necessarily reduced in proportion to the amount of limestone that is added to it. The Lake Superior ores contain no Hmestone. In the Birmingham district nature has to a great extent reheved the furnace man of the labor and expense incident to the mining and mixiag of Hmestone with iron ores. A great part of the Birmingham ores are known as "self -fluxing" ores. This is explained by Mr. Perrin and Prof. Grasty in their testimony before this committee. The Chairman. Are any of these ores self-fluxing ores ? Mr. Perin. Most of the ores of the second and toird class are self-fluxing. The Chairman. What do you mean by self-fluxing ores ? Mr. Perin. In my previous dissertion on iron smelting, I referred to this sandy material, this siliceous material, whidi is known as an acid, and which has to have added to it a base. These ores carry a base in the shape of Hmestone which will take care of the acid material which the ores carry witJi it. In other INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 201 words, when you mine a ton of iron ore you also mine enough limestone to take care of the earthy material contained in the iron. The Chairman. And where they are found mixed together by na,ture, j'-ou mine both at the same time; and if they are not mixed together by nature, you must mine them at separate times ? Mr. Perin. Yes. The Chairman. Now, for example, say you have the highest grade Bessemer ore — 60 per cent iron — how much limestone do you put with that — 25 per cent approximately ? Mr. Perin. Assuming the same type of fuel is used The Chairman (interposing). Yes; I mean taking the same character of fuel. Mr. Perin. Suppose we take standard Connellsville coke in each case, you use approximately a quarter of a ton of limestone. The Chairman. Using the same smeltiag material, the same coke, in 2,000 pounds or material, you would have 1,500 pounds of ore and 500 pounds of limestone ? Mr. Perin. Approximately. (Hearings, p. 982.) Mr. Grastt. You mean, as I understand you, that the Lake Superior ore, while much higher in metallic content than the southern ore, when the limestone is added for fluxing it, as a matter of fact you really reduce the percentages of iron, because you add two things, you mix it together, and you consequently reduce the percentage of iron. The Chairman. In other words, it is not scientifically correct to say, for the purpose of maldng iron, that those limy ores in this district are 33| per cent iron and leaving the furnace there is 66§ per cent of useless material in the making of iron ? Mr. Grasty. No. The Chairman. If you have to have 20 per cent of limestone put in the furnace to fuse the Superior ore, it is just as much an essential part of the iron-making material as the iron itself, or the coke ? Mr. Grastt. It is; yes. That point is well taken, I think. The Chairman. And, if I understand you, you have to mix this iron artificially with Superior ores ? Mr. Grastt. Yes. The Chairman. How much limestone do you have to put in the furnace with a ton of Superior ore ? Mr. Grastt. I don't know about that; I think about one- quarter. I am not positive at all. I can not tell you exactly. The Chairman. About 25 per cent. Mr. Grastt. Yes. The Chairman. How much do you have to put with your limy ore? Mr. Grastt. Sometimes a very small quantity; sometimes none at all. The Chairman. Over 10 per cent ? Mr. Grastt. No; I should say not. The Chairman. Then you can put in 15 per cent more ore into the furnace of the same size when using Birmingham ore than you can a furnace of the same size where you use Superior ores ? Mr. Grastt. Roughly; yes. (Hearings, p. 5320.) 202 INVESTIGATION OP UNITED STATES STEEL COBPOEATION. It will be seen from the testimony of these experts that a "fluxible mixture," artificially made by the commingling of 50 per cent Superior ore and limestone, is in its iron content the exact equivalent of the "self -fluxing" Birmingham ore containing 40 per cent of iron. As has been shown, these ores meet a stiU more practical test. That is, the raw materials essential to the making of a ton of pig iron can be assembled and smelted at Birmingham for from three to four dollars less per ton than at Pittsburgh. The Steel Corporation has capitaHzed its ore deposits at a valuation of $700,000,000. It main- tains that these ores are worth from 40 to 60 cents a ton at the lowest estimate. The committee places no such value upon the Lake Superior ore. Assuming that the estimates made by Nelson and other dis- interested holders of iron ore in the Lake Superior region are correct, that Superior ores contain'ing 50 per cent of iron are worth not to exceed 10 cents per ton, then the Birmingham ores, containing 40 per cent of iron, are as valuable for aU practical purposes. Assuming that the Tennessee Coal & Iron Co.'s holdings are only worth half that amount, even at 5 cents per ton the 700,000,000 tons of ore held by this com- pany are worth all that the entire property cost the Steel Corporation, to say nothing of 1,600,000,000 tons of coal, the Birmingham Southern Railroad, and $11,000,000 in blast furnaces, steel mills, and other improvements. The contention of the Steel Corporation that it took over this property at a distinct loss is absolutely untenable. The President was advised that the Steel Corporation controlled not exceeding 60 per cent of the business and was determined not to increase that control. The President seems to have regarded the United States Steel Corporation simply in the Ught of a manufacturer of finished material and never to have considered the extent of its holdings of raw mate- rial or the effect of that holding upon the steel industry. The Chaikman. Col. Roosevelt, you say they told you that it would not increase their output, their control of finished and semifinished product, over 4 or 6 per cent. Did I understand you correctly? Mr. Roosevelt. I would be unable to say whether they used the words "output" or "iinished product." Exactly what was the expression that I used in my letter to Mr. Bonaparte as to the proportion of the holdings ? Mr. Baetlett. "Control," I think it was. Mr. Roosevelt. The statement was made generally that their Eohcy had been to have less than 60 per cent of the total steel oldings in the country. I am a little doubtful. You see it is four years ago, Mr. Stanley. My memory is that they said this would not increase their holdings to more than 60 per cent; and that some other information at the time was given me to the effect that it would change it from 68 to 62 per cent, but the difference was trival. INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 203 The Chairman. Four or five per cent ? Mr. KoosEVELT. Four or five per cent ; something like that. The Chaikman. Was it your impression from what they said that they were buying some steel mills in Alabama belonging to the Tennessee Coal & Iron Co. — plants ? Mr. Roosevelt. That they were buying the Tennessee Coal & Iron plant. The Chairman. Plant. Did they say anything to you about the ore properties that they were buying at that time ? Mr. Roosevelt. They did not go into detail at all. (Hear- ings, p. 1379.) The corporation's control over the iron and steel industry can not be measured by its output of finished material. If this corporation with its present ore holdings and its transportation facilities should divest itself of all the finishing mills it now holds, its mastery of the business and its control of prices would not be appreciably affected. In any effort to ascertam the effect upon the iron and steel industry by the absorption of the Tennessee Coal & Iron Co., it is as futile to discuss the value of its blast furnaces and rolling mills as it would be to make an inventory of the approximate cost of the blaclcsmith shops on the Mesabi Range. All the raw material in the Birmingham district, with the exception of from 2 to 5 per cent, were held by steel com- panies. The only way to get a foothold in this district was to absorb some existing concern. The Steel Corporation had no holdings in that whole southern region. It was the ore and the coal that the Steel Corporation needed and it was. the ore and the coal that it was after, and yet in their conference with the President the real transac- tion was never mentioned, and after his interview with Messrs. Gary and Frick, as evidenced by Col. Roosevelt's statement before this committee, he was still under the impression that the Steel Cor- f oration had 'bouglit some "plants" in the Birmingham district. It is surprising that the Steel Corporation's rapid and extended control over natural resources had up to this time entirely escaped the attention of the President. Any investigation of this corporation's affairs, however casual, would have revealed it. In the report recently issued by the Commissioner of Corporations this company is expressly charged with a monopoly of the ores and transportation facilities in the Lake Superior district, and the use made of that monopoly is unequivocally condemned. Mr. F. J. MacRae, in his report to this committee, has filed a list of documents furnished by the Steel Corporation to the Conunissioner of Corporations covering over 70 printed pages. Judge Gary testifies that the Government was furnished with tons of data covering every detail of their business and at an expense of several hundred thousand dollars. Among other thi n gs, it is manifest that the Bureau of Corporations was advised as to the location and extent of the mines 204 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. and ore holdings of the Steel Corporation. It appears that the Com- missioner of Corporations had been investigating this company since 1896. On June 26, 1906, at a meeting of the executive committee, at which Messrs. Gary, Frick, Rogers, Morrison, Perkins, Converse, Gayley, Hughitt, J. D. Rockefeller, jr., Corey, Baker, Nathaniel Thayer, and Griscom were present, Judge Gary made the following statement: At the last session of Congress a resolution was passed by both Houses asking the commissioner to investigate the United States Steel Corporation. The commissioner did not pay any attention to that resolution; but soon after Congress adjourned he appeared at this office and stated that he believed it was his duty to know the general purposes in detail of our business, about our corporation, its capital stock, its habihties, its assets, the amount of its business, the costs of production, and its methods generally. After considering the question very care- fully our finance committee seemed to think that it was good pohcy, and, perhaps, advisable, to aid the commissioner in making his investigation; and the investigation has been going on more or less since that time. As stated, however, by the deputy commissioner, we decided to furnish the information that was requested at our own expense and by our own labor. The questions which have been asked are very numerous, very searching, and very comprehensive, and we have undertaken to answer these questions in detail. They involve a great deal of labor on the part of our officials, and of the subsidiary companies particularly — so much so that, with respect to many subjects, the representatives of the department have said that they would not have the time to go over it if we went further into detail or covered a longer period. I am making this explanation because you are interested in it and because you may be more or less disturbed without reason. The finance committee has been in close touch with the matter aJl the time. We have been in frequent and almost constant communication with Commissioner Garfield, and more or less with the President himself, concerning these matters. Up to date they have made no complaint of us whatever; but we do not know any better than you do what may be the future. We are trying to be frank and accommodating to the department, and we suppose we have an understandmg that we will not be unnecessarily injured and that we will not be wron^Uy charged without havmg an opportunity to shpw the facts. We have seen nothing to show us that we need anticipate any troutiie. Quite hkely in some respects we may be traveling very near the line between propriety and impropriety. (Hearmgs, pp. 3S85-3886.) Having already obtained control of the Lake Superior ores, it was vitally important that this concern above aU others should not preempt the only other supply of available ores on the continent. In this case, however, the President did not ask nor did the Com- missioner of Corporations proffer any information whatever. imrESTIGATION or tTNITED STATES STEEL COEPOEATION. 205 As to the contention that the President and the Steel Corporation prevented " a general industrial 'smash-up,'" it is stoutly maintained by Col. Roosevelt and by Judge Gary that the advantage in the "sweetening" of Grant B. Schley's obligations — that is, the substitu- tion of steel bonds for Tennessee Coal & Iron stock in about six or seven million out of thirty-eight million dollars of loans — prevented the most disastrous panic of recent times. Col. Roosevelt when before this committee graphically describes the terrific financial cataclysm in which he played so conspicuous a part: Mr. Lcttleton. I am endeavoring to find out how accurately and truthfully the real situation in the Street was represented to you, and how truthful it was, that it was necessary to have these exchanges of stock in order to save that situation. Mr. Roosevelt. Now, Mr. Littleton, I can answer you right away that I was then thoroughly satisfied, and the after events made me even more thoroughly satisfied, that what was done was necessary to save the situation; that the panic would have spread and very great disaster occurred if exactly what was done had not been done. A good many of the questions, Mr. Littleton and Mr. Stanley, that you are offering are requiring me to search the hidden domain of motive of Mr. Frick and Mr. Gary. I never supposed that they were going to take action that would be damaging to themselves, for I would have been exceedingly sure they would have gotten no gratitude for taking such action if they had taken it. My feeling toward them was — I can illus- trate it by two similies. I have spoken of a sailboat already. If it is necessary to haul on a rope on a boat in order to prevent the boat from gomg over, I welcome the help of any husky individual that hauls and I do not care whether he is hauling f rpm altruistic motives about me or to save his own skin. I want him to pull hard on the rope. That is aU I want. Again, if a fire is coming down a row of buildings, I expect the man on the end of the row to join in and help put out the fire farther up the row, partly, I hope, because he feels kindly toward the threatened people, and also because if the fire spreads it will burn his own building. But I do not ask him to analyze the extremely mixed motives which made him come forward and help put out that fire. I want him to help put out the. fire. That IS all. Mr. Littleton. Taking the first similie, Col. Roosevelt, the only apprehension that the evidence would create in the minds of any persons hearing and reading regarding the pulling on the rope would be this: Whether or not the pulling was on a rope which was actually attached to the sail or whether it was one of the guy ropes attached to the mast. [Laughter.] And if you were to pull the wrong rope, the question is not what you would have done, not what you did, as to whether your motives were good, because I would not question those for a moment. My ' question is as to whether or not you were rightly advised on the situation and encouraged with them to pull a rope which was reaUy attached to the sheet against which the storm was blowing. 206 INVESTIGATION OF UNITED STATES STEEL OOEPOBATION. Mr. Roosevelt. Mr. Littleton, no man during the storm was capable of making any such error as that of which you speak. Not until an danger was passed would any htmian being of knowledge hare ventured to suggest that we were not pulling on a rope that was attached to the saU. The supposition was pre- posterous. We were puUing on a rope that we thought was at- tached to the one sail that was in danger. No human being who knew the facts doubted it, and the result showed it so clearly that it is not possible to be in error about it. (Hearings, pp. 1383-1384.) How a panic which had persistently resisted the combined efforts of the Federal Government and John D. EockefeUer and J. P. Morgan & Co., and remained in unabated fury after Morgan and Rockefeller had turned loose $60,000,000 and the Federal Treasury $25,000,000 more should suddenly be stilled by this manipulation of Grant B. Schley's loans has not been explained either by Mr. Roosevelt or by any other witness. Yet it is urgently maintained that the panic con- tinued prior to this magical scoop of securities and that the instant the Steel Corporation acquired the Tennessee Coal & Iron Co.'s stock it subsided instantly and permanently. Mr. Littleton. Let me ask you this question: When or how did these bonds, which were the curative remedy for the difficulty in Wall Street, reach the point that needed to be cured ?. Mr. Gaet. The announcement from Washington, immediately after the conference with the President, that the trade would be consummated Mr. Littleton. "All is well?" Mr. Gaey. That certainly, I have no doubt, produced a great feeling of reUef immediately in New York. Of course the banks knew then that the purchase would be made and the bonds would be delivered and that everyone would be reheved. Mr. Littleton. Then the men who were saying "Take out Tennessee," "Take out Tennessee" heard the word from Wash- ington that the Tennessee had been sold now, and that the secur- ity which was necessary to protect their loans would come to to take the place of the Tennessee Coal & Iron stock ? Mr. Gaey. There is no doubt of it. (Hearings, p. 176.) That Col. Roosevelt distinctly heard ominous rumblings in WaU Street at the time he consented to this remarkable merger can not be doubted. In the light of subsequent events, it is equally certain that it was the receding and not an approaching storm which dis- turbed him. In an editorial on June 7, 1911, published in the New York World, it was clearly demonstrated that the panic was over prior to the interview between Col. Roosevelt and the representatives of the Steel Corporation: Let the record of the panic testify as to whether this action on the part of Mr. Roosevelt was actually necessary "if a fijiancial cataclysm was to be averted;" INVEsi?IGATION OF UNITED STATES STEEL OOKPOEATION. 207 October 19, 1907, it was announced that Charles W. Morse had resigned from all the banks and trust companies with which he was connected. October 20 the clearing-house committee stated that the Heinze-Morse-Thomas interests had been ehminated from the banking situation. The committee issued the following state- ment: "A committee of the clearing house have examined the several banks of the association that have been under criticism and, find- ing them solvent, the clearing-house committee have decided to render them such assistance to meet their deposits as the com- mittee may think necessary." October 21 the National Bank of Commerce, controlled by Thomas F. Ryan, suddenly notified the other clearing-house banks that it would cease to act as clearing-house agents for the KJnickerbocker Trust Co. October 22 there was a run on the Knickerbocker Trust Co., which closed its doors, and the panic was in fuU swing. That evening J. Pierpont Morgan said: ' 'We are doing everything we can as fast as we can, but nothing has yet crystallized." October 23 something "crystallized," for the New York Times printed a statement inspired by George W. Perkins, one of Mr. Morgan's partners, saying, "The chief sore point is the Trust Co. of America." A run immediately began on the Trust Co. of America. This same day George B. Cortelyou, Secretary of the Treasury, dumped 125,000,000 of Government money into Wall Street. October 24 the Morgan-Rockefeller interests advanced $60,000,000 to steady the stock market. October 25 stocks advanced, and Clark WiUiams, State super- intendent of banks, said the situation was improving. The Trust Co. of America was steadily paying off its depositors, but under difficulties. October 26 Mr. Roosevelt issued a statement congratulating Mr. Cortelyou "on the admirable way you have handled the present crisis." Mr. Roosevelt also congratulated "those con- servative, substantial business men" who did "invaluable service in checking the panic." Apparently the panic was over. The newspapers ceased to publish the news of it on the first page. (Hearings, p. 247.) Up until the time of this interview the Steel Corporation owed its success and its permanency to the power and the skill of the financiers who had created and the iron masters who had directed its operations. Since that time its dominance has been due in no small measure to the sudden, ill-considered, and arbitrary fiat of the Chief Executive. The President's refusal to interfere was an absolute warrant to proceed. A suggestion from him to the Attorney G«neral was equiva- lent to a command; and upon a refusal of the Attorney General to act, the corporation was immune. This is admitted by Col. Roosevelt, and he unhesitatingly assumes full responsibility in the matter. 208 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. In transmitting his letter of November 4, 1907, to the Senate, the President states: ♦ As to the transaction in question, I was personally cognizant of and responsible for its every detail. (Hearings, p. 1122.) Before this committee Col. Roosevelt stated: Mr. LiTTLiETON. I call your attention to what it is only neces- sary to call your attention to, because you undoubtedly have it in mind, that the Sherman antitrust law, whether wisely or unwisely remains to be seen, provides in section 4 that the Attor- ney General or the district attorneys could, if they chose to do so, invoke the courts of equity to enjoin certain powers. Mr. Roosevelt. Certainly. Mr. Littleton. And that remedy has been held to be an exclu- sive remedy; that is, they are the sole authorities who could invoke the courts of equity to enjoin such pow6rs? Mr. Roosevelt. Yes. Mr. Littleton. I suppose you naturally understood Mr. Gary and Mr. Frick were commg to you because of a distressing situa^ tion in New York, because if they undertook to do this thing without apprising the Government fully what they intended to do, and they were enjoined in the proceeding by the Attorney General, it would make the difiB.culty all th^ worse. Mr. Roosevelt. My own belief was — of course again I am now giving my impression of their acts, Mr. Littletdn. Mr. Littleton. Yes. Mr. Roosevelt. But my belief was that they knew that even if I did not direct an injunction against them, that if I merely stated that it ought not to be done, they could not do it. Mr. Littleton. Yes. In other words, the adverse attitude of the Government, whether in a distinct direction to your Department of Justice, or the announcement of your position — — Mr. Roosevelt. Would have been conclusive agamst it. Mr. Littleton. Would have been conclusive against it. Mr. Roosevelt. As I said there, my responsibility was com- plete and absolute. I can not state it any stronger, Mr. Littleton. (Hearings, p. 1387.) If the Steel Corporation could have absorbed the Tennessee Coal & Iron Co. without a semblance of injury to the steel industry or without the violation of existing law it would not have been necessary for Judge Gary and Mr Frick, on a special car "rigged" up at mid- night, to make that hurried run to Washington or to confer with the President before breakfast. If the merger was in violation of the law it is equally clear that the President had no right to condone or encourage its violation, or to prevent the Attorney General from per- forming his duty, even though the prosperity of a dozen bankers in New York had depended upon it, much less the fate of a single stock broker, whose reckless transactions had involved him in financial disaster. IKTESTIGATION OF tTNITED STATES STEEL COBPOBATION. 209 As stated by Senators Culberson, Kittredge, Overman, Rayner, Bacon, Nelson, and Foraker, in a report touching this transaction, filed March 2, 1909: Assuming, therefore, for present purposes, that the absorption of the Tennessee Co. by the United States Steel Corporation was in violation of the act of Congress approved July 2, 1890, commonly known as the Sherman antitrust law, we are of the opinion that the President was not authorized to permit the absorption. The proposition is self-evident, needing neither argument nor judicial authority to support it, for manifestly the President is without authority to annul or suspend a law or to direct its nonenforcement either generally or in a particular case. The principle involved, in its broadest sense, is inherent in our form of government and is essential in the preservation of the rights and liberties of the people. This view is strengthened, if such were necessary, by the fact that the President is the one official who is by the Federal Constitution expressly enjoined to "take care that the laws be faithfully executed." Whatever may be the supposed emergency, no discretion is lodged in the President as to the enforcement of the law. This is a govern- ment of law and not of men, of law universal in its application, as to which none are immune. It is imperative that this prin- ciple be preserved in such a case as this, lest in time we revive the despotic prerogative of kings to create and Ucense monopolies. CHearings, p. 1135.) FINANCIAL AND INDUSTBIAL RELATIONS OF THE OFFICERS AND DIRECTORS OF THE TTNITED STATES STEEL CORPORATION WITH OTHER CONCERNS. A corporation speaks and acts through its officers, and the charac- ter and scope of its influence are to a great extent determined by the personnel of its directorate. Where two or more corporations are owned and operated by the same group of individuals, their interests will be identical, and in a great measure the strength of one is the combined strength of all. This is true to a degree where the directorates interlock. This rec- ord is replete with instances of the pernicious effect sometimes upon the Steel Corporation itself, and more often upon the public gener- ally, of this interlocking of directorates. The enormous sum paid for the properties of the Lake Superior Con- ' solidated Iron Mines and the manifestly excessive sum for the Troy Steel Products Co., with rebates on purchases to the Standard Oil Co. ; the purchase of supplies by the International Harvester Co. and the American Tin Can Co. at greatly reduced rates ; the complicated web of agreements in restraint of competition, low costs in sliding-scale contracts, and the huge sums paid Mr. H. C. Frick and others in the absorption of the Union-Sharon Steel Co. ; the inordinate sums paid to promoters and underwriters are concrete instances of abuses 54946°— H. Rept 1127, 62-2 14 210 INVESTIGATION OF UNITED STATES BTEEITXfOBae'OKS-lXUJX. directly traceable to this community of interest between a few pow- erful individuals in control of a nimiber of great corporations. The Steel Corporation is capitalized at $1,745,724,284.49 (McRae Rept, Ex. 20) ; but this sum, huge as it is, in no degree determines its actual power. The influence of this consolidation is measured only by the com- bined strength and resources of the 24 directors, who control its resources and direct its operations. The Steel Corporation is strengthened and fortified by combina- tion and cooperation with the multitude of industrial and financial institutions with which its directors are identified and over which they exercise a greater or less, degree of control. These connections, infi- nitely extended and complicated, reach every department of pro- ductive industry and accumulated wealth, permeating the domain of mining, manufacturing, and transportation throughout the country. One or more of the directors of the Steel Corporation are also directors in terminal, steamship, express, and telegraph companies having a total capitalization of $1,271,778,890; in industrial corpora- tions with a combined capitalization of $2,803,509,348; and in banks and trust companies having a capital, surplus, and undivided profits aggregating $3,314,811,178. Of $18,417,132,238 invested in railways of the United States, the directors of the Steel Corporation have a voice in the directorates of or act as executive officers of railroad companies with a total capitali- zation and bonded indebtedness of $10,365,071,833. (See Exhibit D, appendix to this'report.) Many of the evils incident to the close cooperation and often com- bination between great banking, manufactm-ing, and transportation companies are due to the merger of such companies under the control of a " holding company." The holding company is not an evolution, it is an abuse of corporate power, and its prime purpose almost without exception has been the evasion or the violation of the law. It provides a method for combining imder one management and control corporations from one end of the country to the other. The holding of the stocks of transportation fines and other great concerns doing an interstate business by such companies should not be tolerated by the Federal Government where it has the authority to prevent it. The United States Steel Corporation, utilizing to the utmost the opportunity for consofidation and control afforded by a holding company, and supported and sustained by its aUies, financial and industrial, has secured an unquestioned and an absolute dominance over the production, manufacture, and transportation of its product. The extent of that control and its freedom from the restramt inci- dent to legitimate and effective competition is reflected in the prices INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 211 obtained for its output since its organization. From January 1 to December 31, 1910, the net earnings of the Steel Corporation haye aggregated the huge sum of $1,029,685,389.28, or an average of $13 per ton upon its sales to outside customers, or a net profit of 40 per cent on the actual cost of production. (MacRae's Rep., p. 3528.) Mr. Carnegie, who has had every opportunity to know the situation existing in this industry and who now has but little motive to dis- semble, has stated to this committee: Mr. Beall. Do you draw any distinction between a corpora- tion like a railroad corporation, a great public corporation, and one of these industrial corporations ? Mr. Carnegie. Not if the industrial corporations combine and make an arbitrary price. I see no difference. Mr. Beall. Is it not a fact that the reason you are now sug- gesting this appeal to the Government is that in the last 10 or 12 years we have witnessed such a growth in these great corpora- tions that they have now grown so strong and so great that it is the Government, and the Government alone, that is strong enough to face them upon the battle field? Mr. Carnegie. That is my opinion. Mr. Beall. That the only agency that can control them, that can combat with them, is the power of the Federal Government ? Mr. Carnegie. That is my opinion, and it is not recently formed. Mr. Beall. And that before corporations of this kind and combinations of this kind, both existing, as you think, the con- sumers of this country are absolutely helpless ? Mr. Carnegie. Yes; they at the mercy Mr. Beall (interposing). They are at the mercy of these corporations ? Mr. Carnegie. Certainly. You will find this as strongly stated as I can state it in this statement which I have preparedf. (Hearings, p. 2430.) REMEDIAL LEGISLATION RECOMMENDED. The control of corporations by the Federal Government, as recom- mended by Mr. Carnegie, Judge Gary, and others, is not approved. Whatever may be the evil results of the elimination of competition from the steel business, it does not justify such a remedy and could not be cured by it. Such a control, semisocialistic in its nature, is beyond the power vested by the Constitution in the Federal Congress. The abuses mentioned in this report can in a great measure be remedied by giving to the operations of the United States Steel Cor- poration and other like corporations the widest publicity, and by the strict enforcement of laws specifically inhibiting the employment of cunning devices by which an unfair advantage over competitors is secured. The Bureau of Corporations possesses the authority to thoroughly investigate the internal affairs of industrial concerns doing an interstate business. Had the character of the Steel Corpora- 212 INVESTIGATION OP UNITED STATES STEEL OOEPOEATION. tion and the natiire and extent of its operations been known to the people and to the President of the United States at the time of the absorption of the Tennessee Coal & Iron Co., it is highly improbable that the Chief Executiye would in 20 minutes have given his consent to a merger fraught with infinite injury to the steel industry and to the public alike. The Commissioner of Corporations should be required to report to Congress as well as to the President of the United States, at such times and upon such conditions as it may prescribe, and the law creating this bureau should be so amended as to make such reports mandatory upon the Commissioner of Corporations. The enormous earnings of the Steel Corporation are due not to a degree of integi'ation or efiiciency not possessed by its competitors, but to the ownership of ore reserves out of aU proportion to its output or requirements and to the control and operation of common carriers, and to concessions, in the nature of rebates, obtained from other rail- roads through inequitable divisions of rates and inordinate terminal allowances. The busmess of production and transportation should be absolutely separate and distinct, and no industrial concern should be permitted to own or operate an interstate carrier. The Attorney General of the United States and his subordinates should not be permitted to exercise an absolute discretion as to the institution of proceedings under the act of July 1, 1890, known as the Sherman Antitrust Act, or other acts prohibiting combinations in re- straint of trade. The parties injuriously affected by such combina- tions should have access to the courts and the benefit of adequate and sufficient remedies for wrongs inflicted by such combinations. Bills embodying legislation designed to accomplish this purpose are presented with this report. Mr. Littleton does not concur in the proposed bill amending the Sherman antitrust act, which bill is submitted herewith as Exhibit A. A. O. Stanley. Charles L. Baktlett. Jack Beall. Martin W. Littleton. D. J. McGlLLICUDDY. INVESTIGATION OF UNITED STATES STEEL OOEPOEATION. 213 EXHIBIT A. A BILL To further protect trade and commerce against imlavful restraints and monopolies. Be it enacted by the Senate and Hoitse of Representatives of the United States of America in Congress assembled, That the act approved July second, eighteen hundred and ninety, entitled "An act to protect trade and commerce against unlawful restraints and monopolies" is hereby amended by adding thereto the following: Sec. 9. In the following sections of this act, unless the context otherwise requires — (a) The word "suit" means any civil suit or proceeding brought under or involving the provisions of thia act. (b) The word "combination" includes any contract, or combination in the form of trust or otherwise. "^ (c) The words "restraint of trade" mean any restraint in any respect or to any extent of trade or commerce among the several States or with foreign nations. (d) The word "vendor" includes lessor, licensor, or bailor. (e) The word "vendee" includes lessee, licensee, or bailee. (f) The word "purchase" (noun) includes lease, license, or bailment. (g) The word "purchase" (verb) includes leasr, license, or otherwise obtain, (h) The word "purchasing" includes leasing, licensing, or obtaining. (i) The word "sell" includes lease, license, bail, or furnish. (]) The word "sold" includes leased, licensed, bailed, or otherwise dealt in or fur- nished or supplied. (k) The word "sale" includes lease, license, or bailment. (1) The word "price" includes rental, royalty, or other means of compensation. (m)^The word "person" shall be deemed to include "persons." Sec. 10. Any person who shall be injured in his business or property, or shall be threatened with such injury, by any other person or corporation by reason of any- thing forbidden or declared to be unlawful by this act, may bring suit in equity in any district court of the United States in the district in which the defendant resides or is found, to prevent and restrain violations of this act and for other appropriate relief. Sec. 11. Whenever suit has been instituted under section four of this act, any person who shall be injured in his business or property, or threatened with such injury, by the defendants in said suit or any of them by reason of anything forbidden or declared to be unlawful in this act, and any State of the United States,^ may at any time intervene in said suit to protect his interests, or, if the intervenor be a State, the interests of the citizens of such State, and any person interested or any State may after final decree in said suit petition said court for protection or redress in case of any violat on of said decree, and the court shall have power to take such action as may be appropriate in the premises. Sec. 12. Whenever in any suit it shall appear that any combination was entered into, existed, or exists, which was or is in restraint of trade, the burden of proof to establish the reasonableness of such restraint shall be upon the party who contends that such restraint is reasonable. Sec. 13. Whenever it shall' be established in any suit that any combination was entered into, existed, or exists, which was or is in restraint of trade, and that such com- bination was entered into, existed, or exists, for the purpose of restraint of trade, then such restraint of trade shall be conclusively deemed to have been and to be unreason- able and in violation of the provisions of this act, as to any party thereto, who in carry- ing on any business to which such combination relates or in connection thei'ewith shall — (a) Do businesa directly or indirectly under any name other than his own or that of the partnership, corporation, or association of which he is a member, or be guilty of any concealment or misrepresentation as to the ownership or control of such business or any misrepresentation as to the identity of the manufacturer, producer, or vendor of any article sold. (b) As the vendor of any article, secure information concerning the business of any competitor, from any agent, or employee of such competitor, or from any State or Fed- eral official by any iU^al means whatsoever. 214 INVESTIGATION OF tTNITED STATES STEEL COEPOfiATION. (c) As the vendor of any article, supply or ofEer to supply such article without charge^ or at a price at or below cost of production and distribution. (d) As the vendor of any article, fix upon some raw or manufactiu'ed material which be controls and which is required for producing a competitive article an unreasonable high price or unreasonable condition of sale. (e) As the vendor of anyarticle, shall enter into any contract or arrangement under which the vendor shall not sell any article in which he deals to certain persons or classes of persons or to those doing business within certain districts or territories. (f ) As the vendor of any article, supply or offer to supply to any person doing busi- ness in any particular territory articles sold by him upon terms or conditions in any respect more favorable than are accorded to other customers. (g) Aa the vendor of any article, refuse to supply to any other person requesting the same any article sold, or consent to supply same only upon terms or conditions in some respects less favorable than are accorded to any other person. (h) As the vendor of any article, make in the price or other terms of any sale any discrimination based upon whether the vendee pvirchases from him articles of a par- ticular quantity or aggregate price. (i) As the vendor of any article, attempt to prevent or restrain in any manner either directly or indirectly any vendee from pm-chasing such article or any other article from some ether person, or using such article or any other article obtained from some other person, whether such attempt be made (first) by an agreement express or implied against such purchase, or (second) be made by a condition in the sale against such purchase, or (third) be made by imposing any restriction upon the use of the article BO sold, or (fotirth) be made by making in the price any discrimination based upon whether the vendee purchases any article made or sold by some other person, or (fifth) be made in any manner except the ordinary soliciation of trade. (j) As the vendor of any article, use any unfair or oppressive methods of competition. The foregoing enumerations of acts, conduct, methods, and devices shall not include or shall not be construed to include, or as intended to exclude, any other acts, con- duct, methods, or devices which are or may be imreasonable. The provisions of clause (i) shall not apply to the mere appointment of sole agents to sell any article. Sec. 14. Whenever in any suit it shall appear that any combination was entered into, existed, or exists, which was or is in restraint of trade, there shall at once arise a rebuttable presumption that such restraint was or is unreasonable if, in the business in connection with which said restraint existed or exists, the person engaged in such combination controlled or controls or is a member of any corporation or association which controlled or controls, at the time such restraint is alleged to have existed or to exist, more than thirty per centum in value of the total quantity sold in the United States, or more than thirty per centum in value of the total quantity sold in the part of the United States to which the business of such person, corporation, or association extends, of any article dealt in by such person, the trade in which is affected by such restraint. Sec. 15. Whenever in any suit brought by or on behalf of the United States a final judgment or decree shall have been rendered to the effect that a defendant in viola- tion of the provisions of this act has entered into a combination in restraint of trade, or has monopolized or attempted to monopolize, or has combined with any person to monopolize, any part of the trade or commerce among the several States or with foreign nations, the existence of such illegal combination or monopoly or of such attempt to monopolize shall, to the full extent to which the issues of fact or law were litigated, and to the full extent to which such fact, judgment, or decree would consti- tute in any other proceeding an estoppel as between the United States and such defendant, constitute as against such defendant conclusive evidence of the same facta and be conclusive as to the same issues of law in favor of any other person in any other proceeding brought under or involving the provisions of this act. Sbo. 19. Whenever in any proceeding under section four of this act any combina- tion has been adjudged illegal under section one and section two of this act, the court before which sudi proceedings are pending shall have jurisdiction: INVESTIGATION OP UNITED STATES STEEL COEPOEATION. 215 (a) To partition any property owned under any contract or by any combination mentioned in section one and section two of this act in severalty among the owners thereof, or groups of owners thereof, and if the owners include one or more corporations, among the several stockholders thereof, or among groups of the several stockholders thereof, all in proportion to their respective interests. (b) If sales of such property are necessary or proper, either to pay debts or incum- brances thereon, or to re-create conditions in harmbny with the law, to sell such prop- erty as a whole or in parcels; and the court may forbid the said owners, and if the said owners include one or more corporations, the stockholders thereof, from purchasing at such sales, and may prescribe the conditions on which any purchase may be made by any person whatsoever. (c) To make such restraining orders or prohibitions as may be necessary and proper to re-create conditions in harmony with the law, including prohibitions of any acts, conduct, methods, or devices which are enumerated herein as indicating unreasonable restraint. (d) To declare void, as against the defendants or any of them, any contract entered into as a part of the combination found to be in restraint of trade. The relief granted in this section shall be in addition to and not inclusive of other relief permitted by this act, or otherwise by law. EXHIBIT B. In the House of Representatives. A BILL To prohibit persons engaged in the manufacture and sale of railroad cars, locomotives, railroad rails, and structural steel, or in the mining and sale of coal from becoming directors or other officers or employees of railroads engaged in interstate commerce. Be it enacted by the Senate and House of Representatives of the JJni'zd States of America in Congress assembled, That from and after June thirtieth, nineteen hundred and thirteen, no person who is engaged as an individual or as a member of a partnership, or as a director or other officer, or an employee of a corporation, in the business, in whole or in part, of manufacturing or selling railroad cars or locomotives, or railroad rails, or structural steel, or mining and selling coal shall act as a director or other officer or employee of any railroad company which conducts an interstate-commerce business. Sec. 2. That any person who shall be guilty of a violation of this law shall be pun- ished by a fine of one hundred dollars a day for every day during which he shall act as a director, officer, or employee of the railroad company, or by imprisonment for such period as the court may designate, not exceeding one year, or by both such fine and imprisonment, in the discretion of the court. EXHIBIT C. A BILL To regulate the ownership of common carriers engaged in Interstate and foreign commerce and the shipment of articles in interstate and foreign commerce over the lines of transportation operated by such carriers, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled: Section 1. That from and after the thirty-first day of December, nineteen hundred " and thirteen, no cotmpany, firm, or corporation, or officer thereof, doing a mining or manufacturing business, engaged directly or indirectly in interstate or foreign com- merce, shall own in whole or in part, directly or indirectly, by stock ownership or otherwise, any railroad or .other hne of transportation, or the property of either, of any common carrier, subject to the provisions of the act to regulate commerce, approved February fourth, eighteen hundred and eighty-seven, as amended, to own in whole or in part, directly or iiidirectly, by stock ownership of otherwise any railroad or other line of transportation, or the property of either, of any common carrier subject to the provisions of said act. Sec. 2. That from and after the day of it shall be unlawful for any person, company, firm, or corporation, who, or which, owns, holds, or in any way controls a majority of the capital stock of any other corporation, engaged in operat- 216 INVESTIGATION OP UNITED STATES STEEL OOEPOBATION. ing a line of transportation, as a common carrier, in the transportation of passengers or property wholly by railroad (or partly by railroad and partly by water, when both are used under a common control, managemant, or arrangement for a continuous car- riage or shipment) from one State, Territory, or District of the United Sta,tes to any other State, Territory, or District of the United States, or from one place in a Terri- tory to another place in the same Territory, or from any place in the United States to an adjacent foreign country, or from any place in the United States through a foreign country to any other place in the United States, or engaged in like manna in the transportation of property shipped from any place in the United States to a foreign country and carried from such place to a port of transshipment, or shipped from a foreign country to any place in the United States and carried to such place from a port of entry either in tiie United States or an adjacent foreign country, to operate, or in any manner or by any means, participate in the operation, in whole or in part, of such line, or to ship over such line in interstate commerce any article or commodity bought, sold, manufactured, mined, or produced by, or under the control of, or owned in whole or in part by, or in which any interest, direct or indirect, whether by stock ownership or otherwise, is held by any such person, company, firm, or corporation so owning a majority of capital stock. Sec. 3. That the provisions of this act shall not be so construed as to apply to the ( transportation of passengers or property, or to the receiving, delivering, storage, or handling of property wholly within one State and not shipped to or from a foreign country from or to any State or Territory as aforesaid. Sbc. 4. Any person, company, firm, or corporation violating any of the provi- sions of this act shall be deemed guilty of a misdemeanor, and for each offense, upon conviction, shall pay to the United States a penalty of not less than dollars nor more than ten thousand dollars or imprisoned not more than five years, or both; and in case of a contii uing violation each day of such violation shall be held to be a separate offense. Sec. 5. Jurisdiction of offenses under this act shall be the same as that provided for offenses in an act entitled "An act to further regulate commerce with foreign nations and among the States," approved February nineteenth, nineteen hundred and three, and any amendment thereof. EXHIBIT D. Production, in gross tons, all hinds of steel ingots and castings. [Annual Statistical Report tlie American Iron and Steel Association, p. 107.1 Years. 1809 1870 1871 .1872 1873 1874 1876 1876 1877 1878 187-9. 1880 1881 1882. 1883 1884. 1885 1886. 1887. 1888. 1889. ingots and castings. 10,714 37,600 40,179 107,239 152,368 171,369 335,283 469,639 600,524 653,773 829,439 1,074,262 1,374,247 1,514,087 1,477,345 1,376,531 1,519,430 2,269,190 2,936,033 2,611,161 2,930,204 Open- heartb Ingots and 1,339 1,785 2,679 3,125 6,250 8,080 19,187 22,349 32,255 50,259 100,851 131,202 143,341 119,366 117,615 133,376 218,973 322,069 314,318 374,643 Yeata. 1890. 1891. 1892. 1893. 1894. 1895. 1896. 1897. 1898. 1899. 1900. 1901. 1902. 1903. 1904. 1905. 1906. 1907. 19081 1909' 1910' ingots and castings. 3,688,871 3,247,417 4,168,435 3,215,686 3,571,313 ■4,909,128 3,919,906 5,475,315 6,609,017 7,586,354 6,684,770 8,713,302 9,138,363 8,692,829 7,859,140 10,941,376 12,275,830 11,667,649 6,116,765 9,330,783 9,412,772 Open- heartb ingots and castings. 613,232 679,763 669,889 737,890 784,936 1,137,182 1,298,700 1,608,671 2,230,292 2,947,316 3,398,135 4,656,309 6,687,729 6,829,911 5,908,166 8,971,376 10,980,413 11,549,736 7,836,739 14,493,936 16,504,609 Hearings, p 362 Exhibit E. CONCERNS IN WHICH THE DIRECTORS OF THE UNITED STATES STEEL CORPORATION ARE OFFICERS OR DIRECTORS, The following table shows the industrial corporations, raihroadfl, traction, telegraph, express, and steamship companiea; the banks, insurance, and trust companies of the United States of which the president and other directors of the Steel Corporation axe officeie or directors. ^ j- f f < Wheie the entire capital stock of one company is owned by another company, but the bonds are held by the public, the bonds only are given; where both capital stock and bonds of the subsidiary company are held by a parent company, the subsidiary company is not given; where a majority or considerable proportion of the capital stock of one company is held by another company in this list, an explanation of that fact will be found in a note following the tables. In some cases the directors of the Steel Corporation are directors of subsidiary companies and not directors of the parent corporation. Where this occurs, the capitalization and bonded indebtedness of the subsidiary only are given. In subsequent tables, however, the capitalization and bonded indebtedness of these subsidiaries are included in the general total and not given individually. Table 1. — United States Steel Corporation directors. GEORGE F. BAKER. OfDcial position. Industrial cdtporations. Railroad, telegraph, express, and steamship companies. Banks, insurance and trust companies. Name of company. Preferred. Common. Funded Indebtedness. Total. Preferred. Common. Funded indebtedness. Total. Capital. Surplus. Deposits. Total. Adams Express Co $12,000,000 344,645,400 $36,000,000 224,791,700 $48,000,000 669,437,100 American Telephone & Telegraph Co... Director Astor Trust Co do $1,400,000 $747,220 $14,579,160 $16,726,380 Central R. R. of New Jersey.... do 27,430,800 50,261,000 77,097,866 Chase National Bank, New York do 5,000,000 8,440,030 104,318,180 117,768,260 Chicago, Burlington & Quincy R. R. Co. do 110,839,100 8,000,000 31, 000, 000 209,856,000 73,739,273 69,694,549 320,695,100 81,987,848 107,594,549 Cincinnati, namllton & Dayton Ry. Co. do $248,675 17,000,000 Colorado & Southern Ry. Co do Consolidated Gas Co. of New York... . do $99,816,500 $3,802,100 $108,618,000 Continental Insurance Co do 2,000,000 14,246,478 16,246,478' Delaware, Lackawanna & Western do 30,347,720 320, 000 30,667,720 R. E. cfo. East Jersey Water Co do 800,000 800,000 ErleR. R.Co do 03,892,400 112,378,900 225, 997, 747 402,209,047 Fanners Loan & Trust Co do 1,000,000 10,000,000 10,000,000 3,600,000 6,000,000 3,000,000 6,033,000 11,276,430 20,738,320 116,368,590 116,947,740 118,003,110 123,401,690 First National Bank of Chicago do 138,224,170 First National Bank of New York Chairman of board. ... 148,741,430 First Security Co. of New York 3,600,000 Guaranty Trust Co. of New York do 21,532,000 3,691,640 144,728,100 42,910,210 171,260,100 Industrial Trust Co., Providence, R. I ....do ■ .. 49,601,750 do $60,000,000 80,000,000 140,000,000 Lake Erie & Western R. R. Co .. .do 11,840,000 633,500 11,840,000 49, 466, 500 10, 875, 000 159,524,190 34,555,000 209, 624, 190 Lake Shore & Michigan Southern Ry. Co. Lehigh & Wilkesbarre Coal Co do do 8,491,150 19,687,000 28,899,500 Lehigh Valley R. R. Co do 106,300 40,441,100 86, 575, 974 127,017,074 Manhattan Trust Co :....do ■ 1,000,000 2,331,350 18,841,860 22,173,200 do 18,738,000 41,870,573 6,400,000 60,608,678 6,400,000 Mfihftwk ^^ Mftlfmo Ry. Co i . do do 600,000 600,000 1,000,000 1 644, 185, 205 26,000,000 644,186,205 16,161,660 176,331,290 216,492,950 do .. 2,000,000 2,000,000 New York & Harlem R R Co do 1,343,950 8,656,050 12,000,000 2,500,000 5,226,000 208,693,427 29,081,000 22,000,000 2,500,000 5,225,000 491,321,727 69,081,000 New York & Long Brsuicli R. R. Co New York Ai Putnam R R Co do 222,729,300 14,000,000 R. R. do 16,000,000 New York Edison Co do 38,742,622 38,742,622 3,436,000 do 3,436,600 New York, New Haven & Hartford R. R. Co. New York, Susquehanna & Western R. R. Co. do 144,017,425 13,000,000 232,062,600 12, 489, 000 376,069,926 38, 489, 000 do - 13,000,000 do 300,000 126,460 1,439,060 1,805,510 do 248,000,000 298,566,666 546,666,666 do 4,387,000 4,020,000 12,664,600 21,061,500 do 12,125,300 16, 166, 600 64,780,867 93,072,767 do 120,000,000 120,000,000 do 70,000,000 9,057,600 70,000,000 199,400 109,001,950 10,760,000 249,001,960 . 20,007,000 do do 6,000,000 508,302,500 6,989,000 696,361,867 10,989,000 1,464,936,467 do 360,281,100 do 60,000,000 60,000,000 1 1 ■■ 1 1 1 "" 54946°— H. Rept. 1127, 62-2. (To face page 216.) No. 1. ' Total admitted assets. Table I.— United States Steel Corporation directors — Continued. EDMUND C. CONVERSE Name of company. Official position. Industrial corporations. Railroad, telegraph, express, and steamship companies. Banks, insurance and trust companies. Preferred. Common. Funded indebtedness. Total. Preferred. Common. Funded indebtedness. Total. Capital. Surplus. Deposits. Total. Amorican Baak Note Co Director 54,496,200 41,233,300 S4, 496, 194 41,233,300 $8,992,394 82,466,600 American Can Co do Astor Trust Co President and director. a, 400, 000 6,000,000 2,600,000 6,000,000 $747,220 12,860,900 3,385,745 21,632,000 $14,679,160 156,000,000 $16,726,380 172,860,900 5,886,745 171,260,100 Banters Trust Co do Fidelity-Phoeoix Fire Insurance Co Director Guaranty Trust Co do 144,728,100 International Nickel Co do.. 8,912,026 11.542,662 10,000,000 JS, 687,836 29,143,400 10,000,000 International Smelting & Refining Co.. do Liberty National Banfe of N. Y do " ' 1,000,000 2,717,700 26,731,920 30,449,870 Manning, Maxwell & Moore (Inc.) do 6,000.000 1,000,000 2,000,000 2,500.000 3,600,000 6,000,000 2,000,000 4,000,000 4,000,000 3,500,000 Mohican Oil and Oas Co Vice president and director. Director 1,000,000 National Snpply Co., Toledo, Ohio 2,000,000 760,000 Sheffield Coal & Iron Co do 760,000 Texas* Padflc Coal Co do Union Trust Co., Pittsburgh do 1,600,000 28,229,890 36,666,330 66,230,220 United States Steel Corporation do 360,281, 166 608,302,500 696,351,867 1,464,935,467 West Perm Railways Director, chairman of board. $2,750,000 $3,250,6609 $6,516,000 $11,610,000 WILLIAM E. COREY. United States Steel Corporation Director $300,281,100 5508,302,500 $590,351,807 $1,404,935,467 HENRY C. FRICK. Atchison, Topeka & fianta Fe Ry. Co.. Director $114,173,730 22,395,120 5165,618,600 130,117,663 $302,004,952 206,856,000 $581,697,182 361,740,143 Chicago & Northwestern Ry. Co _ do . . .do $200,000 6,000,000 900,000 $634,300 1,499,650 408,102 $3,626,810 36,731,420 $4,461,110 44 230,970 Mellon National Bank, Pittsburgh, Pa. do . .do 1,308,102 .do 412,610,700 70,000,000 29.1,382,799 109,001,950 705,979,773 249,001,960 do 70, COT, 000 .do 100,000 94,748 194,748 ....do 66,544,666 216,677,700 195,896,650 612,045,650 do i, 666, 666 28,229,890 36,600,330 66, 230, 220 TTnited States Steel Cornoration do .. . $360,251,100 $508,302,500 $596,351,867 $i,464,936,4i;7 ELBERT H. GARY. Chairman of hoard $16,050,000 $19,820,000 17,184,000 $11,148,000 6,406,300 $47,018,000 23,590,300 do $1,400,000 20,000,000 $747,220 10,286,340 $14,679,160 176, 453, 670 $16,726,380 Continental & Commeoxlal National Bank of Chicago^ 111. do 206,729,010 do 6,000,000 Chatham & Phoenix National Bank, New York. 6,000,000 3,000,000 11,184,100 47,716,180 61,900,280 do $63,892,400 $112,378,400 $238,297,747 $414,669,047 Gary Wheaton Bank. .'»,000 3,000,000 35,940 12,329,613 649,710 735,660 15,329,613 do 6,242,161 39,994,980 69,379,000 114,616,041 do 60,000,000 80,000,000 140,000,000 do 3,000,000 3,000,000 6,273,210 11,184,100 63,142,270 47,716,180 72,415,480 Director and ex-com. . . 61,900,280 60,666,666 126,666,666 219,283,600 399,383,666 2,760,000 S0S,3O2,5O0 2,298,600 606,351,867 6,038,600 1,464,935,467 Chalnnan of board and director. 360, 281, 100' United States Steel Corporation 64946°— H. Rept. 1127, 62-2. (To face page 216.) No. 2. Table 1. — United States Steel Corporation directors — Continued. CLEMENT A.GRISCOM. Official position. Industrial corporations. Railroad, telegraph, express, and steamship companies. Banks, Insurance and trust compaiues. Name ol company. Preferred. Common. Funded indebtedness. Total. Preferred. Common. Funded Indebtedness. Total. Capital. Surplus. Deposits. Total. Chairman of board di- rectors. Director $51,730,971 149,931,735 26,000,000 412,610,700 $71,462,000 20,000 293,382,79!! 3,600,000 $173,124,700 26,020,000 706, 979, 773 3,000,000 iBtematlonal Mercantile Marine Co Pennsylvania Timnel & Terminal Co... New York, Philadelphia & Norfolk R. R. Co Bank ol North America Philadelphia.. do do $1,000,000 3,000,000 2,000,000 1,000,000 $2, 674, 340 6,433,970 10,861,700 2,254,590 2,074,400 $12,347,020 47,210,000 26,352,600 10,335,970 27,393,920 $16,021,360 66,649.970 Fourth Street National Bank, Phila- delphia Pa. Fidelity Trust Co do 39,214,2tt' 13,610,560 Commercial Trust Co., Philadelphia, Pa. do 30,068,360 delphia. 556,602,950 608,302,600 166,602,960 1,464,936,467 United Gas Improvement Co United States Steel Corporation Atlantic Mutual Insurance Co., N. Y... do do do "■i366,"28i;i66' $596,351,867 i'i4[RS.S,'962' 141888^903 WILLIAM H. MOORE. American Can Co Director $41,233,300 $41,233,300 $82,466,000 $202,351,000 211,307,000 320,000 ziwo'ooo' $277,228,200 286, 284, 200 30,367,000 6376^000' i^Soo^ooo' 160,000,000 Chicago, Rock Island & Pacific R. R. Co. Chicago. Rock Island & Pacific Ry. Co . . do 574,877,200 30,147,000 2i666,'466' i;666;666' 96,000,000 Delaware, Lackawanna & Western R. R. Co. Fldelltv-Phoenix Fire Insurance Co First National Dank of New York Keok-uk 4 Des Moines Railway Nationai B iscuit Co Peoria & Bureau Valley Railroad Board of m Director... do do do do anag( rs 24," 804,' 600' 29,' 236,' 666' 64[646,'666' iJMilMo' jijoooiooo' 1 $13, 806, 166 10,000,000 ""$26; 738; 326' ■■'iiisioosiiio' $13,806,105 148,741,430 United States Steel Corporation do do 360,281,000 608,302,600 $696,361,867 ioe^sM 60,'66i|766' 99,786,968 raiiag^ooo' 40,672,000 ""146^247; 666' 140,368,968 2,000,000 i4, 246, "478 16,246,47* Lehigh Valley Railroad Co Western Union Telegraph Co do do 'Total admitted assets. 64946°_H. Rept. 1127, 62-2. (To face page 216.) No. 3. Table 1. — United States Steel Corporation directors — Continued. J. PIEEPONT MOEGAN. Official position. Industrial corporations. Raikoad, telegraph, express, and steamship companies. Banks, insurance and trust companies. Name of company. Preferred. Common. Funded indebtedness. Total. Preferred. Common. Funded Indebtedness. Total. Capital. Surplus. Deposits. Total. .ffitna Insurance Co., Hartford Director $i'i66,6oo $1,166,666' $6,000,000 $7,369,016 512,369,016 Carttiaee. Watertown & Sackets Har- bor R.E. Central New ED«lan Total admitted assets. Table 1. — United States Steel Corporation directors — Continued. ROBEBT WINSOK. OfBcial position. Industrial ccffporatioiLs. Railroad, telegraph, express, and steamship companies. Banks, Insui^Dce and trust companies Name of company. Preferred. Common. Funded indebtedness. Total. Preferred. Common. Funded indebtedness. Total. Capital. -'urplus. Deposits. Total. 815,124,600 516,124,000 do -419,950,000 $13,300,000 S33,250,000 do $1,000,000 $778,230 513,785,290 {16,663,620 6,000,000 6,000,000 4,'s66i66b FitchbuigR. R. Co... do 318,460,000 7,000,000 23,067,000 48,627,000 Hartford Carpel Corporation , do 2,000,000 3,000,000 5,000,000 606; 666' 237;866' 7371880 Massachusetts Gas Companies do 25,000,000 1,000, 000 _ 25,000,000 2,200,000 85,881,000 950,000 30,881,000 4,100,000 Torrington Co National Shawmut Bank do do 3;666;666" 6;796;666' 99; 961', 876" i69;i9i;876 Eockland-Kockport Lime Co Union Trust Co., Springfield, Mass United States Steel Corporation do do do 825,000 ""'366,'2ii,"666' 876,000 ""608,' 302,' 606" 1,988,500 ""696,'36i,'867' 3,088,500 "i,'464,"936|467' 666;666' 334ii66' 6;647;666' 7',48i;666 Washburn Wire Co Western Telephone & Telegraph Co. . . . Western Union Telegraph Co do do do 2,500,000 1,250,000 3,760,000 ii]'ooh','(m 16,' 666 j 600" 99,786,963 9;958^666' 40,672,000 4i;9J8,'666' 140,368,968 Worcester Trust Co do 54946°— H. Kept. 1127, 62-2. (To face page 216.) No. 8. INVESTIGATION OF tTNlTED STATES STEEL COEPOEATION. 217 TA.BLE 2.— Statement showing capital stock and indebtedness of the railroad companies oJwhKh. the president, chairman of the executive board, and directors of the United StaUs bleet Corporation are also officers or directors. Company. Atchison, Topeka & Kansas E. R. Co Atlanta & West Point R. E. Co Atlantic Coast Line Co., The: Atlantic Coast Line R. R. Co Baltimore & Ohio R. R. Co Bessemer .— The Carnegie Co., a subsidiary of the United States Steel ' Corporation, owns "$5,600,000 common and $5,100,000 preferred of the $10,000,000 common and $2,000,000 preferred capital stock of this company. Pittsburgh Bys. Co., The.— Ail of the $5,000,000 outstanding capital stock of this company is owned by the Philadelphia Co. Southern Bailway Co.— This company owns $5,670,200 of the $6,070,600 capital stock of the Mobile & Ohio R. R. Co. Terminal Bailroad of Buffalo, The.— The $1,000,000 capital stock of this company is owned in equal pro- portions by the New York Central & Hudson Rivej- R. E. Co.'and the Lake Shore & Michigan Southern E. E. Co. Union Traction Co.— This company leases the Philadelphia Traction Co. and is leased by the Philadelphia Rapid Transit Co. United Bys. Investment Co.— This company owns $24,200,000 of the $38,626,000 outstanding capital stock of the Philadelphia Co. Western By. of Alabama.— The $3,000,000 capital-stock of this company is owned jointly by the Louis, ville & Nashville R. R. Co. and the Atlantic Coast Line E. E. Co. West Shore B. B. Co.— The entire $10,000,000 capital stock of this company is owned by the New York Central & Hudson River R. E. Co. Western Union Telegraph Co. — The American Telephone & Telegraph Co. owns a majority of the $32,000,000 outstanding capital stock of this company. INVESTIGATION OF UNITED STATES STEEL COEPOKATION. 221 exhibit f. Plate Agheempnt. agebembnt a. This agreement, made and entered into this 9th day of November, 1900, by and between Carnegie Steel Co., Jones & Laughlins (Ltd.), Illinois Steel Co., Crucible Steel Co. of America, Otis Steel Co., Tidewater Steel Co., Lukens Iron & Steel Co., Worth Bros. Co., Central Iron & Steel Co., the American Wire & Steel Co., the Glasgow Iron Co.— Witnesseth that the above said parties have mutually agreed to and with each other to form an association for mutual interests, and to enable them to pay liberal wages to their workmen, to be known as the Steel Plate Association of the United States: First. Each of the parties above named being manufacturers and sellers of steel plates, shall, by reason of such manufacture and sale, be entitled to membership in this association, and each of the parties hereto shall be entitled to portion of all diip- ments in the following proportions: Carnegie Steel Co 46. 25 Jones & Laughlins (Ltd.) 4. 75 Illinois Steel Co 11. 00 Crucible Steel Co. of America 4. 50 Otis Steel Co 2. 50 Tidewater Steel Co 3.00 Lukens Iron & Steel Co 7. 50 Worth Bros. Co 7. 00 Central Iron & Steel Co 8. 00 American Steel & Wire Co 5. 50 Glasgow Iron Co. to the extent of sales and output up to 40,000 tons, should they be able to accomplish them, prior to December 31, 1901. ' Second. The officers of this association shall be as follows: A president, a treasurer, a commissioner, and an executive committee consisting of six members, including the president. The conclusions of the executive committee meetings shall be at once communicated to all the members of this association. Third. Each member of this association shall, on or before the 10th day of December, 1900, and on or before the tenth day of each and every month thereafter during the term of this agreement, or any extension thereof, render to the commissioner of this association a statement, which statement shall be sworn to, or affirmed to, by one of th^ principal executive officers of the member so making the report, or in case the member so making the report is a copartnership, then, in that case, the report shall be sworn to, or affirmed to, by one of the firm holding membership in this association, which oath or affirmation shaU be to the effect that the report so made is a true and correct report of all the material described in the first clause of this agreement, which was shipped by the member making the report during the month for which the report is made; the form of the report and oath of affirmation as to its correctness shall be fumiahed by the commissioner and shall include a statement of the rolling production for each month; and upon the commissioner's receiving from the respective members their reports, as aforesaid, he, the com m issioner, shall render to each member monthly, as soon as possible after the receipt of all the statements of all the members, copies of statements last rendered by each member, and shall forthwith "state an account," charging each member who has shipped during the month more than its or their percentage of the total amount shipped by aU the members of the association, the sum of thirty-five hundredths. of a cent per pound on each and every pound of such excess, and crediting each member who has not shipped its or their percentage of the 222 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. total amount shipped by all the members of the association, with the sum of thirty-five hundredths of a cent per pound on each and every pound which it or they fail to ship during the month for which the reports are made, as aforesaid, and as a basis of cal- culation marking such "statement of account," the commissioner shall use the table of percentages as set forth in the first clause of this agreement; and upon the statement of such account by the commissioner, he shall immediately mail a copy thereof to each member, of this association, and within five days after the receipt of any account by the member of this association, which account shall show that the member receiving the same is indebted to the association, the member so receiving its or their account, showing its or their indebtedness, shall forward to the treasurer a check or sight draft drawn to the order of T. Mellon & Sons, in payment of such indebtedness, which check or sight draft the treasurer shall deposit in the said T. Mellon & Sons' bank, Pilrtsbuigh, Pa., to the credit of this association and remain to the credit of the member paying on excess of shipments and being increased or diminished as each month's business shows. It shall be the right and privilege of each member, who shall not have shipped hisfull percentage, to call, through the commissioner, on the members who have made an excess, to transfer to the short member a sufficient amount of tonnage, or otherwise enable him to fill up his order book. It being the intent of this agreement that each member shall ship his entire percentage, and at the end of each year it shall be the duty of the commissioner to so arrange between the members as to have the pool balanced; but any member unable, at the end of each year, to produce his allotment, after first deducting his exempted tonnage, shall forfeit such unproduced tonnage, which shall be divided among the other members of the pool in proportion to their respective tonnage allotments. Fourth. To insure the rendering of the statements and the faithful adherence of each party to the terms of this ^reement, a guarantee fund of $100,000 shall be formed by the payment on or before December 3, 1900, of $1,000 for each per cent of allotment, as provided for in the first clause of this agreement, to the treasurer, which fund shall be deposited or invested as directed by the executive committee, in trust for the members in the same proportion as received, subject, however, to such forfeiture or penalty as may be declared by a vote of a remainder of the mem- bers against any member violating the terms of this agreement, and as hereinafter provided. Fifth. Whereas it has been agreed by and between all the members of this asso- ciation to exempt certain tonnage to cover orders already taken, it is agreed that such exemption shall be as follows: Tons. Carnegie Steel Co 140, 000 Jones & Laughlins (Ltd.) 9,400 Illinois Steel Co 15, 394 Crucible Steel Co. of America 2, 687 Otis Steel Co 1, 740 Tidewater Steel Co 2, 520 Lukens Iron & Steel Co 5^ 77g Worth Bros. Co 3, 863 Central Iron & Steel Co 15^ 116 The American Steel & Wire Co 7, 965 Glasgow Iron Co It is understood that those who hold exemptions under this agreement are to pro- portion the shipments applying to them in monthly allotments, between the date of this arrangement and January 1, 1902, and such shipments shall not be subject to the pool assessment. Sixth. It is required that all plates shipped into the States bordering on the Pacific coast, and to be actually used in the territory into which they are shipped, and also INTESTI6ATI0N OF UNITED STATES STEEL COBPOBATION. 223 all plates actually exported for use outside the limits of the United States, to be re- ported to the commissioner, together with bills of lading, or other evidence of expor- tation, for actual use abroad, satisfactory to him (said evidence to be confidential and not to be circulated among the members). Such tonnage will be deducted from the member's report, and the agreed pool tax charged on the balance. Seventh. Upon receiving the written request of two members of the association, stating the object, the commissioner shall, upon the approval of the executive com- mittee, call a meeting of the parties to this agreement, to be held within five days from date of his receiving such written request. Eighth. If at any time any of the parties hereto shall have reason to suppose that any other party or parties to the agreement have violated any of the provisions of this agreement, the said party so supposing the agreement has been violated, shall file with the commissioner of the association, a bill of complaint against the party or parties so suspected of such violation, which bill of complaint shall fully set forth the act or acts complained of, together with all the matters or things connected there- with; the said bill of complaint shaU be in writing, and shall furnish all the evidence that can be submitted in connection with the alleged violation, and upon receipt by the commissioner of any and all bills of complaint, as aforesaid, he shall forthwith use his best offices to have the accuser and accused arrive at an amicable settlement, failing in which he shall then submit all the information he may have to the execu- tive committee for action; if the said executive committee shall determine that the charges have been sustained, they, the executive committee, shall impose a penalty of not less than $1,000, nor more than the amount standing to the credit of the member so punished, in the guaranty fund at the time the fine is imposed upon the party so adjudged as having violated the agreement, but if the executive committee shall determine that the charges have not been sustained, they shall dismiss the complaint from further consideration by them. It is further understood and agreed that no member of the executive committee shall act upon any bill of complaint made by, or made against the member of the association which he represents, nor shall any representative of a member of the association vote upon any bill of complaint brought by or brought against the member of the association he represents. Any penalty imposed by the executive committee will be collected by the treasurer, deducting the amount thereof from the deposit made by the member against whom the penalty is imposed, to the guaranty fund, as provided for in clause fourth of this agreement, within two weeks after such penalty is thus imposed, the sum thereof shall be trans- ferred pro rata as per allotments to the accounts of the members of the association, excluding the member against whom the penalty is imposed, by the treasurer of the association, in which case the member so punished shall immediately remit an amount sufficient to make good the sum taken from the guaranty fund. In case the offending member shall appeal to the association, and the action of the executive committee shall not be sustained by a majority vote of members of the said association, then the fine imposed shall be remitted, and any sum that the member may have paid into the association by reason of this shall be returned. Ninth. No consideration, in the nature of brokerage; or commission, shall be paid to anyone on sales of plates on and after January 1, 1901. All sales between parties to this agreement shall be at pool prices, as provided in agreement " B," and all shipments shall be reported by the manufacturer on which pool tax will be charged the same as to outside parties, the purchaser also to report shipmentB of all such materials so bought, for which they shall claim and receive credit. Tenth. At any meeting of the members of this association, called by the commis- sioner, a^ herein provided, any party or parties may give three months' notice of withdrawal herefrom, but no such notice shall take effect prior to January 1, 1902. 224 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. Statements shall continue to be rendered of all plates shipped up to date of such with- drawal, the pool assessment to be charged thereon. Eleventh. In case other firms or corporations are admitted as partners to this agree- ment, the percentage of the pool allotted to each shall be deducted pro rata from the percentages of the members immediately prior to the time of its admission; and in caae any of the parties hereto, or any of the parties hereafter admitted, shall withdraw, iS^ percentage of the pool allotted to such withdrawing party or parties shall be added pro rata to the percentages of the parties remaining. In such case, the commissioner shall compute and report the new percentages to the nearest one-hundredth of 1 per cent, which degree of accuracy shall be deemed sufficient. Twelfth. The agreement herein made of percentages, the amount of the guaranty fund as herein provided, and the agreement to maintain minimum fixed rates as cov- ered in agreement "B," shall not be altered, amended, or changed in any respect, except by the unanimous consent of all parties to this a^eement. Thirteenth. To provide for the prompt payment of all salaries, rents, and other expenses, a general expense fund shall be called in as needed by the treasurer, in proportion to the percentage allotted each member of the association. Fourteenth. No matter of account, or understanding outside of this agreement, shall afiect the settlements herein provided for, either as an offset or otherwise, nor shall any written or unwritten agreement of the parties hereto, or any of them, to establish and maintain uniformity of prices, or any controversy arising out of any such agreement, or any failure to carry out any of its provisions, or to maintain prices, affect in any way the rendering of the statements and the making of the settlemeata heiretn. required. Fifteenth. Whenever this agreement shall have been terminated, the balance of the deposit, with accumulated interest remaining in the hands of the treasurer to the credit of each party, after provision shall have been made for the payment of all expenses, shall be returned to it, provided it shall have rendered aU the state- ments required from it under this agreement, and have paid all its debtor balances. In case any party hereto shall not have fulfilled its money obligations under this agreement, the amount it has on deposit in the guaranty fund shall be applied toward the fulfillment of those obligations, and the excess, if any, returned to it. But in case any party shall not have fulfilled its agreement to render the monthly statement under this agreement, the amount it has on deposit in the guaranty fund, or the excess thereof, as above stated, shall be divided among the parties who shall have ful- filled their obligations under this agreement, in the proportion of their respective percentages. Sixteenth. For all purposes of this contract, a ton shall be taken and held as two thousand (2,000) pounds. In witness whereof the parties hereto have signed this agreement the day and year first above written. (Hearings, pp. 555-558.) Steuctural Steel Agkeement. agreement a. This agreement, made and entered into this Ist day of January, 1897, by and between the Passaic Rolling Mill Co., Pottsville, Iron & Steel Co., A. & P. Roberts Co., Cambria Iron Co., Phoenix Iron Co., New Jeraey Steel & Iron Co., Universal Construction Co., the Carnegie Steel Co. (Ltd.), Cleveland Rolling Mill Co., Jones & Laughlin Steel Co. (Ltd.). Witnesseth that the above said parties have mutually agreed to and with each other to form an association to be known as the Structural Steel Association of the United States. • INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 225 First. Each of the above parties named, being manufacturers and sellers of steel I beams and channels of sizes not leas than 3 inches in depth, shall, by reason of such manufacture and sale, be entitled to membership in this association, and each of the parties hereto shall be entitled to such portion of all sales by parties hereto of I beams and channels of sizes not less than 3 inches in depth (except I beams and channels for use in car construction and deck or bulb beams) as is allotted to it under the follow- ing table: Per cent. The Carnegie Steel Co. (Ltd.). 49J Jones & Laughlin (Ltd.) 12| A. & P. Roberts Co llj Passaic Rolling Mill Co 6 Phoenix Iron Co 5 Cambria Iron Co 5 Universal Construction Co 4J Pottsville Iron & Steel Co 3 Cleveland RolUng Mill Co 3 100 It being understood that members of this association having bridge works wherein beams and channels, as covered by this agreement, are consumed shall report to this association all shipments to such departments and pay the agreed pool tax as herein- after provided on shipments so made (except such as are used in the construction of buildings for their own respective works, which tonnage shall be reported and credit given therefor). Second. The officers of this association shall be as follows: A president,- a treastu-er, a commissioner, and an executive committee consisting of three members (the presi- dent being a member of the executive committee ex officio). Third. Each member of this association (the New Jersey Steel & Iron Co. excepted) shall, on or before the 10th day of February, 1897, and on and before the 10th day of each and every month thereafter during the terms of this agreement, or any extension thereof, render to the commissioner of this association a statement, which statement shall be sworn to or affirmed to by one of the principal executive officers of the mem- ber so making the report, or in case the member so making the report is a copartner- ship, then in that case the report shall be sworn to or affirmed to by one of the firm holding membership in this association, which oath or affirmation shall be to the effect ttiat the report so made is a true and correct report of all the material described in the first clause of this agreement which was shipped by the member making the report during the month for which the report is made; the form of the report and oath or affirmation as to its correctness shall be furnished by the commissioner. And upon the commissioner's receiving from the respective members their reports, as aforesaid, he, the conunissioner, shall render to each member monthly, as soon as possible after the receipt of all the statements of all the members, copies of statements last rendered by each member, and shall forthwith "state an account," charging each member .who has shipped during the month more than its or their percentage of the total amount shipped by all the members of the association the sum of five-tenths cent per pound on each and every pound of such excess and crediting each member who has not shipped its or their percentage of the total amount shipped by all the members of the association with the sum of five-tenths cent per pound on each and every pound which it or they fail to ship during the month for which the reports are made, as aforesaid; and as a basis of calculation in making such "statement of account" the commissioner shall use the table of percentages as set forth in the first clause of this agreement. And upon the statement of such account by the commissioner he shall immediately mail a copy thereof to each member of this association, and within five days after the 54946°— H. Bept. 1127, 62-2 15 226 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. receipt of any account by the member of this association, which account shall show that the member receiving the same is indebted to the association,! the member so recwving its or their account showing its or their indebtedness shall forward to the treasin-er a check or sight draft drawn to the order of T. Mellon & Sons, in payment of such indebtedness, which check or sight draft the treasurer shall deposit in the said T. Mellon & Sons' bank to the credit of this aasociation, and immediately upon the treas- urer receiving from the members all their respective remittances, in payment of their indebtedness to the association, for any month, he, the treasurer, shall notify the respective members whom the aforesaid "account stated" shall show to be creditors of the association for any month to draw on him (the treasurer) for the amount due to them as shown by said "account stated," and upon receipt of their several drafts so made the treasurer shall accept the same payment at T. Mellon & Sons, and charge the amounts thereof to the fund created by the payments made by the members who shipped in excess of their proportion diudng the month for which the "account stated " was made, thus closing that account each month. Fourth. To insure the rendering of the statements and the settlement of the bal- ances due between the members of this association at the time required by the provi- sions of this agreement, each member (the New Jersey Steel & Iron Co. excepted) shall, immediately after the signing of this agreement, remit to the treasurer its or their check or sight draft for the sum of $2,500, and shall, on or before the 10th day of each month thereafter, remit its or their check or sight draft for $500; the said checks or sight drafts shall be made in favor of T. Mellon & Sons, who shall become the de- pository of all the proceeds of such checks or sight drafts, which shall form a guaranty fund and be held by said T. Mellon & Sons during the continuance of this agreement, or any extension thereof, and disposed of finally as hereinafter provided. It being understood that when the said guaranty fund reaches the sum total of $45,000, that the payments toward said fund shall thereupon cease. Fifth. Whereas it has been agreed by and between the several other members and the New Jersey Steel & Iron Co. that the works of the said New Jersey Steel & Iron Co. shall remain inoperative in the manufacture of I beams and channels, of sizes coming under the provision of and during the life of this agreement, in consid- eration of which the New Jersey Iron & Steel Co. shall receive from this association the sum of $5,000 per month. Said sum of $5,000 to be paid by the several other mem- bers in proportion to their allotments as shown by the table in the first clause of this agreement. On the tenth day of each month the treasurer shall draw at sight on the respective parties to this agreement for the proportionate amount of the iudebted- ness and when all such drafts shall have been paid, he shall immediately notify the New Jersey Steel & Iron Co. to draw upon him at sight for the sum of $5,000, thus closing this accovmt each month. In case any draft which the treasurer shall make, as in this clause provided, shall not be promptly paid, the amount of such draft shall be taken from the deposition the guarantee fund of the party failing to pay such draft, and payment made to the New Jersey Steel & Iron Co., the same as it all such drafts of the treasvurer has been paid, and such party shall immediately remit to the treasurer an amount sufficient to make good the sum so taken from the guarantee fund. Sixth. Whereas it has been agreed by and between all the members of this asso- ciation (the New Jersey Steel & Iron Co. excepted) to exempt all members except the Phoenix Iron Co., to the extent of 5 per cent of 300,000 tons, in the proportion expressed in the table of allotments contained in clause 1 of tliis agreement- the aforesaid Phoenix Iron Co. to be exempted to the amount of 11,000 tons; the pool assessment shall not be charged an any member's shipments until it or they shall have completed its or their quota of exempted tonnage. Seventh. It is required that all I beams and channels shipped into the States bor- dering on the Pacific coast and to be actually used in the territory into which it is INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 227 shipped and also all I beams and channels actually exported for use outside the limits of the United States be reported to the commissioner together with billa of lading or other evidence of exportation satisfactory to him (said evidence to be confidential and not to be circulated among the members). Such tonnage will be deducted from the member's report and the agreed pool tax charged on the balance. Eighth. Upon receiving the written request of any one member of the association the commissioner shall call a meeting of the parties to this agreement, to be held within five days from the date of his receiving such written request. Ninth. If at any time any of the parties hereto shall have reason to suppose that any other party or parties to the agreement have violated any of the provisions of this agreement, the said party so supposing the agreement has been violated shall file with the commissioner of the association a bill of complaint against the party or parties so suspected of such violation, which bill of complaint shall fully set forth the act or acts complained of, together with all the matters or things connected therewith. The said bill of complaint shall be in writing and shall furnish all the evidence that can be submitted in connection with the alleged violation, and upon receipt by the commis- sioner of any and all bills of complaint as aforesaid, he shall forthwith use his best offices to have the accuser and accused arrive at an amicable settlement, failing in which, he shall submit all the information he may have to the executive committee for action. If the said executive committee shall determine that the charges have been sustained, they, the executive committee, shall impose a penalty not less than $1,000, nor more than the amount standing to the credit of the member so punished in the guaranty fund at the time the fine is imposed upon the party so adjudged as having violated the agreement, but if the executive committee shaU determine that the charges have not been sustained, they shall dismiss the complaint from further con- sideration by them. It being further understood and agreed that no member of the executive committee shall act upon any bill of complaint made by or made against the member of the association which he represents, nor shall any representative of a member of the association vote upon any bill of complaint brought by or brought against the member of the association which he represents. Any penalty imposed by the executive committee will be collected by the treasurer, deducting the amount thereof from the deposit made by the member against whom the penalty is imposed to the guaianty fund, as provided for in clause fourth of this agreement, within two weeks after such penalty is thus imposed, the sum thereof shall be transferred pro rata as per allotments to the accounts of the members of the association, excluding the member against whom the penalty is imposed, by the treasm-er of the association, in which case the member so punished shall immediately remit an amount sufficient to make good the sum taken from the guaranty fund. In case the offending member should appeal to the association and the action of the executive committee should not be sustained bya majority vote of said associ- ation, then the fine imposed shall be remitted and any sum that the member may have paid into the association by reason of this shall be returned. Tenth. No member of this association (the New Jersey Steel & Iron Co. excepted) shall make any lump-sum bid, nor shall they or it erect any building, directly or indirectly. This applies only to members as " Rolling Mills." Any question arising as to the interpretation of this clause shall be referred to the commissioner for his immediate decision. Eleventh. No consideration in the natiu-e of brokerage or commission is to be allowed, except to the accredited agents of the parties to this agreement, whose names shall be on file with the commissioner; and in no case will it be permissible for such commission to be divided. No sales or contracts shall be made to or with nuddlemen except on specific work for immediate specifications. 228 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. All sales between parties to this agreement shall be at pool prices, as provided in agreement "B," and all shipments shall be reported by the manufacturer, on which the pool tax will be charged the same as to outside parties, the purchaser also to report shipments of all such material so bought, for which they shall claim and receive credit. Twelfth. At any meeting of the members of this aBsociation, called by the com- missioner as herein provided, any party or parties may give notice of withdrawal herefrom, but no such notice shall take effect until January 1, 1898. If the aggre- gate pool percentages of the parties giving such notice of withdrawal shall amount to less than 4 per cent, this agreement shall continue in force as between the remaining parties, but if such aggregate shall amount to 4 per cent or more- this agreement shall terminate at the time so fixed. But statements shall continue to be rendered of all I beams and channels shipped up to date of its termination, the pool assessment. Thirteenth. The percentages of the parties hereto or of their successors (includii^ as such any concern mainly owned or controlled by any of the said parties or any of their stockholdersj, shall be maintained in the same relative proportion until otherwise agreed, and if any party shall at any time have more than one successor or allied concern, the aggregate percentages allotted to itself and all its successors and allied concerns shall not exceed the percentage that the original concern would have been entitled to if it had continued alone its relations to the other parties under this agreement, and the parties thereto shall include in their statement the shipments for such successors and allied concerns. Fourteenth. In case other finns or corporations are admitted aa partners to this agreement, the percentage of the pool allotted to each shaU be deducted pro rata from the percentages of the members immediately prior to the time of its admission; and in case any of the parties hereto or any of the parties hereafter admitted shall with- draw, the percentage of the pool allotted to such withdrawing party or parties shall be added pro rata to the percentages of the parties remaining. In such case the commissioner shall compute and report the new percentages to the nearest one- hundredth of 1 per cent, which degree of accuracy shall be deemed sufficient. Fifteenth. The allotment herein made of percentages, the amount of the guaranty fund, and the payment made to the New Jersey Steel & Iron Co., aa herein provided, shall not be altered, amended, or changed in any respect, except by the unanimous consent of all the parties to this agreement, but any other matters or things whatso- ever which concern this agreement or the association formed thereby or any regula- tions hereafter adopted, may, at any time, be abrogated or amended or altered at any meeting of the members of this association, provided that two-thirds of the members of the association are present thereat, that they represent at least two-thirds of the percentage allotted to all, and vote in faVor thereof. Sixteenth. To provide for the prompt payment of all salaries, rents, and other expenses (except the payment which is to be made monthly to the New Jersey Steel & Iron Co.), a general expense fund shall be called in as needed by the treasurer in proportion to the percentage allotted each member in the association. Seventeenth. No matter of accoimt or understanding outside of this agreement! shall affect the settlements herein provided for, either as an offset or otherwise, nor shall any written or unwritten agreement of the parties hereto, or any of them, to establish and maintain uniformity in prices, or any controversy arising out of such agreement, or any failure to carry out any of its provisions, or to maintain prices, affect in any way the rendering of the statements and the making of the settlements therein required. Eighteenth. Whenever this agreement shall have been terminated the balance of the deposit, with accumulated interest, remaining in the hands of the treasurer to the credit of each party, after provision shall have been made for the payment of aU expenses, shall be returned to it, provided it shall have rendered all the statements INVESTIGATION OF UNITED STATES STEEL CORPORATION. 229 required from it under this agreement and have paid all its debtor balances. In case any party hereto shall not have fulfilled its money obligations under this agreement, the amount it has on deposit in the guarantee fund shall be applied toward the ful- fillment of those obligations, and the excess, if any, returned to it. But in case any party shall not have fulfilled its agreement to render the monthly statements under this agreement, the amount it has on deposit in the guarantee fund, or the excess thereof, as above stated, shall be divided among the parties who shall have fulfilled their obligations under this agreement, in the proportion of their respective percent- Nineteenth. At the expiration of this agreement, or at any time the president of the association, together with the majority of the executive committee, determine that it is advisable that all or any part of any funds belonging to the association shall be withdrawn from the depository then holding the same, upon notification by the president and a majority of the executive committee of such determination being given the treasurer, he, the treasurer, shall make and sign a sight draft or check upon the depository so holding such funds for the sum named in such notification, which check or sight draft shall then be countersigned by the president or one member of the executive committee, and when such checks or sight drafts are so made and signed by the treasurer and countersigned by the president or one member of the executive committee and duly presented for payment at the office of the depository holding the funds of the association, all such checks and sight drafts shall be paid by such depos- itory. Twentieth. For all purposes of this agreement a ton shall be taken and held of 2,000 pounds. In witness whereof the parties hereto have signed this agreement the day and year first above written. (Hearings, pp. 1813-1817.) XnSWS OP ME. fJTTLETdii. Before entering on a discussion of the general question, I desire id distinctly dissent from the bill presented by the majority. The most pretentious bill presented by my Democratic colleagues is one as to parts of which there has been much discussion. The fundamental fault manifest throughout this bill is that it legislates primarily and directly at the size of industrial units. It preserves the chief fault of the Sherman law, which is the poUcy of a belated attack after a concern has grown up instead of providing any means of prevention. It fails utterly to confer upon any governmental agency the power to see to it that concerns in restraint of trade do not grow up. It distinctly treats the symptoms and ignores the disease. It does not establish any agency which, through the enforce- ment of specific statutes, can insist upon those initial safeguards without which all effort to reach the wrong must fail. Under its provision overcapitalized concerns with the power of holding com- panies may, without challenge, enter and continue in the field of interstate commerce. The real truth is that the bill is simply a com- pHcated rearrangement of the rules of evidence and the burden of proof under existing law, without a serious effort to meet and rightly solve the great industrial problems which have grown up since the existing law was enacted; and even this rearrangement of the rules of evidenc6 is contrary to every notion of English and American juris- prudence. It has been compared with the railroad law requiring railroads, when challenged, to show that their rates are reasonable. It really is a contrast instead of a comparison. A man or a concern may obtain control of 30 per cent of the business in which he or it is engaged by sheer efficiency. He or it may have no way of knowing how much or little trade is restrained or extended because of this. The effects of these acts are as wide and infinite as aU the ranges of commerce and business. The effect is external and beyond them. In the case of a railroad the knowledge of the reasonableness is peculiarly in their possession. In the proposed biU, under section 9, Subdivision C, "restraint of trade" is defined as follows: "The words 'restraint of trade' mean in restraint in any respect or to any extent of trade or commerce among the several States or with foreign nations." 231 ^32 INVESTiGATlOlir OS" TJNITED STATES STEEL COEPOEATION. Under this definition no business could be conducted that is not a restraint of trade, if by restraint of trade is meant restriction of com- petition. If 10 men start in the same line of business and 2 of them survive, with the volume of trade of that business increased a hundredfold, they have extended the trade, but they have imdoubt- edly restricted the competition to the extent of the 8 competitors. The confusion which is perpetuated in this bill between restraint of trade and restraint of competition will cause no end of difficulty. It may be in a given case or ip a number of cases that the extension of trade will result only from the limitation of competition. To say that when it shall appear that any concern or combination of con- cerns is in restraint of trade and that it controls more than 30 per cent of the value of the total quantity of that trade sold to the United States or more than .30 per cent in value of the total quantity sold in that part of the United States to which such concern extends, in such case such concern wQl be required at the suit of the Govern- ment to prove that the restraint is reasonable^ is to multiply the difficulties. We have endeavored, after months spent in patient inquiry, to present the facts concerning the organization and operation of the United States Steel Corporation. We have seen how from the very beginning the tendency has been marked toward the consoli- dation of competing concerns, and we have the example of the largest industrial company in the world as illustrative of a tend- ency in aU modern industrial life — a tendency which seems to be moving resistlessly toward the substitution of some sort of cooper- ation in place of the old trade war. It is perfectly clear that the good which may be done by the development of this tendency may be in a great measure nullified by the evils which unchallenged power in the hands of a sraaU group of men would invite. The question is larger than the simple destiny or lifetime of the United States Steel Corporation. The question is much more far-reaching than a simple approval of its good points or an occasional animad- version upon its bad points. The lesson which this record teaches, ijf it teaches anything, is that the American Government is confronted in the handling of its corporate problems with the most difficult economic and indus- trial problem of its history — a problem, in the first place, which defies the narrow limitations of partisanship and at once challenges the patriotism and wisdom of men of aU parties ; a problem, indeed, which is not improved by the dissolution of existing concerns except in so far as that dissolution furnishes a basis for constructive legis- lation which wiU prevent the recurrence of the evils and make sure and certain the good which cooperation and organization can do. Investigation of united states steel corpokation. 233 After all, the question which we first meet is, What is to be the attitude of the Grovemment toward business — business in its corporate form, business in its large corporate form, business in cooperative corporate form ? Must there continue to be a war of extermination on the part of the Government met by a pohcy of evasion and intrigue on the part of business ? The first requisite of any pohcy which the Government may adopt, or any statute which it may enact, is that that pohcy or that statute will make the Government's attitude toward modem forms of indus- try absolutely certain — an attitude defined and written into its laws through the agencies which have been established by the Constitu- tion for writing these laws, and not an attitude growing out of the particular humor or whim of any department of the Government or bureau under that department. The certainty of the Government's pohcy will insure respect for its authority on the one hand and create and maintain stability in legitimate business upon the other. The business device known as a corporation and its almost uni- versal adoption in the business world have made these problems grow much mdre rapidly than the public understanding of them. The very fact that the grant of a corporate charter comes from the sovereignty of the State made in some measure every corporation organized a large or small problem in the policy of every State. As they combined or extended their operations into other States these problems increased with their endless comphcations. How to keep them within their corporate charter, how to prevent oppression, how to fix habihty, how to insure honest management, how to prevent hurtful overcapitalization, how to prevent combinations of concerns hurtful to commerce, how to keep separate the carrier from the manu- facturer, these, at first problems for the State in which the corpo- ration was organized, grew to be problems for every State into which it extended its busuiess ; and finally became a great national problem in so far as it was located in the field of interstate commerce. The advantage of legitimate corporate development is beyond any intelhgent question. The true corporation has the advantage of assembling the most experienced and intelligent men to direct its affairs and shoulder its responsibihties. It has the advantage of gathering to itself a httle of the wealth of a great number of men with- out embarrassment to them, which enables it, by reason of the total sum thus gathered, to do big things. It has the advantage of being able to distribute in shares the value of a property or plant or enter- prise infinitely. It has the advantage which comes with concen- tration, the economy of organization, and the combination of the wealth of many. Rightly understood and honestly administered, it represents the cooperative enhghtenment of modern business. It stands for the collective energy, intelhgence, and wealth of modern 234 INVESTIGATION OF UN ixisjj btatjds sxJiJii. uuJii-uitAxiuJN . industry. It is the most flexible, resourceful, convenient, and effec- tive instrument yet devised by man to bring forth, manufacture, dis- tribute, and market the raw wealth of the earth. The rapid growth of corporations in the United States is seen in the report of the Commissioner of Internal Revenue, in which it is shown that 270,202 corporations, whose income is in excess of $5,000 annu- ally, report to him for the purpose of taxation under the corporation- tax law. These have an aggregate capital stock of $57,886,430,519.04, a bonded and other indebtedness of $30,717,336,008.84, and an aggre- gate net income of $3,360,250,642.65. We may make hberal allow- ance for the overcapitakzation of these concerns as represented by these figures, and yet we can not fail to consider the true character of this colossal wealth. It is being administered and conserved in cor- porate form. It is distributed in shares, and as such it affords the surest guaranty of the inviolabihty of the right of private property because of the easy and convenient distribution of these shares and the Httle care required in their possession and ownership. These shares and bonds offer an almost unhmited field for the investment of savings by the individual, who can hold and own his investment and receive its returns and- yet pursue daily his own business or profession. What are the other kinds of properties in our country ? How do we judge if? How do we estimate the thrift and enterprise of the people of our country ? Over against this corporate wealth, revealed in the figures just submitted, let us set down that property which is dis- tinctly individualistic, which has little of the character of collective ownership — that naked individualism for which agriculture stands. The estimated value of the farm products of this country for the year 1911 is $8,417,000,000. This is the gross value of farm products, without subtracting the cost of production. No estimate has been made of thexost of this production, but it is not difficult to see that the net income from the farms and the net income from corporate or collective property would not be far apart. Thus we have on the one hand the great collective ownership of property represented by these 270,202 corporate agencies, and on the other hand the distinctly individualistic ownership of the farm represented by this gross income of $8,417,000,000. Each of these classes of property,' each of these fields of human activity, is necessary to the growth, welfare, and continued prosperity of our country. As the ownership and use of all property in an orderly government must be regulated by law, we are confronted with the question. What shaU be the attitude of the Government toward these two distinct classes of property? How shall we regulate and govern the use of these sources of wealth in the hands of individual citizens? How shall we prevent the abuse of that ownership ? INVESTIGATION OP UNITED STATES STEEL OOEPOEATION. 235 Of these two classes of property the corporate class presents the most difficult and complicated problem. The real question which engages now and will continue to engage the attention of those in authority is the question of how to preserve centralized industry, which is represented in the great corporate development of the country, and at the same time insure industrial liberty. In order thoroughly to understand and correctly solve this problem, it must be approached without prejudice, without passion, and without bias. In the distinctly commercial era in which we live the energy and ability of our strongest men is devoted to the getting of wealth. More than in any other period of the world's history we have cultivated and enlarged the creative faculties of our race, and while conspicuous instances of oppression, coercion, and wrongdoing have marked the growth and development of this era, it can not be that simple greed is the single impulse which drives the brains and hands of men to the great task which they have undertaken. It can not be that the mere love of ownership, the naked lust of gain, is the sole inspiration under- neath the great work which men have set themselves to do. In order to afford the fullest freedom to the people of our country to create wealth and acquire property, we have established and main- tain economic hberty— that is, the right to work, to invent, to plan, to acquire, to own, and, finally, to have dominion over property. We have said to the individual. If you put your blood and brain and muscle into a thing called property, you shall become its owner, and shall enjoy and use that ownership for your comfort and happiness under a government of law. So long as this was done by the individual by his individual labor and ability we did not need, and hence did not make, many laws to regulate his ownership and control of property. He could keep what he had, and the range of his economic liberty- was almost unlimited. But when the corporate charter came into general use and men engaged in these enterprises, clothed these enterprises with these charters, the State, acting for the people because it had granted the privileges which the charters conferred, was required to take and hold super- vision of these corporate enterprises, and it was just here that corpo- rate development became involved in the first instance in the politics of the country. While the corporate enterprise remained wholly within a single State its regulation and control was exclusively in the hands of the State government, for the domestic sovereignty of the State was designed to deal with it and all domestic concerns. As a distinctly State problem it presented questions of capitalization, private monopoly, and taxation, and in public-service corporations the additional questions of eminent domain, freight and passenger rates, and all features common to the regulation of raihoads. 236 INVESTIGATION OF UJIlTJSU Bl'ATJfiS STUJfiL OOEPOKATION. As these new and intricate corporate agencies were introduced into new States they were challenged at each step in their progress by the public; and the hostility to their use and adoption found its effective expression in many crude and ill-considered statutes which, instead of beiag directed toward a rational supervision of them, were designed to indiscriminately outlaw them. In 1889 Kansas, Maine, Michigan, Missouri, Nebraska, North CaroUna, Tennessee, Texas, and the Territories of Idaho, Mon- tana, and North Dakota passed antitrust laws; and the new States of Washington and Wyoming introduced siroilar provisions into their constitutions. In 1891 Kentucky and Missouri intro- duced antitrust provisions into their constitutions, and Alabama, Illinois, Mionesota, and the Territory of New Mexico enacted similar laws. New York and Wisconsm followed in 1892; and in 1893 Cahfomia forbade combinations in hve stock and Nebraska forbade combinations in coal and lumber. Thirty States and 2 Territories subsequently passed such laws, and in 17 States antitrust provisions were inserted in the State constitutions. (Gilbert H. Montague.) Notwithstanding these States enjoyed to the full the authority of the comjnon law, which for hundreds of years had denoimced monop- oUes, and notwithstanding the fact that their development impera- tively called for the employment of centralized capital in convenient corporate form, these States, in order to translate their rage and resentment into an offensive weapon, went far beyond the priaciples defined and settled by common law and enacted statutes drastic in character, antagonistic in temper, and in many instances largely the product of political wrath rather than the result of wise delibera- tion, wholly or partially unconstitutional. In 21 States it was made criminal for two or more persons to enter into any agreement, reasonable or unreasonable, which prevented competition in production or sale. In 17 States it was made criminal conspiracy for two persons to agree to regulate the quantity or price of any article to be manufactured, mined, produced, or sold, regardless of whether prices were raised or lowered. In 16 States it was criipinal for two or more persons to attempt to monopoUze any commodity. In Missouri it was criminal conspiracy to maintain a trust, pool, combine, agreement, confederation, or understandiog to regulate prices or to fix the premium for fire insurance. In Mississippi it was criminal conspiracy not only to regulate prices, but also for two or more persons to settle the price of an article between themselves, or between themselves and others. (Gilbert H. Montague.) There were three States, West Virginia, Delaware, and New Jersey, which kept open the door which had been closed by the other States. A corporate franchise can not be forfeited except in the State where the charter is granted, and then only when the laws of that particular INVESTIGATION OF UNITED STATES STEEL OOBPOEATION. 237 State are violated ; and as West Virginia, Delaware, and New Jersey passed no antitrust laws, they could and did grant almost all of the charters to all sorts of enterprises which, when incorporated, pro- ceeded into other States to do business at will. Thus the States which had enacted the most prohibitive laws against all conceivable forms of agreements and arrangements found themselves invaded by alien concerns which they were powerless to attack or dissolve. The legislation which had been enacted in all but three of the States was the result of a failure to carefully study and fully under- stand the substantial welfare of these States. To be sure, it was just and proper to safeguard the consumer against those restraints of trade which the history of the common law had shown were against their interest. But how much more sensible and effective it would have been to have resorted to the common law for protection than to have cluttered up the statutes with this unseasoned assortment of political legislation. How much more statesmanlike it would have been to have looked the problem squarely in the face and to have realized that modern civilization had taken hold of theSe industriaNand business agencies with which to work out the development of the country and to have exercised a cool and discriminating judgment in the rejection of these agencies^ instead of stirring the passions of the people untU they grew into prejudices, and clinging to these prejudices until they were enacted into laws. The very fact that these States did not content themselves with the ample remedies afforded by the common law, but rushed into crusades against corporate business which eventuated in these unreasonable statutes, indicates that in each State the question had been made a political one and leaders were driven, by the storm which they had raised, to do foohsh and extreme things. No one wiU ever be able to estimate the damage done to the growth of these States nor the extent of the restraint imposed upon the prosperity of their people by the unthinking prejudices which wrote these laws upon their books and fixed these policies in their creed. In 1890 the Federal Congress, under the constitutional authority to regulate interstate and foreign commerce, enacted what has become generally known as the Sherman antitrust law. It may be assumed that one of the controlling reasons for the asser- tion by the Federal Government of its unused powers conferred by the Constitution was the fact that three States continued to grant charters and suffer combinations which all of the other States were powerless to prevent and without ability to control, and that as these concerns were crossing and recrossing the lines of interstate commerce, it was thought expedient and necessary to draw a line around the field of this interstate commerce and set up a standard to which every interstate concern should finally conform. 238 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. Another and more general reason is to be found in the fact that the close knitting together of the whole country by the countless threads of communication had drawn the commerce of the States out into that field located between the States; and the activity and volume of this commerce called into exercise those long-dormant powers lodged in the Federal Constitution. However much or little these two reasons contributed, it is undoubtedly true that the imme^ diate, acute, and irritating cause of the enactment of the Sherman law was the fact that concerns doing interstate business, and hence not wholly within the reach of the corrective remedies wielded by a single State, had entered into and were continuing to enter into secret agreements to control the output, advance the prices, and lower the quality of their products. The ungovemed and unguarded field- of interstate commerce furnished an unmolested territory where these hurtful and antisocial practices could be indulged without fear. The Sherman law was the result of much interesting and instructive debate, followed by practically unanimous vote, and for these reasons alone should not be inconsiderately condemned* Furthermore, it has- been touched upon and reviewed in as many as 100 opinions of the courts of our country in a serious effort to make its meaning clear and its provisions effective. The effect of the enactment of this statute was not plain to be seen until the opinion of Mr. Justice Petekham in the Trans-Missouri Freight Association case was handed down, in 1897. From 1890 untU 1897 nothing occurred either in or out of court to indicate what the attitude of the Government would be in regard to its enforcement, nor to what extent its enforcement would affect the then organized indus- trial and business affairs of the country. The decision of the Trans-Missouri Freight Association case, in 1897 directed the attention of all business and industry to the fact that pooling arrangements and loose agreements between concerns in restraint of trade, whether reasonable or unreasonable, were unlawful. The effect of this decision upon the course of development in business and industry was most unexpected. The Sherman law was entitled "An act to protect trade and com- merce against unlawful restraints and monopolies." Its first effective enforcement resulted in a united effort on the part of those engaged in business and cominerce to do the very thing which it had been designed to prevent. It had been supposed that this act of Congress would strike asunder the vicious agreements in restraint of trade and restore at least the competitive contest between the large concerns engaged in business and industry. It was no doubt intended to make impossible all of the agencies, the vices, and subterfuges by which com- petition was being eliminated from our business and industrial life. Just as soon as those engaged in business realized the effect of the decision of the court in the Trans-Missouri Freight Association case INVESTIGATION OF UNITED STATES STEEL COBPOBATION. 239 and that it construed the Sherman antitrust law to prohibit every agreement, contract, trust, or combination in restraint of trade, and that there could be no arrangement of any character between com- peting companies, they adopted one of two courses. Either they procured the organization of "holding" companies, to which they transferred the stock of the competing companies and in turn re- ceived a proportionate amount of the stock of the holding company, and thus consohdated into one great enterprise a number of smaller enterprises; or they procured the organization of a huge corporation with capital sufficient to embrace the combined capital of any num- ber of competing concerns, then dissolved and wound up the constit- uent companies and transferred the physical properties to the newly organized concern. In either case, the result was the same, for we witness then the coming of those stupendous corporations whose dominance has alternately been the wonder and apprehension of this great corporate era. It has been pointed out by Mr. Gilbert H. Montague in his excellent work on trusts that prior to 1897 there were not more than 60 con- cerns that were dominant in their respective trades. Within the three succeeding years, 183 corporations, dominant in their respective trades, were organized. In the year 1899 alone, 79 of these, with a total capitalization of $4,000,000,000, were organized. It has been estimated that these enormous combinations comprised one-seventh of the manufacturing industry of the United States; one- twentieth of the total wealth of the Nation; nearly twice the amount of money in circulation in the country; and more than four times the capitaliza- tion of all the manufacturing consolidations that were organized between 1860 and 1893. From 1897 and throughout the years fol- lowing, until 1904, the country came to recognize and adopt the method of holding companies and huge corporations; and these were treated, tacitly at all events, as compliance with the Sherman antitrust law. Not until 1904, when the Northern Securities case was decided, was there a general, if not universal, revival of the antitrust crusade. The decision in that case marked the second epoch in the history of the Sherman antitrust law and its enforce- ment, and set on foot the prosecutions which from time to time have been conducted by the Government. If the Sherman antitrust law, as it has been finally interpreted by the Supreme Court, had from the beginning been strictly enforced, and the policy of the Nation firmly established, one of two things would have resulted. Either industry and business would have taken on some new and competitive form, or the Sherman law would have been amended or supplemented. In any event, the tumult resulting from its interpretation and enforcement would have less of a nation's industrial structure to disturb and less of a nation's habits to change. 240 INVESTIGATION OP UNITED STATES STEEL COEPOKATION. When the Government, either because of its failure or refusal to enforce the law, had from 1897 to 1904 openly allowed the formation of holding companies and the creation of huge corporations in which untold wealth was invested, and to which incalculable interests had become attached, it was natural that the whole country should view with apprehension the sudden and drastic enforcement of the Sherman law. The country waited with obvious impatience the final decisions of the Supreme Court in the Standard OU and Tobacco cases. The Standard Oil opinion was delivered on May 15, 1911, and around this has revolved aU industrial discussion since that time. The whole country, with patriotic unanimity and with a fine regard for the pre- eminence of that great court, has accepted its last word as law; but the economic conditions resulting from that interpretation is one which the country is struggling with as it never struggled before. We have seen what the effect of the decision in the Trans-Missouri Freight Association case in 1897 was upon the industrial and business development of the country. We have observed how an inactive Government from 1897 to 1904 permitted the country to come to the conclusion that huge industrial and business holding companies were legitimate agencies for the development and conduct of business generally. Let us now examine, as far as we are able to do so, the legal effect of the decisions in the Standard Oil and Tobacco cases; and this can perhaps be better stated by reference to the opinion of Mr. Justice White, in which he declares the conclusive meaning of the Sherman Act as follows : In view of the common law and the law in this country as to restraint of trade, which we have reviewed, and the Ulununating effect which that history must have under the rule to which we have referred, we think it results : (a) That the context manifests that the statute was drawn in the li^ht of the existing practical conception of the law of restramt of trade, because it groups as within that class, not only contracts which were in restraint of trade in the subjective sense, but all contracts or acts which theoretically were attempts to monopolize, yet which in practice had come to be considered as in restraint of trade in a broad sense. (&) That in view of the many new forms of contracts and combinations which were being evolved from existing economic conditions, it was deemed essential by an all-embracing enumera- tion to make sure that no form of contract or combination by which an undue restraint of interstate or foreign commerce was brought about could save such restraint from condemnation. The statute under this view evidences the intent not to restrain the right to make and enforce contracts, whether resulting from combinations or otherwise, which did not unduly restrain interstate or foreign commerce, but to protect that commerce INVESTIGATION OF UNITED STATES STEEL COBPOBATION. 241 from being restrained by methods, whether old or new, which would constitute an interference that is an undue restraint. (c) And as the contracts or acts embraced in the provision were not expressly defined since the enumeration addressed itself simply to classes of acts, those classes being broad enough to embrace every conceivable contract or combination which could be made concerning trade or commerce or the subjects of 3uch commerce, and thus caused any act done by any of the enumerated methods anywhere in the whole field of human activity to be illegal if in restraint of trade, it inevitably follows that the provision necessarily called for the exercise of judgment which required that some standard should be resorted to for the purpose of determining whether the prohibitions contained in the statute had or had not in any given case been violated. Thus not specifying but indubitably contemplating and requiring a standard, it follows that it was mtended that the standard or reason which had been appUed at the common law and in this country in dealing with subjects of the character embraced by the statute, was intended to be the measure used for the purpose of determining whether in a given case a particular act had or had not brought about the wrong against which the statute provided. In other words, the first section denounces "combinations, con- tracts, conspiracies, etc.," not of a particular class but of a general character; and whether or not they are unlawful can only be determined by accurately foretelling their ultimate effect on trade. It does not denounce contracts or agreements which do or attempt to do some specific thing, but it denounces contracts and agreements whose effect is general and well-nigh countrywide; so that a violation of the first section does not depend upon (1) the intent of the person doing the act, nor (2) upon the knowledge of the person doing the act, nor (3) upon the motive of the persons doing the act. , But it depends upon whether the person making the contract is able to survey the whole field of in terstate« trade and to calculate with accuracy the final effect of his contract, and this final effect which he must be able to foresee must be so precisely foreseen and estimated as to enable him to say whether the effect is reasonable or unreasonable, due or undue, direct or indirect. Having done this, he is not yet finished. He must make the con- cluding and all-important calculation as to whether his two estimates — to wit, the general effect of his contract on trade, and whether that effect is reasonable or unreasonable — ^wiU coincide with the opinion of the court before which his contract is to be construed. The second section abandoned all effort at classification and, as construed, declares, in effect, that if any person does anything what- soever which would result in the same thing that the acts denounced in the first section do result in, he has violated the law, so that a per- son capable of the foresightedness demanded by the first section, 54946°— H. Kept. 1127, 62-2 16 242 INVESTIGATION OF UNITED STATES STEEL COEPORATION. having dismissed that section from his mind and honestly endeavor- ing to meet the requirements of the second section, is confronted with this problem: That anything which he may do, although no mention is made in the second section of the kind, quality, charac- ter, or extent of the thing he may be doing, which is afterwards held to be an attempt to monopolize any part of trade or commerce, is an unlawful act and subjects him to punishment. The law in the first section, as construed, does not declare what sort of contracts are to be considered as in restraint of trade. It does not declare what, in the mind of the lawmaker, would amount to a restraint of trade. The lawmaker has no idea himself as to what should be deemed a contract in restraint of trade. But he leaves it to the man making the contract to judge for himself as to whether it is in restraint of trade and to judge at his peril. All that the Supreme Court has accomplished is to require the person making the contract to go one step further and ascertain whether the effect of his contract upon trade is reasonable or unreasonable restraint. Having to some extent ascertained the strictly legal effect of this decision in the Standard OH case, let us inquire just what has been the general effect of the decision on the business upon the country. For a time at least, even if not at the present time, the distinctly business section of the country stood stUl in a state of uncertainty and doubt; those concerns already organized, in many instances fearful of prosecution; those concerns which were in contemplation, arrested lest they should transgress the law. The immediate bewil- dering consequence was that a dense fog of uncertainty settled down upon and completely enveloped American enterprise. This condi- tion resulted in much discussion and many proposals of remedies. When the result of the dissolution of the Standard Oil Co. and the Tobacco Co. had finally been worked out and the country came to understand, as fully as it could understand, the compli- cated readjustment which took place in the affairs of each of these companies, the weight somewhat shifted to the other foot. The leaders of radical thought in the country and those most extreme in their desires to restrain and repress the orga,nization of large indus- trial units suddenly took alarm. Their view was, in homely speech that "the mountain had labored and brought forth a mouse," and they began to bitterly complain of the ineffective and impotent ma- chinery of the Sherman law, so that to-day we have two distinct antagonistic classes of public opinion in regard to the wisdom and efficiency of the Sherman law as enforced. One class rather leans to the opinion that if its worst is no worse than the result in the Stand- ard Oil and Tobacco cases, then its worst can be endured. The other class maintains that if its best and highest efliciency is exemplified in the Standard Oil and Tobacco cases, then at its maximum enforce- INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 243 ment it is impotent and inadequate. It fact, organized business generally, while welcoming a short period of peace, lives in dread of the future; organized poUtics stands confused in front of the problem; and organized labor incessantly demands the amendment of the Sherman antitrust law. Neither the radical nor the conservative in politics is satisfied with it. Neither organized labor nor organized capital approves it. With the question in this unsatisfactory condition and the public mind in this unsettled state, and the welfare of our country vitally interested in the right and just settlement of the problem, we are confronted with the specific question as to what step should be taken by the legislative branch of the Government to bring about its solu- tion. What we stand in need of, what we most desire, is not felici- tous phrases, incisive epigrams, or turgid editorials, but a clear pointing out of the steps which can be taken, and which should be taken, which win be effective in reaching a right solution. The question is one which reaches down through the very vitals of business and commerce to the foundation of the country's prosperity, and its remotest influence finds its way to the very farthest end of the detail of the lives of our people. The thoughtless disturbance of this great and extensive fabric sends a tremor of uncertainty and fear far down to the very ends of human interest and emplo3maent. No one man knows enough to know the full and final influence of a change in the established policy of dealing with these concerns. There is no such organized difference of opinion between the political parties as would require the settlement of this question either properly or necessarily as a political adjustment. There is no line of cleavage between political parties upon this industrial question, either as to what the end desired is or the means adequate to reach that end. It is of the utmost importance that the question as a whole should be cut clean loose from the agitation and uncertainties of politics and dealt with upon the bare questions of intrinsic merit. Therefore it is my opinion that the legislative branch of the Federal Government, in whose hands the question is exclusively lodged, should create a joint body of the Senate and the House for the purpose of considering the whole question. This committee should be created without regard to the political affliations of its members. This would provide a rational, constitu- tional method of treating the question. The committee should take counsel and advice of organized capital and organized labor. It should consult the interest of every class of citizens and should ascer- tain as far as possible the effect of legislation upon each class. It should inquire into the experience of other countries in dealing with industrial growth and corporate development, study the measures 244 nrvESTiGATioN op xjsttbd states steel cobpobatioit. adopted by these countries, analyze the results of these measures, and profit, as far as possible, by their experience. Its sole aim and object should be sound legislation. This committee should examine care- fully aU of the judicial interpretations of the various courts of our country of the Sherman law in order to fully understand its judicial history and its judicial growth. The committee should carefully analyze the result of the enforcement of the law, particularly the result as illustrated in the reorganization in the Standard Oil and To- bacco Co. cases — this with a view of determining whether its enforce- ment has cured the evils denounced by the Supreme Court in its opinion. The selection of such a committee would concentrate the energy and abihty of the legislative branch of the Government upon the solution of this problem. It would focus the attention of the whole country upon the committee and its work and reduce under its impar- tial and judicial inquiry the agitation of this country to orderly and constitutional treatment. This committee could draw a line around the field of interstate commerce and consider, first, under what terms and conditions con- cerns desiring to do interstate business should enter this field, whether by Federal hcense. Federal incorporation. Federal registration, or Federal certification. Second, just how elaborate and exacting these terms and conditions should be. Third, this committee should con- sider what laws should be enacted to govern concerns in this field of interstate commerce after they had compHed with the terms and con- ditions of their entry. Fourth, the committee could consider the manner in which an offending concern should be excluded from the field of interstate commerce and devise an orderly and constitutional method by which the concern condemned in the eyes of the law should be excluded from this field and wound up. In fact, such a committee, giving its time, industry, and intelligence to the solution of this problem, would insure order in the place of chaos, impartiahty in the place of partisan appeal, and judicial temper in the place of poMtical rancor. If you should ask me what I, as an individual, think would be a solution of the question, I can give you a general indication of my views, conscious that they fall short of a complete remedy and anxious that they shall be considered only as a suggestive contribution rather than a perfected program. The real vice in the treatment of the whole problem heretofore has been the attempt to legislate solely against the result or effect of a series of acts instead of specifically defining and prohibiting these acts. In an effort to prevent and punish confessedly conspicuous evils, we have set all business groping and feeling about with uncer- tain step like a man in the dark. We must first realize that compe- tition is the final law of all life, but that it is a growth, just as coopera- INVESTIGATION OP TTNITBD STATES STEEL COEPOBATION. 245 tion is a growth; that it is the law of trade and barter and not the law of statutes; that no government ever had roots so deep or standards so high as to be able to enforce compulsory competition any more than the naightiest man is able to make the right hand the earnest competitor of the left. It will always exist at one time or another, but it can not be le^slated into commerce any more than it can be legis- lated out of commerce. To be exact, it is not competition which we seek to maintain but the unhindered right to compete. We do not make men go into business to compete with others. We maintain just laws so that if a man chooses to go into business and has the efficiency to win in the contest he shall not be molested in his pur- suit. Competition is not a concrete and stationary thing to be preserved. It is an ebbing and flowing tide of industrial life which may run high upon the shores in one period and ebb into the middle of the sea in another To change the figure, it may be strangled to death by superior strength unjustly used. It is an ever-changing, ever-diminishing, ever-enlarging condition of industry. It is a state of industrial liberty and economic freedom. It must be free but not by coddhng the inefficient or holding everyone back for the laggard. It is bound to mean a reduction in the number of competitors but not a perma- nent appropriation of the thing competed for. In the hard struggle of industry and business life there must be an elimiuation of those who are unable to endure it, but this elimination should be solely upon the inability of those eliminated to survive an honest contest waged under the m'ost enlightened rules of business warfare. When corporations found that it was necessary and profitable to combine and either turn themselves over to a holding agency or dis- solve and unite in one huge corporation, they did it in order to economize in the expense of administration and to enable them to control prices. Whatever the purpose was, the effect in many cases was to give the holding company or the huge corporation the monopoly of the business in which it was engaged. We were confronted then and we are confronted now with the question as to how we should deal with the monopoly, and it is by no means an easy task. In many of our constitutions and most of our laws we have for- bidden the creation of monopolies by the Government; that is, we have said that no concern should be granted the exclusive right to do a particular kind of business and, except in the case of allow- ing exclusive patent rights, we do not grant such rights; but the withholding of such grants by the Government has not prevented monopoly. We have monopohes which have been created by individual ingenu- ity and effort, and it is this individual ingenuity and effort with which the Government must deal in attempting to prevent or regulate monopoly. 246 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. There are monopolies which have been built up by unfair practices employed, against competitors, such as the getting of rebates, the use of large amounts of capital to starve out the competitor, the selling below cost to drive a less resourceful competitor out of business, the getting control of the sources of supply. of necessary raw material so that no competitor could get it except at prices which would bankrupt him, the advantages of high tariflF so that no similar article could be brought from abroad. Then there is the monopoly which is created in the first instance by the promoter who collects a large sum for the work of putting several or many concerns into one, and this is made possible by the hope of the different owners that they will add to the value of what they have the combination value, and that they will get a larger dividend without the great cost and trouble and maintaining several establishments. This monopoly also offers the attraction of specu- lation, which to many is a great temptation. Now, these two classes of monopoly are abnormal and result from the desire of a few people, by fair means or foul, to take a short cut in getting money. They do not represent the efl&ciency of combina- tion nor do they promise any benefit to the pubhc. There is still another and third kind of monopoly which presents a much more difficult problem and which must not be confused with the first mentioned two classes. This kind of monopoly is the result of an intelligent organization, skillful combination, and proven efficiency. There can be no doubt that organization when inteUigent and systematic ; combination when brought about for the purpose of embracing all of the processes from the beginning to the end of the manufactured thing; and proven efficiency in the actual work of production or manufacture, will improve the quahty of the thing produced, reduce the cost of production, and cheapen the price to the consumer. Such monopohes, so created, stand for the best that is in our civiHzation. They represent the survival of the highest efficiency. They are simply the winners in the final contest of com- petition. Because of all these quahties which they have, all of these advantages which they enjoy, such monopohes in different fields of endeavor may come into exclusive control of the thing which they manufacture or produce. In other words, by organi- zation, combination, and efficiency they may drive aU competitors from the field. This leaves them in such unchallenged control that they are able, at least for a time, to do much harm to the pubUc if unrestrained, because the pubhc must go to them and no one else for the thing which they manufacture or produce. The question presents itself, then. In what way are we to deal with these three classes of monopolies ? How are we to treat each ? Can we apply the same laws to each t ItTVEStiGAiioN OF tririTED states steel cokpoeation. 247 Willie they are each created by different methods, varying in their character from strangulation of competitors to simple superiority of work and skill, they each at last come to control the thing manufac- tured or produced so as to be able to extort from the public an unrea- sonable price. We can not say we will make it impossible for any one of the three classes to exist, for in doing so we throw away the very fruits of organization, combination, and efficiency. We can not prosecute skill as a crime along with coercion. We can not indict organization as an offense along with conspiracy. We can not punish efficiency as guilt along with oppression. We must establish some rules which will permit the best that is in our race to develop and yet keep ia check the worst that is manifested. In my opinion, we should make definite laws governing competi- tion. These laws should be specific as far as possible in defining and punishing unfair methods of competition. They should prevent hold- ing companies, secret rebates, underselling for the purpose of driving out competitors, factors' agreements, and exclusive control of raw material, such as ore, coal, or oil; and they should prohibit the com- bination of corporations producing the same things ia the same way for the purpose of controlling prices. They should authorize any per- son injured or threatened with injury to apply for an injunction to prevent the threatened injury. Competitors should be made by law to play fair, and the means of enforcing this law should be iu the hands of every man who is about to be injured by the unfair play. We should so enact these laws as to make it impossible, or well-nigh impossible, for a monopoly of the first two classes named to be built up on unfair practices and foul tactics, and then provide that if by chance one should escape the prevention of these laws and grow up the Government would not only prosecute it, but actually destroy it and every vestige of its existence. Now if, with these laws demanding fair play in competition thoroughly enforced, a concern belonging to the third class should, by intelligent organization, skillful combination, and high efficiency, and without resort to any of the unfair means denounced by law, produce the best and cheapest article and one by one drive aU competitors from the field and come into complete control of that field, what shall the Government say to that concern ? If it should undertake to pro- hibit the steps taken by the concern, it would be legislating against intelligence, skUl, and efficiency. If it should undertake to denounce the concern as a monopoly when it had come into complete control of the field, it would be denouncing the fruits of inteUigence, skill, and efficiency. In whatever way the Government should undertake to prevent the growth and prosperity of such a concern, it would, after aU, be trying to prevent the useful employment of the best that is in the human race. 248 INVESTIGATION OF UNITED STATES STEEL COBPOBATION, But you ask, How are we to prevent this concern when it has come into complete control of the field by driving out its competitors from raising the price and reducing the quality of the thing produced? You will be answered by some that the only way is for the Govern- ment to regulate the prices to the consumer. This contention is justi- fied on the ground that the control which the monopoly has obtained gives it such a power for public injury that the Government, acting for the public, has a right to prevent that injury. I think if it were true that the monopolistic control thus obtained did give such a permanent power to injure the pubhc the Government would have a perfect right to prevent that injury even by the regulation of prices; but I think those who have reached this conclusion have done so hastily and without considering all of the elements of the situation. If monopoly is the result solely of inteUigent organization, skillful combination, and proven efficiency, and if unfair methods are made unlawful and the means for preventing these methods are made speedily effective, if the unhindered right to compete is preserved in full and the field kept entirely open and the monopoly may not prevent or check the coming of competition, then by the very law and logic of its creation the monopoly must charge reasonable prices and keep up the standard quality of the article; for as it could not have driven competitors from the field except by break- ing the law on the one hand, or by the highest efficiency and the lowest prices on the other, it can not prevent the return of com- petitors except by breaking the law on the one hand or maintaining the highest efficiency and the lowest prices on the other. And if, in each instance, the law requiring fair play is enforced, the monop- oly must keep its control by the same means that it got control — that is, by inteUigent organization, skillful combination, and proven efficiency — all within the law governing competition. The moment that a monopoly raises the prices or reduces the quahty of its article it invites into a free and open field all of the competitive ability and ingenuity in the country — that very same competitive ability and ingenuity which it drove out of the field. The point is keeping the field free, protecting competition, making the rules of competition fair. No doubt for a short time the monopoly could reap a harvest of high prices, but with this protected compe- tition its harvest would soon be cut short. It is my belief that the Federal Government should resolutely chal- lenge every corporate concern seeking entrance into the field of inter- state commerce, and compel it to conform to a standard which will insure, first, that the concern has behind every issued share of stock the real value which the share represents, not only for the protection of those who buy the stock, but to insure that it wiU not lower the standard of its product to force a dividend on excessive capitalization and thus tend to demoralize the industry in which it is engi^ed. To INVESTIGATION OF TTNITBD STATES STEEL OOKPOEATION. 249 do this effectively, both as a security to the public and as a reacting influence upon the poUcy of the States, the Federal Government should require corporate concerns entering the field of interstate conamerce to submit their status, their true condition, to a board created for that purpose. A report of each company, exanoined with fuU and authentic data should be kept, and the rules governing the conduct of the board should be enacted into law by Congress; and no concern should be allowed to enter the field of interstate commerce imtU the board had issued a certificate to the effect that the concern had com- plied with the law governing its admission. The board should not have the slightest discretion as to what classes or kinds of concerns should be admitted, but only the right to say that it had complied with the laws enacted by Congress. This certificate issued by the board should contain a statement of the laws governing their admis- sion and should stand for and in the place of a charter entitling the concern to do interstate commerce. It ought to be provided that this certificate should be forfeited for a violation of the conditions of entry, as well as for a violation of any law governing the transaction of interstate commerce or business — this forfeiture to be upon notice and after a hearing. Thus at the very foimdation of interstate com- merce the Federal Government would take a good grip upon the instruments and agencies engaged in it, and would hold that grip against the commission of economic wrongs and evils. We are, of course, confronted with the still more difficult problem as to how to treat the vast number of concerns already engaged in interstate commerce. In other words, to make drastic regulations as to all future concerns entering into interstate commerce and leave unregulated and undisciplined those already engaged, which, without restriction, have been allowed to enter into that field, would produce discrimination at once unjust and harmful to the new concerns seek- ing admission as well as to the commerce of the country. The acts of Congress governing the admission of concerns into interstate com- merce could be so framed, no doubt, as to require a gradual com- pHance with them by those concerns already in the field, so that the readjustment would make them all equal in the eye of the law, equal in their regulation, and at the same time be accomplished without too sudden a disturbance of those which have entered without challenge. One of the fundamental difficulties is the slipshod way in which companies go into interstate commerce and the loose and unsound way in which they are incorporated. Having set up the machinery through which companies coming into interstate commerce must pass, having erected a standard by which they must be tested, and put upon them a restraint which can be exercised for the protection of the public, it seems to me that we could then proceed to enact some specific laws for their guidance and control. They should not 250 INVESTIGATION OF UNITED STATES STEEL COKPOEATION. be directed merely toward reducing the size of industrial units. Their purpose should not be to make the contest an even contest by law. There should be no handicap placed upon genius, efficiency, and skill. These laws should be drafted as an industrial code prohibiting spe- cifically the well-known devices by which one concern takes unfair advantage of another. A clear distinction should be made between industrial centralization, which brings together like concerns produc- ing similar products by similar means for the. purpose of controlling output and fixing prices, and the natural and orderly combination of enterprises which assembles under one control those corporations which, step by step and stage by stage, do their respective work in making a finished product out of raw material. In other words, there may be a very efficient, useful, and harmless combination of corporations, each of which performs a portion of the whole labor necessary to perfect a manufactured article — such a combination would increase profits and cheapen the article to the consumer — while a combination of corporations engaged in the same work upon a like article or enterprise, though reducing somewhat the cost of production, would acquire a dangerous control of output and prices. As to what these devices are the joint committee could ascertain by inquiry for the purposes of legislation. Some of them are well known. From time to time as new devices for unfair competition or advan- tages should be developed, they should be added to the prohibitions of the statute. We should save the field of interstate commerce as a territory into which certain corporate concerns, after passing a proper examination, should be allowed to enter, and having entered they should be governed by a definite code of industrial regulations enacted by Congress. Gradually, by the careful study of industrial development, by requiring elaborate reports, and by wise and just control a system of rules governing interstate commerce could be developed and these rules would become famOiar to every one engaged in it. Instead of lodging the exclusive right to apply for and obtain an injunction in the hands of the Attorney General, it should be provided that any person whose property, estate, business, or enterprise is threatened with injury or damage in violation of any one of the pro- hibited acts, or in violation of the conditions on which the concern was admitted to the field of interstate commerce, could apply to any Federal court having territorial jurisdiction for an injunction to restrain the person or corporation threatening the injury. If a con- cern adrntted to the field of interstate commerce should obey the rules and laws provided for its government in that field, and should by skill, efficiency, and energy grow to enormous size and earn rich rewards, I would count these rewards as the fruits of that industry, the harvest of energy and genius, and the crowning triumph of a civiliza- tion resting upon the doctrine of individualism. o 62d Congress, ] HOUSE OF REPRESENTATIVES. J Rept.1127, M Session. X j Part 2. INVESTIGATION OF UNITED STATES STEEL CORPORATION. August 2, 1912. — Referred to the House Calendar and ordered to be printed as a separate document. Mr. Gardner, from the Special Committee to Investigate Violations of the Antitrust Act of 1890, and other acts, submitted the following VIEWS OF MINORITY. SUMMARY— FINDINGS OF FACT. That J. P. Morgan & Co. and the underwriting syndicate received $62,500,000 for organizing the United States Steel Corporation. That the corporation was capitalized at $1,400,000,000, of which lUearly one-half was "water." That the average annual earnings of the corporation have been from 11 to 12 per cent. on the actual value of its assets. That the corporation controls a little over one-half the crude and finished steel business of the United States. That the average wholesale price of steel products has fallen off since the corporation was organized. , That the corporation and all the independents have an tinder- standing as to prices. That the system of interlocking directorates has insidious conse- quences and facilitates "inside management" and the stifling of competition. That the situation as to iron-ore supply is grave and may become menacing. That labor conditions in certain departments of the steel industry are bad. RECOMMENDATIONS. 1. Constructive legislation. — All corporations exceeding $50,000,000 in capitalization or valuation must become United States corpora- 2 INVESTIGATION OP UNITED STATES STEEL COEPOEATION. tions before entering interstate commerce. For smaller corporations United States charters are voluntary. All United States corporations must be recapitalized at their actual value. An Interstate Commission of Industry, like the Interstate Com- merce Commission, to be established. Publicity to be provided for. When the price fixed by a United States corporation has been found to be unreasonable, the Interstate Commission of Industry must pub- licly declare that fact and recommend a reasonable price. Interlocking directorates and "holding" companies forbidden except when permitted by Interstate Commission of Industry. If foregoing recommendations shall prove iasufiicient to meet the trust problem, the Interstate Commission of Industry ought to be given a carefully guarded power to decree maximum prices when necessary. 2. PaUiatwe legislation. — Industrial corporations not to own com- mon carriers. "Unreasonable restraint of trade" defined and burden of proof of "reasonableness" transferred to the defendant. Individuals and States to have the opportunity to intervene in Government suits. Extensive powers and instructions for courts when combinations are adjudged illegal. 3. Recommendation to the United States Steel Corporation. — That in the blast furnaces and rolling mUls three shifts of men, working 8 hours each, ought to take the place of two shifts of men working 12 hours each. Paet I. FINDINGS OF FACT We dispute the findings of fact of the majority without attempting to deal specifically with their allegations. By singling out unusual incidents and unusual evidence, selecting unusual years, unusual prices, and unusual practices as a standard of comparison, the major- ity has created an overdrawn' picture portraying diabolical ingenuity and sinister malevolence as the characteristics of the United States Steel Corporation officials. J. p. MORGAN & CO. The fact is that a very sharp line of discrimination ought to be drawn between the conduct of the banking house which promoted the United States Steel Corporation and the conduct of the exceed- ingly competent, although perhaps not altruistic, managers who have subsequently made it a success. INVESTIGATION OF UNITED STATES STEEL COEPOKATION. 3 In return for promotion services and risks the firm of J. P. Morgan & Co. exacted $62,500,000 in compensation for itself and the under- writing syndicate which it managed. Such a sum bore no relation whatever to the service rendered, the risk run, and the capital advanced. We do not hesitate to say that this transaction of J. P. Morgan & Co. must stand condemned before the more enhghtened business ethics of later years. HERBEET KNOX SMITH's REPOBT. For statistical statements and for close analysis of figures, the minority mainly relies on the report of Herbert Knox Smith, until recently Commissioner of Corporations. We have examined each table prepared by the commissioner, and with slight variations we are convinced that his figures are correct. Only in the matter of our iron ore resources, as hereinafter noted, do we take serious issue with him. CAPITALIZATION AND "WATEB." In substantial agreement with the commissioner, we find that the United States Steel Corporation was organized in April, 1901, with about $1,400,000,000 capital, of which approximately $600,000,000 to $700,000,000 was "water." AVERAGE EARNINGS. In substantial agreement with the commissioner, we find that the earnings of the corporation for the decade from 1901 to 1910, in- clusive, averaged from 11 to 12 per cent annually, on the actual value of the property. PROPORTION OF OUTPUT. In substantial agreement with the commissioner, we find that in 1901 the Steel Corporation produced about 42J per cent of the total output of pig iron of the United States. It produced about 43 per cent in 1910. In 1901, the Steel Corporation produced about 60 per cent of all the crude and finished steel output of the United States. By 1911, its percentage of that output had dropped to a Httle over 50 per cent. WHOLESALE PRICES. The Commissioner of Corporations has as yet pubhshed no findings as to the course of wholesale prices for steel products since the organi- zation of the corporation in 1901. For our facts in this division of the question, we rely on the figures giving in Hearings Nos. 6, 36, 52, and 63, on the annual reports of 4 INVESTIGATION OP UNITED STATES STEEL COKPOBATIOIT. the American Iron & Steel Association, on the Iron Ore Manual, and on the Statistical Abstract of the United States. We find that in the decade from 1901 to 1910, inclusive, the whole- sale price of eight representative steel products fell off from an aver- age of $38.80 per ton to an average of $36.11 per ton. We subjoin a table- of Pittsburgh wholesale prices for each year of the decade. Year. Steel rails. Sbip Wire nails, Pitts- Steel bars, Pitts- Beams, Pitts- burgh. Tin- plate mUl. Bessemer iron, Pitts- Steel billets, Pitts- Average. burgh. burgh. burgh. burgh. burgh. 1910 28.00 32.60 40.09 32.03 32.92 80.64 17.19 25.39 36.11 1909 28.00 31.70 40.70 29.56 31.68 78.40 17.41 24.58 35.24 1908 28.00 36.84 44.35 33.15 36.73 82.88 17.07 26.31 38.17 1907 28.00 38.08 45.02 36.84 38.08 87.96 22.84 29.23 40.63 1906 28.00 35.84 41.56 35.39 38.08 88.56 19.64 27.41 39. 2» 190S 28.00 35.61 39.42 35.39 36.28 78.40 16.36 24.69 36.64 1904 28.00 34.52 40.32 29.66 34.49 76.38 13.76 22.08 34.89 1903 28.00 35.84 44.12 34.94 36.84 89.76 18.88 27.93 39.64 1902 28.00 35.84 44.57 37.40 35.38 88.03 20.15 30.32 39.96 1901 27.40 34.87 60.40 32.92 35.39 89.60 15.72 24.13 38.80 POALITIONS IN THE TEADB. We find that. there is a complete accord as to prices between the United States Steel Corporation and all the independents. In general, the United States Steel Corporation sets the prices and the independ- ents foUow suit. Although from time to time so-called "Gary" dinners have been held, we regard these functions as the gastronomic shadow of the price understandings rather than as their substance. As a matter of common sense, it is obvious that in times of pros- perity no "Gary" dinners are necessary to bring about uniformity of steel prices. When orders are satisfactory no independent, unless secretly, would lower prices for the purpose of getting more orders. Obviously, the Steel Corporation could readily distance any iade- pendent in a price-cutting race. It needs no interpreter to explain that situation t4 all concerned. It is equally plain that no independ- ent can raise prices so long as the corporation refuses to do so. INTERLOCKING DIEECTOKATES. The system of interlocking directorates has insidious consequences which no man can gauge. Yet we venture to say that the evil is not so great to-day as it was five years since. "Inside management" is a term used to express a certain reprehensible practice which a few years ago was all too prevalent in the business world. When in administering the affairs of any corporation, the directors pursue a policy more favorable to their own financial interests than to those of the corporation which they are chosen to represent — to characterize such practices men use the expression, "inside management." INVESTIGATION OF UNITED STATES STEEL COEPORATION. 5 Intel-locking directorates facilitate "inside management." Inter- locking directorates often have been used for the purpose of stifling competition. Yet in many communities it is a distinct advantage not to limit the sphere of usefulness of any business man. We believe that interlocking directorates, like so many other human agencies, are fit subjects for regulation rather than for destruction. We doubt the wisdom of their absolute prohibition, unless regulation shall fail to abate the evil. THE ERON-ORE SUPPLY. The situation with regard .to the iron-ore supply of this country is very serious. Since Herbert Knox Smith made his report, however, two changes for the better have occurred. The Steel Corporation has given notice of the cancellation of its lease of the Hill ore lands, con- taining approximately 250,000,000 tons of iron ore. Moreover, the most recent report of the Minnesota Tax Commission shows that the quantity of high-grade Lake Superior ore has hitherto been under- estimated. Commissioner of Corporations Smith found that the United States Steel Corporation by ownership or lease controlled about 75 per cent of the high-grade ores of the Lake Superior region. The estimate was made prior to the notice of cancellation of the Hill leases. The com- missioner made no estimate of the corporation's proportional holding of southern ores. Omitting the Hill ore lands, we find that the United States Steel Corporation owns or leases from 50 to 55 per cent of the Lake Superior high-grade ores and owns from 35 to 50 per cent of the ores in the Birmingham district. This ore situation is grave to-day and in the future may become menacing. Who can doubt that the strength of its position as to ores will prove a potent lever, if used by the corporation, for the exclusion of future competitors from the field of steel making? THE LABOR SITUATION. The labor situation in certain manufacturing departments of the steel industry has always been bad, and to-day is bad. As a rule, in the plants of the corporation conditions are better than in the plants of the independents. In the rolling mills and blast furnaces, men often have been required to work, or at all events remain on more or less exacting duty, for 12 hours a day for 7 days in the week. Incredible as it may seem, the fact is indisputable. It is true that a blast furnace must be kept going night and day. If it is extinguished, it is ruined. We believe that the corporation is substantially improv- ing this situation; but we can not forbear from uttering the suggestion that three shifts of 8 hours each ought to take the place of two shifts 6 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. of 12 hours each. Although strictly speaking beyond the scope of OUT report, we feel that this recommendation to the corporation may with propriety be made. THE TENNESSEE COAL & IRON CO. Without injecting into this report a political dispute about former President Roosevelt, it is impossible adequately to discuss the absorp- tion of the Tennessee Coal & Iron Co. by the United States Steel Corporation. As the matter has but little practical bearing on the serious issues of which we are treating, the minority will confine itself to the general statement that its findings relative to the Tennessee Coal & Iron Co. are not in accord with those of the majority. Part II. CONCLUSIONS. We dispute the conclusions of the majority primarily because they are based on the tenacious but antiquated assumption that the true remedy for the evils of industrial combinations lies in their dissolu- tion into greater or lesser subdivisions. Secondarily, we dispute the majority's conclusions ia that they fail to suggest adequate means for carrying out their own views. To advocate the present national policy of dissolution while neglecting to suggest appropriate legisla- tion compeUiag it to be fundamental and thorough is to invite the recurrence of dissolutions unsatisfactory to the people. TRUE REMEDY LIES IN FEDERAL CONTROL. While we, the minority, are definitely of the opinion that the true remedy for the trust problem lies in Federal control and in com- pulsory Federal iacorporation, with an imwatered recapitalization, nevertheless we are prepared to admit the possibility, or even prob- ability, that the American people have by no means as yet come to our conclusion. ONE MORE TRY FOE OLD-FASHIONED COMPETITION. On the assumption that the American people wUl insist on one more attempt to restore the competition of bygone days, we sincerely believe that they ought to demand a thorough revision and strength- ening of the Sherman Act. In case the Nation decides to continue the existing policy looking to the dissolution of the trusts, we recommend that instructions to the Federal courts be so extended as to insure the thoroughness and completeness of these dissolutions. INVESTIGATION OF UNITED STATES STEEL COKPOBATION. 7 Of the legislation proposed by the majority we haye little unfavor- able criticism to make other than of its inadequacy to meet the situation. The Nation gasps for the permanent trade wind of constructive measures rather than for the summer zephyr of palliative devices. However, the principles contained in the bUls drafted by the majority are distinctly worthy of commendation, and we give them our approval. But if the policy of dissolution favored by the majority is to be pursued, much additional legislation is required before proper dissolution can be obtained. This legislation the majority has scarcely outlined. CONSTRUCTIVE LEGISLATION. If, on the other hand, as we hope, the country should be favorably impressed by the views of the minority, then a series of fundamental legislative changes must be adopted. To the far-reachiug con- structive measures which we advocate the legislation proposed by the majority may well be added as a desirable embelhshment. (1) We recommend that all corporations or combinations equaling in valuation or in capitalization the amount of $50,000,000, or such other sum as may be determined upon, shall be compelled to acquire an United States charter before engaging in interstate commerce. We recommend that voluntary Federal incorporation shall be pro- vided for lesser organizations. The day has gone by when any niceties of historical policy should be permitted to blind us to the economic obliteration of State lines. (2) We recommend the establishment of an Interstate Commission of Industry, which shall have control over all corporations operating under an United States charter. This control shall be similar to that which is exercised by the Interstate Commerce Commission over the railroad companies, and shall insure the requisite publicity. (3) Whenever the price charged by an United States corporation for one of its products shall have been found to be unreasonable by some competent authority to be determined hereafter, we recommend that it shall be the duty of the Interstate Commission of Industry to make public declaration of the fact and to recommend a price in lieu of that found unreasonable. (4) We recommend that all corporations when they acquire an United States charter shall be required to recapitalize at an amount not to' exceed the true value of their assets. In the valuation of their assets, we recommend that nothing be reckoned for so-called "monopoly" value, or value which arises merely from their exclusive, majority, or substantial control of the industry in which they are engaged. 8 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. (5) We recommend that interlockiiig directorates in United States corporations shall be forbidden except when licensed by the Inter- state Commission of Industry. (6) We recommend that so-called "holding" companies shall be forbidden except when licensed for temporary purposes of reorgani- zation by the Interstate Commission of Industry. (7) 'Should the powers which we suggest prove insufficient to enable the Interstate Commission of Industry to exercise a salutary control over United States corporations, we recommend that further legislation be enacted bestowing on the commission a carefully guarded power to fix a maximum price in lieu of any price adjudged to be unreasonable. We, the minority, are fully alive to the fact that this recommenda- tion rims counter to the time-honored doctrines of the greatest English-speaking political economists of the past. It even runs coimter to much historical experience. Nevertheless, we are also aware that the great political economists of the past contemplated no situation such as now confronts us. In this twentieth century combinations, international in their scope, have by their immense preponderance of power distorted the operation of general economic laws. After the most serious deliberation, with a profound consciousness that this doctrine will offend many a deep student of public affairs, with a sincere hope that such a step may not prove necessary, never- theless it is our belief that we ought not to shrink from violating our traditional policy if experience shall convince us that the trust prob- lem can not otherwise be met. PALLIATIVE LEGISLATION. (8) We concur in the recommendation of the majority that indus- trial corporations shall be forbidden to own common carriers. (9) We also concur in the recommendation of the majority that parties injuriously affected by combinations should have access to the courts and the benefit of adequate and sufficient remedies for wrongs. Individuals or a State ought to have the opportunity to intervene in a Government suit. (10) We also concur in tlie view of the majority that the legal ex- pression "unreasonable restraint of trade" must be defined, that certain obnoxious practices shall be held to be conclusive evidence of "unreasonableness," that in certain other cases the burden of proof of "reasonableness" must rest with the defendant, and that the courts shall have extensive powers when combinations are ad- judged Ulegal. The majority presents a bill covering these questions. When redrafted so as to attain the ends which it seeks to accomplish, we give it our approval, except as regards section 14. Section 14 INVESTIGATION OF UNITED STATES STEEL OOEPOEATION. 9 seeks to create a rebuttable presumption of "unreasonableness" in cases where a combination controls 30 per cent of the domestic trade in a given article. It may perhaps be true that this bill defines as "unreasonable" a number of acts which the common law already interdicts ; but it is as well to crystallize these definitions into the form of a statute. EXTRANEOUS LEGISLATION. (11) As to the recommendation of the majority to the effect that the Commissioner of Corporations should be required to report to Congress as well as to the President, we forbear to express an opinion until we have had an opportunity to hear the question adequately discussed. Augustus P. Gaednee. Heney G. Danpoeth. I concur in the above report except that I believe that the Inter- state Commerce Commission and the railroad commissions of the several States are clothed with sufficient power to remedy all evils growing out of the ownership of common carriers by industrial corpo- rations. To forbid such ownership would tend to decrease economy and efficiency on the part of the industrials. Furthermore, I am not convinced that the power to fix prices is necessary to the efficiency of Federal control. Should experience, however, demonstrate that I am wrong in this conclusion I should unhesitatingly favor the grant- ing of such power. H. O. Young. O H. Kept. 1127, pt. 2, 62-2 ^2 62d Congress, ) HOUSE OF REPRESENTATIVES, j Kept. 1127, Sd Session. ) \ Part 3. INVESTIGATION OF UNITED STATES STEEL COPORATION. AuQTJST 2, 1912. — Eeferred to the House Calemlar and ordered to be printed. Mr. YoTiNQ, from the Special Committee to Investigate Violations of the Antitrust Act of 1890, and other acts, submitted the following VIEWS OF THE MINORITY. SUPPLEMENTARY EEPORT ON THE FACTS BY H. 0. YOUNG, A MEMBEE OF THE SPECIAL COMMITTEE TO INVESTIGATE THE UNITED STATES STEEL CORPORATION. I have joined with my Republican colleagues upon the United States Steel Committee in their report and recommendations, except that I do not agree with them that it is necessary to prohibit indus- trial corporations, under all circumstances, from owning common car- riers, nor that it is advisable or necessary to invest the Federal agency to be intrusted with the supervision and control of large corporations engaged in interstate commerce with the power to fix prices. Under ordinary circumstances I should content myself with such action, but the majority of the committee have united in a report of some 200 pages. A very large proportion of this report purports to be a statement of the facts elicited by the investigation of the com- mittee. This statement is so overdrawn, prejudiced, inaccurate, and exaggerated that I feel it ought not to go unanswered. It is true that the report of the Republican members of t^e com- mittee, signed by me, does in a general way deny emphatically many of the misrepresentations of the majority report, but I feel that it is necessary in order that a correct picture of the situation may be given to go further than this; hence this supplementary report. The special committee to investigate violations of the antitrust act, usually known as the Steel Corporation Committee, was appointed under the authority of House Resolution No. 148 of tiie present Congress. That resolution is as follows : Resolved, That a coromittee of nine Members, to be elected by the House, be, and is hereby, directed, to make an investi- 1 2 INVESTIGATION OP UNITED STATES STEEL OOKPOEATION. gation for the purpose of ascertaining whether there have occur- red violations by the United States Steel Corporation, or other corporations or persons as hereinafter set out, of the antitrust act of July second, eighteen hundred and ninety, and the acts supplementary thereto, the various interstate-commerce acts, and the acts relative to the national-banking associations, which violations have not been prosecuted by the executive officers of the Government; and if any such violations are disclosed said committee is directed to report the facts and circumstances to the House. Said committee is also directed to investigate the United States Steel Corporation, its organization and operation, and if in con- nection therewith violations of law as aforesaid are disclosed, to report the same. Said committee shall inquire whether said Steel Corporation has any relations or affiliations in violation of law with the Penn- sylvania Steel Company, the Cambria Steel Company, the Lack- awanna Steel Company, or any other iron or steel company. Also whether said Steel Corporation through the persons own- ing its stock, its officers or agents, has or has had any relations with the Pennsylvania Railroad Company, or any other railroad company, or any coal companies, national-banking companies, trust companies, insurance companies, or other corporate organi- zations or companies, or with the stockholders, directors, or other officers or agents of said companies, or with any person or persons, which have caused or have a tendency to cause any of the results following: First. The restriction or destruction of competition in produc- tion, sale, or transportation. Second. Excessive capitalization and bonding of corporations. Third. Combinations created by ownership or control by one corporation or the stockholders or bondholders thereof of the stock or bonds of other corporations, or combinations between the officers or agents of one corporation and the officers or agents of other corporations by duplication of directors or other means and devices. Fourth. Speculations in stocks and bonds by agreement among officers and agents of corporations to depress the value of the stocks and bonds of other corporations for the purpose of acquir- ing or controlling same. Fifth. Profits through such speculation to officers or agents of such corporations to the detriment of the stockholders and the public. Sixth. Panics in the bond, stock, and money markets. Said committee shall in its report recommend such further legislation by Congress as in its opinion is desirable. Said committee as a whole or by subcommittee is authorized to sit during sessions of the House and the recess of Congress, to employ clerical and other assistance, to compel the attendance of witnesses, to send for persons and papers, and to administer oaths to witnesses. The Speaker shall have authority to sign and the Clerk to attest subpoenas during the recess of Congress. After the committee had proceeded some time with its investigation the Department of Justice brought a proceeding against the United IirVESTIGATION OF UNITED STATES STEEL COEPOBATION. 3 States Steel Corporation, chaining it with violations of the antitrust act and praying for its dissolution. After the commencement of this suit the United States Steel Corporation, through its attorneys, appeared before the committee and protested against the further continuance of the investigation on the ground that the whole matter was involved in the suit begun by the Government. The committee, at a meeting held on December 11, 1911, by a unanimous vote took the action set out in the following extract from its proceedings: The committee has had vmder careful consideration the objections made by the United States Steel Corporation, through its counsel, to the further prosecution of this investigation. The resolution under which this committee is proceeding directs the committee: First. To inquire into and report as to whether the United States Steel Corporation is in its organization or operations acting in violation of the antitrust law. Second. To inquire into and report violations of the interstate- commerce acts and amendments thereto and to the acts relating ^ to nati&£Lal banking associations. Third. To inquire into the restriction or destruction of com- getition by reason of the relations of the United States Steel orporation and its officers with other companies. Fourth. The excessive capitalization and bonding of cor- porations. Fifth. Combinations created by holding companies, inter- locking directorates, and other devices. Sixm. Combinations to depress the value of stocks and bonds for the purpose of acquiring them. Seventh. Panics in the bond and stock market. And the committee is also directed to recommend such further legislation by Congress as, in its opinion, is desirable. The objection made by the counsel for the Steel Corporation to the further continuance of the investigation was based upon the ground that the Government had filed a bill in the courts of New Jersey against the United States Steel Corporation seeking its dissolution under the antitrust law. As to this objection, it is our unanimous opinion that the committee should continue the investigation as if no proceeding on the part of the United States Government were now pending against said corporation, but not for the purpose of determining the questions involved in the action brought by the Government against the United States Steel Corporation, and any inquiry into the subjects embraced in that action should be made for the purpose of enabling the committee to recommend such further legislation as in its opinion is desirable. Touching all other matters the committee wiU pro- ceed as heretofore. The committee's authority to investigate violations of the law was confined to such as had ilot been prosecuted by the executive officers of the Government. Of course, speaking with technical accuracy, the resolution excluded from the investigation only such violations as had been prosecuted by the Government at the time the resolution 4 INVESTIGATION OF UNITED STATES STEEL CORPOBATION. passed. But in sobstMice and in, reason it excluded from the investi- gation tius violations, or alleged violations, dealt with in the suit b^un aftCT tile committee had entered upon its deliberations. The ccmunittee so far coincided with this view as to declare tiiat any invest^tions tbey might make into the subjects embraced in the siuit of the Government should not be for the purpose of deter mining tiie questions involved in that action, but only for tiie purpose of enaUing tiie committee to recommend such furthesr legislation as it deemed d«sirable. We b^eved that this action of tiie committee was proper, Mid that it precludes tiie committee from any finding as to whether tiie matters involved in the suit by the Grovemment consti- tuted or do not constitute a violation of the law. The impropriety of a committee of Congress, which speaks with some authority, and which would naturally to some extent influence public opinion, declar- ing, during the pendency of a suit, as its solemn judgment that the defendants were, or were not, guilty of the acts of wrongdoing charged in the Government's complaint, I am confident must appeal to the sound judgment of every lawyer and to the good sense of evay judicious and fair-minded man. Therefore so far as the matters involved in the suit of the Government are concerned I shall confine myself to a statement of the facts as they appear from the evidence taken by the committee without drawing any conclusion as to whether they do or do not constitute violations of the law. I shall begin, there- fore, with that portion of the resolution which directs the committee to investigate the organization and operation of the United States Steel Corporation. If I should attempt to point out in detail aU of tiie inaccuracies, exaggerations, and misrepresentations in the report of the majority it would draw this report out to a length which would tax my endurance and prevent its being read by anyone. I shall therefore adopt the course of calling attention to a very few of the distortions and mis- statements in that report and then present a statement of what I con- ceive to be the real facts in the case upon which the committee were required to report. The majority report contains the following quotation from some testimony given by Judge Gary before the Ways and Means Com- mittee relative to the United States Steel Corporation: Mr. CooHRAN. Of this whole sum, $1,782,000,000, was not one billion, at least, capitalized profits as distinguished from original investment ? Mr. Gakt. I should have to guess at that, but I should guess yes, including increase in value. This statement is perfectly clear that both Mr. Cochran and Mr. Gary had in their minds the distinction between original investment and the surplus profits made in the business which were later capital- ized. INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 5 But later the majority of the committee, in referriag to this state- ment of Judge Gary, transmutes it into the following: Judge Gary before the Ways and Means Committee guesses that a billion dollars of this capitalization of the United States Steel Corporation was water. His guess is approximately correct. And again it is stated, referring to the same matter, "when it is remembered that the ' concern' at its organization was already bonded for $303,450,000 more than the actual value of its property," etc. Later in the report the statement is again repeated that the actual value of the United States Steel Corporation was. less than $300,000,000. There is absolutely no testimony in the record upon which to found this statement. The United States Steel Corporation was heavily overcapitalized, as will be shown later on, but the very least physical value placed by anyone upon its properties, at the time of its organi- zation, is $676,000,000. (Herbert Knox Smith Kept., pt. 1, pp. 15, 19, and 36.) At another part of the report the statement is made that the United States Steel Corporation acquired a one-third interest in the Negaunee mine for $500,000. This statement is made for the purpose of show- ing the value of mining properties and is based upon a statement in McRae's report, page 3789, that the United States Steel Ccaporation negotiated for the purchase of this property at that price. As a mat- ter of fact it never acquired this interest in it, and the property was subsequently leased to other parties, who paid a bonus of $1,500,000 for a lease upon a 30-cent royalty. The majority in an argument intended to prove that the prop- erties purchased by the United States Steel Corporation of the Union Iron Co., which had lately absorbed the Sharon Steel Co., were purchased to eliminate competition urges that the extrava- gant price paid for that property is only proof of their conclusion. They state that the price was $75,860,501, and compared it with the value of seven other steel companies to show its extravagance. As a matter of fact the price paid, instead of $75,860,501, was $33,202,490, and this included liquid assets of $2,341,989, leaving the amount actually paid for the property $30,860,501. This error is the more astonishing as the contract imder which this property was acquired is set forth in full in the McRae Report, beginning on page 4348, and the transaction is fully explained in Herbert Knox Smith Report, part 1, on page 283. This transaction in brief was as follows: The Union Steel Co. was not fully organized at the time of its purchase and the contract of the United States Steel Corporation was made not with the Union Steel Co., but with its owners. The entire capital stock of this company was transferred to the United States 6 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. Steel Corporation, and the United States Steel Corporation in con- sideration therefor guaranteed $45,000,000, par value, of bonds authorized by the Union Steel Co. These bonds had not been issued but were used as foUows: $33,202,490, par value, of them were issued to the owners of the Union Steel Co. in full payment for the property. The remainder of the $45,000,000 were retained by the Union Steel Co., which by the transfer of its stock became the property of the United States Steel Corporation, to be issued to acquire a working capital. It appears that a considerable portion of them never were issued. Just how the majority arrived at their findings I am unable to comprehend, but that they are absolutely without any foundation in fact is patent. Again, In reference to the purchase of the Tennessee Coal, Iron & Rail- road Co., and the action of President Roosevelt therein. The letter of President Roosevelt, dated November 4, 1907, addressed, to Attorney General Bonaparte, is set forth in fuU. Commenting upon this the report of the majority says among other things, "this letter contains the following alleged statements of fact" — and I will confine myseK to the first of these: 1. A certain business firm of real importance in New York, having among its assets a majority of the stock of the Tennessee Coal, Iron & Railroad Co., was about to faU if help was not forth- coming from the Steel Corporation. * * * Such were the representations made hj Messrs. Frick and Gary to the President of^the United States during this brief 20 minutes' interview. The same number of palpably incorrect statements were probably never couched io tne same number of words before or siace. As to the existence of this unknown business of great importance which was alleged to have had a majority of the assets of the Tennessee Coal, Iron & Railroad Co., there was no concern in the city of New York of any importance which had among its assets a majority of the stock of the Tennessee Coal, Iron & Rail- road Co. or which would in any way have been affected by the exchange of such stock as it did have for any other stock. The President was evidently laboring under the impression that some great financial institution burdened with its load of Tennessee Coal, Iron & Railroad Co. securities was tottering to its ruin and about to smash up other concerns by its fall. Now, the evidence before this committee shows that the ma- S" rity of this stock was locked up m the strong boxes of Ogleby, anna. Gates, and others, no one of whom was in any way involved. Anyone who charges another with falsification should themselves at least take ordinary pains to be correct. It appears from all of the testimony that the firm in question was Moore & Schley, bankers and brokers; that they were worth about $10,000,000 and had lia- bihties of about $38,000,000, while approximately the same amount was owing to them. To the ordinary man it would seem clear that a INVESTIGATION OP ITNITED STATES STEEL COBPOKATTON. 7 concern with this capital and credit was one "of real importance in New York business circles." Now then, did it have among its assets a majority of the securities of the Tennessee Coal, Iron & Railroad Co. ? The capitalization of the latter company was 294,000 shares, approximately. (Schley, hearings, p. 1049.) In regard to the amount held by Moore & Schley, Mr. Schley testi- fied as follows : Mr. Littleton. How much do you think at that time of the stock of the Tennessee Coal & Iron Co. Moore & Schley had loaned money on to their customers and had in turn hypothe- cated with their other securities in making loans for themselves ? Mr. Schley. I could only estimate that. Mr. Littleton. Well, give us the best estimate you can. Mr. ScHLET. I should say we had approximately 150,000 shares. • Mr. Littleton. One hundred and fifty thousand shares ? Mr. ScHLET. One hundred and forty thousand or one hun- dred and fifty thousand shares on our books subject to loan. Mr. Littleton. You say "subject to loan," and those short phrases sometimes we do not understand. Mr. ScHLET. Well, upon which stock our customers were bor- rowing money. Again Mr. Littleton returned to the subject and the following colloquy occurred: Mr. Littleton. It says here, "among its assets are a majority of the securities of the Tennessee Coal Co." Were the assets of Moore & Schley, or did they contain, a majority of the Tennessee Coal Co.'s stocK ? I mean Moore & Schley assets. Mr. Schley. I should not think so; but it approximated it. Mr. Littleton. Moore & Schley, as a matter of fact, did not have among their assets a majority of the stock of the Tennessee Coal Co., did they? Mr. Schley. It approximated it. (Hearings, pp. 1095, 1096.) It will be noted that Mr. Littleton specifically confined his question to the assets of Moore & Schley alone and got the final answer that those holdings approximated a majority of the stock of the Ten- nessee Coal, Iron & Eailroad Co. This testimony is sufficient to show that the statement that Moore & Schley were a financial concern of importance in New York and that they had among their assets a majority of the stock of the Tennessee Coal Iron & Railroad Co. was at least substantially correct. But the majority report says further that no concern of importance in the city of New York would have in any way been affected by the exchange of said stock; but Mr. Schley swears that the situation of Moore & Schley previous to the sale of Tennessee Coal, Iron & -Rail- road Co. was as if "a sword was suspended over their head; it might sever it at any moment." (Schley, hearings, p. 1110.) 8 INVESTIGATION OF UNITED STATES STEEL CORPOEATION. And, speaking of the effect of the sale upon the affairs of Moore & Sdiley, he says " that it put $12,000,000 into their coffers." He adds: The effect was enormous, Mr. Littleton. When you reduce $35,000,000 of loans by $12,000,000, bringing it down to $23,000,- 000, you are bringing into your boxes 30 or 35 per cent, or what- ever the margin was you had up, of new material to bring into your box and seU it. Thirty per cent of $12,000,000 is $3,600,000. That strengthens you, and your loans are less; and Moore & Schley were $5,000,000 richer, with much less loans and within ,35 days impregnable. (Schley, Hearings, p. 1089.) In view of this testimony, which is uncontradicted, what can the majority mean in their report when they state that there was no con- cern in the city of New York of any importance which would in any way have been affected by the exchange of such stock ? But this is not all. The majority in the portion of the report already quoted say that the evidence shows that the majority of this stock was locked up in the strong boxes of Ogleby, Hanna, Gates, and others, intend- ing to have it understood, of course, that if it was in the possession of these gentlemen it could not have been in Moore & Schley's posses- sion. But the evidence shows nothing of this kind. It accounts for less than 100,000 shares of the Tennessee Coal, Iron & Railroad Co. stock as not being in the hands of Moore & Schley, and as to the remainder, if any, which was not in their hands the record is utterly silent. It must not be thought that the above instances of inaccuracy, unfairness and misrepresentation are isolated cases; they are merely typical cases with which nearly every page of the report bristles. Now, having called attention to the fact that the report of the majority, as presented to the members of the minority members of the committee, can not be relied on as to its statement of facts, and that one who wishes to know the facts when examining that report must constantly refer to the record, I will proceed with a state- ment of. what I consider to be the facts disclosed by the testimony before the committee. Doubtless some errors wiU creep into my statement, but they wiU be unintentional, and I shall be glad to have them pointed out. The organization of that great corporation was only the last step in the evolution of the iron and steel industry in this country. It was not a sudden birth, but, on the contrary, was the outgrowth of a slow and steady development and grew out of the conditions sur- rounding the industry. In order to understand the causes that led to the promotion of this great corporation, it is necessary to recall briefly the previous history of the industry. From very humble beginnings it has grown to gigantic proportions. ENTESTIGATION OF TTNITBD STATES STEEL COBPOBATION. 9 Until about 1867 the manufacture of steel was insignificant. The industry was confined almost entirely to iron. The history of the iron industry divided itself naturally into two periods, the first extend- ing from the beginning until about the year 1840. During this period charcoal was the only fuel. During the second period, which begins about 1840, the industry was based upon anthracite and bituminous coal as a fuel. This change in fuel constituted almost a revolution in the business and extended it by leaps and bounds. THE CHAHCOAIi PEBIOB. During the charcoal period facilities for transportation were small and the ability of the people to buy was slight, so the business was necessarily conducted in small plants, cheaply built and having only a local custom. The first iron furnace in this country of which we have any authentic record was built at Lynn, Mass., in 1645. In the century following a large number of small furnaces and bloomeries were erected and oper- ated in New England, using bog ores almost exclusively. In 1734 the richer brown ores of western Connecticut and southern New York were obtained and largely replaced the bog ores. After the close of the Revolution the iron industry expanded rapidly, following the western progress of settlement, and had reached western Pennsylvania and the Appalachian Valley of Vir- ginia and Tennessee before the close of the eighteenth century. In the first 40 years of the nineteenth century it had reached as far west as Missouri and north to Michigan. In 1810 the entire pig-iron production of this country was 53,908 tons, or a little less than 19 pounds to each inhabitant of the country. In 1840 this production had grown to 286,903 tons, or about 37 pounds for each inhabitant. This product was made in 804 blast furnaces, making an average of 356 tons per annum from each fur- nace. (Hearings, pp. 3577, 3578; Encyclopsedia Americana, vol. 9.) THE ANTHRACITE AND BITTJMINOUS PERIOD. David Thomas erected the first furnace for the making of anthra- cite pig iron at Catasauqua, Pa. It was blown in Jidy 3, 1840, and made an average of 50 tons of metal a week. In 1846 the first bitu- minous furnace was constructed at Lowell, Mahoning County, Ohio. The substitution of anthracite and bituminous coal for charcoal, as has been said, worked a revolution in the iron business. The capacity of the furnaces was greatly increased. With improvement in transportation facilities, the industry was concentrated at fewer points, which were advantageously located with reference to the fuel supply. The ore was brought to the fuel, hence only the best ore 10 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. and the largest deposits were worked, for none other would stand the cost of transportation. The change was marked by a rapid increase in the amount of pro- duction and the concentration of the business at points favorably located for obtaining cheap coal. The production of pig iron in 1860 had increased to 821,223 tons, or about 59 potmds per inhabitant. This compares with a production in Great Britain, for the same year, of 3,826,752 tons. Of the amount produced in this country, 552,560 tons was manu- factured in the State of Pennsylvania and aU but about 100,000 tons in the States of New York, Pennsylvania, New Jersey, Maryland, and Ohio, combined. The rapid iocrease in the iron business, as weU as its tendency to concentrate at fewer places and in fewer hands, is well illustrated by the fact that while in 1840 there were 804 furnaces in this coimtry, manufacturing a total product of 286,903 tons, or about 37 pounds for each inhabitant and about 357 tons per annum for each furnace, in 1870 the product had increased (to 1,665,179 tons, or an average of 98 pounds per inhabitant, and this product was produced in only 386 establishments, producing an average of 4,314 tons each per annum, or about twelve times the average product per establish- ment of 1840. (Encyclopaedia Americana, vol. 9 ; hearings, pp. 3507, 3577, 3590; Report American Iron & Steel Association, 1905, p. 119; Comp. Ninth Census, pp. 8, 909.) LAKE STJFEBIOB ORES. During this period occurred the discovery of iron ore near Lake Superior, which was destined to exert a marked influence on the iron and steel industry of this country. The first shipment from this district occurred in 1865, immediately after the opening of the first canal through the rapids in the St. Marys River, opposite Sault Ste. Marie, Mich. The shipment was from the Cleveland-Chffs iron mine at Ishpeming, Mich. It amounted to 1,449 tons, and was sold in Cleveland, Ohio, at SIO per ton. In 1860 the shipments from this district had increased to 114 401 tons and in 1870 to 830,940 tons. This compares with a total pro- duction of iron ore in the Uinted States for the same years, respec- tively, of 2,873,460 tons and 3,813,891 tons. (Mineral Resources of Lake Superior, by A. P. Swineford, p. 152; hearings, pp. 3462, 3463, 3490, 3498.) The following tables will show the rapid increase in the consumption of ore, the source whence it is now drawn, and the growing impor- tance of the Lake Superior field: INTESTIGATION OF UNITED STATES STEEL OOEPORATION. 11 Yearly tonnage shipments of iron ore from, each range of the Lake Superior district. [Since the opening ol the lock and canal at Sault Ste. Marie in 1856. Reprinted trom the Iron Trade Eeview.J Year. Marquette. Menominee. Gogebic. Vermilion. Mesaba. Grand total. 1865-. 1,449 36,343 26,646 16,876 68,832 114,401 49,909 124,169 203,055 243,127 236,208 278,796 473,567 491,449 617,444 830,940 779,607 900,901 1,162,458 919,557 891,257 992,764 1,010,494 1,033,082 1,130,019 1,384,010 1,679,834 1,829,394 1,305,425 1,648,034 1,480,422 1,627,383 1,861,414 1,918,750 2,634,816 2,993,664 2,612,242 2,665,169 1,835,893 2,060,260 2,097,838 2,604,221 2,715,035 3,125,039 3,757,010 3,457,522 3,245.346 3, 868, 026 3,040,245 2,843,703 4,215,672 4,057,187 4,388,073 2,414,632 4,256,172 4,392,726 1,449 36,343 26,646 16,876 68,832 114,401 49,909 124,169 203,055 243,127 236,208 278,796 473,667 491,449 1856 1857 1858 1869 1860 1861 1882 1863 1864 1865 1866 1867 1868 1869 617,444 1870 830,940 1871 779,607 1872 900,901 1,162,458 1874 919,557 1875 891,257 1876 992, 764 4,593 78,028 245,672 524,735 727,171 1,136,018 1,047,415 895,634 690,435 880,006 ,1,193,343 1,191,101 1,796,755 2,282,237 1,824,619 2,261,499 1,466,197 1,137,949 1,923,798 1,560,467 1,937,013 2,522,265 3,301,052 3,261,221 3,619,053 4,612.509 3,749,567 3,074,848 4,495.451 5,109,088 4,964,728 2,679,156 4,875,385 4,237,738 1,015,087 1878 1,111,110 1879 1, 375, 691 1880 1,908,746 2,307,006 2,965,412 1882 1883 2, 352, 840 1S84 1,022 119,860 747,589 1,303,267 1,424,699 2,016,391 2,847,786 1,839,574 2,971,991 1,329,386 1,809,468 2,547,976 1,799,971 2,258,236 2,498,461 2,795,856 2,875,295 2,938,155 3,654,929 2.912.708 2.398,287 3,705,207 3,643,614 3,637,102 2,699,856 4,088,067 4,315,314 62,124 225,484 304,396 394,252 611,953 844,682 880,114 894,618 1,167,650 820,621 948,513 1,077,838 1,088,090 1,278,481 1,265,142 1,771,502 1,655,820 1,786,063 2,084,263 1,676.699 1,282,513 1,677,186 1,792,355 1,686,267 841,544 1,108,215 1,203,177 2,506,814 2,516,201 3,559,374 4,742,276 1885 1886 1887 1888 6, 046, 503 7,292,644 9,003,801 7,071,053 9,070,554 6,065,716 7,749,242 10,429,037 9,934,828 12,464,574 14,024,673 18,251,804 19,059,393 1890 1891 1892 4,245 613,620 1,793,052 2,781,687 2,882,079 4,276,809 4,613,766 6,626,384 7,809,535 9,004,890 13,342,840 12,892,542 12,166,008 20,158,699 23,819,029 27,495,708 17,257,360 28,176,281 29,201,760 1894 1895 1896 1893 .. 1900 .. . . .. 20, 593, 507 1902 27, 562, 566 24,271,761 1904 21,755,359 34, 252, 115 1906 38,421,173 42, 170, 878 1908 25,892,538 42,604,110 1910 43,350,715 32, 130, 411 Total 96,336,406 -39,689 75,306,746 +144,047 65,179,956 -44,139 30,328,562 224,905,184 492,066,854 To adiust +60, 219 972,309 96,296,717 75,450,793 65,135,817 30,328,562 224,905,184 493,089,382 12 INVESTIGATION OF UNITED STATES STEEL OOEPOBATION. Production of iron ore in tht United States, 1860-1910, in long tons. Year. Hematite. Brown oze. Magnetite. Carbonate. .a Total. 1860 2,873,460 1870 3,831,891 1875 4,017,857 1880 2,243,993 1,918,622 2,134,276 823,471 7,120,362 1881 7,119,643 1882 8,700,000 1883 ": 8,800,000 1884 7,718,129 1885 7,600,000 1886 10,000,000 1887 11,300,000 1888 13,0S2,S30 1889 ■. 9,056,288 10,627,650 9,327,398 U, 646, 619 8,272,637 9,347,434 12,613,996 12,576,288 14,413,318 16,150,684 20,004,399 22,708,274 24,006,025 30,632,149 30,328,654 23,839,477 37,567,055 42,481,375 46,060,486 31,788,564 46,208,640 51,367,007 2,523,087 2,669,938 2,767,564 2,485,101 1,849,272 1,472,748 2,102,358 2,126,212 1,961,954 1,989,681 2,869,785 3,231,089 3,016,715 3,306,484 3,080,399 2,146,795 2,546,662 2,781,063 2,957,477 2,561,825 2,700,431 2,868,572 2,506,415 2,570,838 2,317,108 1,971,965 1,330,886 972,219 1„268,222 1,211,626 1,069,479 1,237,978 1,727,430 1,537,551 1,813,076 1,688,860 1,576,422 1,638,846 2,390,417 2,469,294 2,679,067 1,547,797 2,229,839 2,631,835 432,251 377,617 189,108 192,981 134,834 87,278 ' 73,039 91,423 83,295 65,373 81,559 76,247 51,663 27,642 34,833 19,212 21,999 17,996 23,589 26,588 16,527 22,320 14,518,041 1890 18,036,043 1891 14,591,178 16,296,666 1893 11,587,629 11,879,679 1895 15,957,614 16,005,449 1897 17,618,046 1898 19,433,716 1899 24,683,173 27,553,161 1901 28,887,479 1902 35,554,135 1903 36,m9,308 27,644,330 1905 42,626,133 47, 749, 728 1907 .' 61,720,619 1908 35,924,771 1909 61,155,437 66, 889, 734 Quantity and value of iron ore produced in the United States, 1909 and 1910, by States. State. 1909 Quantity, in long tons. Value. Quantity, in long tons. 1910 Value. Increase (+) or de- crease (— ) in 1910. Quantity, in long tons. Vatos. Percentage of increase (+) or decrease (—) in 1910. Quan- tity. Value. Alabama California, Colorado, New Mexico, Washington, and Wyoming Coimecticut and Massachusetts Georgia Kentucky and West Virginia Maryland Michigan Minnesota Missouri New Jersey New York North Carolina , Ohio Pennsylvania Teimessee Texas Virginia Wisconsin Total 4,321,252 637,682 38,272 221,016 14,996,455 4,801,276 74,769 23,888 900,384 975, 149 89,954 643,720 016,333 61, 150 16,527 666,889 667,796 6,474 837,847 087,436 646,082 141,274 332,478 110,287 46,786 32,282,622 60,263,314 210,853 1,6 . 3,072,323 107,013 28,547 792,672 907,282 9,318 1,693,188 2,727,406 861,850 34,168 313,878 64,347 14,062 13,303,906 31,966,769 78,341 521,832 1,287,209 65,278 22,320 739,799 732,247 29,535 903,877 1,149,551 $6,083,722 877,223 121,306 482,659 480,023 -t-tl,0S7,2e7+ 11.11 + 224,268 - 4,114 + 92,862 231, l«l - 19,968 + 160, la + 35.17 - 10.75 + 42.02 + 21.76 + 35.78 - 14.13 + 45.17 29, 41,393, 78,462, 168, 1,582, 3,848, 114, 36, 911, 1,048, 34, 1,845, 3,610, 085- 105- +1, 56rt+2, 697 10,422 9,826 403,522 991,620 11,613 21,888 271,876 4,128 5,793 72,910 74,452 23,061 65,530 + 82, 115 + 9, +18, 963 + 1,452^+ + + + 24,202 17,681 110, — 209,246 42,156 24,790 776,360 7,224 7,319 119,175 141,041 24,685 161,956 882,943 13.9 41.1 11.7 + 10. a - 12.9 - 4.0 + 26.781+ 25.27 - 21.94 - 37.79 + 28.22 + 30.22 - 19.99 1.54 224+ 6.75 '" ' 05 93 32 20 82 + 35.1 + 10.1 + 11. a +356.: + 7.8 + 7.6 + 6.76 + 25.64 + 15.03 + 16.55 +264.92 + 8.97 + 32.37 Bl,l«6,487109,964,90366,889,734140,736,e07 +4,714,297+30,770,704+ 11.21+ 27, INVESTIGATION OF UNITED STATES STEEL COEPOEATION, 13 STEBL. The first steel known to have been produced in this country was made in Connecticut in 1728 by Samuel BQghley and Joseph Dewey. Crucible sterf was first successfully produced in the United States in 1832 at the works of WDliain and John H. Carrard, at Cincinnati, Ohio. But this industry was insignificant, and in 1860 the production in this coimtry had only reached 11,838 tons. In 1856 came the great invention of Sir Henry Bessemer. But this process was not perfected imtil a number of years later. Bessemer steel was first made in this country in September, 1864, by William F. Durfee at an experimental plant at Wyandotte, Mich., and the first Bessemer steel rails made in America were roUed at the North Chicago Rolling Mill, in the presence of the American Iron and Steel Institute, in May, 1865, from ingots made at Wyandotte, Mich. Open-hearth steel was first made in 1864 in this country by the New Jersey Steel & Iron Co. at Trenton, N. J. The first plant for the manufacture of Bessemer steel in this country in commercial quantities was erected by the Pennsylvania Steel. Co. at Steelton, Pa., near Harrisburg, Pa., and was put in operation in June, 1867. The first Bessemer steel rails made in eastern United States were rolled by the Cambria Iron Co. at Johnstown, Pa., in August, 1867, from ingots made by the Pennsylvania Steel Co. in its plant at Steelton, Pa. The total product for that year was 3,000 tons. The Siemens-Martins process for making open-hearth steel was introduced into the United States in 1868 by F. J. Slade for Cooper, Hewitt & Co. at the works of the New Jersey Iron & Steel Co. at Trenton, N. J. The basic open-hearth process was introduced in this country in 1880 by Carnegie, Phipps & Co., at Homestead, Pa. (Hearings, p. 3510; Ency. Brit., vol. 14, p. 804, 11th ed.; "Iron and Steel Indus- try," Ency. Am., vol. 9.) The rapid growth of the steel industry throughout the world and the steady forging to the front of this country therein, until it had passed aU its rivals, is well illustrated by the table following (taken from the Ency. Brit., vol. 14, p. 834, 11th ed.). 14 INVESTIGATION OF UNITED STATES STEEL OOEPOKATION. Production of steel in thousands of long tons. Besse- mer. Open hearth. Crucible andmis- ceUa- neoos. Total. United States 1870. 37 215 1 78 31 69 Great Britain . ; 292 The world 692 United States 1880. '1,074 1,044 603 101 261 87 72 80 33 1,247 1,375 arfnt Hritain 728 Theworld .". 4,205 4,277 3,679 2,127 United States 1890, 3,689 2,015 613 1,664 75 100 (iTfut Rritain Theworld .". U,902 V 10,188 United States 1900. (acid... ibasic 6,685 853 2,645 3,156 105 Great Britain /acid... \basU!.. 1,254 149 } S,050 Germany and Ltixemburg- 6,541 28,273 } 23,383 The world United States 1907. facld... Ibasic. 11,668 1,270 10,279 3,385 1,279 209 3,976 145 Great Britain /acid... basic. acid... basic. 1,280 679 381 7,098 ^ 6,523 Germany and Luxemburg. 208 1 11,873 The world 50,375 The following table illustrates the same movement in this industry. It is taken from the Abstract of the Twelfth Census, page 311, and covers the entire industry of manufacturing iron and steel in this country. Comparative summary, by specified industries, 1900, 1890, 1880. Number of estab- lish- ments. Capital. Iron and steel. Value of Year. Wage earners. Cost of materials used. products, including custom Average number. Total wages. work and repairing. 1900 668 646 1,006 1573,391,663 372,678,018 230,971,884 222,490 148,715 140,978 1120,820,276 78,977,900 55,476,785 $522,389,932 295,777,843 191,271,150 1890 1880 It will be noticed that while in 1880 there were 1,005 establishments in the business, in 1900 these had decreased to 668, while the capital invested had increased from a little over 230 millions to over 573 millions of doUars. The employees had increased from 140 thousand to 222 thousand. Their total wages had increased from 55 millions to 120 millions of dollars; the cost of material from 191 milliops to tNTESTIGATION OF UNITED STATES STEEL OOEPOSATION. 16 522 millions of dollars; and the value of the product from 296 mil- lions to 803 millions of dollars. It win be readily seen, from the facts already given, that immedi- ately upon the beginning of the use of anthracite and bituminous coal as a fuel the process of rapid growth and concentration in fewer places and fewer hands began. This movement was greatly accele- rated by the discovery of Sir Henry Bessemer and the perfection of the Siemens-Martin and basic open-hearth processes, which resulted in the general substitution of steel for iron. This new manufacture required vastly greater plants and larger investments than did the simpler manufacture of iron. As the tonnage of the product increased by leaps and bounds, the demand for greater investment and more capital was incessant. The Carnegie Co. showed by its example the immense advantage of complete integration from the ore and coal and limestone to the finished product with f acihties of transportation by land and water. THS CARNEGIE STEEL CO. The history of this company is so typical of the marvelous growth of the iron and steel business, and especially of the tendency to ex- pansion and integration, and it became so important a part of the United States Steel Corporation, and its activities were so intimately connected with the movement toward the formation of that com- pany, that it deserves a more extended notice than is necessary in the case of the other subsidiaries of that corporation. In 1858 Andrew Kloman and his brother Anton buUt a small forge in Girtys Run, now a part of Allegheny. This was the nucleus of the Carnegie Co. In 1859 Thomas N. Miller and Henry Phipps became partners in this concern with the Klomans. The business having prospered, a new partnership agreement was entered into between the EQomans and Phipps, who also represented Mill er, under the date of January 1, 1862. The capital of the firm was stated to be $80,000. The new firm proceeded to build a new mill on Twenty-ninth Street, in Pittsburgh, which was given the name of the Iron City forge. Some difficulty havkig arisen in the firm. Miller bought out the interest of Anton Kloman, April 16, 1863. A little later, in the same year, difficulties having agaia developed, in the company. Miller sold his interest to Thomas M. Carnegie, who bought with money fiumished by his brother, Andrew Carnegie. This was Andrew Carnegie's first entrance into the iron business. He himself fixes the date as November, 1861. But the facts stated by Bridge seem to iadicate that Mr. Carnegie was mistaken as to this date. 16 INVESTIGATION OP UNITED STATES- STEEL COBPOBATION. Miller now having severed his connection with the firm of Kloman & Co., and Andrew Carnegie not appearing in that firm as a partner, on the face of the papers, he and Miller, with others, organized the Cycldps Iron Co., and in 1864 built a rival mill at Thirty-third Street, in Pittsburgh. In 1865 the Union Iron Mills Co. was organized, and took over both the Kloman and Phipps mUl, at Twenty-ninth Street, and the Cyclops Tttill at Thirty-third Street, which were thereafter known as the Upper and Lower Union Mills. The Twenty-ninth Street property was taken over by the Union at a valuation of $150,000, and the Thirty-third Street property at a valuation of $50,000, and the capital of the company was fixed at $500,000. In the meantime, in April, 1865, the Keystone Bridge Co., in which Andrew Carnegie was a prominent figure, had been formed to take over the bridge works of Piper & Schiffler, at Pittsburgh. It had a capital of $300,000. On December 1, 1870, Andrew Kloman, Henry Phipps, and the Carnegies organized the firm of Kloman, Carnegie & Co., and the next spring began the construction of the famous Lucy furnace, at Fifty- first Street, in Pittsburgh. This furnace began with a production of 350 tons of pig iron a week, which was regarded as a fair average, but before the end of the year its production had arisen to 500 tons a week, and the next year a new record of 578 tons a week was reached. In October of this year, 1874, it reached a weekly production of 653 tons. In October, 1875, it had reached a production of 762 tons a week. In 1878 it had raised this record to 804 tons in a single week, and in 1880 to 945 tons a week. In 1883 the production reached 300 tons a day. This astonishing record is but one example of the wonderful effi- ciency that in the end characterized all of the Carnegie plants. The year 1873 marks the entrance of Andrew Carnegie into the business of manufacturing steel. William Coleman, father-in-law of Thomas M. Carnegie, had obtained an option on what was known as Braddock's Field, paying some $59,000 for the tract, subject to a mortgage of $160,000. In January of that year the finn of Carnegie, McOandless & Co. was formed with a capital of $700,000, of which Coleman furnished $100,000; Andrew Kloman, Henry Phipps, Mc- Candless, Scott, Stewart, and Thomas M. Carnegie each subscribed $50,000 and Andrew Carnegie $250,000. Thus was started the great enterprise which afterwards became famous as the Edgar Thomson Steel Works. On October 12, 1874, the firm of Carnegie, McCandless & Co. was dissolved and the Edgar Thomson Steel Co. (Ltd.) was incorprated with a capital of $1,000,000 to take its place, and the INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 17 unfinished works at Braddock were transferred to the latter corpora- tion for $631,250.43, subject to a mortgage for $201,000. In 1881 the firm of Carnegie Bros. & Co. (Ltd)., with a capital of $5,000,000, was formed to take over the Carnegie iron and steel interests. The properties included, and their estimated value, are as follows: Value. Mortgage. Edgar Thomson Works J2, 385, 000 80,000 35,000 750,000 630,000 120,000 $594,000 Coal mines and coke ovena at Unity 160,000 UnlonlronMffls Four-fifths interest in Larimer coke worlcs ... . . ■ ' 4,000,000 The remainder of the capital, $1,000,000, was to be subscribed in cash, and the interest of the various stockholders was as follows: Andrew Carnegie $2, 737, 977. 95 Thomas M. Carnegie 878, 096. 58 Henry Phippe 878, 096. 58 David A. Stewart '. 175,318.78 John Scott , 175,318.78 Gardnier McCandless 105, 191. 00 John W. Vandervort 50, 000. 00 It is interesting to note that the profits of the various concerns composing this consohdation for the last year previous to the con- soHdation was $1,885,197.46, of which amount the Edgar Thomson Steel Works contributed $1,625,000. Steel had driven iron into a very subordinate position. On October 21, 1879, the Pittsburgh Bessemer Steel Co. (Ltd.) with a capital of $2,500,000, was organized by certain gentlemen in Pitts- burgh, of whom Andrew Kloman was one. This company built the original Homestead works. The first steel was made in these works March 19, 1881, and the first steel rails on August 9 of the same year, and by September, 1881, the Homestead works were turning out 200 tons of rails a day. This company became very much embarrassed by a strike among their employees, and in October, 1883, they were glad to sell the property to the Carnegie group. On Jime 4, 1886, the Duquesne Steel Co. was organized to bmld the Duquesne plant as a rival to the Carnegie plants. Its capital was $350,000. The enterprise was subsequently reorganized in March, 1888, as the Allegheny Bessemer Steel Co., with a capital of $700,000. This company, though it showed great superiority in the mechanical construction of its plant, was not markedly successful financially, and in October, 1890, passed into the hands of the Carnegie interests for a consideration of $1,000,000 for the plant. Mr. Bridge remarks that 64946°— H. Kept. 1127, 62-2, pt 3 2 18 INVESTIGATION OP U MXJiiU STATJiiS til &BiLr VVSeol!i&.XlUJS . the Carnegie interests, as a result of this transaction, once more were without a rival rail mill in their own territory. On July 1, 1892, the Carnegie Steel Co. (Ltd.) was oi^anized with a capital, of $25,000,000, and took over all of the Carnegie interests, namely, Upper and Lower Union mills, Lucy furnaces, Edgar Thom- son Steel Works, Homestead plant, Duquesne plant, Keystone Bridge Works, Beaver Falls plant (unsuccessful), and some small interests in iron ore and natural gas. Mr. Frick, who was now in active charge of the company, built the Union Railway to connect the principal works with each other and with the different transportation systems entering the Pitts- burgh district. In 1886 Mr. Schwab built the first open-hearth furnace at Home- stead. (Bridge, pp. 1, 3, 4, 6, 8, 9, 10, 11, 17, 21, 23, 55, 57, 58, 76, 77, 134, 151, 152, 159, 174, 175, 179, 254, 256; Hearings, pp. 2348, 2465.) OLIVER IRON MINIITa CO. Previous to the organization of the Carnegie Steel Co. (Ltd.) in 1892, the various Carnegie interests that were then united in that company purchased nearly all their ore supplies. But Mr. Frick was now in active control of the company and the spirit of faitegration was in the air. In 1892 Henry W. Oliver, of Pittsburgh, oi^anized the Oliver Iron Mining Co. to operata the Mesabi Mountain mine on the Mesabi Range. Mr. Frick purchased for the Carnegie Co. a one-half interest in the Oliver Iron Mining Co. for a loan of $500,000, to be spent in devel- opment of the property. And a little later the interest of the Car- negie Co. was increased to five-sixths of the total stock. At this time the capital of the Oliver Iron Mining Co. was $1,200,000. In 1896 the Oliver Iron Mining Co. leased from the Rockefeller interests very large bodies of iron ore on the Mesabi Range in Min- nesota. The royalty was 25 cents a ton with a guaranteed output of 600,000 tons a year, to be shipped over the Rockefeller railroads and steamships on the lakes, with an equal amount from the Oliver mine. This amounted to 1,200,000 tons a year and the contract ran , for 50 years. Mr. Carnegie states that the royalty was 15 or 20 cents a ton, but as he spoke entirely from memory, Mr. Bridge's statement would seem to be the more trustworthy. Whatever the rate was Mr. Carnegie was anxious to consummate the bargain and regarded it as a great victory. He says, " When we discovered that we could put Rocke- feller ore into that open-hearth steel, as I described to you this morn- ing, I said to Mr. Gayley, who is with you now and I think has testified before you : 'Gayley, you go and sleep in New York and do not come home until you bring us a lease of the whole Rockefeller ore.' Gayley INVESTIGATION OF UNITED STATES STEEL OOEPOKATION. 19 went." Mr. Carnegie adds : "Don't you know it does my heart good to think I got ahead of John D. Rockefeller on a bargain." After the acquisition of the Rockefeller ore, and before the organi- zation of the United States Steel Corporation, the OhTer Iron Mining Co. had greatly added to its already immense ore holdings. It is deeply to be regretted that the investigator for the committee, Mr. MacRae, did not see fit to obtaia, when he had ample opportunity to do so, a complete statement of the properties so acquired, and their cost. This is but one example of the utter worthlessness of very much of the information collected by the investigators of the cominittee. It appeared in the hearings, that as first organized, the Oliver Iron Mining Co. had a capital of $1,200,000, nominal. The inference is fair that only a small portion of this amount was actually paid in at that time, for the Carnegie Co. acquired a one-half interest in the Oliver Iron Mining Co. for a loan of $500,000, which was to be repaid. Soon after the organization of the United States Steel Corporation that company acquired a one-sixth interest in the Oliver Iron Mining Co. for $9,250,000 of its preferred stock and an equal amount of its common stock, which at its then market value would amount to about $12,000,000. The committee was naturally much interested in the question how a company, a one-half interest in which could be acquired in 1892 for the loan of $500,000, should have so increased in value that a one-sixth in it sold in 1901 for about $12,000,000. Mr. McRae examined the minutes of the OUver Iron Mining Co., which would have shown aU of the facts relating to this enormous increase in value. But he contented himself with the statement that " the minutes of the Ohver Mining Co. consist of twelve or thirteen hundred closely written, or typewritten, pages replete with the pur- chase of ore lands, or leases of ore lands, or leased ore lands"; and then follows a brief and fragmentary statement of the names of a few of the properties acquired, and in a very few instances of the priqe paid. But from this fragmentary and unsatisfactory state- ment, and from other bits of testimony cropping out "here and there in the hearings, it is clear that the amount and value of the property acquired by this company between the date when the Carnegie Co. acquured a half interest therein and the acquisition of a one-sixth interest by the United States Steel Corporation was enormous. In addition to the Rockefeller lands, the acquisition of which so re- joiced Mr. Carnegie, this company acquired between the dates men- tioned the Tilden and Norrie groups, a three-fourths interest in the Queen or Negaunee group, the Aurora mine, the Aragon mine, a three-fourths interest in the Lake Superior Iron Co., which in addi- tion to its mines owned a fleet of boats upon the Lakes; the Chapin mine, a one-half interest in the Pewabic mine, the Mansfield mine, and the Race Track property, all of which mines are in Michigan. Also the Pioneer and Zenith mines, on the Vermilion Range, and 20 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. the Pittsburgh Steamship Co., with a capital of $5,000,000, $1,000,000 of which was represented by stock and $4,000,000 by bonds. This hst, it is evident, is very incomplete; but it at all events shows that the property which the United States Steel Corporation acquired in 1901 was an entirely different and immensely greater property than that in which the Ca,rnegie Co. acquired an interest in 1892. In fact, practically all of the property of this company was acquired between these two dates. That these great ore holdings had added many millions to the value of the Carnegie Co. is evident. The latter company having acquired a large amount of ore in the Lake Superior district, with a fleet of vessels for transporting its ore from Lake Superior to Lake Erie ports, in 1896 acquired the nearly bankrupt and, but for its franchises, practically worthless Pittsburgh, Shenahgo & Lake Erie Railroad, and rebuilt and con- tinued the same to Conneaut, thus completing its transportation line for its ore from Lake Superior to its various plants in and about Pittsburgh. It also owned part of the stock of the Henry C. Frick Coke Co. (Bridge, pp. 257, 259, 260, 261, 267, 272, 273, 308. Car- negie, hearings, pp. 2391, 2392, 2466; Hearings, pp. 2363, 2395, 3803, 3921, 4098, 4109, 4110.) Mr. Gayley describes the growth of the Carnegie Co. from the time he entered its service in 1885 to its absorption by the United States Steel Corporation as "tremendous," and adds that. the improve- ments in -methods during that period had increased the earning capacity of the plant "tremendously." The Carnegie Co. in 1901, owing to its location, ownership of raw materials, and splendid organ- ization was easily the leading steel company in this coxintry. Light is thrown from a different angle upon its wonderful growth hy an examination of its eariungs from 1876 to 1900, both inclusive, as set forth by Mr. Bridge, in the Inside History of the Carnegie Steel Company. The figures follow: Profits Carnegie interests, finally merged in the Carnegie Co. 1876 ■-., $181,007.18 1877 ' 190,379.33 1878 U01,800.00 1879 512,068.46 1880 1,885,197.46 1881 2, 000, 377. 46 1882 2,128,422.91 1883 1, 019, 2"33. 04 1884 1,301,180.28 1885 1,191,993.54 1866 2,925,350.08 1887 3,441,887.29 1888 1,941,555.44 (Bridge, pp. 97, 99, 100, 102, 134, 295.) 1889 $3,540,000.00 1890 5,350,000.00 1891 4,300,000.00 1892 4,000,000.00 1893 3,000,000.00 1894 4,000,000.00 1895 5,000,000.00 1896 6,000,000.00 1897 7,000,000.00 1898 • ,. 11,500,000.00 1899 21,000,000.00 1900 40,000,000.00 1 Edgar Thomson Steel Works alone. IKTESTIGATION OF UNITED STATES STEEL COEPOEATIOK. 21 In 1900 the remainder of the stock of the Henry C. Frick Coke Co. was acquired, and all the Carnegie iaterests, which had been greatly increased in extent, value, and earning power, were merged into a new company, created for that purpose and named the "Car- negie Co." It had a capitaMzation of $160,000,000 in bonds and $160,000,000 in stock and, in addition, $25,081,813 in purchase- money obligations and underlying indebtedness. This company was organized under the laws of the State of New Jersey. Truly, Andrew Kloman's Httle forge, in Girtys Run, had developed marvelously, and the modest company, which, in 1862, was capital- ized at $80,000, had increased in value with comfortable celerity. All of the increase, however, had not come from within. Capital had been added from without from time to time; but making due allowance for the added capital, the growth from within had been so remarkable as to read like a story from the Arabian Nights. While this company had at times made agreements with its com- petitors as to prices and percentage of output (to be discussed in a later part of this report), its general poHcy had been to rely on its superior advantages as to location, plant, and capital, coupled with the abihty of its organization, and keep its mills running without much reference to the wishes or interests of its competitors. While it had at times bought out its competitors, as in the cases of the Homestead and Duquesne companies, it ha,d only done so where it could buy cheaper than it could build. There can be no question that the main purpose of its extensions was the enlargement of its business, and in later years the complete integration of the plant, raw material, and transportation facihties, the avoidance of paying profits to others, and the cheapening of production. It did not pay overmuch attention to its competitors, but rehed on its strength to meet all challenges and come oflf best in the encounter. OTHER IRON AND STEEL COMPANIES. While the Carnegie Co. was developing in the manner described, others engaged in the same industry had not been idle. The tend- ency to concentration in fewer plants with larger capitalization, vfhich began with the substitution of anthracite and bituminous coal for charcoal, proceeded at an accelerated pace as the industry grew in importance. From the beginning of the manufacture of Bessemer steel, in 1867 until 1883, there had been no halt in the industry, each year showing a greater tonnage than the preceding. The efforts of aU engaged in the business were taxed to the utmost to keep up with the growing demand. The output had grown from 19,643 tons of steel in 1867 to 1,736,692 tons of steel in 1882. This ever-increasing demand was met in the main by the extension of existing plants, though the con- solidation of the plants of separate owners was not unknown. 22 INVBSTIGATIOK OF XTNTTED STATES STEEL COEPOEATIOW. The industry received two setbacks — one in 1883 and the other in 1888 — but notwithstanding this the production had greatly increased in the entire period, and in 1889 there was a sharp recovery. THE EB.A OF CONSOLIDATION. Simultaneously witii this recovery an era of consolidation set in. This reached a climax in the period from 1898 to 1901. Mr. Herbert KJQox SmitJi gives two tables showing the consolidations in the years 1898-99 and 1900, the first being those that were later merged in the United States Steel C!orporation and ihe second those that were not so merged. Those tables are as follows: Table 1. — Leading consolidations in the iron and steel industrg, 1898—1900. [A. ConsoUdatioa later merged into the United States Steel Corporation.] Name and year of organization. American Steel and Wire Co. ol Illinois. Federal Steel Co American Tin Plate Co American Steel and Wire Co. of New Jersey . American Steel Hoop Co National Steel Co National Tube Co 1900. American Bridge Co , American Sheet Steel Co. . . Carnegie Co. of New Jersey. Shelby Steel Tube Co Total. Preferred stock. $12,000,000 100,000,000 20,000,000 40,000,000 14,000,000 27,000,000 40,000,000 (5,000,000 20,000,000 0,000,000 320,000,000 Common stock. 112,000,000 ioo,ooo,ogo 30,000,000 60,000,000 19,000,000 32,000,000 40,000,000 35,000,000 26,000,000 160,000,000 9,000,000 513,000,000 Bonds. 130,217,179 273,000 130,656 2,561,000 156,000 2,000,000 185,081,813 220,419,648 In most cases practically all of the authorized securities were actually issued. The most conspicuous in this list were the Federal Steel Co., which issued origtaally about $30,500,000 of each class; and the American Tin Plate Co., which retained in its treasury about $2,000,000 preferred and $2,000,000 common stock. [B. Consolidations not sabseqnently merged into the United States Steel Corxwration.] Name and year of organization. Preferred stock. Common stock. Bonds. American Car & FomidryCo American Iron&Steel Manufacturing Co Empire Steel & Iron Co , National Enameling & Stamping Co Pressed Steel Car Co , KepubUo Iron & Steel Co , Slos9-Shel£eid Steel & Iron Co United States Cast-iron Pipe & Foundry Co. . Virgfaila Iron, Coal & Coke Co , 130,000,000 3,000,000 6,000,000 10,000,000 12,600,000 25,000,000 10,000,000 15,000,000 1900. Cinoible Steel Co. of America. Total 26,000,000 $30,000,000 17,000,000 6,000,000 20,000,000 12,500,000 30,000,000 10,000,000 16,000,000 10,000,000 25,000,000 $600,000 3,836,000 16,' 666, '666 135,509,000 174,600,000 14,435,000 INVESTIGATION OF UNITED STATES STEEL COBPORATION. 23 CONSOLIDATIONS SUBSEQUENTLY MERGED IN THE UNITED STATES STEEL CORPOBATION. THE ILLINOIS STEEL CO. The first important consolidation was the Illinois Steel Co., which was formed by combining the North Chicago Rolling Mill Co., which owned a branch plant at South Milwaukee, the South Chicago Roll- ing MiU Co., the Union Rolling Mill Co., and the Joliet Rolling Mill Co. It was capitaUzed at $25,000,000, $18,000,000 of which was issued. These plants had competed previous to the consolidation, but with the growth in the industry a larger organization for economy and efficiency was necessary. And while the desire to eliminate com- petition may have b,een one of the motives in this consolidation, undoubtedly the main motive was the desire for a better and more efficient organization and promotion profits, which now seem very moderate. THE FEDERAL STEEL CO. In September, 1898, the Federal Steel Co. was organized. It was a merger through stock purchase of the Illinois Steel Co., heretofore referred to, and the Minnesota Iron Co., which owned extensive ore properties on the VermiUion Range, estimated at about 250,000,000 tons of ore. It owned the stock of the Duluth and Iron Range Rail- road, which extended from Lake Superior to both the VermiUion and Mesabi Ranges. It also owned the Minnesota Steamship Co., thus providing for the transportation of the ore from its mines to lower lake ports. To these two principal corporations were added the Lorain Steel Co. at Lorain, Ohio, and the Johnstown Steel Co. at Johnstown, Pa. The Federal Steel Co. also acquired the stock of the Elgin, JoUet & Eastern Railway, a belt line of 180 miles, connecting with nearly every railroad entering Chicago. This road directly served the Joliet plant of the company and formed a connection with its other plants. The Illinois Steel Co. also qontroUed the Chicago, Lake Shore & Eastern Railway Co., which connected its various plants in and about Chicago. The principal companies in this consolidation had been closely connected through common-stock ownership and business. Some friction had arisen in regard to the price of ore charged the lUihois Steel Co. by the Minnesota Iron Co., between those stockholders of the Illinois Steel Co. who were interested in the Minnesota 'Iron Co. and those who were not. A desire to settle this difficulty was one of the purposes of the consolidation. Another purpose was the integration of the business from the ore to the finished product. The competition between the Illinois Steel Co. and the Lorain Steel Co. was insignificant, and it is improbable that the desire to eliminate 24 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. competition played any part in the organization of this corporation. (Gates, hearings, pp. 28, 29; Herbert Knox Smith Kept., pt. 1, pp. 63, 87, 88; Gary, hearings, pp. 201, 202, 203, 204; Bacon, hearings, pp. 5322, 5323, 5324.) THE AMERICAN STEEl] & WIRE CO. As early as 1874 John W. Gates had engaged in the wire business. With him was associated a little later Isaac L. EUwood. Gates's first wire company was the Southern Wire Co. of St. Louis. To this was added, by purchase, the St. Louis Wire Mill Co., and a new plant was erected at Braddock, near Pittsburgh, Pa., which was known as the Braddock Co. Later Mr. Gates and his associates acquired the Lambert & Sheffield Co., of Joliet, and one or two others. These were operated separately for a time, and about 1891 they were united into one company under the name of the Consolidated Steel Wire Co. of Illinois. In 1898 the Consolidated Steel Wire Co. of Illinois was merged in the American Steel & Wire Co. of Illinois with a capital of $12,000,000 preferred and $12,000,000 common stock. In 1899 this latter company, the Washburn Manufacturing Co. of Worcester, the Worcester Wire Co., the Cleveland Wiring Mill Co., the American Wire Co. of Cleveland, the R. B. Nail Co., the Cincinnati Barb Wire F^noe Co., the Oliver Wire Co., and several others, probably 50 plants in all, were merged into the American Steel & Wire Co. of New Jersey. The American Steel & Wire Co. was capitalized at $40,000,000 pre- ferred and $50,000,000 common stock. About two-fifths of the plants it had acquired were dismantled or concentrated. The companies merged in the American Steel & Wire Co. competed to a considerable extent, according to their location. (Gates, hearings, pp. 24, 25 j Herbert Knox Smith Kept., pt. 1, pp. 91, 92.) Undoubtedly the desire to reduce competition played an important part in this consolidation and the desire to decrease the cost of pro- duction, by concentrating the plants, eliminating those badly located, and reducing overhead charges, and creating more salable securities, were equally influential. THE MOORE PROPERTIES. The National Steel Co., the American Sheet Steel Co., the American Tin Plate Co., and the American Steel Hoop Co. were all promoted by Judge W. H. Moore, of Chicago. The National Steel Co. manufac- tured crude steel which was consumed largely by the other three companies in the group. Together they made a fairly well-integrated concern. They were heavily capitalized, composed in many instances of competing concerns, and the promotion profits were very great. Their organization had been well timed and stock sold well upon the market. Unquestionably promotion and stock profits played a INVESTIGATION OF UNITED STAIES STEEL COBPOEATION. 25 considerable part in these organizations. The Tin Plate Co. con- trolled a very large proportion of the business in this country. (Her- bert Knox Smith Kept., pt. 1, pp. 89, 90, 91.) OTHER COMPANIES. The National Tube Co. was a merger of 13 independent concerns, between which there was competition previous to the merger. (Her- bert Knox Smith Rept., pt. 1, p. 92.) The American Bridge Co. was also a consolidation of previously competing concerns. It never had very much control over the market and that amount has steadily decreased since its organiza- tion, owing to the rapid increase of independent rivals. (Herbert Knox Smith Kept., pt. 1, p. 93.) The Shelby Steel Tube Co. was a small concern which owned a valuable patent for making seamless tubes. (Herbert Knox Smith Kept., pt. 1, p. 93.) Unquestionably the desire to limit severe or destructive competi- tion played an important part in the organization of all of these companies, save the Carnegie Co. and the Federal Steel Co., the two most important companies, merged in the United States Steel Corporation. The period from 1899 to 1901, inclusive, was one of great pros- perity, not only in the iron and steel industry, but in all lines of business. The success of the consohdations already accomplished seemed assured. Their earnings were large, the profits of their promotion had been great, and the daily quotations of their stocks showed handsome advances upon the value of the properties at the time of the consolidation. This in itself would have been sufficient to lead to greater consolidation and integration. But other reasons were not wanting. EFFORTS TO SELL THE CARNEGIE COMPANY. Mr. Carnegie wished to retire from business. As early as 1889 he desired to seU the Carnegie properties and endeavored to dispose of them to some EngHsh capitalists. This effort failed. This, project was again taken up ten years later. Mr. Bridge states that on January 5, 1899, at a meeting held at Mr. Carnegie's house in New York, it was decided to sell the Carnegie Co. stock for $250,000,000 to a syndicate of New York and Chicago capitalists, payment to be made one-half in cash and one-half in 50 year 5 per cent gold bonds. These terms were rejected by the syndicate. Several plans of consolidation and reorganization were under discussion when in the early spring of 1899 the owners of aU the stock in the Carnegie Co. gave a power of attorney to Messrs. Frick and Phipps to sell it for $250,000,000. This did not include the 26 INVESTIGATION OF UNITED STATES STEEL OOEPOBATION. H. C. Flick Coke Co. In pursuance of this power of attorney Messrs. Frick and Phipps gave an option on the property to Judge Moore, of Chicago, and others for $250,000,000, under the terms of which Moore and associates were to forfeit $2,000,000 if they failed to take the property. This option bears the date of April 24, 1899. Its principal terms are set forth by Mr. Bridge, accompanied by a prospectus prepared in furtherance of the sale. Mr. Moore and his associates were unable to dispose of the property imder their option, and Mr. Carnegie exacted his portion of the for- feiture, something over $1,000,000. It was in furtherance of this sale that Mr. Schwab, on May 15, 1899, wrote the frequently quoted letter in which he stated that the Carnegie Co. could make rails for less than $12 a ton. Mr. Schwab, referring to this letter, says, "First of all I want to say that that letter was written as an enthusiastic optimistic young man seeking •preferment in a great company." He adds that the $12 a ton was mill cost and included none of the general diai^es. Mr. Schwab adds, secondly, "I wish to explain the motive of that letter. The letter was written at Mr. Frick's solicitation. It was at a time when he was anxious to dispose of the Carnegie Co., and it was also written in an optimistic vein for like reasons. If you will bear that in mind in reading that letter you will probably understand it better. " It will thus be seen that the principal stockholders in the Carnegie Co., as early as January, 1899, were making systematic efforts to dispose of the property. A good deal of misconception has arisen in the public mind as to the value of the Carnegie Co., growing out of the disclosures made in a certain suit brought by Mr. Frick against Mr'. Carnegie. An agree- ment known as the "iron-clad agreement" had been entered into between Carnegie Bros. & Co. (Ltd.), and the partners composing it, by which each of the partners bound himself to sell his interest to the company at its value, as it appeared on the books of the company, whenever requested to do so by three-fourths in number and in interest of the partners. Some difficulty having arisen between Mr. Frick and Mr. Carnegie, it was sought by the latter and some of his associates to enforce this •agreement against Mr. Frick. This Mr. Frick resisted. The plead- ings in the case which resulted are set forth at length in the hearings, No. 36, page 2550 et seq. The book value of the assets of the Carnegie Co. on the 31st of December, 1899, was $75,610,104.06. The testimony as to how this was arrived at is conflicting and uncer- tain, but it is clearly apparent that it did not represent either the judgment of the owners of the property as to its worth, nor did it represent what it had actually cost. It seems clear that the partners, either with a view to enforce harmony in the company through the INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 27 fear of serious losses to be incurred by the enforcement of the "iron- clad agreement" and the sale of a partner's interest for much less than its true value or for its effect upon taxing officers or merely from pride in keeping the book value far below the real value or as a matter of policy or for some other reason actually did fix this value at far less than the true value. The real issue in the suit was whether Mr. Frick was bound hf the "iron clad agreement" and could be compelled to take less than the real value of his property because the book value was less. The answer of the defendants does not assert that the book value repre- sented the true value of the property; it does not even assert that it represented the cost of the property. The nearest it comes to the latter assertion is the following statement: " To a large extent this book value represents the actual cost of the properties represented in the balance sheets of the association." Messrs. Frick and Phipps joined with Judge Moore and his associates in taking the option for the purchase of the Carnegie properties, at a valuation of $250,000,000, for which privilege the negotiators, includiug Messrs. Frick and Phipps, agreed to pay $2,000,000. It is unbelievable that at the time this option was given and received anybody connected with the Carnegie Co. beheved that the book value was the real value of the property. Three of the defendants in that suit, Messrs. Carnegie, Schwab, and Gayley, appeared as witnesses before the committee, and each asserted that the book value did not represent the true value. The suit of Mr. Frick was never tried, but resulted in a consolidar tion of the Carnegie Co. with the H. C. Frick Coke Co., under the name of the Carnegie Co., with a capital of $160,000,000 in stock and $160,000,000 in bonds, as previously related. Seventy million dollars was considered the value of the H. C. Frick Coke Co. and $250,000,000 the value of the old Carnegie Co. This was the condi- tion of affairs when the movement was started for the organization of the United States Steel Corporation. (Bridge, pp. 293, 294, 299, 300, 305 to 312; hearings — Carnegie, pp. 2372 to 2378, 2396, 2409, 2413, 2407; Schwab, pp. 1308 to 1822, 1324, 1333, 1364, 1366,2559; Gayley, pp. 309, 310; Judge Reed, pp. 2402, 2408, 2409.) THE XTNITED STATES STEEL CORPORATION. The United States Steel Corporation owed its origin largely to the desire of Andrew Carnegie to sell out his business and to the active promotion of Mr. Charles M. Schwab. In the fall of 1899 Mr. Schwab was given a dinner in New York which was attended by a large num- ber of leading financiers and business men of that city. Mr. Schwab in an after-dinner address chose as his subject the future development of the steel business in this country and dwelt upon the great advan- 28 INVESTIGATION OF UNITED STATES STEEL OOBPOEATION. tages that would result in manufacture from such an organization as the United States Steel Corporation became, working out his ideas in detail. The address appears in full in the hearings, beginning on page 1280. Among the gentlemen present at that banquet were Mr. J. P. Morgan, Mr. Harriman, Mr. Carnegie, and Mr. Phipps. No suggestion is made in the testimony that this banquet was arranged for the purpose of bringing a consolidation of the iron and steel inter- ests to the attention of the capitalists assembled, but the internal evidence is strong that such was its real purpose. At the same time the Carnegie Co. was contemplating the building of a tube mill or a wire mill at Conneaut, and there was a discussion as to a railroad to connect Pittsburgh with the seaboard. It is insisted by the witnesses that these were simply matters of natiiral growth and were considered only from the basis of the natural devel- opment and extension of the business. No attempt seems to have been made to keep these purposes secret, and knowing the desire of those interested in the Carnegie Co. to dispose of it, something more than a suspicion is raised that these were moves in the interest of a sale. It is daimed, at all events by certain witnesses, that consider- able imeasiness was developed among rival manufacturers and rail- road men as to these activities. Some time after the Schwab dinner Mr. Schwab was called up over the telephone by Mr. John W. Gates and asked if he would meet Mr. Morgan. The interview took place in New York City. This was the beginning of the negotiations which led to the organization of the United States Steel Corporation. Mr. Gates states that he called uplilr. Schwab at the request of Mr. Morgan, who a short time previously had organized the National Tube Co. Mr. Gates states that Mr. Morgan asked him how Carnegie could be stopped from building a railroad to the Lakes and building a tube works at Conneaut, and he suggested the calling of Mr. Schwab. Mr. Gates was evidently in error in regard to the railroad to the Lakes, for that road. was completed before this conversation took place. Mr. Gates was at this time a commanding figure in the American Steel & Wire Co., which also went into the combination. He states that his purpose in assisting the organization was to convert a lot of doubtful assets into cash. Judge Gary states that Mr. Frick, some time previous to the giving of the Moore option by the Carnegie Co., though he thinks the date was early in 1900, while as a matter of fact the Moore option was given earUer than that, approached him with a proposition to sell the Carnegie Co. Judge Gary consulted certain other gentlemen about the matter, but it came to nothing. Later Mr. Schwab approached him, suggesting that the Federal Steel Co. purchase the Carnegie properties. He approached Mr. Morgan in regard to it, but received no encouragement at that time. Subsequently Mr. Schwab met Mr. INVESTIGATION OP UNITED STATES STEEL' OOBPOEATION. 29 Morgan and presented to him a letter from Mr. Carnegie, stating that he, Mr. Carnegie, would sell his properties and take his pay in bonds secured on the properties. This was after the interview between Mr. Gates and Mr. Morgan. A considerable amount of negotiations then occurred, in which Judge Gary, Norman B. Eeam, H. H. Rogers, D. O. MiUs, H. H. Porter, and Marshall Field, representing the Federal Steel Co., and Mr. Schwab, representing the Carnegie Co., and various other gentlemen, representing other companies, finally combined in the United States Steel Corporation, took part. It is greatly to be regretted that the committee did not accept the suggestion made by Hon. A. P. Gardner, at a time when Mr. J. P. Morgan was in this coun- try, to subpoena him as a witness upon this and other phases of the investigation. These negotiations resulted in the organization of the United States Steel Corporation. The legal advisors in this organization were Francis Lynde Stetson and Victor Morawetz. The capitalization of the corporation, when finally completely organized in August, 1901, was as follows: Preferred stock $510, 205, 743 Commoii stock 508,227,394 United States Steel Corporation 303, 450, 000 Underlying bonds 59,091,657 Purchase money obUgations, real estate mortgages — i 21, 872, 023 1, 402, 846, 817 It was a purely holding company. Its assets consisted of a working capital of $25,000,000 and all of the capital stock of the Carnegie Co., the Federal Steel Co., the American Steel & Wire Co. of New Jersey, the National Tube Co., the National Steel Co., the American Tin Plate Co., the American Steel Hoop Co., the American Sheet Steel Co., the American Bridge Co., the Consolidated Lake Superior Iron Mines, the Shelby Steel Tube Co., and a one-sixth interest in the Pittsburgh Steamship Co., and the Oliver Iron Mining Co., except about half a million dollars' worth of the capital stock of the various companies, which was owned by different individuals. VALtTB OF ASSETS. Mr. Herbert Knox Smith estimates the value of the tangible assets of the constituent concerns of the United States Steel Corporation on April 1, 1901, as $676,043,000. This estimate is made by taking the property of each constituent company separately. He makes another estimate by classifying all the property of the corporation according to its character, as ore property, manufacturing plants, etc., and this estimate amounts to $682,000,000. In making the last esti- mate he placed a valuation of $100,000,000 on the ore properties, and 30 INVESTIGATION OF UNITED STATES STEEL COKPOEATION. presumably he has figured the ore properties belonging to the con- stituent companies in the first estimate at about the same sum. The United States Steel Corporation itself, in a suit pending in July, 1902, estimated the value of its ore properties at $700,000,000, and the enormous difference in this estimate from that of Mr. Smith consti- tutes the main difference between his estimate and that of the United States Steel Corporation itself. There can be no question that the value of $700,000,000 was a great deal too high, but it does not necessarily follow that Mr. Smith's valuation is right. Unquestion- ably the value of this kind of property is very difficult to estimate. The reasoning on which Mr. Smith bases his conclusions is not at all conclusive. Many wild guesses have been indulged in as to the value and amotmt of the ore in the Lake Superior district owned or leased by the United States Steel Corporation. Mr. Schwab and Mr. Munsey both exercised their imagination on this interesting subject. Let us look at the real estimates. The Minnesota tax commission in 1909 estimated the holdings of the United States Steel Corporation on the Mesabi Kange, outside of the so-caUed "Hill lease," at 523,547,252 tons, and the holdings on the Vermillion Range at 8,000,000 tons. Mr. Joseph Sellwood, who is a mining man of large experience, and who purchased for the Minnesota Iron Co. its large holdings of nearly 250,000,000 tons of ore, which became later a part of the United States Steel Corporation's holdings, estimates the tonnage of the United States Steel Corporation on the Mesabi Range at 550,000,000 tons, and its holdings on the Vermillion Range at 20,000,000 tons. Mr. T. F. Cole, who was formerly president of the Ohver L-on Mining Co., and in charge of all the mining operations of the United States Steel Corporation in the Lake Superior district until three years ago, when he severed his connection with the corporation, and whose knowledge of their holdings is probably more intimate and complete than that of any other man, estimates their entire holdings in the State of Miimesota, outside of the "HUl lease" at 750,000,000 tons, or a httle over 50 per cent of all the ore in that State so far dis- covered. Mr. James R. Finlay, who made a very careful and elaborate esti- mate of the ore tonnage and value of the mining property in the State of Michigan for the Michigan State Tax Commission, under date of December 11, 1911, estimates the entire ore holdings of the United States Steel Corporation in Michigan at 54,932,355 tons. This, taken with Mr. Cole's estimate of the Minnesota ores, would make a total of a Httle over 800,000,000 tons. Now, as to its value, Mr. Finlay estimates the mines of the United States, Steel Corporation in Michigan to be worth $42,645,000. INVESTIGATION OF UNITED STATES STEEL OOEPOBATION. 31 Mr. Sellwood estimates the value of iron ore on the Mesabi Range at 25 to 30 cents a ton in the ground, and adds that at the time the United States Steel Corporation was formed he could have bought some, but not all, of its ore lands at a rate of 30 cents a ton. Mr. Cole fixes the value of ore in the ground on the Mesabi Range at about 35 cents a ton for Bessemer and 20 cents a ton for non- Bessemer. The Minnesota Tax Commission fixes a price on ore mines, for pur- poses of taxation, at from 14 to 33 cents a ton, according to quality and mining conditions, and states that it fixes values on the property of Minnesota at about 40 per cent of its true value. It will be noted that Mr. Finlay fixed the valuation of Michigan ores, fckT purposes of taxation, at an average of about 80 cents a ton. These ores are more valuable per ton than the Minnesota ores. Finally, Mr. Rukard Hurd, secretary of the Minnesota Tax Com- mission, states that in 1910 the Minnesota Tax Commission assessed the mining properties of the Vermillion and Mesabi Ranges at $225,000,000, " the value of which approximates $562,000,000." Assuming these figures to be correct and taking Mr. Cole's estimate that the United States Steel Corporation owns a little over 50 per cent of the ores of the Mesabi Range and all of the ores on the VermiUion Range, say 53 per cent of the Minnesota ores, we would have, accord- ing to the Minnesota Tax Commission figures, a value on the Minne- sota ores of the United States Steel Corporation of $297,860,000 ; add to this the valuation of the Michigan mines, as found by Mr. Finlay, $42,645,000, and we have $340,505,000. ' It is true that the tax commission figures are of a later date than the organization of the United States Steel Corporation and that about one-half the ore controlled by the United States Steel Corporation is leased upon a royalty. But making all reasonable deductions for these causes it is difficult to fix a lower value on the 800,000,000 tons of ore of the United States Steel Corporation than 25 cents a ton, or $200,000,000. Mr. Herbert Kjiox Smith also gives a table of the average market valuation of the stock of the constituent companies of the United States Steel Corporation covering a period from the organization of each to the 1st day of January, 1901 . This table represents the value placed upon these properties by the investing public. Undoubtedly where, as in this case, the stock quotations are carried over a con- siderable length of time, they are one of the best evidences that can be obtained of value, provided the public has the opportunity to know the value of the properties contained in the estimate which are not immediately productive. It represents the consensus of opinion of many thousands of exceptionally shrewd people who have a direct 32 XNVESTIGATIOil OF UNITED STATES STEEL OOfiPOKA.XIOM . interest in the subject. While stock fluctuations occur from day to day from causes which do not affect the real value of the properties, such aberrations correct themselves when carried over long periods of time. The following- is the table referred to (from Herbert Knox Smith Kept., pt. 1, p. 20): Approximate market valuation of securities acquired by United States Steel Corporation in 1901, as indicated by average market prices, 1899-1900. Constituent coacenis. Amonnt of stock ao- gnired by TJnlted states Steel CorporaUon. Arerage market price of stock In 1899-1900. Value at average price. Stocks regularly quoted: Federal Steel Co.— Preferred .-. Par mUue. $53,260,200 46,483,700 39,999,000 49,981,400 40,000,000 40,000,000. 26,996,000 31,970,000 18,325,000 28,000,000 14,000,000 19,000,000 31,357,600 30,946,400 4,776,100 8,018,200 24,499,600 24,499,600 29,413,905 159,450,000 160,000,000 200,000 221,700 Per cent of par value. 76.38 50.04 89.41 48.26 94.20 48.72 91.16 4L67 84.77 34.77 77.34 32. U 93.10 43.88 56.48 10.90 65.88 19.00 75.00 105.00 100.00 } 140,680,141 rjiTriTTinTi ' 23,260,443 American Steel and Wire Co.— Preferred 35,763,106 24,121,024 National Tuie Co.— Preferreo, . .■ 37,680,000 19,488,000 National Steel Co- Preferred 24,609,554 13,321,899 American Tin Plate Co.— 15,534,103 Cornnipn .... 9,735,600 American Steel Hoop Co.— Preferred. 10,827,600 6,100,900 American Bridge Co.— 29,193,926 13,579,280 2,697,541 873,984 16,140,336 4,654,924 .2,060,429 167,422,500 160,000,000 Shelby Steel Tube Co.— Preferred . CoTprnom ... Stocks not actively quoted: American Sheet Steel Co.— Prefferred Common Carnegie Co.: Stock. OliVPr Ti'nTl 'WiTil'ng f^n ^0"P--*rfTt>> ^ntprpst , , , 9,250,000 Total 881,398,405 686,995,290 21,872,023 59,091,657 25,003,000 -Cash capital Grand total 792,961,970 Of the stocks given in this table those of the Carnegie Co., the Lake Superior Consolidated Iron Mines, the Oliver Iron Mining Co., and the Pittsburgh Steamship Co. were inactive, so the values of the former two stocks were based on a few transactions and those of the last two on an estimate. The foregoing table, however, represents all of the property acquired by the United States Steel Corporation for the $1,400,000,000 of securities issued. INVESTIGATION OF UNITED STATES STEEL CORPORATION. 33 It will be noticed that the figures in this table are about SI 10,000,000 higher than the highest of the other two tables. If the true value of the ore holdings of the United States Steel Corporation was $200,000,000, instead of 1100,000,000, and this extra $100,000,000 were added to the estimate of the physical -value of those properties, we would have a sum approximately equal to that which the invest- ing public placed upon the combined stocks of the constituent com- panies. Too gi'eat reliance should not be placed upon the absolute correctness of these figures, but they no doubt represent a fairly good estimate of the value of the properties combined in the United States Steel Corporation. If the table gives a fair estimate, it is evident that the common stock of the company represented nothing except the hopes and expectations of the stockholders as to future profits, and that the bonds and preferred stock of the United States Steel Corporation exceeded all of the assets it acquired. Without placing implicit reli- ance on this estimate of value, it is evident that the capital stock and bonds of the corporation exceeded by a very considerable amount the physical value of the properties it acquired. TTie investing 'public tooTc tJiis view of ike matter from the start. Mr. Herbert Knox Smith states that during the first year of the United States Steel Corporation's existence the average price of the preferred stock in the market was .94, and of the common stock .44. Taking those figures and allowing the bonds of the corporation to have been worth par, we have the following as the estimate of the investing public of the value of the United States Steel Corporation for the first year of its existence: $510,205,743, preferred stock at .94 ". $479, 594, 298. 42 $508,227,394, common stock at .44 223, 620, 043. 36 U. S. Steel Corporation bonds 303, 450, 000. 00 Underlying bonds 59,091,657.00 Purchase money, obligations, real estate, mortgages 21, 872, 023. 00 1, 087, 628, 021. 78 Or about $295,000,000 morerthan the value placed by the public on the stocks of the constituent companies, added to the $25,000,000 of working capital. This sum of $295,000,000 measures the increased value of these properties caused by the consolidation as estimated by the investing public. According to Mr. Schwab, this added value came almost entirely from economy in operation and transportation, and there is no doubt that these economies were very great. Others will undoubtedly believe that the chief element in this increase in value was because of the supposed power to fix prices. No doubt both elements contributed in this increase. (Hearings: Schwab, pp. 1276, 1278, 1279, 1280, 1281, et seq, 1331, 1332; Gates, 5-1046°— H. Kept. 1127, 62-2, pt 3 3 34 INVESTIGATION OP ITNlTJSU Bl'AXJSS BTKJSL UOKl-OliATION. pp. 31, 59; Gary, pp. 204, 205, 206, 207, 208, 211, on values; Herbert Knox Smith Rept., pt. 1, pp. 14, 20, 19, 36, 29; Minnesota Tax Com.= mission, pp. 5377, 5365, 3457, 3455, 3459, 3480, 5368; Sellwood, pp. 5365, 5370, 5387, 5367, 5368; Cole, pp. 5457, 5479, 5493; Finlay, p. 2015; Rukard Hurd, p. 3459.) After the organization of the United States Steel Corporation, from time to time it added to its property by purchase and also by new construction. THE UNION STEEL CO. In December, 1902, it purchased the entire capital stock of the Union Steel Coi, which latter company had previously absorbed the Sharon Steel Co., the Sharon Ore Co., the Sharon Coke Co., the Sharon Sheet Steel Co., the Donora Mining Co., the Republic Coke Co., the River Coal Co., and a controlling interest in the Sharon Tin Plate Co., and the Sharon Coal & Limestone Co. This property was paid for by the United States Steel Corporation by guaranteeing an issue of $45,000,000 of Union Steel Co. bonds. This amount included, however, not only the purchase price of the stock of the Union Steel Co. but a sum estimated to be sufl&cient to complete the plants of that company then under construction and provide it with a working capital. The total amount paid for the entire capital stock of the Union Steel Co. was $33,202,490, and the liquid assets of the Union Steel Co. amounted to $2,341,989, leaving the cost of the properties $30,860,501. (Report of U. S. Steel Corporation for 1902, p. -19; Herbert Knox Smith Rept., pt. 1, pp. 252 to 254, inclusive, and 282- to 286, inclusive.) THE CLAIB.TON STEEL CO. In the spriQg of 1904 the United States Steel Corporation pur- chased the entire capital stock of the Clairton Steel Co., which was turned over on the 18th day of May of that year. Its property con- sisted of its plant at Clairton, Pa., on the Monongahela River, and important ore properties in the Mesabi and Marquette Ranges and coking coal properties in Fayette County, Pa. The cost to the United States Steel Corporation qi these properties was $13,710,565, including net working assets of $2,951,005. The actual investment of the former-owners in the Clairton property was $17,663,287.09. (Herbert Knox Smith Rept., pt. 1, pp. 254, 255, 286, 287, 288.) OTHER PtmCHASES. The United States Steel Corporation also acquired in the early years of its existence the Troy Steel Products Co. and the Trenton Iron Co. The. first was acquired in 1902 and the second in 1904. These pur- chases were relatively insignificant. (Herbert Knox Smith Rept., pt. 1, pp. 255, 256.) INVESTIGATION OF tTNITBD STATES STEEL COEPOEATION. 35 ACQTTISITION OF IRON OBE. It extended its ore holdings by leasings of ore from the Chemung Ore Co. in August, 1903, from the Canesteo Mining Co. ia 1905, and by the so-called "HHl lease" in 1907. The latter lease embraced 39,296 acres of land. At the time it was executed it was rumored that said lands contained from four hundred to five hundred million tons of ore, but subsequent examiaation reduced this amount to 250,000,000 tons of available ores. The lease required that the ore should be shipped over the Great Northern Railway and the royalty provided for iacluded the freight rate to Lake Superior, which freight rate was 80 cents a ton. The royalty rate, including this freight rate, , was $1.65 per ton for 59 per cent ore for the first year and increased 3.4 cents per ton each additional year. The lease gave the lessee the option to cancel it after January 1, 1915, by giving notice thereof two years previously. This option has been already exercised. All of the lands not being actually worked have been surrendered and are now in the possession of the lessors. The remainder wUl, by the terms of the cancellation, pass into the hands of the lessor on January 1, 1915. The United States Steel Corporation has never increased the value placed upon its assets by itself because of this lease. The rate of royalty is so high as to have , occasioned much comment. Mr. Andrew Carnegie described it as a speculation in ore and few were surprised when the United States Steel Corporation relinquished its rights therein. THE TENNESSEE COAL, IRON & RAILROAD CO. In the fall of 1907 the Tennessee Coal, Iron & Railroad Co. was acquired at an actual cost, including improvements made to the close of 1907, of $49,946,095.57. Payment was made for the stock in the bonds of the United States Steel Corporation, and its bonded debt of $14,226,000 was assumed. It should be stated, however, that the market value of the bonds issued by the United States Steel Corpo- ration in payment of this property at the time — this being in the midst of the panic — was about $4,940,000 less than par. (Herbert Knox Smith Rept., pt. 1, pp. 256, 280, 289, 290, 292, 310, 311, 312, 324; United States Steel Corporation Rept. for 1910, opposite p. 32.; Rept American Iron & Steel Association for 1910.) But great as these additions to the assets of the United States Steel Corporation are, they are small indeed when compared with its increases in the way of new construction and added surplus. These additions consisted of the building of the Gary plant, the acquirement of some further bodies of ore and coal, and extensive improvements in the manufacturing and transportation properties, and an increase in the -v^orking capital. Mr. Herbert Knox Smith estimates that the net additions to the investment from April 1, 1901, to December 31, 1910, was $504,- 36 INVESTIGATION OF UNITED STATES STEEL OOBPOEATION. 928,653, after making proper deductions for depreciation, and that the tangible property of the United States Steel Corporation on" December 31, 1910, was $1,186,982,038. (Herbert Knox Smith Rept., pt. 1, pp. 280, 292, 310, 311.) The allowance for depreciation by 'the United States Steel Corpo- ration itself is very much larger than that made by Mr. Smith, but he contends, with a good deal of force, that many of the items allowed by the United States Steel Corporation are not depreciation at all, but arbitrary amounts cut off from the capitaHzation of subsidiary companies ia order to correct the excessive sums at which their properties were carried on the books of the United States Steel Corporation. Assuming for the moment that Mr. Smith is sub- stantially correct as to the question of depreciation, let us see how his figures of actual value of tangible property agree with the valuation placed upon the United States Steel Corporation by the ravesting public. The total capitalization and bonded indebtedness of the United States Steel Corporation on December 31, 1910, was as follows : Common stock $508,302,500 Preferred stock. . ; 360, 281, 100 Bonds and purchase money obligations 599, 449, 660 . 1, 468, 033, 260 Herbert Knox Smith Report, pt. 1, pp. 312, 324. (U. S. Steel Corporation Rpt. for 1910, opposite p. 32.) The average price of the preferred stock for the year 1910 was $117 and of the common stock $76.75. Applying these values to the capitaHzation, the account would stand as follows: Bonds and purchase money obligations $599, 449, 660. 00 $360,281,100 preferred stock at 117 422,428,887.00 $508,302,500 common stock at 76i 389,922,168.75 1, 411, 800, 715. 75 Mr. Herbert Knox Smith, on arriving at his value of $1,186,982,038, fixes the value of the iron ore at $134,145,450. If we substitute for this the estimate of the Minnesota Tax Commission for the Minnesota ores and the estimate of Mr. Finlay, acting for the Michigan Tax Commission, for the ores in Michigan, Mr. Smith's figures would be increased as follows: Taxing officers' valuation of iron ore $340, 505, 000. 00 Deduct Mr. Smith's valuation of iron ore 134^ 145^ 450. OO And we would have a balance of 216, 359, 550. 00 To this add Mr. Smith's estimate 1, ige, 982^ 038. 00 And we have 1,403,341,588.00 Value fixed by the investing public i i, 4ii_ goo, 715. 75 Mr. Smith's valuation as corrected by taxing officers , 1, 403, 341, 588. 00 Or a difference of only 8,458,127,75 INVESTIGATION OF "UNITED STATES STEEL CORPORATION. 37 It should be remembered that dming 1910 the average price in the market of the securities of the United States Steel Corporation was the highest of any year during its existence. We are justified in the conclusion that the actual value of the United States Steel Corpora- tion, at the close of 1910, was not far from $1,400,000,000, or about $68,000,000 less than its capitalization. The United States Steel Corporation is the greatest industrial organization in the world. Its properties embrace 149 distinct manufacturing plants, 96 working mines, 78 coking plants, con- taining 23,947 beehive ovens, 1,172 by-products ovens, and 31 coal plants, not connected with coldng operations. It owns 7 railroads besides 19 plant-facility roads, having altogether a total trackage, including branches, spurs, second tracks, siding, and lines operated under trackage rights, of 3,491 miles, with docks at Two Harbors and Conneaut, and 1,193 locomotives, and 46,334 cars. In addition to this property it owns 106 boats upon the Great Lakes, 110 river barges, and 2 ocean-going steamers. In 1910 it had 218,435 employees and paid $174,955,139 in wages. It produced 25,245,816 tons of iron ore, 13,649,578 tons of coke, 4,850,000 tons of coal, not included in that made into coke, 11,645,510 tons of pig iron, 14,179,369 tons of ingots, 10,733,995 tons of finished steel, and 7,001,500 barrels of Portland cement. THE BOND CONVERSION PLAN. It wiU be noticed that the preferred stock of the United States Steel Corporation on December 31, 1910, was about $150,000,000 less than at the time of its organization. This was brought about by the conversion of $150,000,000 of preferred stock into bonds. The manner in which this was effected has been the subject of much criticism. The facts in regard to it are as follows: In the spring of 1902 it became evident that the United States Steel Corporation required 40 to 50 million of dollars more money for its business purposes. Various schemes of obtaining this money were canvassed. The preferred stock of the United States Steel Cor- poration was then selling at about $90 a share, and under the law it could only be issued at par for money or its equivalent in property. Moreover, if it had been possible to do this, it would have been a most expensive way to raise the money, because the issuance of $50,000,000 in stock would have only produced $45,000,000 in' cash, for which there would have been a perpetual interest charge of 7 per cent upon $50,000,000, in addition to the original loss of $5,000,000. The next method considered was that of issuing $50,000,000 of sec- ond-mortgage bonds.' The reason that decided the company against this plan is substantially the same reason that ruled against the sale of preferred stock, namely, that if the preferred stock bearing 7 per cent interest only brought $90 per share it was beUeved that the 38 INVESTIGATION OF TJNITED^STATES STEEL T3DEP0EATI0N. bonds could only be sold at a considerable discount. It was finally determined that the most economical and advantageous way was to issue $250,000,000 face value of second-mortgage bonds and use these and their proceeds, first, in procuring the $50,000,000 cash and, secondly, in purchasing and retiring $200,000,000 par value of the outstanding 7 per cent cumulative preferred stock. The retirement of this stock would save $14,000,000 per annum of the cumulative dividend charge, and this sum so saved would not only pay the interest upon the whole issue of new bonds, but would leave a surplus of $1,500,000 per annum, which would be sufficient to provide a sink- ing fund for the payment of the bonds at or before maturity, which was fixed at 60 years, and leave besides $450)000 per annum in sur- plus apphcable to common stock. In other words, the plan enabled the corporation to procure the new capital without increasing its annual outgo for interest and cumulative preferred dividends and, in addition, furnish a sinking fund for the payment of the bonds and provide for the reduction of its capital stock, which would inure greatly to the benefit of the remaining preferred and all the common stock. The finance committee was of t|he opinion that the immediate effect of a proposition to withdraw from the market and retire 40 per cent of the corporation's preferred stock would be to appreciate the market value of the preferred stock and that if such market value became above par, or above the price at which the new second mortgage 5 per cent bonds might be quoted at, stockholders would refuse to make an even exchange and it would defeat the plan and prevent any subscrip- tion. It seemed to them that the only way the stock could be taken up was by organizing a syndicate which would undertake to guarantee absolutely the whole, or a large portion of the preferred stock and cash needed, and deposit the stock with some trustee and hold it until the plan could be carried through. It was recognized that it would be difiicult to get men to do this because of the risk involved and the necessity for locking up so large a sum of money for a long period of time. It was considered that it might take from a year to a year and a half to carry through such a plan with thousands of stockholders scattered all over the world. Men had to be found who would buy, or furnish preferred stock under an agreement that would permit of its being locked up beyond their power to sell for a year and a half and it was finally found impossible to secure a pledge of the entire $200,000,- 000 of preferred stock, but the best that could be done was to organize a syndicate which would agree to the following, namely, to purchase and lodge with J. P. Morgan & Co. $80,000,000 of preferred stock, agree to exchange all of this, or only 40 per cent of it, at the option of the United States Steel Corporation, for second mortgage bonds. Third, take second mortgage bonds from the United States Steel INVESTIGATION OF UNITED STATES STEEL CORPORATION. 89 Corporation, at par in exchange for $20,000,000 in cash. For this the United States Steel Corporation was to allow the syndicate 4 per cent commission on all the bonds it took, so that if the syndicate furnished the whole $100,000,000 the United States Steel Corporation would have paid the syndicate $4,000,000, of which J. P. Morgan & Co. would have received $800,000. The United States Steel Corporation reserved the right to offer to every preferred stockholder, in the cor- poration, the option to subscribe for these new bonds to the extent of 40 per cent of his preferred stock. This right the United States Steel Corporation exercised. If every preferred stockholder had exercised his option and taken 40 per cent of bonds in exchange for his stock, the syndicate would have only had $32,000,000 of its $80,000,000 of its preferred stock converted into bonds and would have been left with $48,000,000 of preferred stock on its hands, although it had bound itself to tie up this 180,000,000 of stock so it could not sell it for 18 months. For this risk the syndicate was given the right to receive a commission of 4 per cent on the bonds issued to preferred stockholders who were not members of the syndicate. This plan was adopted by the directors of the United States Steel Corporation in March, 1902, subject to the approval of the stockholders, at a special meeting to be held on May 19, 1902. The meeting was held as called and about four-fifths of the preferred and an equal amount of the common stock was represented. Of those present 99.83 per cent voted in favor of the bond-conversion scheme and seventeen one-hundredths of 1 per cent voted against it. A suit was brought by the dissatisfied stocldiolders to enjoin the carrying out of this plan. A final judgment was rendered in the case by the Court of Errors and Appeals of the State of New Jersey on October 11, 1902, confirming the action of the corporation and dissolving the injunction. This plan was never carried out in its entirety, only $200,000,000 of bonds were issued, $150,000,000 of which were used in retiring an equal amount of preferred stock at par and the remaining $50,000,000 in obtaining additional capital. It is difficult to see that anybody was injured by this plan. Indeed, it seems pretty clear that all of the stockholders were benefited. It is true that an addition of $50,000,000 was made to the securities which were prior to the common stock, but at the same time $50,000,000 was added to the assets so that the relative position of the common-stock holder was the same as before. Each preferred-stock holder had the option, if he chose, to change 40 per cent of his stock into a security bearing a less rate of interest which would be prior to the jjreferred stock and therefore theoretically, at least, a better security. If he did not exercise this option, it was because he beheved the preferred stock was still an excellent security. The deduction of $1,500,000 in the 40 INVESTIGATION OP UNITED STATES STEEL COEPOEATION. annual charge for interest and preferred dividend requirements, coupled with the use of $50,000,000 additional capital, could not have failed to be a benefit to every stockholder. It is claimed that the allowance to the syndicate, which finally amourited to $6,800,000, was unreasonable. But as the stockholders approved of it by an affirmative vote of over 99.75 per cent it is not obvious that the general public should be unduly concerned in regard to it. (Hearings : Perkins, pp. 1490, 1509, 1510, 1511, 1512, 1513, 1537, 1538, 1560, 1561, 1562, 1563, 1564, 1565, 1592.) ACQUISITION OF THE TENNESSEE COAL, IRON & RAILROAD CO. VALUE OF PKOPEKTT. No act of the United States Steel Corporation has aroused so much public interest and developed so general discussion as its acquisition of the capital stock of the Tennessee Coal, Iron & Railroad Co. during the panic of 1907. This controversy related to the value of the prop- erty, the methods and motives of the United States Steel Corporation in acquiring it, the fairness of the transaction, the extent to which this acquisition increased the control of the United States Steel Corporation over the iron-ore situation, and the propriety of the conduct of President Roosevelt in relation to the matter. The property of the Tennessee Coal, Iron & Railroad Co. consisted of the Ensley Steel Works, at Ensley, Ala., including 100 acres of mill property, 6 blast furnaces, 1 Bessemer plant, 8 open-hearth fur- naces, 1 blooming mill, 1 rail taill, and other auxiliary departments, also plate and merchant mills at Bessemer, and 10 blast furnaces at other points in the South. It also owned the capital stock of the Birmingham Southern Railroad Co., which had 31 miles of track, about 70 miles of yarding and siding, 35 locomotives, and 750 cars. But the main value of the property consisted in its lai^e holdings of iron-ore and coal lands. At the time of its acquisition by the United States Steel Corpora- tion it had a bonded indebtedness of $14,226,000 and a capital stock of $29,742,170. The valuation of the fixed property, according to its own books, after some slight adjustments made by the United States Steel Corporation, was as follows: Plants and equipments $15, 382, 233. 71 Real estat*. 26, 525, 143. 93 Binningham & Southern Railroad Co 1, 442, 698. 11 Land and town sites 289, 063. 90 Potter Ore Oo 398,000.00 Total 44,037,139.65 INVESTIGATION OP UNITED STATES STEEL CORPORATION. 41 In addition the company owed the following current obligations: Past-due notes for borrowed money $300, 000 . Notes for borrowed money soon to mature 1, 334, 000 Accounts payable, largely past due '. 1, 370, 000 Accrued pay rolls 397, 000 Accrued interest and taxes 666,000 4, 167, 000 The United States Steel Corporation purchased the capital stock at par, pajdng for it in its second-mortgage bonds at their market price, which was then 84, so that the total face value of its bonds delivered for the stock amounted to $35,407,000. The total cost to the United States Steel Corporation, after a complete adjustment, was $48,961,208.83, as stated ra the report of the United States Bureau of Corporations. AH the testimony agrees that the manufacturing plants were poorly constructed and very expensive in operation. Herbert Knox Smith regards the value of $15,382,234, placed upon the plants at the time they were acquired, as hberal. Mr. D. H. Bacon, who had charge of the property from January 1, 1901, until May 1, 1906, as its chief executive ofl&cer, and nearly all the time as its president, says that the open-hepth plant was de- signed by a man who did not understand the making of open-hearth furnaces, and was a costly and inefficient machine, and that the real value of the property, up to the time that the syndicate bought it out, in the fall of 1905, was chiefly what was under ground, as there were few things on the surface that could do their work as cheaply as could be done by other properties in the North. Mr. L. C. Hanna, who became interested in the property in the fall of 1905, says that the plant was in such condition that you could not figure on what its capacity was, because it was continually breaking down. Mr. Earl W. Oglebay, who became interested in the property at the same time with Mr. L. C. Hanna, also speaks frankly of its bad condition. There seems to be no dispute as to the poor character of the manu- facturing plant. This was so evident that when the "syndicate," hereafter to be mentioned, acquired the control of the property, in the fall of 1905, they began the expenditure of- large sums of money in rehabilitating and rebuilding it, and up to the time of its acquisition by the United States Steel Corporation, in 1907, they had expended about $7,000,000, and the work was incomplete. Mr. Bacon estimated that it would take $25,000,000 to rehabilitate the property and put it on a paying basis, and the syndicate had spent about one-fourth of this sum at the time the property was pur- chased by the United States Steel Corporation. 42 INVESTIGATION OF XTNITED^TATES STEEL COEPOEATION. mON QBE QUANTITY. The iron ore owned by the Tennessee Coal, Iron & Railroad Co. was of two kinds,' generally designated as "red ore" and "brown ore."' The red ores constituted the great bulk ol its holdings. The brown ores occur in pockets of uncertain size, and the total amount is difficult to estimate. They are all higher grade than the red ores, running about 45 per cent in metallic iron, but they are irregular in place and amount, and this renders thena of far less importance from the indus- trial standpoint than the red ores. The red ores in the Birmingham district lie in a vein or sheet at an incline of about 30 per cent from the horizontal, outcropping on Red Mountain for a distance of about 15 miles and sloping from there under Shades Valley to the foot of Shades Mountain and probably beyond. The veins are very regular in thickness, though a little broken by faulting in the lower part of Shades Valley. In certain portions the vein is separated into an upper and a lower vein by a thin stratum of slate. The upper vein is the richer in metallic iron, and in some cases only the upper vein is mined. During the time that Mr. Bacon was president of the company an attempt was made to consolidate the Tennessee Coal, Iron & Railroad Co. with the Schloss-Sheffield Coal & Iron Co. and the Republic Iron & Steel Co., and these companies selected a number of engineers to estimate the amount of coal and ore belonging to each company. Among these engineers were Mr. Perin and Mr. Given, who both appeared as witnesses before the committee. That estimate appears upon*pages 1034 to 1040 of the hearings. It shows that the tonnage of the red ore belonging to the Tennessee Coal, Iron & Railroad Co., as estimated, was 402,621,500 tons. To this should be added 10,177,000 tons of brown ore, making a total of 412,798,500 tons. The brown ore, with the exception of a small amount, is estimated to run from 45 per cent to 50 per cent in metallic iron. Of the red ores, 250,000 tons are estimated at 45 per cent in metallic iron; 21,591,800 tons are estimated at 30 per cent metallic iron; and of the remainder — nearly nineteen-twentieths of the whole amount — at from 36 per cent to 37 per cent in metallic iron. The practical men connected with the company did not place a very high value upon this estimate for accuracy, although aU admit it had some value. Mr. Gates says: "I do not think anyone could testify correctly to- day as to the amount of ore owned by the Teimessee Coal, Iron & Railroad Co." Mr. Hanna says, speaking of this estimate, that the engineers did not take time enough to make a careful estimate, but that the esti- mate was not all guesswork and it was of some value. INVESTIGATION OF UNITED STATES STEEL CORPORATION, 43 Mr. Bacon estimated the ore owned by the Tennessee Coal, Iron & Railroad Co. at 400,000,000 tons. Mr. Gayley estimates it at 440,000,000 tons. Mr. Gates says: "We always estimated that we had not less than 300,000,000 tons, and we flight have 500,000,000 to 700,000,000 tons." Judge Gary, speaking on this subject, says: "I would not be at aU surprised if we have six or seven hundred million tons oj all Icinds, but they have always taken off the top of the ore and left the bottom of it and are still doing so. How much of the ore is usable at the present time I do not know, but I believe 200,000,000 tons; but it wUl take a good while to use that." Mr. Perin, speaking of the estimate made by the engineers at the time of the contemplated consolidation with the Republic Iron & Steel Co. and the Schloss-Shef&eld Co., said that in fixing the amount of available ore they made some allowance for improvements in manufacturing methods which would bring lower grade material into the market. A more careful estimate, was made by the United States Steel Cor- poration after it acquired possession of the property. Its estimate is as follows: Keasonably assured (In- cludtDg ton- nage already developed). Additional probable ton- nage. Total. • Red ores * 175,600,000 279,600,000 3,150,000 35,000,000 455,200,000 3,150,000 239,000,000 Eed ore of lower grade, but which may be of future value. 204,000,000 Total 379,600,000 317,750,000 697,350,000 This table reduces the actual tonnage, now available, t^ 175,600,000 tons, but adds to this a probable tonnage of 279,600,000 tons, which would make a total probable tonnage of 455,200,000 tons. Taking all of these estimates together it would seem that an actual tonnage of available ore of 400,000,000 tons was a very liberal estimate. IRON ORE VALUE. As to the value of the iron ore in the ground, Mr. John A. Top- ping, who became the chief executive officer of the company upon the resignation of Mr. Bacon, May 1, 1906, says that during the last five years he purchased a body of iron ore for the joint account of the Republic Iron & Steel Co. and the Tennessee Coal, Iron & Rail- road Co. known as the Potter group of mines "which we satisfied ourselves contained over 70,000,000 tons of ore, at a cost of $800,000." This wotdd amount to one and one-seventh cents per ton. 44 INVESTIGATION OP UNITED STATES STEEL OORPORATION. Mr. Grasty. who represented some capitalists that owned a consid- erable body of gray ore, and needed some red ore to mix with it, says that his people were ready to pay from 2 to 3 cents a ton, but he found no ore satisfactory to him and made no offers. Mr. Bacon referring to this testimony of Mr. Grasty, says that this is more than anybody had paid up to this time, so far as he knew. There was some testimony from Mr. Perin to the effect that royal- ties on iron ore were paid as high as 25 to 30 cents a ton. But Mr. Perin expressly states that it would be unfair to take the royalties as a fair basis of he valua ion of the ore in the ground, because the royalty is paid over a considerable period of time, as the ore is taken out. In other words, a dollar in the hand is worth more than a dol- lar 50 years from now. It is apparent that the value of a large body of ore, containing some hundred million tons, would depend very largely on how soon it could be utilized, but hi the case at hand a very little figuring will show how absurd the royalty basis would be for determining the value of such a body of ore as that owned by the Tennessee Coal, Iron & Railroad Co. Assuming that the estimate of 400,000,000 tons is correct, its value at 25 cents a ton would be $100,000,000. The Tennessee Coal, Iron & Railroad Co. bonds bore 6 per cent interest and this would make an interest charge of $6,000,000 a year. The company was mining at the time of its acquisition by the United States Steel Corporation about 1,500,000 tons per annum, and the interest charge alone on this amount of*ore would be $4 a ton, a figure which is, of course, prohibitive, not to say absurd. If, how- ever, we take the figure paid for the Potter property and apply it to the 400,000,000 tons, we would have a little over $4,700,000 as the value of the ore, or applying the value of 2i cents a ton, which Mr. Topping said was the amount he estimated for the value of ore in the ground, when figuring the cost of making pig iron, we would have $10,000,000 as the value of the ore. Certainly the latter is an oui> side figure, much more than anybody has paid of recent years. The interest charge at 5 per cent on this latter amount would be 25 cents a ton on an annual output of 2,000,000 tons, and it would be far better economy tb lease the ore at a royalty of 25 cents a ton than to buy so large a body at 2i cents a ton, where the output was so restricted, as in this instance. COAL. The coal holdings were estimated by Mr. Bacon at 1,000,000,000 tons. Mr. Gary estimates the total coal holdings from a billion to a billion two hundred milUon tons, and the Perin-Aldrich report at 1,621,639,500 tons. INVESTIGATION OP UNITED STATES STEEL OOEPOBATION. 45 While the men who made the Perin-Aldrich report seem to have been competent engineers, it must not be forgotten that the purpose of their estiraate was to form the basis of a consolidation of the Ten- nessee Coal, Iron & Railroad Co. and the Schloss-Sheffield Iron & Steel Co. and the Republic Iron & Steel Co., and that their attention was chiefly directed to the question of relative value between the three c«mpanies. It is also well to remember that overcapitalization was the order of the day and that low valuations did not sound well in a prospectus. Their estimates were undoubtedly liberal. The careful estimate made by the United States Steel Corporation, after it had obtained the property, arranged the tonnage under three heads, "Proven," "Probable," and "Possible," and gives the follow- ing figures: Tons. Proven .'.. 285,000,000 Probable 441, 800, 000 Possible 670,500,000 Just w;hat value should be given as a basis for capitalization and the sale of securities to a trusting public to this 670,500,0t)0 tons of "possible" coal is left to the candid reader. It would seem evident that a billion tons of known available coal was a Hberal estimate. The hearings do not contain any very definite information on which to base an accurate estimate of the value of coal in the ground at Birmingham. There is no testimony as to recent sales, as in the case of the Potter iron ore mines. Mr. Given fixes the royalty valuations on the coal as from 3 to 10 cents a ton, according to location, quality, thickness of vein, etc. He places a royalty of 10 cents a ton only on the Pratt vein. Assuming that about 6 cents is the average royalty, we are in position to compare this with the cost under a cash pay- ment for the entire body of coal. It is clear that the number of years it will take to exhaust the coal is a very important point in this prob- lem. In 1907 the Tennessee Coal, Iron & Railroad Co. produced 1,709,251 tons of coal, not kicluding that used for coke. It also pro- duced 1,170,826 tons of coke. Assuming that 100 pounds of coal will make 59 pounds of coke, which is a fair estimate for this district, according to Mr. Burchard, of the United States Geological Survey, this would amount to a production of 1,981,061 tons of coal used for coke, or a production altogether of 3,609,312 tons of coal. The Tennessee Coal, Iron & Railroad Co. owns a very small pro- portion of the coal in the entire district. According to Mr. Bacon not over a tenth, and perhaps much less than a twentieth. The entire production of the district is about 16,000,000 tons a year, 6,000,000 tons of which is produced by operators not in any way con- nected with any of the iron and steel companies, so that a great increase in the production of coal for sale on the part of the Teimessee 46 INVESTIGATION OF UNITED STATES STEEL COKPOEATION. Coal, Iron & Railroad Co. can not be expected. In order to be entirely safe let us assume that the annual production of the Tennes- see Coal, Iron & Eailroad Co. will be 7,500,000 tons of coal per annum, considerably more than twice its production in 1907. The annual interest charge for the original investment would have to be borne by the production for that year. Assuming that the value of this body of 1,000,000,000 tons of coal was $10,000,000, 'his would amount to 1 cent a ton for the coal in the ground. The interest charge on that amount at 5 per cent would be $500,000, which would amount to a little over 6 cents a ton on an annual production of 7,500,000 tons. Adding to this 6 cents 1 cent a ton purchase prige, we would have 7 cents a ton to compare with a royalty of from 3 to 10 cents a ton. While this calculation can make no claim to accuracy, it is at least sufficient to say that an estimate of $10,000,000 for this entire body of coal is, as Mr. Herbert Knox Smith phrases it, liberal. The acreage of the entire iron ore, coal, and limestone property of the company at the time of its acquisition was as foUows: [TJ. S. Steel Corporation Annual Report for 1907, p. 26.) Surface and ' mineral < rights. Acres owned in fee. Total acre^ owned. In the State ot— Mineral rights only. Surface only. Alabama 165,096 98,842 1,053 170,152 6,898 367 5,015 340 263 TftTlTlP.'WRR 1051740 1,420 Georgia Total 264,991 177,417 5,015 447,423 It will be seen by this table that while the company owns 442,408 acres of mineral lands it owns the surface to only 270,006 acres. Something of course should be added to the valuation of the coal and the iron ore for these surface rights, but as many of them can not be utilized for fear they will interfere with mining operations or that improvements will be made upon them which it would be necessary to pay for later when the surface is needed for mining operations or the ground caved this fact will greatly depreciate their value. While the figures gathered by the committee are not sufficient to enable them to set a definite value on the properties, it is at least certain that the value fixed in the statement of the companv itseK of $26,525,000 seems reasonably high. (Herbert Kjiox Smith Eept., pp. 256, 257, 258, 290, 291; Hearings, Gary, pp. 143, 125, 150; Bacon, pp. 5325, 5326, 5346, 5347, 5345, 5329, 5330, 5331, 5349, 5328, 5360, 5333; Hanna, pp. 860, 862, 871; Oglebay, pp. 921, 922; Gates, pp. 8, 6, 7; Aldrich-Perin Kept., pp. 1038, 1036; Gayley,' p. 401; Topping, p. 1256; Grasty, p. 5306; Perin, pp. 987, 974, 1017; Given, pp. 1004 to 1016; Moore, p. 1027; Bulletin No. 400, U. s! Geological Survey, p. 183; U. S. Steel Corporation Kept., 1907, p. 26.) INVESTIGATION OF UNITED STATES STEEL OOBPOBATION. 47 AB VANTAGES OF BIBMINGHAM FOB, THE PBODTICTION OF IRON AND STBEI,. It is generally conceded that there is no place in the United States where the materials for making pig iron, namely, iron ore, coke, and limestone, can be so cheaply assembled as in the Birmingham district, and that this fact oflFsets the low mineral contents in the ore and adds immensely to the value of the raw materials. This would be true if the figure for the cost of manufacture in the Birmingham district were as low as claimed and there was a market for the product near at home. Unfortunately, however, neither of these things is true, and the great bulk of the products of this district have to be sold in the northern market, where the extra freight rate entirely offsets the lower cost of production. There is inserted in the record an estimate ,by a Mr. Phillips, a mining engineer, at one time in the employ of the Tennessee Coal, Iron & Railroad Co., of the average cost of making pig iron at Bir- mingham. This table is as follows : The following average costs of manufacture of pig iron in 1904- 1906: 189i 1895 1896 1894 1896 1896 Ore 1.86 .16 2.78 1.754 .240 2.840 1.716 .128 2.735 Current expenses 0.181 .077 .170 .026 .003 .037 0.200 .070 .183 .025 .005 .033 200 Coke 200 .080 006 Total for materials 4.800 4.834 4.679 Tnsnranf^R Matnrials, 4.800 .835 .338 4.834 .998 .302 4.576 .966 .314 Labor . ... 6.457 6.660 6.464 The lowest cost during 1904 was S6.71, the highest was $7.81, and the average selling price of No. 2 foundry iron was 17.20. The lowest cost during 1896 was 55.84, the highest J7.02, and the average selling price of No. 2 foundry iron was $7.15. The lowest cost Suring 1896 was $5.74, the highest $6.84, and the average selling price of No. 2 foundry iron was $7.22. Mr. •Perin, speaking of figures similar to this table, says: "There has been no more monumental example of bad accountiag than has been exhibited in the case of pig iron south of the Ohio River." This was in reply to the following question by Mr. Young: "Have not the southern iron and steel men continually fooled themselves as to what their actual cost was?" Mr. Perin then goes on to state an instance of a furnace in which to his knowledge there was an actual depreciation cost of a dollar a ton. Again he says : " My own opinion is that the cost keeping of the blast furnaces of our country has been radically wrong. We have never allowed a sufficient amount from the amount of the destruction of the property, either the coal or iron-ore property, nor have we made proper allowance for renewals or replacement of the plant." 48 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. It must be remembered also that 1894, 1895, and 1896 were years of abnormally low costs and prices. Mr. Perin, speaking directly of the figures 3f Mr. Phillips, says: "I do not think there is anybody to-day who could come within $3 of that cost." Mr. William M. Given, mining engineer, living at Birmingham, says: "There was no value to labor in 1895 * * * that was the basis of iron making in those days from 1892 to, 1898, and that can not be considered in a comparison at all. They were impossible- conditions, which will never exist there again. * * * The price of labor in 1895 was whatever you wanted to give that labor. * * * I gaw men in Virginia whom I had paid $3 a day in 1891 — in 1893 I have seen them come to my house and ask me for food, and I have gone with them to the store and given them a sack of flour, and they were glad to get 90-cents-a-day jobs." Mr. Bacon, speaking of the years from 1901 to 1906, says that those were years of low prices and low cost, but that in the old furnaces of the Tennessee Coal, Iron & Railroad Co. the cost of makinp pig iron was between ten and eleven doUars a ton, and that in the one new, modern furnace of the plant their cost was between seven and eight dollars a ton — say under $8. As the Tennessee Coal, Iron & Railroad Co. at that time was making a large proportion of the pig iron in the Birmingham district and as the cost at their best furnace was a little under $8 and in their bther furnaces between ten and eleven doUars a ton, it can easily be seen that Mr. PhiUips's "average cost" of about $6.50 per ton was a pure figment of the imagination. The cost to the Tennessee Coal, Iron & Railroad Co. for making pig iron for the year 1907, the last year it worked before its acquisition by the United States Steel Cor- poration, was, according to its books, 111.02 per ton. The United States Commissioner of Corporations in his report of the Steel Corporation, part 2, page 52, shows that the average cost of making pig iron from Lake Superior ores was $11.82 per ton. If these figures are to be relied on, and they are the best available, it will be seen that the actual difference in the cost in manufacturing pig iron between the Tennessee Coal, Iron & Railroad Co. and the northern companies at the present time is less than a dollar a ton. It is true that Mr. Perin says, speaking of the Birmingham and Pitts- burgh districts: "Based on to-day's selling price, which I presume would be a fair approximation of their cost prices, there is nearly $4 difference between the cost of production between the two districts." And a little later he admits that on arriving at this difference he has not made a proper charge for depreciation of ore nor a proper allow- ance for depreciation of the plant at Birmingham. Unquestionably, however, the cost of manufacturing pig iron at Birmingham is less than in any large northern district; but this, as INVESTIGATIOK OF UNITED STATES STEEL COKPOKATION. 49 stated before, is entirely offset by the increased cost of getting the product to the market. Speaking on this subject, Mr. Bacon says that while he was in charge of the plant their pig iron was sold a good deal at Cincinnati, sonaetimes in Detroit and St. Louis, some in New England and dif- ferent points between, and some at Philadelphia. That a very small tonnage indeed was sold in the South— the consumption in the South was almost "nil." Mr. John M. Topping, who succeeded Mr. Bacon in charge of this company, says that 60 to 75 per cent of the pig iron went north of the Ohio River. Mr. Hanna says that^he market for pig iron is largely in the North. He adds : " I think it will be very many years to come before the value per ton of ore will be the same in the South as in the North. In the first place, there is not the demand, and I question whether there wiU be." Judge Gary also refers to the want of market for the southern iron in the South as depreciating the value of the property. Mr. Perin also, in speaking of the Tennessee Coal, Iron & Railroad Co., says: "But it is a property which requires a great capital to develop, a high type of technical skill to get the best results from it, and the country immediately in the neighborhood has got to develop so as to give the great advantages to this district which it would nat- urally have were there a market near at hand, because if you have to add 13 or $4 a ton on every ton that goes out, you take away the distinct advantages which this district has." Again he says that if the production of pig iron is much increased in the South the bulk of it will have to be marketed in the North. No company at Birmingham, except the Tennessee Coal, Iron & Railroad Co. has made any attempt to manufacture steel, and the books of the Tennessee Coal, Iron & Railroad Co. show that up to the time of its acquisition by the United States Steel Corporation its attempt had not been a financial success, with some few exceptions. In 1907 the average price for which it sold its rails was 128.76 per ton; the cost was $29.48 per ton. The selhng price for billets was $33.27 and the cost was $24.67 per ton, but it sold only 2,496 tons. It sold 17,000 and odd tons of bars; the seUing price was $37.97, and the cost $36.42 per ton. Of plates it sold 15,000 tons; the selling price was $40.08, and the cost was $38.13. Its pig iron cost was $11.02 and the selling price $16.49. This was a boom year in the iron and steel business, but the profits of the company were practically confined to pig iron, THE COMPANY ttaT) NEVER BEEN A FINANCIAL SUCCESS It had been in operation for many years. Mr. Bacon states that during his administration the company did not improve its plants 54940°— H. Rept 1127, 62-2, pt3 i 50 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. because it did not have the money; that it could not do it out of it-" profits, because they were so small. He states that it paid three quarterly dividends at the rate of 6 per cent annually in the nine months previous to the purchase of the control of its stock by the so-caUed syndicate, but that the new people who took charge imme- diately stopped the dividends. Again he says, "It was not a profit- able business while I was president." And again he says that if he had charged -up the proper amount to depreciation there would not have been a dollar of profits from which to pay dividends. He expresses the opinion that while the syndicate people were in con- trol the company was not on a profitable basis, although they paid 4 per cent dividends for a little while. He adds that their improve- ments had not been completed and that the price of products was low during that period. Mr. Perin, being asked if at the time of the making of the Perin- Aldrich report (which appears on page 1034 of the hearings) the Tennessee Coal, Iron & Railroad Co. was not making strenuous efforts to get more money to develop the property, rephes, "1 never knew them when they were not in that condition," previous to the control by the syndicate. And he admits that a dividend of 4 per cent was an entirely iaadequate return for an investment ia so hazardous an enterprise. During the three years immediately preceding the acquisition of the company by the United States Steel Corporation, its earnings, as shown on its books, equaled 4.8 per cent on the investment, and in the three years and two months from November, 1907, to Jan- uary 1, 1911, during which time it has been controlled by the United States Steel Corporation, its net earnings, on its common stock amounted to $4,068,753, equal to an average of 4 per cent per anmmi on its common stock and 3.4 per cent on the United States Steel Corporation's investment in the stock. During the year 1907 its net earnings, as appeared from the statement of the books of the United States Steel Corporation, were $1,426,864. During the time that Mr. Bacon was in charge of the property he made an estimate that it would take $25,000,000 to rehabilitate the property and put it on a paying basis. He says: "There was scarcely any of the property that was rig'ht, if it was possible for it to be wrong. I think the stock was seUing at that time for about $50." That would be about $11,000,000 for thestock and the bonds I think, were about $12,000,000. A httle later he says that Mr! Gates began buying the stock at $55 and run it up to a little over $100. In the statement that it was Mr. Gates who began buying the stock, Mr. Bacon is probably wrong, as the testimony shows that it was Mr. Kessler who began buying up the stock. If Mi-. Kessler was INVESTIGATION OF UNITED STATES STEEL COBPOBATION. 51 connected with Mr. Gates in this operation, the testimony does not disclose it. (Hearings, p. 883; PhiUips, p. 985; Perin, pp. 1030, 1031, 994, 984, 983, 1033, 985, 996, 995; Given, p. 1012; Bacon, pp. 5332, 5333, 5334, 5343, 5344, 5345, 5346; Gary, pp. 145, 146, 144; Topping, pp. 1233, 1257; Hanna, p. 874; Herbert Knox Smith Kept., pt. 2, p. 52.) CIRCUMSTANCES SURROUNDING THE PURCHASE OF THE TEN- NESSEE COAL, IRON & RAILROAD CO. BY THE UNITED STATES STEEL CORPORATION. In November, 1905, Mr. George W. Kessler, a wealthy wine mer- chant of the city of New York, had accumulated a large amount of the Tennessee Coal, Iron & Railroad Co. stock. Whether he ap- proached Mr. Grant B. Schley, of the jBrm of Moore & Schley, or Mr. Schley approached him in regard to the matter, does not appear, but at aU events Mr. Schley learned that a large amount of Ten- nessee Coal, Iron & EaUroad Co. stock could be acquired from Mr. Kessler. This led to a conference between Mr. Schley, Mr. Guthrie, who w.as then president of the Republic Iron & Steel Co., and Mr. L. C. Hanna, of Cleveland. These gentlemen a httle later met Mr. Kessler, who informed them of the number of shares he had in his possession, and an arrangement was made to purchase the control of the Tennessee Coal, Iron & Railroad Co. At this time the stock was selling in the market in the eighties and nineties. . Other gentle- men weae enlisted in the enterprise. The stock was bought by each separately. The amoimt of stock purchased at that time was 118,300 shares. On the 27th of November, 1905, a syndicate agreement was entered into, which is set out upon page 917 of the heariogs. By the terms of this agreement the syndicate managers, Messrs. Grant B. Schley and Charles S. Guthrie, were given full control over the stock belonging to the members of the syndicate, with the power to pledge it or sell it. Mr. Guthrie soon died, and Mr. L. C. Hanna, of Cleveland, was sub- stituted in his place as one of the syndicate managers. The mem- bers of the syndicate and. the amoimt of syndicated stock owned by each appears in the following table: Shares. O.H.Payne 10,300 L. 0. Hanna 10, 300 G. B. Schley 10, 300 J.B. Duke 10,300 E. J. Berwind 10,300 J.W.Gates 10,300 A.N.Brady...- 10,300 G. A. Kessler 10,300 0. Thorne 10,300 Shares. E. W. Oglebay 5,150 H. S. Black 5,150 F. D. Stout 5, 150 J. W. Simpson 5,150 G. W. French 2,500 S. G. Cooper 1, 500 J. A. Topping 1,000 Total 118,300 52 INVESTIGATIOlf OP UNITED STATES STEEL COBPOEATION. At this time the total stock of the Tennessee Coal, Iron & Railroad Co. was about $22,500,000, divided into 225,000 shares, so that 118,300 shares was sufficient to carry the control. Of this amount, 82,000 shares was bought by the syndicate directly from Mr. George W. Kessler at a price of $110 per share, and the 36,300 additional to make up the 118,300 shares was ptifchased upon the street the next day at an average price of a Uttle less then $110 a share. It is certainly a remarkable circumstance that this large purchase of stock in the open market did not raise the price of the stock as high as the amount paid to Mr. Kessler at private sale. The reason for purchasing the Kessler stock, imdoubtedly, was because it would have been very difficult for the syndicate to obtain the control of the company with Kessler's stock against them. A little later a second syndicate was formed, embracing some of the parties who were in the first syndicate and some additional men, to take 50,000 additional shares of the stock on the street. There is printed in the hearings a second agreement bearing the date of August 27, 1906, headed "Tennessee Coal, Iron & Railroad Co., stock syndicate agreement No. 2." This agreement is similar to the fixst; is for the acquisition of 40,000 shares; appoints Messrs. Grant B. Schley and Leonard C. Hanna managers, and is to run until February 7, 1907. It refers to another syndicate agreement bear- ing date February 7, 1906. As the original syndicate agreement bore date November 27, 1905, it would appear that there had been an intermediate agreement bearing date February 7, 1906. This may account for the discrepancy in the number of shares which is fixed in this agreement at 40,000 and Mr. Schley's statement that it embraced 50,000 shares. Fifty thousand shares may have been the total under the agreement of February 7, 1906, and the one of August 27, 1906. Each of these agreements states that its pur- pose is the acquiring and disposing of, or distributing capital stock of, the Tennessee Coal, Iron & Railroad Co. The parties to the first agreement, who were sworn as witnesses before the committee, vigorously denied that any stock-jobbing opera- tion was intended, but claimed that the real purpose was to develop, improve, and keep the property. These agreements themselves, however, contain internal evidence that there was also in the minds of the members of the syndicate, from the beginning, the probability of selling the property on such terms as the syndicate managers might determine. The price paid for this second syndicate stock was either 120 or 130. Neither Schley nor Kessler were parties to this second sjmdicate, but the stock was bought from them, Kessler furnishing about 45,000 shares and Schley about 5,000 shares. nrSTESTIGATION OF TJITITED STATBS STEEL COEPOEATION. 53 In the meantime, in order to obtain money for improvements, the capital of the company had been increased and new stock issued at par to an amount which brought the capital stock up to 297,600 shares at the time of its acquisition by the United States Steel Corporation. This stock was all taken by the stockholders propor- tionately to their former holdings. No sooner was the second syndicate formed, apparently, and the 50,000 shares of stock disposed of than Kessler and Schley began buying more stock. ScMey made these purchases to sustain the market. (Schley, hearings, p. 1059.) The situation of stock ownership at the time of the panic was: Shares. First syndicate 118,300 Second syndicate 50, 000 First syndicate, new stock, first call 17, 750 First syndicate, new stock, second call 19, 441 In addition to this Mr. Schley owned outside the syndicate about 25, 000 Mr. Kessler 28, 000 Making a total of 258,491 In addition to this Mr. Kessler had five or six accounts with dif- ferent brokers in which he carried Tennessee Coal, Iron & Railroad Co. stock, but the exact amount of which is not stated in the testimony. The second syndicate took its proportion of the new stock, but whether this embraced two calls or only the last call is uncertain. If it was only the last call it would be about 7,500 shares, which, added to the above amount, gives a total of 265,991 shares. It is entirely safe to say, then, that not to exceed 30,000 shares of the capital stock was owned outside of the two syndicates and Schley and Kessler personally. Of this entire stock issue practically 150,000 shares was in the assets of Moore & Schley. That firm had loaned to their customers upon it and had' rehypothecated from 100,000 to 105,000 shares thereof. "When the panic came on Moore & Schley owed about $38,000,000. Nearly all this amount was due and their condition was becoming precarious. Of this amount about $1,500,000 or $2,000,000 was borrowed of Morgan & Co. and over $2,000,000 from the First National Bank of New York; and scattered through the collateral for a large number of these loans was about 100,000 shares of Tennessee Coal, Iron & Railroad Co. stock, together with a large amount of other industrial stocks, like Tobacco common and Republic Iron & Steel common. When the financial situation became disturbed there was a general tightening up of the banks as to the character of collateral, and the banks quite generally began to object to Tennessee Coal, Iron & Railroad Co. stock and other stocks of like character as collateral and asked for substitution of other stocks. There was no difference in the treatment by the banks of 54 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. the Tennessee Coal, Ircm & Railroad Co. stock and other stocks of similar character. (Schley, hearings, pp. 1051, 1065.) • Mr. Hanna says for a long time there had been no market for Ten- nessee Coal, Iron & Railroad Co. stock. It was quoted from 120" tj 130 on the market, but these quotations were absolutely nominal. Sometimes a month or two months wOuld go by without a single transaction, and it was selling high considering the earning power or dividend rate. He also says that as a going proposition it was not worth what the syndicate paid for the stock, but he thought it was, looking to the future. That conmiercially he thinks it was worth what the United States Steel Corporation paid for it; but whether it was worth it under the conditions as existed at that^ime was a subject for argument. (Hanna, hearings, pp. 862, 863, 872.) Further speaking of the stock, he said: "In the first place, the stock is what is termed in the street as pegged stock, from the fact that a large majority of the stock was under a syndicate agreement for a specified time. I think any stock occupying that position might be, on the part of the bankers, considered what you term a contraband stock. I think that in its general terms it was such a stock, a stock of the character of the Tennessee. The company was in process of further development. It had been a football in the Street for many years and had not very many friends. The legiti- mate side of the company had not kept pace with the pace of the steel industry of the country. The property was not very well regarded, except under abnormally prosperous conditions of the steel industry. Then they always managed to get the price of it marked well up. I think that,- too, with its past experience and the fact that it had been a football in the Street for many years preeediBg, it was still tinctured, even under the new control, with its old reputa- tion to some extent. There was absolutely no market for it." Mr. Hanna adds, "My judgment is if I had gone on the market with a thousand shares of stock and forced it, I would have broken the market from 10 to 20 points. Wall Street always shied at a stock in that position. One hundred and twenty to 180 was a high price for a stock that only paid 4 per cent." Mr. Schley says that Tennessee Coal, Iron & RaHroad Co. stock was not acceptable to the banks in 1906 or 1907. It was in a very bad way as to market prices, and there is no bank that will loan on a stock that has no market. He adds that there was nobody buy- ing or selling Tennessee Coal, Iron & Railroad Co. stock. The stock was regarded as a pegged or pooled stock, with only nominal quotations, without any real transactions, and the banks could not realize on it in time of panic. The record is full of testimony of 'this character, and there is no contradictory evidence. INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 55 In the meantime financial matters had got to a crucial condition. Banks had failed, and the banks of New York City had been com- pelled to resort to clearing-house certificates, and the panic was of a most acute character. Col. OUver H. Payne, one of the syndicate, who was a warm friend of Mr. Schley, loaned Mr. Schley, for the use of Moore & Schley, from $6,000,000 to $8,000,000 of standard securities to use in supporting their loans, taking as security therefor uncurrent securities of Moore & Schley. This loan was subsequently changed into an absolute exchange, Moore & Schley becoming the owners of the standard securities and Mr. Payne becoming the owner of the uncurrent securities. Mr. Payne, becoming alarmed at the situation, urged Mr. Schley to dispose of his Tennessee Coal, Iron & Railroad Co. stock as the only possible means of relief. This urging on the part of Col. Payne con- tinued for about a month. He suggested that Moore & Schley should call in the assistance of Mr. Lewis Cass Ledyard, a distin- guished lawyer in the city of New York. At Col. Payne's solicitation Mr. Schley fiinally sent for Mr. Ledyard, and asked him to go and see Mr. J. P. Morgan to try to sell him the stock for the United States Steel Corporation. To this Mr. Schley consented. (Schley, hear- ings, pp. 1081, 1078, 1079.) Mjr. Ledyard testified that in the last week of October, 1907, Col. Payne informed him that Moore & Schley were largely indebted to him and that he was much concerned over their condition and laid the condition before Mr. Ledyard. He stated that he saw no way to save Moore & Schley unless they could sell their Tennessee Coal, Iron & Railroad Co. stock, and that there was no market for it unless the United States Steel Corporation could be induced to purchase it, and said he would suggest to Mr. Schley that Mr. Ledyard be asked to see Mr. Morgan and get him to lay the proposition before the corpora- tion. This was done, and Mr. Schley sent for Mr. Ledyard on Friday night, the 31st of October, 1907. At this interview ]fc. Ledyard familiarized himself with the situation and at Mr. Schley's request went to see Mr. Morgan the next day and laid the situation before him. Mr. Morgan expressed the greatest concern and said that it was the most serious thing that had been brought to his attention in connection with the panic. He said that if Moore & Schley should go there was no telling what the effect on the financial institutions of New York would be and how many other houses would be involved in the consequences. He telephoned both Judge Gary and Mr. Frick; and Mr. Morgan, when they came, told each of them in Mr. Ledyard's presence of Moore & Schley's situation and the proposition to sell to the United States Steel Corporation. The conferences on the 56 INVESMGATlON Ot tJKKn!Wffim?^MfiL UUHJJUIil'i'XujNr- — subject continued through Saturday and Sunday, at some of which Mr. Ledyard was present. Judge Gary expressed great reluctance to buy the stock, saying it was not worth over $60 or $65 per share at the outside. Mr. Ledyard replied that he thought it likely, if they waited long enough, they could get the stock for $25 a share, but suggested that when that time came the United States Steel Corpo- ration would not be in condition to buy anything at any price. Mr. Frick objected to the trade unless it were arranged, at the same time, that the bankers should save the threatened trust companies. Judge Gary was still reluctant to purchase and offered to loan Moore & Schley $5,000,000. This proposition was submitted to Mr. Schley and rejected by him. He said it would be perfectly useless; that it would not pull him out and would not be effective. Before closing the trade either Mr. Morgan or Judge Gary re- quested that Moore & Schley's books should be examined to see if their situation was as bad as represented, and this was done by experts. Judge Gary said to Mr. Morgan, during one of these conferences, that he would not think of considering the purchase of this stock without going to Washington first and taking the matter up with the President or the Department of Justice, or both. Mr. Morgan said, "Why? Have they any right to say whether we buy or not?" Judge Gary said, "No, they have not. But there is a financial crisis, and from your standpoint the object of buying this stock is to assist in overcoming this panic, and if the Department of Justice or the President should find out we had purchased or were about to pui> chare it and should enjoin us from purchasing, on the ground that it would add to our holdings, and thereby raise the question of creating or adding to a monopoly, you can see at once that what we had done would be to make the financial conditions very much worse than now; and therefore it seems t(f me we ought to know how the President and the Department of Justice would feel about the question." Mr. Morgan said, "Well, I think that is very forcible, and I see no objec- tion to your going over there if you feel like it." (Gary, hearings, p. 130.) So Messrs. Frick and Gary came to Washington to see President Koosevelt. Both Judge Gary and ex-President Roosevelt gave an account before the committee of what occurred at that interview. Judge Gary says that Mr. Frick and himself stated the case to the President, who said he would like to consult the Attorney General, Mr. Bonaparte. But Mr. Bonaparte was out of the city, and so the President requested the presence of Secretary Root, who came, and at the President's request Judge Gary restated the case in Mr. Root's presence. In order that an accurate record might be kept of what INVESTIGATION OF tJNllBD STATES STEEL COKtOEATlON. 67 had occurred Judge Gary wrote the following letter to Secretary Root, and the correspondence following it occurred: November 7, 1907. My Deae Me. Seoeetaey: At the recent interview at the White House between the President, yourself, Mr. Frick, and myself I stated, in substance, that our corporation had the op- portunity of acquiring more than one-half of the capital stock of the Teimessee Coal, Iron & Railroad Co. at a price somewhat in excess of what we beheved to be its real value, and that it had been represented that if the purchase should be made it would be of great benefit to financial conditions and would probaby save from failure an important business concern; that under the circumstances Mr. Frick and I had decided to favor the proposed purchase of stock unless the President objected to the same. I further stated that the total productive capacity of our com- panies would not be materially mcreased by the ownership of the properties of the Tennessee Co., and, after the purchase, would probably not amount to more than 60 per cent of the total steel production in this country, which was about the percentage of our companies at the time of the organization of the United States Steel Corporation; that our policy was opposed to secur- ing a monopoly in our lines or even a material mcrease of our relative capacity. I understood the President to say that, while he would not and could not legally make any binding promise or agreement, he did not hesitate to say from all the circumstances as presented he certainly would not advise against the proposed purchase. If consistent, will you kindly write me if the above statement is in accordance with your understanding and recollection ? Sincerely, yours, E. H. Gaet. Mr. Root responded as follows : NOVEMBEE 11, 1907. My Deae Me. Gaey: I have your letter of November 7. It fully agrees with my recollection of the interview to which you refer, in which you stated to the President the circumstances under which the United States Steel Corporation had been asked to relieve the financial situation by purchasing a majority of the stock of the Tennessee Coal, Iron & Railroad Co. I have sent a copy of your letter, with this answer, to the President, with a recommendation that it be transmitted to the Department of Justice for filing there Very sincerely, yours, Et.ttttj Root. I received another letter from Mr. Root, as follows : NoVEMBEE 20, 1907. Deae Me. Gaey: I inclose a copy of a letter which I have sent to the President, inclosing a copy of your letter of November 7, and a copy of the President's answer. You have a complete copy of what you will be able to find upon the files of the Depart- ment of Justice if feny occasion arises. Very sincerely, yours, Elihu Root. 58 INVESTIGATION OF UNITED STATES STEEL COBPOBATION. Inclosed were the following copies: First, from Mr. Root to the President, dated November 11, 1907: Dear Me. President:.! transmit herewith a copy of a letter from Mr. E. H. Gary,, president of the United States Steel Cor- f)oration, dated November 7, 1907, received by me on the fol- owing day. You will perceive that it relates to the interview which Mr. Gary had with you last week- regarding the purchase by his company of the capital stock of the Tennessee Coal, Iron & Railroad Co. I send also a copy of my answer to Mr. Gary, and recommend that these papers be sent to the Department of Justice and placed upon the files of that department. Very truly, yours, Elihtj Root. A letter from the President to the Secretary of State : November 19, 1907. Mt Dear Mr. Seoretaet: I am in receipt of your letter of the 11th iostant and iuclosures, and have forwarded them to the Attorney General to be placed on the files of the Department of Justice, together with a copy of this letter. Mr. Gary states the facts as I remember them. Very truly, yours, Theodore Roosevelt. Judge Gary further says: Mr. Gary. I remember some of the conversation. I remember the Secretary of State saying to the President that of course he had no right to say that* we could buy this property. The President said he understood that. He thought all we wished to know was what would be the disposition of the President and the Department of Justice in case we did buy, for the reason that if there was an objection by the Government we would not accomplish the desired result. I remember the President saying he was glad to know that the Eercentage in production of the steel of this coimtry of the f^nited States Steel Corporation was not greater and was even less than it was at the tune of the organization of the company; that he felt, as I knew, that the question of monopolies in this coimtry was a very serious one, but he said: "In view of the fact that your percentage has not increased, but has decreased, and the further fact that all of us have an appreciation of the financial conditions in New York, I do not beheve that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under the cir- cumstances." Ex-President Roosevelt made the following statement before the committee: statement of HON. THEODORE ROOSEVELT. Mr. Roosevelt. In the fall of 1907 there were severe business disturbances and financial stringency, culminating in a panic which arose in New York and spread over the country. The damage actually done was great, and damage threatened was nTVESTIGATION OF TTNITED STATES STEEL COEPOBATION. 59 incalculable. Thanks largely to the action of the Government, the panic was stopped before, instead of being merely alerigus business check, it became a frightful and nation-wide calamity, a disaster fraught with untold misery and woe to all ouB*people. For several days the Nation trembled on the brink of such a calamity, of such a disaster, as you gentlemen doubtless remem- ber. During those days both the Secretary of the Treasury and I personally were in hourly communication with New York, following every change in the situation, and trying to anticipate every development. It was the obvious duty of the admmis- tration to take every step possible to prevent appalling disaster by checking the spread of the panic before it grew so that nothing could check it; and evente moved with such speed that it was necessary to decide and. to act on the instant, as each successive crisis arose, if the decision and action were to accom- plish anything. The Secretary of the Treasury took various actions, some on his own initiative, some by my direction. Late one evening I was informed that two representatives of the Steel Corporation wished to see me early the following morrdng, the precise object not being named. Next morning, while at breakfast, I was informed that Messrs. Frick and Gary were waiting at the office; I at once went over, and as the Attorney GenerS, Mr. Bonaparte, had not yet arrived from Baltimore, where he had been passing the night, I sent a message asking the Secretary of State, Mr. Root, who was also a lawyer, to join us, which he did. Before the close of the interview and 'in the Eresence of the three gentlemen named, I dictated a note to Mr. lonaparte, setting forth exactly what Messrs. Frick and Gary had proposed and exactly what I had answered, so that there might be no possibility of misunderstanding. This note was published in a Senate document while I was stiU President, and is already spread on the minutes of your committee. It runs as follows: Shall I read it, gentlemen ? The Chairman. Just as you like. Col. Eoosevelt. Mr. Roosevelt. With your permission, I will readmit. The White House, Washington, November 4j 1907. Mt Dear Mr. Attorney General: Judge E. H. Gary and Mr. H. C. Frick, on behalf of the Steel Corporation, have just ca^ed upon me. They state that there is a certain business firm (the name of which I have not been told) which will un- doubtedly fail this week if help is not given. Among its assets are a majority of the securities of the Tennessee Coal Co. Appli- cation has been urgently made to the Steel Corporation to pur- chase this stock as the only means of avoiding a failure. Judge Gary and Mr. Frick informed me that as a mere business transac- tion they do not care to purchase the stock; that under ordinary circumstances they would not consider purchasing the stock, because but little benefit will come to the Steel Corporation from the purchase; that they are aware that the purchase will be used 60 INTESTIGATION OS" tnsrlTEI) STATES STEEL COEPOTJATIOIT. as a handle for attack upon them on the ground that they are striving to secure a monopoly of the business and prevent com- petition — not that this would represent what could hojaestly be said, but what might recklessly and untruthfully be said. They further informed me that, as a matter of fact, the policy of the company has been to decline to acquire more than 60 per cent of the steel properties, and that this purpose has been perse- vered in for several years past, with the object of preventing these accusations, and, as a matter of fact, their proportion of steel properties has slightly decreased, so that it is below this 60 per cent, and the acquisition of the property in question will not raise it above 60 per cent. But they feel that it is immensely to their interest, as to the interest of every responsible business man, to try to prevent a panic and general industrial smashup at this time, and that they are willing to go into this transaction, which they would not otherwise go into, because it seems the opinion of those best fitted to express judgment in New York that it will be an important factor ia preventing a break that might be ruinous ; and that this has been urged upon them by the combi- nation of the most responsible bankers in New York who are now thus engaged in endeavoring to save the situation. But they asserted they did not wish to do this if I stated that it ought not to be done. I answered that while, of course, I could not advise them to take the action proposed, I felt it no public duty of mine to interpose any objections. Sincerely, yours, Theodore Roosevelt. Hon. Charles J. Bonaparte, Attorney General. Mr. Bonaparte received this note in about an hour and that same morning he came over to acknowledge its receipt, and said that my answer was the only proper answer that could have been made, having regard both to the law and to the needs of the situation; he stated that the legal situation had been in no way changed, and that no sufficient ground existed for prosecuting the Steel Corporation. But I wish it distinctly understood that I acted purely on my own initiative and that the responsibility for the act was solely mine. I was intimately acquainted with the situation in New York. The word "panic" means fear, unreasoning fear; to stop a panic it is necessary to restore confidence; and at the moment the so-called Morgan interests were the only interests which retained a full hold on the confidence of the people of New York, not only the business people but the immense mass of men and women who owned small investments or had small savings in the banks and trust companies. Mr. Morgan and his associates were, of course, fighting hard to prevent the loss of confidence and the panic distrust from increasing to such a degree as to bring any ' other big financial institutions down, for this would probably have been followed by a general and probably; world-wide crash. The Kjiickerbocker Trust Co. had already failed, and runs had begun on or were threatened as regards two other big trust com- panies. These companies were now on the fighting line, and it was to the interest of everybody to strengthen them in order that INVESTIGATION. OF UNITED STATES STEEL OOEPOBATION. 61 the situation might be saved. It was a matter of general knowl- edge and belief that they or the individuals prominent in them held the securities of the Tennessee Coal & Iron Co., which securities had no market value and were useless as a source of strength in the emergency. The Steel Corporation securities, On the contrary, were immediately marketable, their great value being known and admitted all over the world, as the events showed. The proposal of Messrs. Frick and Gary was that the Steel Corporation should at once acquire the Tennessee Coal & Iron Co. and thereby substitute among the assets of the threat- ened institutions (which, by the way, they did not name to me) securities of great and immediate value for securities which at the moment were of no value. It was necessary for me to decide on the instant before the stock exchange opened, for the situation in New York was such that any hour might be vital, and failure to act for even an hour might make all subsequent effort to act utterly useless. From the best infdRnation at my disposal I believed (and believe) that the addition of me Tennessee Coal & Iron property would only increapd the proportion of the Steel Co.'s holdings by about 4 per-cent, making them about 62 per cent instead of about 58 per c^t of the total value in the country, an addition .which by itself, m my judgment (concurred in, I may add, not only by the Attori^f General but by every competent lawyer with whom I talked), vtorked no change in the kgal status of the Steel Corporation. \ jP**"/^ \ Furthermore, I believed that'^Ae action was emphatically for the general good; that it offerees' tjie only chance for arresting the panic ; and that it woidd probably^arrest the panic, as it did. I answered Messrs. Frick and Gary, as set forth in my published letter, to the effect that I did not deem it my duty to interfere^ — that is, to forbid the action which, more than anything else, in actual fact, saved the situation. The result justified my judg- ment. The panic was stopped, public confidence in the solvency of the threatened institutions being at once restored. _ Incidentally I may mention that when I was in Birmingham last spring every man I met, without exception, who was com- petent to testify, informed me voluntarily that the results of the action taken had been of the utmost benefit to Birmingham, and therefore to Alabama, the industry having profited to an extraor- dinary degree, not only from the standpoint of the business but from the standpoint of the community at large and of the wage workers, by the change in ownership. The results of the action I took were beneficial from every standpoint, and the action itself at the time when it was taken was vitally necessary to the welfare of the people of the United States. In my judgment I would have been derelict in my duty, I would have shown myself a timid and unworthy public officer if in that extraordinary crisis I had not acted as I did act. In every such crisis the temptation to indecision, to nonaction, is great, for excuses can always be found for nonaction, and action means risk and the certainty of blame to the man who acts. But if the man is worth his salt he will do his duty; he will give the people the benefit of the doubt and act in anv way which their interests demand and which is not affirmatively prohibited by law, unheeding the likelihood that he himself, when the crisis 62 INVESTIGATION OF UNITED STATES STEEL OOBPOEATION. is over and the danger passed, will be assailed for what he has done. Every step I took in the matter was open as the day, and was known in detail at the moment to all people. The press con- tained full accounts of the visit to mq of Messrs. Frick and Gary, and heralded widely and with acclamation the results of that visit. At the time the relief and rejoicing over what had been done were well nigh universal. The danger was too imminent and too appalling for men to be willing to condemn those who were successful in saving them from it. But I fully understood and expected that when there was no longer danger, when the fear had been forgotten, attack would be made upon me. If I were on a sailboat J should not ordinarily meddle with any of the gear; bi^t if a sudden squall struck us, and the main sheet jammed, so that the boat threatened to capsize, I would unhesitatingly cut the main she5t, even though I were sure that the owner, no mattei' how grateful to me at the moment for having saved his life;., would a few weeks later, when he had forgotten his danger and>his fear, decide to sue me for the value of the cut rope. The ex-President further said: ^ Mr. Roosevelt. Now, Mr. Littleton, I can answer you right away that I,jwas then thoroughly satisfied, and the after events made*Bic-^#n more thorou^y satisfied, that what was done was necesJmy to save the situation; that the panic would have spread and Vjery great disj&ster occurred if exactly what was done had not been done. A'good many of the questions, Mr. Littleton and Mr. Stanley, th^t you are offering are requiring me to search the hiddea domain of motive of Mr. Frick and Mr. Gary. I never supposed that they were going to take action that would be damaging to themselves,. for I would have been exceedingly sure they would have gotten no gratitude for taking such action if they had taken it. My feehng toward them was — I can illus- trate it by two similes. I have spoken of a sailboat already. If it is necessary to haul on a rope on a boat in order to prevent the boat from going over, I welcome the help of any husky indi- vidual that hauls, and I do not care whether he is hauling from altruistic motives about me or to save his own skin. I want him to pull hard on the rope. That is all I want. Again, if a fire is coming down a row of buildings, I expect the man on the end of the row to join in and help put out the fire far- ther up the row, partly, I hope, because he feels kindly toward the threatened people, and also because if the fire spreads it will bum his own building. But I do not ask him to analyze the ex- tremely mixed motives which made him come forward and help put out that fire. I want him to help put out the fire. That IS all. Ex-President Roosevelt further said, speaking of this transaction: I never had any doubt as to the wisdom of my action — not for a moment, and if Mr. Schley says that he does not know that he would have failed without the action being taken, that was taken, then he is the only man in New York who does not know it. INVESTIGATION OF UNITED STATES STEEL OOEPOEATION. 63 Near the end of his testimony occurs the following: Mr. Roosevelt. Believe that I had acted wisely? I felt that the information I had received on the situation here, on all the vital points in which I was concerned, was essentially accu- rate. The only reason, Mr. Young, I hesitated to answer your question at all was this: It is not necessary for me now, and it was not necessary for me at that time, to form any judgment as to whether the representatives of the Steel Corporation were anxious to get possession of that company, because it would be of benefit to the Steel Corporation, or whether they were only anxious to save the situation caused by the panic. I never found it necessary to try in my own mind to apportion the relative weights of those motives in their minds. But in all essentials the representations they made to me I believed then to be accurate, and on all the information I have had since I believe to be accu- rate. They were in accord with what I had heard from New York, in so far as they influenced my action and in so far as they affected my judgment. From the pubhc standpoint the events exactly bore out and justified what I had been told and the action I took on what I had been told. On the retm-n of Messrs. Frick and Gary from Washington the deal was closed, on the basis of par for the Tennessee Coal, Iron & RaUroad Co. stock, which was paid for in second mortgage 5 per cent bonds of the United States Steel Corporation, at their market price at that time, namely, $0.84 of their face value, or figuring the bonds as worth par, about $119.75 for the stock. Messrs. Hanna, Schley, and Gates insisted that the minority stockholders should have the right to turn in their stock at the same price. This was acceded to — all of the minority stockholders took advantage of this option. Before agreeing to pay par for the Tennessee Coal, Iron & Railroad Co. stock Mr. Gary offered 90 for it. This Mr. Schley refused, on the ground that it would not be sufficient to help him out and that nothing less than 100 would save him. In addition to the stock owned by Schley, or Moore & Schley, or pledged with Moore & Schley, Col. Payne had altogether 25,000 shares of the stock of the Tennessee Coal, Iron & Railroad Co., with a par value of $2,500,000. As soon as the sale went through, this stock was converted into United States Steel Corporation bonds and the proceeds loaned to Moore & Schley, so Moore & Schley obtained an additional $2,500,000 through that deal. In order to make it certain that Moore & Schley would not fail, Mr. Payne and Mr. Baker, president of the First National Bank of New York City, and one other gentleman tendered $1,000,000 each of first-class securities, to be placed in the hands of Mr. Morgan as security for further loans in aid of Moore & Schley should such further aid become necessary. Mr. Morgan did not find it necessary to draw upon this fund. 64 INVESTIGATION OF UNITED STATES STEEL COKPORATION. The price paid by the United States Steel Corporation, according to the statement of all the witnesses, with the possible exception of Air. Gates, was at least the full market value of the stock. Mr. Gates says he regarded it as a forced sale, and he also adds that if the stock had been thrown upon the market he could hare bought it at a very low price and made a large amount of money. He adds that the market was a ptirely nominal one, and if the day before Messrs. Gary and Frick saw President Roosevelt anybody had thrown 2,500 shares of the stock upon the market it would have probably brought the price down to 110 or 115. On the other hand, he would have prob- ably found difficulty in buying that stock at 150. Mr. Oglebay says that he was not forced to sell and was willing to sell under the conditions that existed. When it is recollected that these gentlemen, Messrs. Gates, Hanna, and Oglebay, were among the sellers, their testimony has a special weight, and the conclusion is fair that the price paid was a fair one for the stock and under the conditions that existed a remarkably liberal one. It has been intimated, in the public press and in certain other quarters, that there was in the market and among some financial institutions an effort to depreciate Tennessee, Coal, Iron & Railroad Co. stock and to embarrass Moore & Schley for the purpose of aiding the United States Steel Corporation in purchasing the property at a low figure. The committee called before it Messrs. Gates, Hanna, Topping, Oglebay, Thome, and Schley, all of whom were members of the syndicate whose stock was sold. Not a scintilla of evidence developed to justify the suspicion that there was a drive at either Moore & Schley, or the Tennessee Coal, Iron & Railroad Co. stock for any purpose. No witness testified that he had, or now has, any suspicion that such was a fact, and most of the witnesses deny the existence of such an attack in most vigorous language. (Hearings: Schley, pp. 1065, 1098, 1109, 1071, 1101; Hanna, pp. 876, 879; Oglebay, pp. 930, 931; Topping, p. 1258; Ledyard, p. 956; Gates, p. 13.) The evidence indicates that tiiere was no great eagerness on the part of the United States Steel Corporation to purchase the property. Judge Gary continually insisted that the price was too high. Mr. Gayley, former vice president of the United States Steel Corporation, said that when the Tennessee Coal, Iron & Railroad Co. stock could have been bought for $50 a share, he suggested tbat the purchase might be a g6od thing on account of the ore and coal reserve, but that Mr. Frick was opposed to it and nothing came of the proposition. Mr. Schley, whose position might naturally have made him sus- picious of the motives of the United States Steel Corporation, thinks that company was not anxious to purchase the Tennessee Coal, Iron & Railroad Co. stock, axid it appears that Judge Gary preferred to loan Moore & Schley $5,000,000 rather than to purchase the stock. nrVBSTIGATION OP UNITED STATES STEEL CORPOBATION. 65 Mr. Gates does testify that Mr. Kessler told him that Mr. Morgan had expressed a willingness to pay 150 for the stock, if those interested with him were satisfied. Judge Gary, on the contrary, swears that Mr. Morgan told him that Mr. Kessler had said that he thought the control of the company could be purchased at about 130 and asked for Judge Gary's opinion, and that he, regarding the price as unreason- able, turned down the proposition and nothing came of it. Messrs. Morgan and Kessler, who could have settled this question of fact, unfortunately were not brought before the conmiittee. Everything seems to indicate that while the corporation was willing to purchase the stock at the price paid it was not anxious to do so and displayed a considerable degree of reluctance. (Hearings: Gary, pp. 127, 147; Gayley, p. 402; Schley, p. llOl^Ledyard, p. 962; Gates, p. 10.) The effect of the sale of the Tennessee Coal, Iron & RaUroad Co, stock has been stated by a number of witnesses. Their testimony is uniform as to its great effect in allaying the panic. Mr. Hanna says that that deal was the turning point of the panic. Mr. Schley says that his customers made good immediately when they got the bonds. That the reason that the sale of the Ten- nessee Coal, Iron & Railroad Co. stock relieved the situation more than the sale of any of his other industrial stock would have done was that he had so much of it. The sale relieved every friend he had; it relieved his office and brought iu inunediately United States Steel Corporation bonds, or money. The bonds were practically equivalent to money; it relieved the whole situation immediately. It paid Kessler's loan; it brought us in $12,000,000; the effect was enormous. When you reduce $35,000,000 of loans by $12,000,000, bringing it down to $23,000,000, you are bringing into your boxes 30 or 35 per cent, of whatever the margiu you have up, of $12,000,000, to bring into your boxes and swell it. Thirty per cent of $12,000,000 is $3,600,000; that strengthens you and your loans are less. Moore & Schley were $5,000,000 richer with $12,000,000 less loans and within 35 days impregnable. ' It was generally believed in financial circles of New York that this was one of the most important steps taken ia stopping the panic. (Hearings: Pp. 917, 1124, 1125, 918, 917; Schley, pp. 1042, 1043, 1124, 1125, 1045, 1046, 1061, 1059, 1056, 1095, 1051, 1053, 1054, 1055, 1086, 1087, 1109, 1110, 1067, 1077, 1078, 1065, 1063, 1066, 1067, 1079, 1081, 1076, 1082, 1098, 1071, 1101, 1072, 1073, 1062; Hanna, pp. 860, 855, 856, 898, 862, 863, 872, 903, 909, 913, 876, 879, 858; Ledyard, pp. 933, 935, 939, 936, 937, 946, 950, 956; Gates, pp. 5, 12. 16, 13; Topping, p. 1258; Gary, pp. 131, 185, 137, 138, 139, 132, 183, 139; Roosevelt, pp. 1369 to 1372, inclusive, 1383, 1384, 1388, 1392; Oglebay, pp. 927, 930, 931.) 64946°— H. Rept. 1127, 6^-2, pt 3 5 66 INVESTIGATION OF UNlTJiU STATES BTKKL UOiii'OKSTION. BATLROADS. The railroads owned by the United States Steel Corporation consist: 1. Of railroads which are common carriers in the ordinary sense of that term, but a majority of whose business comes from the United States Steel Corporation itself. 2. Of railroads which are partly plant facilities but do some work for others than the owners, and it is claimed perform a part of the actual service of transportation for the railroads for which they are entitled to a division of rates. 3. Of pure plant facilities. 1. The railroads of the first class are the Duluth & Iron Range Railroad, the Duluth, Missabe & Northern Railway, and the Pitts- burgh, Bessemer & Lake Erie Railroad, which is operated by the Bessemer & Lake Erie Railroad Co. The first two named are mainly ore roads and extend from the iron-ore mines of Minnesota to Lake Superior, the former reaching the lake at Two Harbors and the latter at Duluth. The third of these roads extends from Conneaut, on Lake Erie,, to Bessemer, near Pittsburgh. It is used mainly for transporting ore from Conneaut, on Lake Erie, to Pittsburgh, and coal from Pittsburgh northward. The mileage of these three roads, exclusive of spurs, sidings, second tracks, etc., is, respectively, 200, 224, and 208 mUes. The Duluth & Iron Range Railroad was built by the owners of the principal mines on the Vermilhon iron-ore range for the purpose of transporting their ore to Lake Superior. This was done at a time when the whole country, this railroad now serves, was a wilderness. The Duluth, Missabe & Northern Railway, in like manner, was built by the owners of some of the mines on the Mesabi iron range for the purpose of transporting their ore to Duluth, on Lake Superior. The first of these roads was acquired by the United States Steel Corporation as a part of the assets of the Federal Steel Co., and the other was acquired as a part of the property of the Lake Superior Consolidated Mines Co. The Great Northern Railway owns a line which competes with these roads, and has docks at Superior, Wis. The principal business of the roads belonging to the United States Steel Corporation, above mentioned, is the transportation of iron ore. This is carried in large quantities for independent operators as well as for the United States Steel Corporation. These roads also do a general freight and passenger business. The earnings of both these roads during their early years were small, the first mentioned paying no dividends from 1884 to 1899, but latterly their earnings have been phenomenally large. The freight rates for the carriage of ore which the United States Steel Corporation found in force when it acquired the property remained unchanged until last fall, when a cut was announced of from 25 to 40 per cent. INVESTIGATION OF UNITED STATES STEEL COKPOBATION. 67 The Pittsburgh, Bessemer & Lake Erie RaUroad Co. is capitalized at $12,000,000 m stock and has a bonded indebtedness of $15,269,000. The Bessemer & Lake Erie Raikoad Co., which is the operating company and owns about 8 miles of track, is capitalized at only $500,000 and has a funded debt of $4,030,000. Its total annual ton- nage of freight is about 13,000,000 tons, of which 7,000,000 tons is iron ore, 3,500,000 tons coal, 700,000 tons iron and steel, and the remainder miscellaneous freight. In late years it has received no ore for transportation save for the United States Steel Corporation. Ore is shipped southward and eastward from Buffalo, Conneaut, Ashtabula, Fairport, Cleveland, Lorain, Huron, and Toledo. Very little ore is shipped south from Buffalo. The connection south from Erie is over the Pennsylvania Railroad. The connection south from Ashtabula is over the Lake Shore & Michigan Southern and the Pennsylvania Railroads, at Fairport the Baltimore & Ohio, at Cleveland the Pennsylvania, at Lorain the Baltimore & Ohio and the Lorain & West Virginia, at Hiu"on the Wheeling & Lake Erie, at Toledo the Cincinnati, Hamilton & Dayton and the Hocking Valley. Thus it wiU be seen that there are plenty of opportunities for competition, if competition is not prevented by agreements, among numerous railroads. The independent iron and steel manu- facturers ship all of their ores over roads not owned by the United States Steel Corporation. About the time the Pittsburgh, Bessemer & Lake Erie Railroad was completed to Conneaut the freight rate on iron ore from Lake Erie ports to Pittsburgh was $1.18 a ton — ^it is now 96 cents a ton. It is claimed that this rate is excessive, and also that the freight rates on Minnesota roads on ore are excessive. How- ever that may be, the Interstate Commerce Commission has complete jurisdiction over shipments from aU Lake Erie ports to the Pittsburgh district^ and on all interstate shipments from the Minnesota mines, and over shipments from the Minnesota mines which end within the State of Minnesota the State Railway and Warehouse Commission of Minnesota has jurisdiction and authority to fix rates. The principal railroads belonging to the second class are the Elgin, Joliet & Eastern Railway, the Chicago, Lake Erie & Eastern Rail- way, the Birmingham Southern Railroad, and the Union Railroad. These differ considerably in character. The Elgin, JoUet & Eastern Railway is a belt line extending around the city of Chicago, from Waukegan on the north to Porter, Ind., upon the south and east. Its capital stock is $6,000,000 and it has a bonded indebtedness of $8,500,000. It has 196 miles of main track, 33 miles of branches, 147 miles of siding, and operates 271 miles in addition under trackage rights. The Chicago, Lake Erie & Eastern has about 15 miles of main track and 466 miles of branches and spurs. Much of its track is in the 68 rNVESTIGATION OF TJNITBD STATES STEEL OOBFORATION. vicinity of Gary, South Chicago, Joliet, and Bay View. It is to a large extent a plant facility. The Union Railroad Co. connects the works of the Carnegie Co. in the vicinity of Pittsburgh and has a main line '16 miles in length. The Birmingham Southern connects the plants and coal mines of the Tennessee Coal, Iron & Railroad Co., and also connects with some 45 plants of independent manufacturers. All of these four roads claim the rights to a division of rates or switching charges, and all but the Birmingham Southern Railroad receive compensation from the main lines with which they connect either by a division of rates, a tonnage allowance, or in some other way. A very large proportion of the business done by all these roads is done for the United States Steel Corporation. At Birmingham, Ala., the situation is peculiar. The Louisville & Nashville Railroad Co., the Southern Railway Co., and the Frisco Railroad all have direct connections with the plants and mines of the Tennessee Coal, Iron & Railroad Co. Lately a new competing line, the Atlanta, Birmingham & Atlantic Railroad Co., has been built from Brunswick on the Atlantic coast of Georgia to reach the traffic- producing industries of the Birmingham district. The situation is such that it is practically impossible for it to connect physically with the plants in the Birmingham district. The Louisville & Nashville Railroad, the Southern RaOroad, and the Frisco Railroad are its- competitors, and so it sought and made a joint traffic agreement with the Birmingham & Southern Railroad. The situation is such that if the Atlanta, Birmingham & Atlantic Railroad can not make this connection it will be practically worthless and the money expended in its 430 miles of road will be lost. It is naturally to the interest of the other competing roads to prevent this connection. They have therefore brought proceedings before the Interstate Commerce Com- mission to prevent the consummation of this contract. A vast amount of testimony has been taken, and it is expected that a decision will be reached before July. The Interstate Commerce Commission has laid down some general principles governing cases of this kind. It has held that the mere fact that a railroad was owned by a manufacturing company did not of itself deprive it of a right to share in the through rate if it actually performed service in transportation; that it was impossible to lay down a general rule which should determine when a railroad was a mere plant facility and when it was a common carrier entitled to a division of rates, but that each case must r^t upon its own facts. The division between a facility for manufacturing industry and a facility for transportation seems clear enough, and in any given case where the facts are before the commission, there ought to be very INVESTIGATION OF UNITED STATES STEEL COEPORATION. 69 little difficulty in arriving at a just decision. In many instances the compensation received for the service of these roads from the trunk lines is extremely liberal, in sOme cases amounting, in my opinion, to an indirect rebate. I think this is a matter which deserves the early attention of the Interstate Commerce Commission, BESTBAINT OF TEADE. INTEKLOCKING DIEECTORATES. The directors of the United States Steel Corporation, generally speaking, are men of wealth, having great business ability and large interests. Most of them have observed the old doctrine that it is not wise to put all their eggs in one basket. .Their experience and abUity has been largely utilized by the companies with which they are con- nected. They are nearly all directors in other companies than the United States Steel Corporation. . These companies are of various kinds and include railroads, banks, and manufacturing companies. No evidence was given or offered tending to show that the fact of such relations, on the part of the directors of the United States Steel Cor- poration, had ever been used or attempted to be used to the injury of competitors, to obtain any unfair advantage for the United States Steel Corporation, or to the detriment of the general public. In every instance the directors of the United States Steel Corporation constitute only a very small minority of the directors of the other companies with which they are connected. Such relations, however, give opportunity for abuses and agreements in restraint of trade. POOLING AGREEMENTS. After the steel busiuess became a great industry and previous to the organization of the United States Steel Corporation, there was a suc- cession of boom years, when prices rose to fabulous heights, followed by years of corresponding depression, when each man was struggling for business enough to keep his works rimning. These struggles re- sulted in relentless and destructive competition, when the weaker was frequently driven out of business and was glad to sell his plant to a more successful rival at a fraction of its cost. After these trade wars had continued for a time the manufacturers, or those of them who had survived, would generally get together and enter into an agreement fixing prices, or apportioning the business to be done by each, or both. These associations, or pools, did not ia any instance embrace the whole industry, but only a portion of it. The only ones which were investigated by the committee to any extent were the "plate pool," the "structural-iron pool," and the "wire pool." The structural-iron pool was organized about 1898 and the plate pool in the fall of 1900. Mr. William C. Temple was the so-called commissioner, or secretary. 70 IirVESTIGATION OF UNITED STATES STEEL COEPOKATION. of both these pools. The parties to the plate pool were the Carnegie Co., Jones & Laughlin, the Illinois Steel Co., the Crucible Steel Co. of America, Otis Steel Co., Tidewater Steei Co., Lukens Iron & Steei Co., Worth Bro. Co., Central Iron & Steel Co., and the American Steel & Wire Co. Of these corporations, the Carnegie Steel Co., the Illinois Steel Co., and the American Steel & Wire Co. later became subsidiaries of the United States Steel Corporation. This pooling agreement proyided, in substance, that each of the parties to it should be entitled to a certain percentage of the plate business stated in the agreement, provided for the fixing of minimum prices, and prescribed a penalty to be assessed against any member who should exceed his allotted portion of the business, which penalties were to be paid to those members of the association who received less than their share of the business. The penalties were fixed upon a tonnage basis. Provision was made that each of the members of the association should make reports to the commissioner, and the com- missioner in turn transmitted the result of these reports to the various members of the association. Accurate accounts were kept, and for a time the penalties were rigorously exacted. The association had frequent meetings, and the members became well acquainted with each other and acquired confidence each in the other. This agree- ment continued in force until the last of December, 1904, and the Carnegie Co., the American Steel & Wire Co., and the Illinois Steel Co. remained parties to it until that time. It was brought to an end by Judge Gary. Mr. Temple, the commissioner, states that tl.e association was informed that Judge Gary had investigated the mat- ter and ordered the subsidiaries of the United States Steel Corporation to withdraw from it. He said Judge Gary stated that he did not believe in the association, did not believe that the association was desirable or necessary, and he demanded the abrogation of the agree- ment and the cessation of the association. So the association was dissolved and distributed its assets. (Hearings, p. 555; Temple, pp. 1717, 1718, 1719, 1729.) But the members of the association continued for some two years after to give each other the same information as to the amount of business each was doing as they had done during the existence of the association. After that they ceased to give such information. Undoubtedly the purpose of giving this information was that each might know the extent of the business done by his competitor. These men were well iiiformed as to the plant capacity of the others, and if each was doing about that proportion of the whole business which its plant capacity bore to the whole plant capacity, the infer- ence would naturally be that all were selling at about the same price; whUe if the business of one or more suddenly or largely increased the reason for the increase would naturally be a subject of inquiry. lilVESTIGATION OF UNITED STATES STEEL CORPORATION. 71 The wire pool continued to a later date and resulted in the prose- cution of the members in the court. The history of that transaction is too fresh in the minds of all to require further comment. These associations were all a^eements to apportion output and fix prices, and of course plain violations of the antitrust law. Judge Gary denied before the committee any knowledge of the existence of these pools until about the time of their termination. There is no evidence that any of the officers of the United States Steel Cor- poration were ever present at any of the meetings, but that some of them had knowledge of the existence of the pools seems certain. GARY DINNERS. In November, 1907, and at irregular intervals thereafter. Judge Gary gave a series of dinners in New York,. to which men who were prominent in the iron and steel industry were invited. The purpose of these dinners is stated to have been to bring about a better acquaint- ance among the men influential in the iron and steel industry and to discuss matters of common interest in the industry and to exchange information. Judge Gary, at a dinner given him in London by the governors of the Iron and Steel Institute of Great Britain, on September 11, 1908, referring to the first of these meetings, said in part: Early in November an invitation was extended to the leading men connected with this industry, including about 60 in number, to meet in conference, and without exception the invitation met with an affirmative and cordial response. * * * At the first meeting, after each one present had expressed his opinion what the conditions and dangers were, as I have previously stated, the doctrine of conciliation and cooperation was suggested. In some respects at least it was novel. In times gone by, when business prosperity was interrupted by a financial depression or by doubt and distrust, however provoked, it had been customary for each one to consider and to endeavor to protect his own interests regardless of all others. Each sold his own products wherever and at whatever price he could obtain. Demoraliza- tion, panic, and prolonged failure followed. * * * The sug- gestions which were made and finally adopted were simple. It was proposed to appoint a general committee of seven with power to appomt subcommittees connected with special lines. To the subcommittees any one interested in a particular line might apply for information and advice. And to the general com- mittee the respective chairmen of subcommittees or any indi- vidual might apply for information and advice. Without going into detafls it suffices to say that these committees kept fully informed in regard to the affairs of all and freely advised indi- viduals with respect to the conditions generally or in detail. While they were given no power, their advice was usually fol- lowed. No agreement to maintain prices, restrict output, or divide territory or any other agreement was made. Without 72 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. going further into details it is-sufficient to say the effort has been successful. It was to be expected there would be some mistakes by subordinates, and that to some extent there would be trans- actions beyond the bounds of propriety and fairness, but the total result has been a great benefit. A certain percentage, however small, of the people of every country is made up of ordinary liars. The wonder is that such a large percentage believe the liars. And, of cotirse, from time to time manufacturers were imposed upon by proposed purchasers, who made the usual misrepresentations that other manufac- turers were seUiog at a reduced price. . It was not long before the movement sectired the approval and hearty cooperation of all concerned. Prices have generally been maintained, demoralization and insolvency prevented, and greater profits realized. The benefit to genered business condi- tions and the influence in aiding the restoration of business pros- ?erity are testified to by financiers and by the press generally, erhaps the most prominent good which has resulted is found m / the feeling of friendship which exists among the members of the industry. This will be of great benefit and profit to all iu the long run. Frequent meetings are held at which each one present expresses vnth great freedom and fi'ankness his views concerning all questions involved, and all have confidence in one another. The business is well in hand. The manufacturers are running their own business for their own gain, and yet at the same time they have injured no others. On the contrary, they have advanced the iuterests of their customers, their employees, and the public generally. * * * I do not advocate imything that is antagonisti* to the laws or the public welfare. What I propose is the utUization of our opportunities for the advancement of all our interests — a closer connection, a better understanding of ideas and information con- veyed by one to another concermng all the business questions, and an organized committee composed of men whose advice shouid always be followed. These thoughts amplified and formu- lated should bring to all of us the largest measure of success. At th« dinner held at the Waldorf-Astoria Hotel January 11, 1911, Judge Gary was the principal speaker, and the main question of dis- cussion during the evening was the maintenance of prices. Many of the speakers did not refer to this subject, but quite a number did, and all who did mention the subject expressed an opinion that the re- duction of prices would be a mistake and would not bring increased business. Among other things. Judge Gary said: At this present time there is not in this country a demand for more than 50 per cent of the total producing capacity in our lines. It is obvious from this statement of fact that there is not enough business to go around and that there is no possible way of protecting one another and thereby protect one's self, except to submit ourselves to the conditions as they exist and to take and be satisfied with our fair proportion of the business that is offered. It is not necessary in this presence to say that if one individual or company engaged in this business tries to secure or INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 73 actually secures for a day or a week more than a fair proportion, still it simply means that in the long run that man or that com- pany gets no more than its share. He has accomphshed nothing whatever except to bring about demoralization, reduction of ? rices, and heavier losses to all concerned, including himself, 'his is a logical proposition. No man is smart enough to long continue a practice which gives to him more than his fair share of business. He may get away from his friend or competitor or his customer for a sin^e transaction or two transactions, but it is just as certain that the competitor whose business has been taken away will the next day or the next week enter within the domain of the one who first trespassed, taking away his business and adjusting, equalizing, and brmging about at the end of the year or at some defimte period simply the natural division of business and at greatly reduced prices. And there is no exception to this unless it be on the basis of the strong man or the strong com- pany having the advantage over his neighbor, if there is such a one, and he gets the business only by means which result in forcing his competitor out of business and in that way antago- nizing the public interest and earning the condemnation not only of the public but of the very Government itself. Therefore it is impracticable. Now, in view of the fact that we have no right legally to enter into any arrangement by direct or indirect means which enables us to maintain prices, to divide territory, to restrict output, or in any way to interfere with the laws of trade or to stifle com- petition; in view of the fact that we can not legally directly or mdirectly do anything which may be construed to be in restraint of trade, and are therefore relegated to the one position of treat- ing each other on the basis of fair, just, and equitable treatment, it behooves us to use the greatest care in the exercise of our rights and in the transaction of our business so as to make it absolutely certain that day by day, and "with reference to every transaction we are certain to recognize the rights of our com- petitors, our friends, and the obligations which we are under toward them. Again he says: I would not make an agreement under any circumstances to maintain prices or to do or refrain from doing anything which would prevent me from being absolutely independent from all others m every respect concerning every department of our corporation, or in regard to the conduct of our business and I would not ask for any different conclusion from others. As I stated before the very fact that it is understood we have this right that we are independent that we can go out of this room and do exactly as we please without violating any agreement or understanding and that all must depend upon the belief that as honorable men we are desirous of conducting ourselves and our business in such a way as not to injure our neighbors must make each of us more careful in regard to the conduct of our affairs and there will be no secrecy in what we do. (Gary, hearings, pp. 1772, 1773, 1776, 1779.) 74 INVESTIGATION OF UNITED STATES STEEL OOKPOBATION. Jt is evident that the question raised by these dinners is a some- what difficult and delicate one. Section 2 of the antitrust act, so- called, prohibits monopolies and the attempt to monopolize. That fierce and unrestrained competition which is intended to result, and if carried far enough inevitably does result in the destruction of one or more of the competitors and the survival of the fittest, has always been construed by the courts as strong evidence of an intent to monopolize. On the other hand, section 1 prohibits every contract, combination, or conspiracy in restraint of trade or commerce among the several States or with foreign nations. On one hand the indi- vidual or corporation is prohibited from entering into combinations to fix prices, limit output, divide territory, etc., and on the other from crushing his rival by unfair means with a view to obtaining his business. Between these two extremes there are many things the corporation may do to advance its business interests, and it is only when we approach the border line upon one side or the other that difficulty arises. . No one would contend that the manager of a large corporation in time of business depression was bound to run his works to their full capacity without reference to the extent of the market or what portion of that market would be occupied by business competitors. His duty to the stockholders requires biTn to keep informed upon such points. Would any one contend that the law prohibited him from ascer- taining from his competitor the extent of the latter's production in exchange for like information, given his competitor as to the business of his own corporation ? If two companies can do this many can do it. Take, for instance, the manufacturer of steel rails. Each probably now knows the capacity of the plant of each of his competitors, and if he knows how much business each is doing it is but a matter of computation to ascertain the amount of the entire demand in the country and what proportion that demand bears to the entire capac- ity of all of the plants in the country. If it be found that the pro- duction of each competitor is in the same proportion to the entire production that his plant capacity is to the entire plant capacity, the inference is very strong that all are selling at about the same price. But if it should be found that the production of one is entirely out of proportion to the capacity of his plant the inference would be very strong that he was underselling his competitors or giving some other advantage to his customers and the conduct of each competitor would undoubtedly be influenced, if not absolutely determined, by the information he obtained in this maimer. Assuming, as I think we must, that the obtaining of such information is entirely legitimate under the law, it wUl be readUy seen how short a step it is to a con- dition of affairs where there will be a tacit understanding between all of the competitors that each will keep his production within the limits which are marked out for it by the proportion its plant capacity INVESTIGATION OF UNITED STATES STEEL COBPOEATION. 75 bears to the total plant capacity of all engaged in the business. But this would be a conspiracy in restraint of trade. Can there be any legal objection to competitors in business exchanging views as to general business conditioiis and expressing opuiiohs as to what course ought to be taken as to prices ? Such a course tends to stability in business conditions and benefits not only the producers but the consumers and the entire business public. But again, how narrow is the division, how almost intangible the barrier, that separates this line of conduct from one where there is a tacit understanding after the matter is discussed, that each is to carry out the line of conduct indicated as most desirable by the opinions expressed. But, on the other hand, can it be that we have reached a point where business men engaged in the same line of industry can not have the benefit of each other's knowledge, without subjecting themselves to the penalty of fine and imprisonment ? In our judgment it would require a far more careful scrutiny into the facts and the methods of the men who met at the Gary dinners than was given to them or could well be given to them by the committee to determine whether the conduct of the persons engaged crossed the intangible line which separates what is permissible and proper from that which is prohibited by the law. MONOPOLY OF RAW MATERIALS. mON ORE. It has been claimed that the United States Steel Corporation, by ob- taining control of the Tennessee Coal, Iron & KaUroad Co., obtained a monopoly or monopolistic control of the iron and steel business south of the Ohio River, which monopoly or monopolistic control was based upon the large ownership of that company of the raw materials neces- sary for the manufacture of iron and steel, namely, iron ore and coal. The question of monopoly can best be considered in connection with the general ore situation throughout the entire United States. It will be remembered from the former statements contained in this report that the red ores in the Birmingham district, which constituted the great bulk of the ores so far discovered in that region, outcrop on Red Mountain for a distance of 15 miles or more, and from the outcrop extend to the eastward at an incline of about 30 degrees from the horizoiital in a continuous vein of nearly uniform thickness and quality down the mountainside and across Shades Valley to the foot of Shades Mountain, and perhaps beyond. The ore body is so nearly uniform in thicknesa and quaUty that the portions of the tonnage of different owners within this mineralized region can be determined with a reasonable degree of accuracy from a comparison ©f their acreage. Mr. Perin states that, including the holdings of the Tennessee Coal, Iron & RaUroad Co., the Schloss-Sheffield Steel & Iron Co., the Repub- 76 INVESTIGATION OF UNITED STATES STEEL COEPOEATION. lie Iron & Steel Co., the Birmingham Coal & Iron Co., the Birming- ham Iron Co., and the Woodward Co., the Tennessee Coal, Iron & Railroad Co. possess about 70 per cent of Red Ore Mountain. It will be noted that this estimate is confined strictly to Red Ore Mountain. It specifically excludes from the calculation the ore owned by the Cen- tral Coal & Iron Co., the Williamson Co., the Southern Iron & Steel Co., the Alabama Consolidated, and perhaps others. It is specifi- cally confined to the immediate Birmingham district and by its terms excludes Shades Valley. Mr. Given states that he estimates the Tennessee Coal, Iron & Rail- road Co. to control 60 to 70 per cent of the ores now being worked. This evidently is not intended to embrace all of the ores in the district. Later, he says that of the total available ore in what he describes as the Birmingham district he estimates the holdings of the Tennessee Coal, Iron & Railroad Co. at from 50 to 60 per cent. He adds that that is nothing but an estimate — there are no figiu-es back of it. Mr. Walter Moore estimates the entire holdiags of the Tennessee Coal, Iron & Railroad Co. at from 60 to 65 per cent of the district tributary to Birmingham. Prof. Grasty estimates that the Tennessee Coal, Iron & Railroad Co. has over 50 per cent of the ore in the district, and says that in these estimates he siinply includes the ore of Red Mountain, con- sidering it as far back as the limit of Shades Creek. Later he fixes it more definitely at from 52 to 53 per cent. He adds that if he should take in Shades Mountain it would increase the percentage to nearer 75. But this is evidently an error, as it clearly appears, from the testimony, that the Tennessee Coal, Iron & RaUroad Co. has no holdings on Shades Mountain. Again Mr. Grasty makes the following estimate: Tons. Tennessee Coal, Iron & Railroad Co 218,000,000 Woodward Steel Co 81,000,000 Republic Iron & Steel Co 48,000,000 Schloss-Sheffield Steel Co 54,000,000 Alabama Consolidated and Southern Steel Co 30, 000, 000 431, 000, 000 Mr. Ernest F. Burchard, an expert of the United States Geological Survey, has also made an estimate as follows: Tons. Total available ores in the whole district. .■ 358^ 400 000 Of which the Tennessee Coal, Iron & Railroad Co. owns 131, OOO 000 Other furnace companies 109, ooO, 000 Private owners 117, ooO, 000 Percentages: Per cent. Tennessee Coal, Iron & Railroad Co. (acreage, 36.8) 37. 5 Independent furnaces 3j 7 Private owners '. . . 30. g INVESTIGATION OF UNITED STATES STEEL COKPOEATION. 77 Mr. Bacon, who was president of the company from January, 1901, to May, 1906, says, that mcluding Red Mountain and Shades Valley, to the foot of Shades Mountain, which district has been proven to contain iron ore, by drill holes, the Tennessee Coal, Iron & Railroad Co. owned from 30 to 33 per cent of the acreage and tonnage of that district. He says, further, that since the time he was in charge of the property, the Tennessee Coal, Iron & Railroad Co. has added a one-half interest in l,l00 acres of ore lands. This tract is esti- mated to contain 70,000,000 tons of ore, of which the Tennessee Coal, Iron & RaUroad Co. would own half. Mr. Bacon says further, that there is an outcrop of ore in the north- east end of Shades Valley, northeast of any ore owned by the furnace companies, which contains at least 170,000,000 tons of ore and that the ore to the south has not been carefully explored. While the above figures seem somewhat contradictory, a part of the discrepancy is accounted for when we see that the different wit- nesses are not dealing with exactly the same territory or ownership. But if they had been so dealing, admitting that all of them were qualified, honest, and equally well informed, discrepancies are to bo expected, because of the many uncertainties in estimating the amount of ore in any deposit which is not in sight. In all human probabihty the proportion of ore owned by the various mining companies iu and about Birmingham, is very much less then present development would indicate, because it is these mining companies alone which have been trying to develop their property. The private owners have been waitiag for an opportunity to sell and have not been willing to assume the expense of exploration. It would be very remarkable, considering the experience in other mining districts, if it should finally be demonstrated that the Tennessee Coal, Iron & Railroad Co. owns nearly as much as 50 per cent of the available ores in that district. Surely 50 per cent is an outside figure and 35 per cent is probably much nearer the truth. (Hearings : Perin, pp. 972 to 980, 899, 990; Given, pp. 1001, 1019; Moore, p. ^1027; Grasty, pp. 5296, 5297, 5300, 5301, 5302, 5303, 5304; Bacon, pp.'5330; 5329, 5350, 5356, 5357, 5358; Burchard, p. 5299; Topping, p. 1256.) Turning now to the Lake Superior district. In 1911 the Minnesota tax commission estimated the total tonnage of ore on the Mesabi Range at 1,368,000,000 tons. (Hearings, p. 5364.) Their estimate for the Vermillion Range is' about 8,000,000 tons. In the committee hearings, upon pages 5569 to 5592, inclusive, is printed the detailed statement of the Minnesota Tax Commission of the tonnage and valuation of aU the mining property in Minnesota for the year 1908. The total tonnage, as estimated at that time by the commission, is 1,193,728,959 tons. The or^of the United States Steel Corporation is all credited in that table to the CHver Iron Mining Co. At that time the so-caHed Hili lease was in full force 78 INVESTIGATION OF UNITED STATES STEEL COKPOKATION. and the ores contained in the HUl lease to the United States Steel Corporation are a part of the ores credited to the Oliver Iron Minin g Co. In other vrords, the ores credited to the Oliver Iron Mining Co. embrace all the ores controlled by the United States St§el Corpora- tion at that time, including the HiU lease. The total tonnage so credited to the United States Steel Corporation by the Minnesota Tax Commission, in 1908, was 752,352,166 tons, or a trifle over 63 per cent of the total tonnage of the State. Mr. James J. HiU, who was before the committee as a witness, ^ estimated that the United States Steel Corporation^ including aJl the ores embraced in the HiU lease, controUed from 70 to 75 per cent of aU the ores of Mumesota, and that excluding the ores embraced in the Hill lease they controUed about 53 per cent of the ores in Minnesota. Mr. HiU also testified that the amount of ores on the lands embraced in the HUl lease, added to those leased by the same company to others, were about 400,000,000 tons. Mr. Joseph SeUwood testified that the ore leased to others, referred to by Mr. HUl, which is the Mahoning mine, amounted to about 150,000,000 tons, and that the remaining ore embraced in the HUl lease would be about 250,000,000 tons, of which 150,000,000 tons were on the HUl lands proper and 100,000,000 tons on the Longyear lands. In 1909 the estimate of the Minnesota tax commission of the ores of the- United States Steel Corporation, not embraced in the HUl lease, is 523,547,253 tons. Mr. SeUwood's estimate of aU the ores upon the Mesabi is between 1,300,000,000 and 1,400,000,000, of which the United States Steel Corporation, outside of the HUl lease, controls,' according to his esti- mate, about 550,000,000 tons. He, however, thinks the Minnesota Tax Commission figures of the VermiUion Range are too low — that those should be estimated at about 20,000,000 tons. Mr. SeUwood made a rough estimate of the ownership of the ores, on the Mesabi Range, outside of those owned by the United States SteeLCorporation. This he said was only relatively and approxi- mately correct. It is as foUows : Tons. HiU ore, embraced in lease to the United States Steel Corporation 160, 000, 000 Longyear, embraced in leaBe 100, 000, 000 Mahoning 150,000,000 Snyder 50,000,000 Piekands, Mather & Co .' 75, OOO, 000 Jpnes & Laughlin 75, ooO, 000 Corrigan, McKinney Co ^ 50, 000, 000 Eidgway ' 25, 000, 000 Wisconsin Co 20,000,000 International Harvester Co 10, qoo, ooO M. A . Hanna Co , 50, 000, 000 Sundry small operators 50, ooo, 000 Making a total of 805, 000, 000 IKVESTIGATION OF tTNITED STATES STEEL COEPOKATION. 79 Or, deductii^ the ores embraced in the Hill lease, 555,000,000 tons. Judge Gary also estimates the ores embraced in the Hill lease at from 200,000,000 to 250,000,000 tons. It will be seen that the estimates of the Minnesota Tax Commission, of Mr. Sellwood, and Mr. James J. Hill are practically agreed. Mr. Thomas F. Cole, who was president of the Ohver Iron Mining Co., until about three years ago, placed a somewhat higher tonnage on the ores in Minnesota than either of the gentlemen named, but does not vary substantially the percentages fixed by them, as between the United States Steel Corporation and other owners. He fixed the tonnage of the United States Steel Corporation, outside the Hill lease, on the Mesabi and VermilUon Kanges, as in excess of 750,000,000 tons. Of this amount he says 20,000,000 to 25,000,000 tons are on the Ver- million Range. The independent holdings, on the Mesabi Range, including the ore covered by the Hill lease, are nearly equal to the United States Steel Corporation's holdings. In this connection it may be remembered that Mr. James J. Hill, speaking of mining experts on the Minnesota ranges, said : ' 'I would take Joe Sellwood and Tom Cole's estimates in preference to any 10 men I know." Turning now to the Michigan ranges. In 1911 a very careful esti- mate of the ore on the Michigan ranges was made by Mr. James R. Fihlay, of New York, a very distinguished engineer, for the Michigan Tax Commission, assisted by Dr. C. K. Leith, of the United States Greological Survey. A summary of his estimate is printed in the hearings. According to such estimate the tonnage of the United States Steel Corporation in Michigan is 54,932,355 tons, and of other owners 135,020,809 tons. According to that estimate the United States Steel Corporation owns only 28.9 per cent of the available ores in Michigan. Taking the estimate of Mr. Cole for the tonnage of the United States Steel Corporation in Minnesota, which is the highest tonnage given, and the estimate of the Minnesota Tax Commission for 1911 for the total tonnage in Minnesota, and the estimate of Mr. Finlay for the Michigan tonnages and we would have the following' result: Tons. Total toimage in Minnesota 1, 368, 000, 000 Total tonnage in Michigan 189, 953, 164 Total tonnage 1,557,953,164 Of which amount the United States Steel Corporation owns — In Minnesota 750, 000, 000 In Michigan - 54, 932, 365 Or a total of 804, 932, 356 80 nrvESTiGATioN OP united states steel oobpoeatiow. Others own — Tons. In Minnesota 618,000,000 In Michigan 135, 020, 809 Ora total of 753,020,809 Keduced to percentages, the United States Steel Corporation would own 51.6 per cent and other owners 48.4 per cent of the avail- able Lake Superior ores. But in making the above estimate we have taken the highest estimate of the United States Steel Corporation ores in Minnesota and lower estimates for the total. If we should take Mr. SeUwood's esti- mates for the Minnesota ores and Mr. Finlay's estimate for the Michi- gan ores we would have the following result: Total tonnage in Minnesota 1,375,000,000 Total tonnage in Michigan 189, 953, 164 Total 1,564,953,164 Of ■which the United States Steel Corporation owns — In Minnesota 570,000,000 In Michigan ^ 54, 932, 355 Total 624,932,355 Others own — In Minnesota 805,000,000 In Michigan 135, 020, 809 Totkl 940,020,808 Or, in percentages, the United States Steel Corporation owns 39.94 per cent — others own 60.06 per cent. It is impossible to entirely reconcile these figures and it must be remembered that they represent the conditions which will prevail in 1915 when the surrender of the Hill lease, by the United States Steel Corporation becomes completely effected. At the present time the United States Steel Corporation has surrendered all of the property covered by the Hill lease upon which it is not carrying on active operations and the lessors now have possession of the same. The committee has no figures which will show approximately the amount of ore thus surrendered, but it must be considerable. To ascertain the situation, previous to the surrender of the Hill lease, we can take the Minnesota Tax Commission figures for 1908 for Minnesota and the Finlay report for Michigan; this gives the follow- ing result: Tons. Total tonnage in Minnesota 1, 193, 728, 959 Total tonnage in Michigan 189, 953, 164 Total 1,383,682,123 INTESTIGATION OF UNITED STATES STEEL COEPOKATION. 81 United States Steel Corporation: Tons. In Minnesota 752, 352, 166 In Michigan 54, 932, 355 Total 807,284,521 Other owners: In Minnesota 441, 376, 793 In Michigan 135, 020, 809 Total 576,397,602 Or on a percentage basis: Per cent. United States Steel Corporation 58. 35 Independents 41. 65 It is pretty clear that the United States Steel Corporation in 1915 will control not to exceed 50 per cent of the available ore in the Lake Superior and Birmingham districts. But this is not all of the ore situation. The ores from the Lake Superior district can not be profitably shipped farther east than Pitts- burgh. AU the furnaces east of that point must be supplied from the Champlain district, the Appalachian Range, the New Jersey ore, or from abroad. The imports of ore in 1910 were 2,591,000,031 tons. Of this amount 1,417,914 tons came from Cuba. The known ore deposits of Cuba contain at least 2,000,000,000 tons of ore, or more than the estimated tonnage of the entire Lake Superior district in available ores. Some difiiculties have been experienced in the treatment of these ores, but these are now solved, and very large tonnages will come into the United States ia future years. Cuba probably will be the main sour,ce of supply for the Atlantic seaboard and eastern portion of the States of New York and Pennsylvania and the State of Maryland. Immense quantities of these ores are owned by the Bethlehem Steel Co. and by the Spanish-American Co., which is a subsidiary of the Pennsylvania Steel Co. ; but large quantities still remain in private hands. Mr. Schwab states that the Bethlehem Steel Co. have enough ores in Cuba to supply them for 250 years and expresses the opinion that he might be able to ship these ores to Birmingham and do a profitable business there in competition with the Birmingham ores. These ores can be shipped west nearly, if not quite, to Pittsburgh in competition with Lake Superior ores. No view of the ore situation in this country which leaves out of account these vast bodies in Cuba is at all adequate. Besides these deposits there are known to exist, in the United States, of available ore, at least 100,000,000 tons in the Baraboo district of Wisconsin; from 500i000,000 to 1,000,000,000 tons in Utah; 100,000,000 tons in the Sunrise district of Wyoming; &4946°— H. Kept. 1127, 62-2, pt 3 6 82 INVESTIGATION OF UNITED STATES STEEL COKFOBATION. 250,000,000 tons in California; 100,000,000 tons in New Mexico; 500,000,000 tons in Texas; from 100,000,000 to 200,000,000 tons in the Champlain district of New York. None of these districts, with the exception of the Champlain district of New York, have had anything like thorough exploration and it is probable that the amounts cited above are very much less than the real quantities of ore in these deposits. The Utah ores have a very high metallic content, low phosphorus and great intrinsic value. They are within 150 miles of coal and will no doubt be ex- tensively worked in the future. It must be remembered, however, that the word ' ' available " must be taken Jargely with reference to some particular district. The ore of Wyoming for instance is now l^eing profitably worked by the Colorado Fuel & Iron Co., but is not available for the eastern furnaces; the ores of California, of New Mexico, of Utah, and of Texas will undoubtedly be used in the not distant future to supply the wants of the Pacific coast and Rocky Mountain States and to some degree to the east of that section. They could not, of course, be used east of the Mississippi River any more than the Lake Superior ores could be used at Bethlehem, or Steelton. No one at all familiar with the developments of the mining of iron ore for the last 30 years can doubt that not only will large addi- tional tonnage be discovered in the districts now known, but entirely new districts will be opened up. As an example of the development of old districts the Marquette Range, of Lake Superior, may be cited. Mining began there about 1854 and has been continued un- interruptedly until this time, and yet there is more ore Imown to exist in that district to-day than at ariy former period of its history and some of the most promising deposits have been discovered within the last three or four years. In addition to this, improvements in methods of manufacture are rapidly making available vast tonnages now classed as unavailable. (Hearings, pp. 5364, 5377, 3101, 3502; Hill, pp. 3235, 3237, 3206, 3190, 3200; Sellwood, pp. 5363, 5364, 5365, 5371, 5379, 5389, 5380, 5381, 5390, 5393; Gary, p. 82; Cole, pp. 5446, 5447, 5455, 5456, 5457, 5458, 5459, 5460, 5461, 5480, 5485, 5486, 5489; Finlay, p. 2020; Gayley, pp. 403, 404; Schwab, pp. 1293, 1333, 1334; Perin, pp. 1028, 1029.) COAL. The position of the United States Steel Corporation is very much weaker in regard to its reserves of coal than it is as to its reserves of iron ore. In the Pittsburgh district, which includes the ConneUsviUe region there are about 360',000 acres of good coking coal, of which the United States Steel Corporation owns approximately one-seventh. INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 83 In the Birmingham district it owns not to exceed one-tenth, per- haps not one-twentieth of the entire deposit. (Hearings: Boileau, pp. 784, 790; Bacon, p. 5333.) MONOPOLY OF BTISINBSS. The organization of the United States Steel Corporation had the effect to eliminate whatever competition formerly existed between the companies that became its subsidiaries, but there still remained strong and vigorous competition. Among the competitors were and are Jones & Laughlin (Ltd.), Cambria Steel Co., Pennsylvania Steel Co., Lackawanna Iron & Steel Co., Republic Iron & Steel Co., Bethlehem Steel Co., Colorado Fiiel & Iron Co., and many others. Since the organization of the United States Steel Corporation, how- ever, by purchase and by new construction, it has greatly increased its capacity, as is shown by the following table: Product. Capacity. Per cent Jan. 1, 1911. Apr. 1, 1901. increase. Blast lumace Steel ingots Finished steel Cement tons.. do... do... barrels. . 16,000,000 18,000,000 13,750,000 8,ooo,flqo 7,440,000 9,425,000 7,719,000 600,000 115 91 78 1,600 While this increase seems large it should be remembered that the increase in production of steel during those years has been very much larger. In 1900, the year before the United States Steel Corporation was organized, the total production of steel in this country was 10,188,329 tons, while in 1910 it was 26,094,919 tons. In other words, while the capacity of the United States Steel Cor- poration has increased a little less than 100 per cent, the entire pro- duction of the country has increased nearly 160 per cent. The fact that the United States Steel Corporation is still losing ground, in the relative amount of its production, as compared with the so-called independent producers, is further emphasized by the foUowiag table: Annual Percentage of Peoduction by the United States Steel Coepoeation feom 1901 to 1910. ICompiled by the American Iron and Steel Association from returns of production made directly to tbe office of the association.] The percentage of the Tennessee Coal, Iron & Railroad Co. is included below for 1907, 1908, 1909, and 1910 only. For prior years the production of this cornpany is included with that of the mdependent companies. The United States Steel Corporation was mcorporated on February 25, 1901, and was organized on April 1, 1901. The percentages given for 1901 are obtained by 84 INVESTIGATION OF UNITED STATES STEEL COBPOEATION. using the figures of production and shipments by the constituent companies of the corporation in the three months of that year prior to their absorption by the corporation and by the corpora- tion for the remaining nine months. Percentage of total production of leading articles by the United States Steel Corporation. 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 Lake Supreior shipments of iron ore 61.6 46.1 41.1 43.2 66.7 69.8 62.2 64.6 77.6 27.3 50.1 65.8 73.0 60.4 46.2 37.6 44.8 65.2 67.7 57.9 69.4 71.6 31.2 51.3 64.9 73.4 58.8 43.9 34.3 40.4 63.1 64.4 60.3 59.9 73.2 30.1 .51.2 70.6 78.3 63.8 38.0 36.6 44.7 60.7 64.3 55.2 68.1 71.3 29.2 47.8 67.1 71.3 56.0 43.5 38.0 44.2 60.0 51.2 54.7 57.4 70.0 31.7 47.4 66.1 71.8 54.2 43.2 36.5 44.S 67.8 50.2 64.6 56.3 71.7 34.7 48.2 65.6 74.5 54.8 46.4 33.2 44.3 57. 1 52.2 55.1 66.2 71.6 35.3 48.6 66.4 73.6 56.0 46.3 31.4 43.5 55.9 55,0 47.1 52.0 67.9 32.0 47.1 61.2 69.9 61.4 45.8 34.6 45.0 55.8 57.4 47.1 49.8 69.7 39.4 48.9 60.7 61.9 61.1 44.4 32.7 Production of pig iron 43.3 Production of steel ingots and castings . . Production of steel rails Production of structural shapes : Production of plates and sheats Production of wire rods 64.3 68.8 61.3 48.0 67.3 Production of rolled forms not enutner- ated above 37.6 Total production of finished rolled iron 48.1 55.4 Production of tin plates and temeplates. 61.0 It will be seen from this table that its relative proportion of the business of the country instead of increasing has steadily decreased. Its shipments of Lake Superior iron ore has fallen oflF from 60.4 per cent in 1901 to 51.1 per cent in 1910. Its production of coke has decreased from 37.5 per cent in 1901 to 32.7 per cent in 1910. Its production of ingots, etc., has fallen from 65.2 per cent in 1901 to 54.3 per cent in 1910. Even in the production of steel rails it has not quite held its own. Its production of structural shapes has fallen from 57.8 per cent in 1901 to 51.3 per cent in 1910, and even in wire rods its production has fallen from 71.6 per cent in 1901 to 67.3 per cent in 1910. (Hearings, No. 52, pp. 3524, 3466; No. 63, pp. 5514, 5515.) PBICES. Undoubtedly the question which most deeply interests the Ameri- can people, in regard tq the United States Steel Corporation, is what effect it has had upon the prices of iron and steel products which are furnished to the people of the United States. If it has had the effect, either through inefficiency or otherwise, to increase the cost to the public of the kind of products it manufactures, it is to be condemned upon economic grounds. If it has produced such an effect through illegal combinations, it is to be further condemned as a violator of the law. Of course no one can be certain what the prices of steel products would have been if the United States Steel Corporation had not been organized, and therefore no one can prove with absolute certainty that the United States Steel Corporation has lowered prices beyond what they would have been if it had not been organized; but, on the other hand, those who seek to show that it has a tendency to increase INVESTIGATION OF UNITED STATES STEEL CORPOBATION. 85 prices will find little consolation in the facts ascertained by the com- mittee. It is undoubtedly true that the corporation has a steadying effect upon prices. While the price of all steel products, with the single exception of '"standard Bessemer steel rails," have fluctuated since its organization, those fluctuations have not been so extreme as during the years which preceded its organization. ,^ Attention is called at this poiut to the following tables: ^ Average price of old range Bessemer ores at iMke Superior parts, per ton. 1855 to 1860 $6. 95 1861 to 1870 7.05 1871 to 1880 7.82 1881 to 1890 6.20 1891 to 1900 3.63 1901 to 1910 4.32 1911 4.50 1912 : 3.75 (Hearings, No. 52, p. 3463; No. 6, p. 306.) Average price of pig iron, per ton. 1855 to 1860 $24.92 1861 to 1870 38.88 1871 to 1880 29. 12 1881 to 1890 19. 63 1891 to 1900 12.65 1901 to 1910 17. 09 (Hearings, No. 52, p. 5464.) Average price best refined bar iron rolled, per ton. 1852 to 1860 $70.44 1861 to 1870 90. 66 1871 to 1880 64. 55 1881 to 1890 48. 09 1891 to 1900 '. ■- 36. 44 1901 to 1910 42. 56 (Hearings, No. 36, pp. 2627, 2678.) / Average price common iron bars, Pittsburgh, per pound. 1845 to 1850. ......J, $0. 035 1851 to 1860. . .'. 0344 1861 to 1870 0423 1871 to 1880 0285 1881 to 1890 0191 1891 to 1900 0135 1901 to 1910 0157 1911 013 (Hearings, No. 63, p. 5559.) Average price steel billets, per ton. 1886 to 1890 $30.57 1891 to 1900 20.98 1901 to 1910 26.08 (Hearings No. 36, pp. 2627, 2628.) . 86 INVESTIGATTON OP UNITED STATES STEEL COBPOEATION. Average price of steel rails, per ton. 1867 to 1870. $140. 86 1871 to 1880 76.08 1881 to 1890 36.92 1891 to 1900 26.10 1901 to 1910 27.93 (Hearings, No. 36, p. 2629.) Average price of wire nails, per keg. 1887 to 1890 $2.67 1891 to 1900 1. 88 1901 to 1910 2.09 (Hearings, No. 36, pp. 2627, 2628.) Average price of tin plate, coke, per box. 1869 to 1870 , $7. 25 1871 to 1880 7.24 1881 to 1890 4.80 1891 to 1900 4. 50 1901 to 1910 3.69 (Hearings, No. 36, pp. 2631, 2632, 2633.) The prices of the principal other steel products would show sub- stantially similar results. The following tables covering the years since the organization of the United States Steel Corporation will show the general trend of prices : Castr4ron pipe. [Average prices 6-inch cast-iion water pipe, 30 pounds per foot, f. o. b. New York City, carload lots, per ton of 2,000 pounds.] January February March April May June July August September October November December Average. 1902 24.50 25.00 26.25 26.00 27.75 28.00 28.50 29.50 29.60 29.50 30.75 29.25 27.88 29. 2S 29.25 30.76 31.00 30.76 30.76 30.76 29.60 29.00 26.00 24.50 24.26 28.81 24.60 24.26 24.25 24.26 24.00 23.50 23.50 23.50 23.00 23.26 25.00 27.00 24.17 28.00 28.60 26.75 27.00 27.26 27.25 27.25 27.25 27.25 28.26 29.00 29.26 27. 75 1906 29.76 29.50 30.50 29.76 31.00 32.50 30.25 30.50 31.00 33.00 33.26 36.50 31.38 1907 34.25 34.26 34.00 33.50 34.26 33.50 34.00 32.60 33.00 33.50 28.50 28.00 32.77 1908 27.09 26.76 26.25 26.25 26.26 26.76 25.76 26.25 26.75 25.76. 26.00 26.50 25.94 24.50 24.25 25.25 26.00 26.25 26.00 26.26 26.00 25.76 25.50 27.00 27.26 25.67 1910 25.75 25.75 26.75 25.76 25.76 25.50 24.25 23.75 23.75 23.26 22.00 22.00 24.44 22.00 21.60 21.00 21.00 21.00 21.00 21.00 21.00 21.00 21.00 21.75 22.00 21.27 INVESTIGATION OP UNITED STATES STEEL COKPOEATION. Bessemer steel billets. [Average quotations, Pittsburgh.] 87 1S91 1892 1893 1894 1895 1896 1897 1898 189'9 1900 January 2S.60 26.00 26.25 25.35 25.60 25.25 25.50 25.31 26.00 24.90 24.16 24.20 25.00 24.36 23.00 22.81 22.41 22.97 23.50 23.81 23.65 23.53 24.94 22.40 21.56 21.62 22.60 22.44 21.69 21.70 21.06 20.45 19.31 18.06 17.37 16.69 16.12 15.75 15.55 15.69 18.00 18.12 18.00 17.15 17.19 16.00 15.57 15.12 14.90 14.95 14.84 15.44 16.30 18.63 20.75 21.76 24.00 21.90 19.13 16.97 16.80 17.38 17.09 19.63 19.50 19.12 18.85 18.75 19.75 19.76 20.00 17.60 15.42 15.25 15.44 14.60 13.82 14.06 14.00 14.00 15.60 16.44 16.67 15.00 14.93 15.06 16.25 15.06 14.85 14.65 14.60 15.85 16.00 16.66 16.06 15.80 16.62 18.00 24.30 26.37 26.75 30.10 33.12 35.40 38.37 38.76 36.60 33.75 34.50 34.87 March 33.00 AprU 32.00 May 28.90 27.25 July 21.00 August.., 18.20 16.93 October 16.60 18.95 December 19.75 Average 25.08 23.53 20.38 16.62 18.30 18.67 14.93 15.21 29.75 26.15 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 19.75 20.31 22.88 24.00 24.00 24.38 24.00 24.20 24.88 26.70 27.00 27.60 27.50 29.37 31.25 31.60 32.20 32.37 31.75 31.06 29.50 29.70 28.50 29.12 29.60 29.87 30.62 30.26 30.37 28.87 27.60 27.00 27.00 27.00 24.00 23.00 23.00 23.00 23.00 23.00 23.00- 23.00 23.00 23.00 20.00 19.60 20.26 21.20 22.75 23.50 24.00 24.00 23.60 22.00 22.00 24.00 25.00 25.62 26.00 26.00 26.25 26.60 26.70 27.00 26.40 26.63 27.25 27.80 28.00 28.00 28.88 29.60 29.40 29.50 29.00 30.12 30.30 29.62 30.00 29.25 29.37 28.20 28.00 28.00 28.00 28.00 28.00 28.00 28.00 25.92 26.00 25.00 25.00 25.00 26.00 25.00 25.00 25.00 23.00 23.00 23.00 23.00 23.60 24.16 26.00 26.00 27.16 27.20 27.00 27.00 27.00 26.75 25.86 25.00 25.00 24.60 24.25 23.65 23.25 23.00 23.00 23.00 March 23.00 23.00 May 22.92 21.00 July.../. 21.00 21.00 20.60 October 20.00 November 19.00 19.25 24. S 30.32 27.93 22.08 24.03 27.41 29.23 1 26.33 24.68 25.20 21.40 Steel plates. [Tank plate, Pittsburgh.! AVERAGED QUARTERLY FROM OPEN QUOTATIONS. Year. First. Second. Third. Fourth. Year 1S92 1.92 1.69 1.23 1.12 1.36 1.10 1.00 1.49 2.17 1.42 1.60 1.60 1.60 1.55 1.60 1.70 1.70 1.47 1.65 1.40 1.85 1.58 1.18 1.21 1.32 1.00 1.07 2.16 1.65 i:66 1.00 1.60 1.60 1.60 1.60 1.70 1.67 1.26 1.49 1.38 1.80 1.54 1.21 1.73 1.19 1.00 1.11 2.62 1.13 1.60 1.60 1.60 1.56 1.60 i.no 1.70 1.00 1.39 1.39 1.31 1.74 1.41 1.17 1.63 1.12 1.04 1.13 2.64 1.27 1.60 1.00 1.60 1.42 1.60 1.64 1.70 1.60 1.53 1.38 1.14 1.83 1.56 1894 1.20 1896 1.42 1.24 1897 . . . , 1.05 l.OS l^qg 2.20 1.65 1901 1.55 1909 1 1.60 1.60 1904 -• 1.54 1.69 1.61 1907 1.70 1.64 1909 1.41 1.45 1911 1.31 » Premiums lor prompt delivery. 88 INVESTIGATION OF UNITED STATES STEEL CORPORATION. Structural thape*. QUAETEELY AVERAGES OF QUOTATIONS. Year. First Second. Third. Fourtli. Year. 1894 1.21 1.21 1.44 1.5S 1.15 1.36 2.25, 1.61 1.60 1.60 . 1.60 1.65 1.70 1.70 1.70 1.43 1.55 1.40 1.20 1.25 1.49 1.33 1.16 1.60 2.21 1.60 1.60 1.60 1.60 1.60 1.70 1.70 1.68 1.25 1.49 1.38 1.27 1.66 1.56 .98 1.19 2.12 1.68 1.60 1.60 1.60 1.65 1.63 1.70 1.70 1.60 1.40 1.41 1.34 1.25 L5S 1.60 1.09 1.20 2.25 1.50 1.60 1.60 1.60 1.41 1.70 1.70 1.70 1.60 1.63 1.40 1.17 1896 1 40 1896 1 49 1897 1898. ..J 1899 1 83 1900 1901 1902 1 60 1903 1 60 1904 1.54 190S 1906 1907 1908 1 64 1909 1 40 1910...: : The following table gives the average quarterly prices of steel beams and channels at Pittsburgh from 1894 to 1911. Average quarterly prkea of beams and channels. [Average price per 100 pounds.] Year. First quarter. Second quarter. Third quarter. Fourth quarter. Average. 1894 , J1.21 1.21 1.44 1.66 1.15 1.35 2.25 1.61 1.60 1.60 1.60 1.55 1.70 1.70 1.70 1.45 1.55 1.40 11.20 1.25 1.49 1.33 1.15 1.60 2.21 1.60 LOO 1.60 1.60 1.60 1.70 L70 L68 L25 1.63 SI. 27 1.56 L65 .98 1.19 2.12 1.68 1.60 1.60 1.60 1.55 1.63 1.70 1.70 1.60 1.40 1.41 SI. 25 1.58 1.60 1.09 1.20 2.26 1.60 1.60 1.60 1.60 1.41 1.70 1.70 1.70 1.60 1.53 1.40 SI. 23 1.49 1.49 1.24 1.17 1.83 1.91 1.68 1.60 1.60 1.54 1.62 1.70 1.70 1.64 1.41 1.47 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910. 1911 During the above period the lowest average quarterly price was in the third quarter of 1897, 98 cents per 100 pounds. The highest average quarterly price was in the last quarter of 1899 and the first quarter of 1900. The average price for April and May, 1911, was $1.40. On June 1, the price was $1.35. (Annual Statistical Kept, of the American Iron and Steel Association, July 26, 1911, p. 46.) , INVESTIGATION OF UNITED STATES STEEL COEPOEATION. 89 Average monthly prices of wire nails, Chicago. [Per keg of 100 pounds.] {Annual Statistical Beport of the American Iron and Steel Association, July 25, 1911, p. 50.] Months. 1901 1902 1903 190i 1906 1907 1908 Januai7 February March April , May June July August September.... October November . December Average, 12. 35 2.45 2. 45 2.45 2.45 2.45 2.45 2.45 2.45 2.42 2.35 2.25 {2.16 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.15 2.05 2.00 2.00 $2.08 2.12 2.20 2.15 2. IS 2. IS 2.15 2.15 2. IS 2.15 2.16 2.00 S2.04 2.05 2. 09 2.10 2.10 2.07 2.05 1.90 1.7S 1.7S L77 1.88 SI. 90 1.95 1.95 1.95 1.95 1.95 1.95 •1.87 1.87 1.95 1.95 1.95 $1.94 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.96 2.00 2.04 2.15 $2.15 2.15 2.15 2.15 2.15 2.18 2.18 2.18 2.23 2.23 2.23 2.23 $2.23 2.23 2.23 2.23 2.23 2.13 2.13 2.13 2.13 2.13 2.13 2.13 $2.13 2.13 2.13 2.13 1.83 1.88 1.90 1.98 1.98 1.98 1.98 2.00 $2.03 2.03 3i.03 2.03 2.03 2.03 1.94 1.88 1.88 1.88 1.88 1.88 2.41 2.15 2.13 1.93 2.18 2.17 2.00 The following table, published by the Wall Street Journal, gives the average yearly prices per gross ton of eight leading steel products from 1901 to 1910, inclusive, together with the so-called official prices as of May, 1911, in dollars: Year. Steel rails. SUp plates, Titts- Wire nails, Pitts- Steel bars, Pitts- Beams, Pitts- burgh. Tin- plate mill. Bessemer iron, Pitts- Steel biUets, Pitts- Average. burgh. burgh. burgh. burgh. burgh. 1911 28.00 31.36 40.32 31.36 31.36 82.88 15.75 23.00 35.50 1910 28.00 32.60 40.09 32.03 32.92 80.64 17.19 25.39 36.11 1909 28.00 31.70 40.70 29.56 31.58 78.40 17.41 24.58 35.24 1908 28.00 36.84 44.35 33.15 36.73 82.88 17.07 26.31 38.17 1907 28.00 38.08 45.02 35.84 38.08 87.96 22.84 29.23 40.63 1906 28.00 35.84 41.56 35.39 38.08 88.56 19.54 27.41 39-29 1905 28.00 35.61 39.42 35.39 35.28 78.40 16.36 24.69 36.64 1904 28.00 34.52 40.32 29.56 34.49 76.38 13.76 22.08 34.89 1903 28.00 35.84 44.12 34.94 36.84 89.76 18.88 27.93 39.64 1902 28.00 35.84 44.57 37.40 35.38 88.03 20.15 30.32 39.96 1901 27.40 34.87 50.40 32.92 35.39 89.60 15.72 24.13 38.80 Note. — 1911 prices represent present prices. It will thus be seen that the average price of iron ore, pig iron, and steel products during the 10 years since the organization of the United States Steel Corporation has been the lowest of any decade in our history, except the one from 1890 to 1900, when the conditions for a considerable period were abnormal. If a comparison should be made between the year 1900, just previous to the organization of the United States Steel Corporation, and 1911, the decrease ia prices would be still more striking. That the price of iron and steel should have a considerable de- crease since the organization of the United States Steel Corporation is a little remarkable when it is considered that the course of prices generally has been iu the other direction and the wages of labor have considerably advanced. The wages paid to labor in 1902 amounted to $14.70 per ton of production and in 1910 to $16.30 per ton. La 90 INVESTIGATION OF UNITED STATES STEEL COKPOBATION. other words, based upon the production of 1910 the increase of wages for that year, above the wages prevailuig in 1902, amount to over $17,000,000. To this amount should be added the sums paid in bonuses and for old-age pensions and for accident relief, which would add from $2,000,000 to $3,000,000 a year. (Hearings, No. 52, pp. 3530, 3531.) It appeared, frpm the undisputed testimony, that the wages paid by the United States Steel Corporation in the Pittsburgh district were a little higher than those paid by its competitors in the same district, the lowest wages paid being 17i cents per hour to common labor. Complaint has been made in the past as to the hours of labor, which have been excessive. These are the same as those of other companies in the business and the same as existed when the United States Steel Corporation was organized. The long hours have arisen from the necessity of continuous operation in the making of steel, but the corporation has taken steps which have already resulted in the elimi- nation of the 24-hour day, or the long turn at the time when the shifts were changed from night to day or from day to night. The practical elimination of the seven-day week and the general better- ment of local conditions are shown by extensive tables and are printed in the hearings, beginning with page 3310 and continuing to page 3388, showing the actual number /)f hom-s worked and number of days worked in a month and the nationality of the laborers. WhUe the condition of labor is not ideal, it is at least as good as among the competitors of the United States Steel Corporation. CONCLUSIONS OF H. O. YOUNG ON THE FACTS. ORGANIZATION. 1. The United States Steel Corporation when organized was greatly overcapitalized, but to a great extent this has been remedied by extensive investment of earnings since its organization. 2. The objects aimed at in the organization of the United States Steel Corporation were: (a) Greater integration and the consequent increased economy and efficiency in operation and the avoidance of paying profits to out- siders. (6) Promotion and stock market profits. (c) Lessening of severe competition. EAILEOADS. 3. The Interstate Commerce Commission with the aid of the sev- eral State railroad commissions has ample power to correct all prac- tices incident to the ownership of railroads by the corporation which INVESTIGATION OF UNITED STATES STEEL COKPOKATION. 91 are unfair to competitors or inimical to the general welfare. To claim tkat it has not such power is to say that it has utterly failed in the purpose for which it was created and given its present exten-\ sive powers and to leave little excuse for its further continuance. 4. In some instances the share of the through rate received by the railroads owned by the United States Steel Corporation is so exces- sive as to call for early action by the Interstate Commerce Commis- sion. It is but just to state, however, that these rates were all inherited by the United States Steel Corporation. That ia no instance have they been increased by the United States Steel Corpo7' ration, although in some instances they have been lowered by that corporation, and that the gjactice denounced is shared by many other manufacturers in maii;^lines of business. EESTEAINT OP TEADE. ' 5. Previous to the organization of the United States Steel Corpora- tion several corporations^ engaged in the manufacture of plates, structural iron, and wire, some of which subsequently became sub- sidiaries of the United States Steel Corporation, entered into illegal pooling contracts, fixing prices, and dividing production on a per- centage basis. Under these contracts they continued to act after the organization of the United States Steel Corporation, in the case of plate and structural iron agreements, until January 1, 1905, and in the case of the wire, agreements until a later date. The plate and structural steel agreements were brought to an end by the direct intervention of Judge Gary. Judge Gary denied any knowledge of the existence of the wire pools, and there is no evidence to the con- trary. The circumstances are such, however, as to indicate that some of the officials of the United States Steel Corporation must have been cognizant of these acts. 6. One of the main purposes of the Gary dinners, so called, was, by creating confidence and friendly relations among the manufacturers of steel, to maintain prices and prevent destructive trade wars. ■ '^' ■ MONOPOLY. 7. The United States Steel Corporation, outside of the so-called Hill lease, which it has exercised its option to cancel, controls about one-half of the now available iron ore in the Lake Superior district, and not to exceed one-half of the now available iron ore in the Bir- mingham_ district. Its ownership or control of iron ore in other portions of this country, or in Cuba, is iaconsiderable. It owns a very much smaller proportion of the coking coal of the country than it does of the iron ore, while it produces a Uttle more than half of the steel products of the country. In other words, its acquisition of raw 9,2 INVESTIGATION OF UNITED STATES STEEL COEPOBATION. materials has not kept pace with its manufacturing capacity or achievements. Its ownership of now available Lake Superior ores does not exceed 40 years' supply at the present rate of consumption, and considering its vast investment in plants is no more than common prudence would dictate it should acquire, and lacks very much of being a monopoly. 8. The entire production of the United States Steel Corporation, relative to the entire iron and steel production of" the country, has steadily decreased since its organization and is lower now than et any former period of its history, while the relative proportion of the production of the other manufacturers of iron and steel, in this country, has steadily increased and is higher now than at any period since the organization of the United States Steel Corporation. The United States Steel Corporation, since its organization, has by purchase and new construction about doubled its capacity, but in the same time the production of the country has increased about* 160 per cent, so that neither in production or capacity has the United States Steel Corporation kept pace with the growth of the iron and steel industry. PEICES. 9. The general tendency of iron and steel products since the organization of the United States Steel Corporation, though they had many fluctuations, has been downward. The average price -of steel products since its organization have been lower than during any other like period in our history, except the decade from 1890 to 1900, during which conditions in all industries were abnormally depressed and labor was unemployed. I am of the opinion that the United States Steel Corporation has to some extent steadied prices and prevented wide fluctuations, but that on the other hand prices are as low, and probably lower, than they would have been if this company had never existed. TENNESSEE GOAL, lEON A EAILEOAD CO. 10. During the height of the panic of 1907, Moore & Schley, bankers and brokers of importance in the city of New York, had among their assets, mainly as collateral for loans, about 150,000 shares of the stock of the Teimessee Coal, Iron & Railroad Co. about 100,000 shares of which they had rehypothecated with various bankers as a part Of the collateral for their own indebtedness, which amounted to about $38,000,000, nearly all of which had come due. The stock was uncurrent and not deemed good oollateral, especially in times of panic. Moore & Schley caused the United States Steel Corporation to be approached with a view to a sale of the stock of the Tennessee Coal, Iron & Railroad Co., in order to relieve their own situation. IKVBSTIGATION OF UNITED STATES STEEL COBPORATION. 93 11. There is not the slightest evidence that there was any attempt by the United States Steel Corporation, or J. P. Morgan & Co., or any- one else to depress Tennessee Coal, Iron & Railroad Co. stocl^iin the market or to embarrass its owners, or Moore & Schley, so as to buy the stock cheap. On the contrary, the evidence shows conclu^vely that all of the business interests in New York City were working un- selfishly and patriotically to stem the tide of the panic and financial disaster that was sweeping over the country. 12. The failure of Moore & Schley at the time would probably have resulted in many other failures and in greatly aggravating the panic and spreading loss and suffering among millions of our people. 13. Moore & SclJey would probably have failed but for the relief offered by the sale of the Tennessee Coal, Iron & Railroad Co. stock. No other practicable means of saving them was proposed by them- selves or anyone else. Judge Gary, on the part of the United States Steel Corporation, offered a loan of $5,000,000, and this was rejected by Mr. Schley as wholly inadequate. 14. Messrs. Frick and Gary made frank and truthful statements to President Roosevelt of the material facts of the case. 15. The steps taken by President Roosevelt in the matter were inspired by patriotic motives. They gave the United States Steel Corporation no additional rights and granted it no immunity from civil or criminal prosecution should it later appear that it had in any way violated the law. 16. The effect of the sale of the Tennessee Coal, Iron & Railroad Co. stock was to place over $12,000,000 in Moore & Schley's hands to enable them to reduce their loans with the banks from $35,000,000 to $23,000,000, to turn their assets into cash, to add $3,600,000 to their reserves, and to render them impregnable. It was one of the most important steps in allaying the panic. 17. The United States Steel Corporation was not overanxious to buy the stock of the Tennessee Coal, Iron & Railroad Co. Those who engineered the sale on the part of the Tennessee Coal, Iron & Rail- road Co. demanded and obtained the agreement that all the stock- holders should have the option to sell at the same price. All the stockholders availed themselves of the option, showing that they thought the price reasonable. Full value was paid for the stock, and it has not so far proven a very profitable purchase. 18. Its purchase did not give the United States Steel Corporation, through the ownership of raw materials or otherwise, a monopoly of the iron and steel business of the whole or any portion of the South. SEPARATE VIEWS OF MR. STERIING Olf INVESTIGATIOBT OF imiTED STATES STEEL CORPORATION. I do not concur in all the recommendations of the minority nor in all the views therein expressed. I heartily favor governmenta'l regulation of corporations engaged in interstate commerce. The first step in this direction is legislation providing for Federal incorporation. Such legislation should limit the capitalization to the actual value of the corporate property and thus eliminate from the commerce of the country that abominable fiction of values commonly tenfied "watered stock." The extent to which fictitious values have been created by over- capitalization of corporate property has shaken public confidence in corporate securities and made the public mind distrustful of large business enterprises. This policy has cheated both the investor and the consumer. The investor has purchased stock under the mistaken belief that the face had some relation to the value. The consumer of corporate products has come to feel, and with much justification, that he has been made to pay exorbitant profits to overcapitalized corporations that they might pay dividends on fictitious stock values. Such legislation should provide for a system of reports, to a com- mission or other Government agency, giving full publicity to the manner and purpose of the organization, its methods of doing busi- ness, and it profits. It should provide for rigid supervision of all issues of securities and prohibit one corporation from holding stock in another, and limit the extent to which two or more corporations may have common directorates. I do not concur in the view of the minority that the true remedy for industrial evils does not lie in the dissolution of industrial trusts. I am of the opinion that the dissolution of the great industrial com- binations into their integral parts would do much to restore trade to a natural and healthy condition and inspire confidence of tM people in the business situation and revive commercial prosperity v The proposition that the Government shall recognize and permit to exist trusts, monopolies, and combinations in restraint of trade and then regulate them by legislative control, is one calculated to sup- press individual enterprise and destroy competition. From such a recommendation I unhesitatingly dissent. It is conceded that such a policy would result necessarily in the fixing of prices of the products 95 96 INVESTIGATION OF UKITED STATES STEEL COBPOBA330N. of such combinations by law. If Government undertakes to do that, where will be the end ? If Government fixes the price of the finished product, must it not also fix the price of the raw material and of the labor that converts it? If Government undertakes to fix the price of labor, must it not also, in the ultimate analjrais, fix the price of those things which sustain the laborer, such as food, clothing, and shelter 1 Such a condition to my mind would be subversive of the principles of free institutions and free men. It is urged that large industrial combinations can produce more cheaply than small ones. This is a fundamental fallacy from which proceeds the paternalistic doctrine that Government shall recognize and permit monopolistic combinations and fix the price of their product. Competition is certainly more conducive to progress than is monopoly. Its very essence is improved methods, better machin- ery, greater skiU, and hence more economic production. Its benef- icence does not stop at cheaper production and cheaper distribution. In its very nature it prevents exorbitant profits and compels capital to be satisfied with a fair return. The Federal Government by proper legislation can resolve greiat^ combinations into their integral parts, and then by wise and just regulation of corporate powers maintain a natural and healthy con- dition of trade. It is plainly its duty to do so. Cornell University Library HD 2769.S8AS 1912 Investigation of United States steel cor 3 1924 002 403 917