Cornell University Library HD9519.U6B5 The United States steel corporation; a st 3 1924 002 401 549 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/cu31924002401549 2 THE UNITED STATES STEEL CORPORATION STUDIES IN HISTORY, ECONOMICS AND PUBUC LAW EDITED BY THE FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY Volume XXVII] [Number 2 THE UNITED STATES STEEL CORPORATION A Study of the Growth and Influence of Combination in the Iron and Steel Industry BT ABRAHAM BERGLUND, Ph.D. l^m gork THE COLUMBIA UNIVERSITY PRESS THE MACMILLAN COMPANY, AGENTS London : P. S. King & Son 1907 PROPERTY or UBP'ARY CORNELL UNiVEF^SITY Copyright, 1907 BY ABRAHAM BERGLUND PREFACE The following dissertation is an attempt to discuss the rise, character, and influence of the United States Steel Corporation. So much has been written about this organ- ization that little can be said of its history that is absolutely new. The works which have treated this subject, how- ever, have generally been either descriptive rather than analytical in nature, or confined to certain limited phases of its development and financial policies. The purpose of this essay is not so much to give a detailed" description of the. Steel Corporation as to discuss the influences which gave it birth, and to interpret its general character and reaction upon industrial conditions in the light of those influences. TK?^ sources 6pon which the writer has mainly relied have been the annual reports and other publications of the Steel Corporation itself; several trade journals, of which the most important are the Iron Age and Commercial and Financial Chronicle; and certain governmental documents, particu- larly the Report of the Industrial Commission. The writer has also derived aid from interviews with officials connected with the Steel Corporation and other steel companies. He is also under obligations to Drs. E. R. A. Seligman and H. R. Seager who have looked over his manuscript and offered several valuable suggestions. A. B. Manlius, New York, April, 1907. 227] S UU5 CONTENTS CHAPTER I Introduction PAGE 1. Concentration in the iron and steel industry 1 1 2. Conditions producing concentration 12 3. The Steel Corporation not a monopoly 17 1 4. Financial stability of the corporation 18 5. Influence on prices 20 6. Relations to iron and steel associations 22 CHAPTER II Determining Factors in the Iron and Steel Situation 1. Four important influences 25 2. Natural conditions. A. Relative position of the United States among iron and steel producers 25 B. Principal iron and steel centers of the United States 27 C. The leading ore regions and their influence 29 3. The concentration of capital. A. The tendency toward consolidation 33 B. The necessity and economy of large capital 36 C. The question of the upper limit to the economy of large capital • ■ • ■ 37 4. Effect of alternating periods of prosperity and depression. A. Causes oscillations in the iron and steel trade 39 B. Oscillations in prices and earnings 40 [ C, Effect of oscillations on desire for control ■ 42 \t,. The tariff. _ , A. The tariff restricts area of competition and fosters combinations • • • 43 { B. Its influence illustrated in the tin plate industry from 1890 to 1900. 46 J 6. Cooperation of these influences evolved the Steel Corporation S*' 229] 7 CONTENTS [230 CHAPTER III The Beginnings of the Steel Corporation PAGE ^ I. General condition of the steel industry from 1890 to 1900 54 >^' 2. The formation of great consolidations 55 3. Overcapitalization and lack of reserve funds ■ ■ ■ 58 4. The Carnegie Company and its industrial policy 60 5. The interdependence of the various companies 62 6. Effect of the depression of 1900 64 v^ 7. The organization of the Steel Corporation • 66 8. Exchange of securities 69 9. Mr. Carnegie's personal share in the exchange 70 10. The total issues of stocks and bonds 71 CHAPTER IV The United States Steel Corporation J 1. The purpose of the chapter 73 2. General character of the Steel Corporation 73 3. Possessions of the new corporation 78 4. Additions to the Steel Corporation since its formation 81 5. Growth of export and western trade 85 6. Internal changes 87 7. Present capital 88 8. The bond conversion 89 9. The profit sharing scheme of the corporation 90 10. Earnings from 1902 to 1906 ._ 92 11. The Steel Corporation's share of the country's trade 95 CHAPTER V The Capitalization of the Steel Corporation 1. The effect on capital of the organization of consolidations in prosperous times 100 2. The Steel Corporation and its constituent companies organized during a prosperous period loi 3. Increase of stock over the original issues for the companies incorporated. loi 4. Earning capacity of the companies absorbed 103 5. Original companies overcapitalized 105 231] CONTENTS 9 PAGE 6. A large proportion of the stock represented intangible assets 108 7. Relationship of oscillations of trade to overcapitalization 109 8. Additions to the tangible assets of the Steel Corporation and constituent companies since their formation iii 9. Actual assets of the Steel Corporation 112 10. Capitalization based on future values of ore and coal properties 1 14 11. Present value of the plants and properties of the Steel Corporation 118 12. The bond conversion 120 13. General summary 124 CHAPTER VI The Steel Corporation and Prices ' I. The data for iron and steel prices 126 2. Declining prices during the last thirty years 127 3. Causes of this decline 128 4. Influence of consolidations and pools 131 5. Prices before and after the organization of the Steel Corporation 136 6. General policy of the Steel Corporation regarding the prices of raw and crude material 140 7. Comparison of prices during igoi-03 and 1906-07 142 8. The steadying effect on prices 143 9. Prices of exported products - . 144 10. Prices of armor plate 146 11. The cost of ore to the Steel Corporation and the probable effect of the transfer of the Hill holdings 149 12. General conclusion regarding prices 151 CHAPTER VII Monopoly and Iron Associations 1. The proportion of trade controlled by the Steel Corporation since its organization 152 2. Conditions giving birth to monopoly 153 3. Application of those conditions to the iron and steel industry 155 4. The possible control of the sources of raw material 157 ' 5. The uncertain tenure of monopoly if secured 162 ^ 6. The nature of pools 163 7, The Merchants' Ore Association 165 8. The Bessemer Pig Iron Association 166 / 9. The steel billet pools 166 lO CONTENTS [232 PAG 10. The Steel Rail Association 167 1 1. The International Rail Association 16S 12. Other associations 171 /t3. General influence of pools 172 14. The legal and economic aspect of pooling 174 Conclusion 175, CHAPTER I Introduction § I. The making of iron and steel has probably advanced farther along the line of capitalistic development than has any other manufacturing industry. It has_had_a large share of the attention of trust .promoters ; and it is doubtful if any other industry better exemplifies the general charac- ter and .opefations of the so-called trust movement. The conditions which'"have contfTBtited toward consolidation in iron and steel manufacture have in many respects been simi- lar to those which have facilitated the formation of com- binations in general; and the reactions of consolidation upon the conditions contributing toward this movement il- lustrate some of the most salient tendencies inherent in large-scale production. The concentration of produption which had been going on in the irtin and steel industry during the closing decades of the nineteenth century — and especially during the clos- ing years of that century — reached a climax in the form- ation t)f the United States Steel Corporation in igoi. The forces or conditions which evolved this Organization cannot be stated in a few categorical sentences; nor can their in- fluence be properly gauged by mere statement. In the de- velopment of this great consolidation several forces, imme- diate and remote, industrial and financial, co-operated. Some of these, though usual accompaniments of the evolu- tion of large-scale production, have exercised only subor- dinate influence; others stand out prominently as determin- 233] II 12 THE UNITED STATES STEEL CORPORATION [234 ing factors in the iron and steel situation. It is with refer- ence to these latter forces or conditions that the existence, character, and influence of the Steel Corporation can be best interpreted. § 2. Fundamentally, the conditions which gave birth to this "great combination are similar to those which have given riseto" other consolidations. In several character- istics, iron and steel goods resemble those which are ordin- arily produced under trust management. They are subject to standardization — to certain uniformities of shape, size and quality. They are in general demand over a wide ex- tent of territory. They are most economically manufac- tured on a large scale. At distances from certain local points, or places of manufacture, freight charges enter largely into their prices; and in so far as large producers have been able to secure better terms in the matter of trans- portation than their smaller rivals,- the movement toward concentration has been accelerated. In certain particulars external to the mere manufacture of iron and steel, the industrial situation has been influenced by conditions similar to those contributing to the growth of other combinations. Intensity of competition, due partly to mal-adjustments between the number and size of competing producers and the strength and extent of the de- mand for goods, have furthered the desire for consolidation. The protective tariff, too, by limiting the area of competi- tion has encouraged producers to combine in the hope of securing control over certain branches of the trade in the ■ home market. The geographical distribution of the sources of raw material, in so far as these sources are conveniently located for a single corporate or unified control, has helped to the same end. These influence5„ajid.,Q±hgrs which might be mentioned, are not peculiar to the iron and steel 4Bd.«stryr The condi- 235] INTRODUCTION 1 3 tionSjJioweverj_BLliictLexercise_(L:^€-most determining ef- 'fects were peculiar in magnitude and mode of operation.' ^och- TvereTH? tfiTTileiices exer-ted" by the existence and geographical distribution within the country of large ore and coal fields ; by the superior efficiency of large over small capital ; by the extreme fluctuations in the demand for iron and steel goods ; and by the restrictions imposed on foreign trade by the protective tariff. All these influences co- operate in promoting the growth of concentration. As is well known, the existence of the iron and steel in- dustry on any large scale is dependent upon adequate ore and coal supplies and facilities for the easy assembling of material. With these essentials the United States is richly endowed, and it is to-day leading the world in the produc- tion of iron and steel. The greater part of this industry is carried on in the northeastern part of the country where the leading producers depend, for their raw material, upon the Lake Superior ore districts and the Pennsylvania and West Virginia coking-coal areas. fAbout eighty per cent of the country's iron and steel is produced from ores mined in the region about Lake Superioi^lQ^e localization of so much ore within such a limited area with cheap transporta- tion over the Lakes to Ohio and Pennsylvania has favored combinationj Dependence upon the same or adjacent sources of raw material, common transportation facilities, and trade in the same market have brought producers into relations with one another which have not infrequently led to pooling or consolidation of interests. / Geographical conditions, therefore, have favored the growtfr of the in - dustry in the United States, and have facilitated to a very appreciable extent the tendency toward concentration/ (jMore potent even than geographical conditions in de- veloping this tendency has been the superior efficiency of large capitarTj [There are other industries which require a 14 THE UNITED STATES STEEL CORPORATION [236 great outlay of capital for the most economical production, but the making of iron ani^el is in a pre-eminent sense the industry of large ca^t^tJ The proper equipment of a steelj)lant for effective competition involves extraordinary costs. J Not only must the rollings mills_be furnished with elaborate and adequate machin,ery^Jbiit_tlie producer must be prepared-temantrtacture his own iron and steel, and even secure his own oreamdcoal fi eMiV/ Such a condition «is in- compatible with niere individual or partnership manage- ment. It necessitates not only corporate control, but in- volves a consolidation of interests engaged in different s tages of production. [_The nature of the industry itself thus tends toward large-scale production ; and this helps to limit its management and control to a relatively small number of producers:^ l^-operating wit^lythese influences making for concen- tration there have been violent oscillations in the demand for iron and steel due to alternating periods of prosperity and depressionTJ No other industry is more susceptible to general trade conditions or has been more influenced by such susceptibility. The fluctuations which have character- ized the iron and steel industry explain much of the ten- dency toward consolidation and in no small degree the spec- ial character which consolidations have assumed. The de- mand for iron and steel is great or small according as the times are prosperous or dull. The opening up and shut- ting down of furnaces and mills, incident to this changing demand, involve much waste ; and hence the necessary cost of production is greater than if the demand for goods were normal and steady. During a prosperous epoch, also, an unduly large number of producers are induced to enter the industry ; and this makes competition exceedingly severe and even ruinous during a period of depression. These considerations make some control over the conditions of the trade peculiarly desirable from the standpoint of producers. 237] INTRODUCTION 15 i Furthermore, this varying demand for iron and steel has mmenced the character of the resulting consolidations. It was the stress of competition during dull times that led the manufacturers of finished material to reduce as far as pos- sible their costs by securing the sources of their raw ma- terial and the producers of crude material to extend their markets by manufacturing finished goods. This tendency has resulted in making the more important combinations largely independent and self-sufficient — a feature which is pre-eminently characteristic of the industry!]! Capitalization has also been influenced by these osdHations. Combina- tions, as a rule, are formed during periods of prosperity or rising prices. Capitalization is generally based upon real or supposed earning power. As earnings are more than normal during so-called brisk times, capitalization tends to become inflated. It is true that monopoly advantages re- sulting from consolidations have been capitalized; but the fluctuating character of the iron and steel trade must be looked upon as a prime cause of what has been considered the over-capitalization of the Steel Corporation and its con- t'tuent companies. The influence of the tariff has been not unlike that in other industries. In restricting foreign competition it has rendered control of the industry within the country easier of attainmentj As great consolidations are usually formed with the object of controlling trade, the existence of the tariff has been an important factor in fostering their growth. Such combinations as the American Tin Plate Company and the American Steel and Wire Company, whose aims were monopoly control, would hardly have been formed without tariff protection. These companies included practically all the plants of the country in their respective lines, and were enabled to secure temporary monopolies by virtue of the high duties on tin plate and 1 6 THE UNITED STATES STEEL CORPORATION [23S wire goods. The tarifif co-operating with other influences has thus facilitated combination by limiting the area of competition. The conditions, therefore, under which iron and steel have been produced in the United States have been favor- able to a considerable degree of concentration. Funda- mentally, it may be said that it was the co-operation of these conditions that developed the Steel Corporation. The geographical distribution of ores and coal favored the growth of the iron and steel industry in this country, and in large measure facilitated consolidation. The large capital necessary for the most economical production and the pro- ifcective tarifif, by shutting out foreign competition, tended to limit the domestic market to a relatively small number of great producers. The fluctuations of the trade, resulting in much waste and uncertainty, contributed still more to ac- centuate this growth toward concentration by increasing the desire among producers for some control over the in- dusitry. I 'I'he immediate cause of the formation of the Steel Cor- porHlion was a desire on the part of certain financial in- terests to secure some control over the iron and steel in- dustry, and avert a threatened competition. 'By the close of the last century the bulk of the trade was already under the control of a few great consolidations or corpora tions ?} While some of these organizations had secured some meas- ure of monopoly in their respective fields, the vicissitudes of the trade — especially the depression of the latter half of 1900 — led to a threatened invasion on the part of some concerns of one another's fields. The organizations most vitally interested in this threatened invasion were the Car- negie Steel Company, the Federal Steel Company, the Na- tional Tube Company, and the American Steel and Wire Company. The outcome of this condition was a consolida- 239] INTRODUCTION ly tion of these and other potential rivals into the United States Steel Corporation. § 3. By the formation of this great corporation more than half of the country's iron and steel production came under the control of a single organization. Miihile the ori- ginal purpose of the Steel Corporation was to avert threat- ened competition and exercise some measure of control over the steel industry of the United States, the conditions which fostered the tendency toward concentration ha^ g not oper- ated, thus far, to promote permanent monopolization^ The sources of raw material have not as yet come under the control of this organization. The Steel Corporation, like other great concerns engaged in the same business, owns or controls its sources of ore and coal supply. While holding some of the best ore lands in the Lake Superior region, it has not gained full possession of the productive forces of this district. Notwithstanding several additions to its holdings in this region, probably more than a fifth of the ore lands of the Lake Superior district are owned or held on lease by concerns in competition with it. The existence of consider- able ore in other parts of the country under the control of independent companies renders any monopoly of the coun- try's deposits of this material improbable in the immediate future. Nor has the Steel Corporation, by virtue of its size, been enabled to secure control over the output of crude and fin- ished products.. The iron and steel industry requires large capital for the most economical production; but the prin- cipal economies seem to be achieved long before such a high capitalization as that of the Steel Corporation is reached. One of the ofificials of the Jones and Laughlin Steel Com- pany declares that at least twenty or thirty million dollars are necessary to equip a steel plant for effective competition. The nominal capitalization of all the companies in the 1 8 THE UNITED STATES STEEL CORPORATION [240 United States, engaged in the manufacture of steel, is about two billion dollars, of which amount a billion and a half is represented by the Steel Corporation, and the remaining_fi\'e hundred million by ten or twelve large companies, [^ipt- withstanding the preponderating position of the Steel Cor- poration, its size apparently gives it no competitive advant- age over its smaller rivalsTj During the six years of its his- tory, it has absorbed o^flier concerns, increased its holdings of ore and coal, and expended large sums on improvements and additions to plants. Yet its relative share of the coun- try's output of iron and steel has shown no tendency to in- crease, and in some important lines of manufacture has even appreciably diminished. During its career its- net earnings, while large, have not been extraordinary in com- parison with its huge capitalization, and in view of the prosperity of the period during which it has existed. For more than two years these earnings were not deemed suffi- cient to pay dividends on the common stock. The Steel Corporation, while organized to avert a threat- ened competition, has been compelled to withstand not a little rivalry. Outside of a few lines of manufacture guar- anteed by patents it has achieved no monopoly. Paradoxi- cal as it may seem, it is less of a monopoly than were some of the com-panies out of which it was formed. These com- panies, being consolidations of practically all the concerns of the country engaged in certain lines of production at the time of their formation, were enabled to control their markets. This control was safeguarded, so far as foreign competition was concerned, by the protective tariff. How- ever, domestic competition soon developed ; and by the time the Steel Corporation was organized much of this control was being undermined, and to-day most of it is entirely gone. § 4. In forming any estimate, therefore, of the stability of the corporation, its reaction on the conditions that gave 241 ] INTRODUCTION 19 it birth, and its probable future evolution, we must remem- ber its character as a great, but not monopolistic organiza- tion. Its financial integrity and its influence on trade con- ditions do not rest upon any present control exercised over the steel industry. Its tendencies and significance for the future must be interpreted in the light of conditions which characterize the iron and steel trade as a whole. Viewing the Steel Corporation as a competitive concern and at the same time the largest industrial organization in the world, the question of its financial stability is one of in- terest and significance. This organization started on its career with a capitalization in round numbers of $1,400,- 000,000 — several hundred millions more than the aggre- gate capitalization of all its constituent companies before they became parts of this great consolidation. Most of these companies were themselves capitalized on the basis of incomes earned during a period of prosperity, or of real or supposed monopoly achievement. This fact has tended to give the capitalization of the Steel Corporation a highly in- flated aspect, and has seemed to make its ability to meet its corporate obligations extremely problematical.. This capitalization, however, has been defended on the ground that the constituent companies, both before and after the organization of the Steel Corporation, have made several additions to their plants, and that their ore and coal prop- erties have greatly increased in value. Indeed, the princi- pal asset of the corporation is held to be its ore properties which, on account of the increasing use of steel, are becom- ing more and more valuable. This defense has a certain basis of justification. The properties of the Steel Corporation are unquestionably more valuable to-day than they were at the time of its organiza- tion. Barring such contingencies as the discovery of new and extensive ore fields in other regions advantageously 20 THE UNITED STATES STEEL CORPORATION [; situated and cheaply worked, and the invention of new i cesses transforming the character of the steel industry, holdings in the Lake Superior district will remain a rr valuable asset. In capitalizing such a business, howe^ some discount should be made for the contingencies scribed. This is especially urgent in view of the fact t more than a third O'f the corporation's capital consists a bonded debt whose obligations must be met durinj period of depression as well as in normal and prosper times. When it is remembered that the iron and steel dustry is exposed to great vicissitudes in trade and t new discoveries and inventions may change its chara( and places of operation, it can hardly be said that the fin cial stability of the organization is fully assured. Vie\ in the light of existing conditions, however, the assets the Steel Corporation are unquestionably of great va The critics of the financial policies of the corporation h probably more frequently underestimated its resources tl the defenders have overestimated them. § 5.rTKe Steel Corporation, while not a monopoly, 1 nevertheless, reacted upon the conditions which favored growth. Its career has been too short to justify any v sweeping generalizations in regard to this influence, but ( tain facts stand out in considerable prominence. Since formation of this organization, the fluctuations in the pr of iron and steel have been less marked than in any ot period of similar length since i860. One of the most pel forces in the development of the tendency toward cone tration of production has been these fluctuations inciden changes in demandTl To reduce these oscillations in pr is an avowed purpose of the officials of the Steel Corj ation. Controlling more than half the steel trade of country, this organization has considerable influence on policy of producers in fixing prices. In times of pros] 243] INTRODUCTION 21 ity it has pursued a conservative course in the matter of 1/ raising prices; and independent concerns have found it to their interest to follow suit. By keeping prices relatively low in brisk times no inducements are offered to outsiders to enter the industry as competitors. This policy renders competition among those already in the field less severe in times of depression. As a consequence prices have tended toward greater uniformity. The Steel Corporation is favored in the pursuit of this policy by the fact that the steel industry of the country is nearly all controlled by about a dozen concerns. All these cor^;oanies control most of their sources of raw ma- terial; and practically all the known deposits of ore are held by them. By keeping the prices of finished material in periods of prosperity at a low level, relative to those of raw and crude products, producers who do not control their own deposits of ore and aspire after more than a local mar- ket are virtually excluded. As a result of this policy there would not be such a cutting of prices in a time of depression as has heretofore proved so ruinous to many establishments because more firms or companies had entered the industry than the trade could support. While the influence of the Steel Corporation has been in the direction of greater stability of prices, its power to achieve this end has been limited. It can exert an appreci- able influence on trade in the way described, but it does not control the productive forces of the industry. It is still exposed in a considerable degree to the vicissitudes of trade. While the officials of this organization disclaim any intention of controlling the industry, it seems not improb- able that they will seek to extend the corporation's influ- ence. The holdings of the corporation in the Lake Su- perior region have been greatly increased since its forma- tion; and efforts to augment them still further are likely to 22 THE UNITED STATES STEEL CORPORATION [2, be made. This may indicate a desire ultimately to contr the trade by controlling the sources of raw material. Sui a constimmation, however, will be difficult of achievemei Much of the Lake Superior district is held by independe concerns which have no present intention of selling the holdings. These holdings and ore lands in other parts the country are sufficiently extensive to make it difficult f any iron and steel consolidation to control the sources raw material. Even were such control secured, the gTO^ ing public sentiment against monopoly would probab show itself in a clamor for abolition of tariff duties on in and .steel. § fe. If the Steel Corporation secures fuller control ov the iron and steel industry of the United States in the ne future, it is likely to achieve this end in association wi other producers. The industry is still exposed to gre changes in the demand for commodities; and the desire regulate production in accordance with these changes well as to secure monopolistic advantages will incite further attempts to gain control over the trade. Such 'i tempts have been made in various lines in the past by mea of pools or associations. These organizations have had prominent place in the history of the industry; but in mc cases they have been weak on account of the number concerns involved, the consequent difficulty in securing he mony among the members, and the ease with which outsi capital could enter the field and break up the poolN T relatively small number of companies in the UniteO Stal now engaged in the steel trade on any large scale wot facilitate the making and keeping of agreements in rega to production and prices. The small number of concer engaged in the manufacture of steel rails accounts in lar measure for the success of the steel rail association, whi for six years has held the price of steel rails at $28.00 i ^45] INTRODUCTION 23 ton. In this association, as in others, the Steel Corpora- tion with its large share of the country's trade has had a preponderating influence. On account of the attitude of public opinion and the more active enforcement of the ajiti- trust laws many of these associations have been nominally discontinued. Tacit understandings, however, in regard to prices' prevail now as ever, a.nd seem nearly as effective as definite pooling agreements. What the influence of such associative action will be upon the interests of consumers can only be conjectured. The number of steel producers being relatively small, agree- ments or understandings in regard to prices will tend to be more stable in the future than in the past. There may be some marking up of prices as a result of such associa- tive action; but the attempt to raise them much above what market conditions would justify would in all likeli- hood weaken the ties of the association, induce outside com- petitors to enter the field, and provoke much public opposi- tion. In Germany the great coal syndicate has for these reasons often resisted the movement to raise prices in periods of prosperity. In this country at the present time it is worthy of note that it is the Steel Corporation and not the independent companies that is resisting the attempt to raise prices. This opposition, of course, is due to the re- cognition of the importance of a steady rather than fluctuat- ing volume of trade. Unless the steel industry becomes monopolized by the Steel Corporation or some other com- bination, having the sanction of the law, the interests of con- sumers do not seem to be menaced by the attempt to re- duce the oscillations of the trade. In the above outline it is seen that the Steel Corporation is an expression of the centralizing tendencies of the iron and steel industry, that it has assumed a certain position as 24 THE UNITED STATES STEEL CORPORATION [2 a result of these tendencies, and that it has reacted up the conditions that gave it birth. In the following paj an examination of this organization will be made with 1 theory above outlined in view. CHAPTER II Determining Factors in the Iron and Steel Situation § r. For an adequate appreciation of the forces which have evolved the United States Steel Corporation, and are fixing its character and economic position, some analysis is necessary of the determining factors in the iron and steel situation in this country. As has already been indicated several forces co-operated in the development of this great organization. /Hiowever, the movement toward consolida- tion and the^fiost~~salient features of this movement are the outcome principally of these four determining conditions : first, the natural distribution of ore and coal which made the growth of iron and steel manufacture in this country possible and favored in great measure large scale production; second, the nature of the industry which necessitated large capital for economical production ; third, the fluctuating demand for goods which made some con- , trol over the trade peculiarly desirable from the standpoint I of producers; fourth, the protective tariff which shut out ; effective foreign competition and acted as an inducement to \ the great pre^licers to combine for the purpose of mono- polistic contcoU § 2. A. For several years the United States has easily ranked first among the world's producers of iron and steel. This pre-eminence has in part been due to the productivity of the ore and coal fields with which the country is en- dowed. Through its ownership of land richly supplied with raw material, and by the application of large capital to 247] 2.; THE UNITED STATES STEEL CORPORATION [248 1 mining and manufacture, this country has been en- ;d to supply nearly all the home markets and to export ^e quantities of iron and steel goods. )f the world's production of iron ore in 1903 — estimated the Acnerican Iron and Steel Association to have been Lit 100,198,000 tons ^ — the United States produced 35,- ,308 tons, or about 34.95 per cent. The countries next rani? were Germany and Great Britain, which contri- ;d respectively, 21.19 P^r ^^^^ ^^^ ^3-9^ P^^ <^^"^t- I" same year this country produced 18,009,252 tons of pig 1, or 38.83 per cent of the world's total, and 14,534,978 ; of steel, or 40.57 per cent. The production fo656,309 8,713,302 13,369,611 35 902 5.687,729 9.138,363 14,826,092 38 903 5,829,911 8,592,829 14,422,740 40 904 S.908,166 7,859,140 13,767,306 43 905 8,971,376 10,941,37s 19,912,751 45 The steady increase of the production of open-heat steel is noticeable, and its increasing relative importance significant. The fact that this product seems fully the eqi )f the Bessemer material,^ and is even supplanting it, h illayed much of the fear once felt concerning the effei jf the possible monopolization of the Lake Superior regie From this brief consideration of the ore and coal distrii jf the country and of the industries depending upon the districts, it will be seen that natural conditions have deti mined the location of iron and steel plants. The^gn ;ombinations o-f-these regions have been formed among c( porationX Either engaged in different stages of the mar ^ Iron Age, Mar. 22, 1906, p. 1042. 2 Ihid., Feb. 8, 1906, p. 513. See account of meeting of Amerr Society of Civil Engineers. 255] DETERMINING FACTORS 33 facture of the same class &F-Gla-9S&s of commodities in one or other of these regions, or depending upon the same sources of raw material and competing in the same markets. In neither district has the trade been monopolize^ In the North, where consolidations have attained their greatest de- velopment, there is still much competition. The ore and coal fields have thus far proved too extensive for monopoli- zation. Even if these fields should come under a single control, there would still be much effective competition from the South, and possibly from the West. § 3. r^4?^nother factor of prime importance in determin- ing the iron and steel situation is the large capital neces- sary for economical production. This condition has fav- ored the formation of large corporations. The fact that only large concerns can compete successfully tends to limit the number of producers and facilitates combination among these producejgTf In order to form some estimate of the in- fluence of this ccmdition we may note, first, the fact of con- centration, and then consider the question of the economies aehi§ved^ I The tendency toward concentration has been very marked during the last two or three decades. During this period an increasing amount of capital has been used to equip properly blast furnaces and rolling mills, and secure re- quisite mining and transportation facilitigsJ^The acquisi- tion of mining and transportation facilities was not con- sidered essential to an efficiently organized manufacturing company until the later nineties ; but it is now almost indis- pensable to a corporation aspiring after more than local trade. The trend toward more elaborate equipment can be seen in a comparison between the number of iron and steel establishments and the amount of capital invested. During the twenty years from 1880 to 1900 the number of active blast furnaces in the United States declined from 341 THE UNITED STATES STEEL CORPORATION [256 24. The amount of capital invested in- blast furnaces — ading rented property — increased in the same period n $89,531,362 to $148,226,113.^ In other words con- rably more than twice as much money was expended tie equipment of the average blast furnace in 1900 than 880. The number of active establishments producing I ingots or castings and rolled iron and steel numbered 880, 358; and in 1906, 438. The capital invested in- sed from $116,458,390 to $441,795,983.^ Thus, while number of rolling mills and steel works increased dur- these two decades less than twenty per cent, the capital Sled was augmented by nearly three hundred per cent, jiis trend in the direction of concentration in the steel le may be illustrated by organizations in rail manu- ureT^n 1887 the first rail pool was organized; and this ibinaBon consisted of fifteen members. At first it was ,k, owing to considerable outside competition, and also- nternal dissatisfaction with the allotments of trade. In allotment of 1888, the largest percentage granted to one company was 13.5 ; and this share was given to the negie Company. In 1897, ten years after the forma- i of the first pool, this rail association consisted of but members. The only considerable manufacturer of steel s outside of the pool was the Illinois Steel Company, ch did not enter this association on account of the Il- ls laws against pooling. In the allotment of 1897 the negie Company was given 53.50 per cent of the pool's le, and the Lackawanna Company, nearly two-fifths of remainder. Thus within a single decade the number ;ompanies producing steel rails on any considerable scale i reduced, and the tendency of the industry to come ier the control of a few large corporations became more Twelfth Census, vol. 10, p. 29. " Ibid., vol. 10, p. 54. 257] DETERMINING FACTORS 35 and more apparent. Since the spring of 1901, nearly three-fifths of the steel rails manufactured in the United States have been produced by the constituent companies of the Steel Corporation; and the remainder, principally by five companies, — the Lackawanna, the Bethlehem, the Cam- bria, the Pennsylvania, and the Maryland, of which the most important is the Lackawanna. Another indication of this drift toward large corpor- ate ownership is seen in the number of abandoned estab- lishments. In 1900, according to the Twelfth Census, there were 123 iron and steel establishments with a total capital of $23,831,819 reported idle. This was the larg- est idle investment shown for any industry. Such an abandonment of industrial establishments is significant both of the shifting location of the iron industry and of the increasing concentration in large plants. In many states there exist abandoned mills which were built to utilize a local supply of ore and which have been rendered per- manently unproductive by the competition of new mills, either better equipped, or in proximity to superior raw i mter ials. \ The tendency toward large-scale production has not only been in the direction of larger and better equipped blast furnaces and mills, but also in the direction of consolida- tion of plants and companies. This trend is exemplified in two kinds of combinations: the union of concerns engaged in different stages of the production of a class or classes of commodities ; and the consolidation of companies manufactur- ing the same grades or classes of articles. An example of the former would be the Federal Steel Company, organ- ized in 1898, and now a part of the Steel Cor poration. \ This company consisted principally of the Minnesota Iron Com- pany owning ore fields in the Lake Superior region and manufacturing crude iron, the Elgin, Joliet and Eastern THE UNITED STATES STEEL CORPORATION [258 road Company providing certain transportation facilities Dme of the coal regions of Illinois, and the Illinois Steel ipany manufacturing crude material like bars, slabs, and some finished products like steel rails. Such a in is formed to secure a higher degree of productive iency by adjusting more economically the production aw and crude material to the demand for finished goods, example of a consolidation manufacturing the same ie of articles would be the American Tinplate Company, merged in the Steel Corporation. This company con- id of more than forty rival concerns. A combination his character generally aims to restrict or destroy com- tion, although economy of production may also be jht. An indication of the extent to which this integra- of industries in both these directions has gone is seen he fact that nearly all the great steel concerns of the itry are producers of raw, crude, and finished material, that more than half the country's trade is now con- I gfl hj ^a single corporation. '. The progress of this concentration has been due in ; to the fact that increasing returns have resulted from application of large capital. To-day it is practically ossible to carry on an extensive manufacturing business he higher and more important grades of iron and steel ds with a capital of less than fifteen million dollars.) s fact may be illustrated by considering the cost-&f-s«dr item as a modern blast furnace. Such a furnace is ly to be from 500 to 700 tons capacity. A rough esti- e is, to the effect that a 500 ton furnace costs about 0,000, and takes upward of a year and a half to build.* iddition to this investment, the labor of some hundreds men and the transportation of 1,500 tons or more of ' Report of Industrial Commission, vol. I, p. 945. 259] DETERMINING FACTORS 37 material must be provided for each day. This of itself re- quires a capital of half a million. In other words it would take about $1,000,000 capital to build, start, and keep in operation a single 500 ton furnace. The cost of producing- a ton of pig iron in such a furnace is from forty to fifty per cent less than in the average furnace of the early eighties, which represented an investment of $250,000 to $300,000. Plants with large capital have thus supplanted those with small capital because of their superior efficiency and econ- omy. How far production on an enlarging scale continues to be more economical it is difficult to determine. The appli- cation of repeated " doses " of capital does not necessarily continue indefinitely to be more economical. The point on this enlarging scale at which the most efficient production is reached varies with conditions. Under similar conditions, a capital of forty or fifty millions would, in the opinion of one of the officials of the Steel Corporation whom the writer interviewed, be as efficient in the iron and steel in- dustry as a capital of ten times that amount. One of the witnesses before the Industrial Commission testified that a capital of $20,000,000 to $30,000,000 would build and equip a steel plant for effective competition.^ It would seem from these statements that the principal economies achieved in the industry by large investment of capital can be attained with less than $50,000,000. With capital of this amount or more a steel concern can own and equip the most efficient blast furnaces and mills and secure control of its sources of raw material. C. The question whether or not a corporation whose capital is many times this amount has any competitive advantage merely by virtue of its size is difficult to answer. To this ^ Report of Industrial Commission, vol. 13, pp. 504-106. 38 THE UNITED STATES STEEL CORPORATION [260 question certain steel officials, as has already been noted, have given a negative reply. PlTiere are, however, some considerations which seem to favor a large consolidation. The well known savings in the matter of advertising and in the employment of a smaller number of traveling agents and salesmen are worthy of mention, although these econ- omies are not so marked as in the case of some other indus- triesj The amount of capital employed for advertising and agency purposes in the iron and steel trade is small com- pared with the total investment. A more important item of economyis found in the organization of the mills consoli- dated. J In concentrating departments of manufacture, for exampfer Instead of compelling each establishment to make numerous sizes and parts of the same product considerable saving can be made. Stopping a mill to change the rolls to suit each size or variety of a commodity involves waste of time. This waste is obviated when the different sizes and shapes are distributed among a number of mills whose productive work need not be interrupted. In many of the more finished varieties of iron and steel goods the estimated saving through thisjmultiplicity of mills amounts to more than one dollar per tonj It may be said m general that the iron and steel trade from its very nature demands large capital. ^Jl^^some ex- tent productive efficiency seems to be increased by con- solidation. Increasing returns have in large measure followed increasing outlays. It is improbable, however, that this law of increasing returns operates indef initely ,! As has already been noted the principal economies attained by an iron and steel concern are achieved with a capital of less than $50,000,000. There are some savings, as has also been indicated, in the ■ multiplicity of mills in cases where the capital may exceed this limit. It is unlikely, however, that any considerable economies are gained by very large con- 26l] DETERMINING FACTORS 39 solidations by virtue of mere size. The fact that the Steel Corporation, as will be noted later, has not increased its proportion of the country's trade during the six years of its existence is some evidence of the truth of this assumption. The necessity of large capital to equip properly a steel con- cern limits the number of such organizations. This facilitates combination for the purpose of controlling the industry. The motive for organizing the larger consolidations is not, therefore, competitive efficiency but the desire for monopoly contrel: -- §41/4. The third great factor in the iron and steel situa- tion Burnishes a powerful incentive toward combination for the purpose of control. This factor is the varying demand for commodities. Alternating periods of prosperity and depression act with great force upon this industry, and make some control over the trade peculiarly desirable from the standpoint of producers. The demand for iron and steel varies, not according to the pressing needs of con- sumers, but according to changes in the development of new enterprises. These changes are periodic; and this period- icity is closely associated with variations in the spirit of investment. In so-called good times new enterprises of all sorts are freely launched. In succeeding periods of dull- ness comparatively few ventures are entered upon. But investment and fresh ventures imply the erection of plants and the increased use of tools and machines. These in r-ji-mgan iron and steel. The heaviest conslffiiers, too, of iron and steel, like rail- road corporations, purchase their material in large ship- ment, and this material is intended to supply a need for many years abeadJ The demand is generally great with the advent^f prosperous times or when confidence is felt in the future. It is then that liberal outlays can be made for the improvement of stock and for embarking upon 40 THE UNITED STATES STEEL CORPORATION [262 new enterprises. If steel cars are to be substituted for wooden ones, they are ordered by the scores and hundreds ; if a new railroad is to be built, shipments of rails must be made in thousands of tons. During periods of depres- sion, on the other hand, little iron and steel is ordered be- yond the maintenance of plants and stocks. Old material, if servicable at all, is likely to continue in use until the out- look points to the return of more prosperous times. Until very recently these fluctuations have been accen- tuated by the influence of intermediate producers. The demand for finished products varies considerably and with great uncertainty from year to year. From the mining of ore to the sale of finished products there are several stages of manufacture and transportation. The intermediate pro- ducers must adjust their scale of production — which, for obvious reasons, cannot be immediately enlarged or con- tracted — to a changeable and often fitful demand on the part of consumers of finished products. This adjustment is necessarily, very imperfectly made where the intermediate producers are independent concerns. This fact has made the combination under one control of all the stages of pro- duction from the mining of raw material to the sale of finished goods desirable and economical. This integrated system is becoming characteristic of nearly all the larger consolidations of the iron and steel trade. B. These oscillations of the industry are reflected in variations of prices. In December, 1898, steel rails were selling as low as $17.00 per ton. A year later the price had risen to $35.00 per ton. In another year the price had de- clined to $26.00 per ton. Steel billets on December 29, 1898, were quoted at $16.25 per ton; on November 29, 1899, at $39.50 per ton; and on October 3, 1900, at $16.50 per ton. The lowest and highest quotations for wire rods during the years 1898 to 1900 inclusive, were respectively 263] DETERMINING FACTORS 4 1 $20.00 and $50.00 per ton. After the latter price had been readied early in 1900, there was a drop to $30.00 per ton before the close of the year. Unstable prices necessarily cause great variations in earn- ings. The income of the Republic Iron and Steel Com- pany during the two prosperous years of 1900 and 1901 is fairly typical of what one is likely to find in a trade marked by great and uncertain changes in the demand for goods. This company showed on its books for the year ending June 30, 1 90 1, a total of $51,000,000 assets. Its capital stock was $47,497,000, of which $20,306,000 was preferred. In 1900 the company's net earnings were $5,684,101, and in 1901, only $1,034,248. The amounts paid out in divid- ends for the two years were $3,643,729 and $309,099 re- spectively.* This falling off means that in 1901, which was generally regarded as a good year, the Republic Iron and Steel Company paid out in dividends only one-twelfth of what it had paid in 1900, and only a little over one- fifth of the amount needed to cover the seven per cent dividends on its preferred stock, leaving nothing at all for the common stock. The vicissitudes in the demand for railroad supplies are strikingly shown in the experience of the Pressed Steel Car Company. This organization from 1899 to 1903^ more than earned large dividends on its full stock — its com- mon stock securing twenty-eight per cent in 1902. In 1904, however, it had so little business, less than one- seventh that of 1902, that it was obliged to draw heavily on its surplus to pay the dividends on its preferred stock and was compelled to pass the dividends on the common.- ^ Report of the British Iron Trade Commission on American Indus- trial Conditions, p. 300. 2 Iron Age, Feb. 23, 1903, p. 655. THE UNITED STATES STEEL CORPORATION [264 V The experience of the Pressed Steel Car Company is il- lustrative of the fact that the more specialized a phase of the iron and steel industry is the more exposed it is to the icissitudes of the trade. The larger consolidations, in ad- dition to securing control of their sources of raw ma- terial and the stages of manufacture from raw to finished product, have embraced under their control several different lines of manufacture. By thus extending their markets these combinations have to some extent steadied their pro- fits. The greater the number of markets the more certain the i ncom e is likely to be./ C. (This desire to lessen the fluctuations of the industry has been a leading incentive to consolidation. The neces- sity of opening up and shutting down mills and furnaces with varying periods of demand causes much waste. The mechanical waste involved is great enough to increase ap- preciably the cost of production. But this is not the only loss. Brisk times are periods of high money wages. The attempt to curtail expenses in times of severe depression by lowering wages meets with resistance from workmen — especially labor lyiionsj The demand for increased re- muneration during flourishing periods and resistance to any curtailment in dull times with consequent strikes and lockouts have been sources of great loss to iron and steel establishments. Another feature of the situation giving rise to waste is what may be called a tendency to abnormal competition. During a period of prosperity — especially if long continued — an unduly large number of competitor^ are induced to enter the field. With the advent of dull times there is great " slashing " of prices among these rival concerns to secure trade. This competition frequently causes prices to sink below the level of cost, and many establish- ments are driven out of business with consequent loss of capital. This feature of the industry has not only caused 26s] DETERMINING FACTORS 43 waste, but has tended to accentuate the naturally great os- ciUations of the trade. *'' The uncertainties and fluctuations of the business have / been responsible for another characteristic of the industry. The prices at which the securities of steel concerns have been sold have been relatively low and very fluctuating. Men put money into the iron and steel business, not as an investment, but as a means of making a fortune. Steel stock was thus a favorite with speculators rather than in- vestors; and the industry as a whole was permeated with a speculative spirit. One of the great ends of consolidation has been to reduce the waste incident to fluctuation and to render returns steadier and more certain. Such an aim could not be achieved without an organization controlling a large per- centage of the trade of the countrjiJ If the organization of the Steel Corporation is to be attributed to any one cause more than another, it is to be assigned to the desire of achieving this end and placing the industry on an invest- ment level. § 5. A. Another determining influence acting on the iron and steel trade of the country and an important factor in facilitating combination has been the protective tariff. It is not the purpose of this dissertation to enter into any detailed discussion of such an intricate subject as the relation of the tariff to the growth of the iron and steel manufacture, but simply to indicate the nature of that re- lation, especially in its bearing upon the growth of con- solidation. It has frequently been asserted that one of the chief causes of combination is the protective tariff. Mr. Havemeyer's dictum that the tariff is the mother of the trusts has many supporters. It may be doubted, however, if this assertion is to be taken without reserve. In this country some of THE UNITED STATES STEEL CORPORATION [266 : largest and most monopolistic combinations have no •ect tariff protection ; and in England, where there is no Jtection, combinations have been formed and operated th success. At the same time many consolidations in s country would never have been organized without the iff. _JIlie restriction which the tariff places upon foreign Tipetition has acted as an incentive to combination where lustrial conditions were in other respects favorable, hether or not such a combination secures permanent coh- A over the domestic market depends upon circumstances, a consolidation secures control of the sources of raw tterial within the protected area, and a tariff is levied on such material imported from foreign countries, it is ar that domestic competition has lost in part at least its wer to lower prices. Without such control or some"^ ler monopolistic advantage within the country itself, the iff will not give a business organization a permanent , )nopoly. A combination of all the manufacturers of a tion may secure a temporary control of the market: t new capital will enter the field and reduce prices to a ■npetitive level. It is true that trust officials in those industries where fh tariffs are levied are generally strong defenders of Jtection. /Amorig several reasons usually cited by them ■ the maintenance of a high tariff is one directly op- sed to the assertion that monopoly is thereby fostered, is contended that protection should be maintained, as its thdrawal would involve the ruin of competing organi- ;ions and thus leave the domestic field in the posses- yn of combinations. The validity of this contention, lich has gained a certain popularity, is difficult to see. a consolidation achieves economies by which it can sell ods more cheaply than its smaller competitors, it can rdly be said that the alleged more expensive methods of 267] DETERMINING FACTORS 45 those competitors should be encouraged by a tariff. The public is concerned with securing cheap products of good quality whether produced by a large or a small concern. li a large organization, by virtue of its size, can manu- facture at a cost sufficiently low to meet foreign competi- tion, but its smaller rivals need tariff protection, it is evi- dent that the public derives no benefit from the economies achieved by the ■ combjnation in safeguarding its rivals by protective measures. and steel industry of the United States Ififf has exercised considerable influence. Until very recently the cost of manufacturing iron and steel has been, in general, higher in this country than in Europe; and an important part of this expense has been labor cost. The contention of manufacturers that the abolition of the tariff would necessitate the payment of lower wages in the industry has not been without some basis of fact. The tariff has protected the American industry by neutralizing the advantages which foreign producers had in the matter of lower costs. ( It may be said further that protective duties on raw and crude material have restricted the area of competition with- in the United States. Hermann Levy has shown that im- port duties on pig-iron have worked injury to steel estab- lishments east of the Alleghanies, which at one time were dependent on foreign producers for their raw and crude material.' The tariff of forty cents per ton on iron ore is probably sufficient to prevent the establishment of iron and steel plants on the Atlantic sea-board, which could easily se- cure cheap raw material from! Nova Scotia, Spain, and •Cuba. This duty, moreover, would be an important safe- 1 Levy, Die Stahlindustrie der Vereinigten Staaten von Amerika, II. 46 THE UNITED STATES STEEL CORPORATION [268 guard to any concern which secured control of all the best ore fields of the country. While the tariff has thus restricted the area of com- petition, no consolidation has, as yet, secured a permanent monopoly in any of the more important branches of the iron and steel trade. The ore and coal fields of the coun- try have thus far proved too extensive for monopolization; and no control has been secured over transportation. In- ternal competition has thus been free to act and has often been sufficient to reduce prices to a point very near the European level. The tariff has acted as a stimulus to com- bination', and has enabled organizations to secure temporary monopolies. In such cases new capital has entered the field, and has soon destroyed the control that had been achieved over market conditions. B. A fair illustration of the working of the tariff in the iron and steel trade is the career of the tin plate industry from 1890 to the time of the organization of the United States Steel Corporation. This industry in this country is generally cited as a product of protection. The develop- ment of tin plate manufacture' in the United States may be said to date from the enactment of the McKinley Bill. Previous to 1890 practically all the tin plate used in this country was imported. An industry of hardly any signi- ficance underwent great development almost immediately after the enactment of the McKinley law. The method of manufacturing tin plate is rather simple, so far as process is concerned; but considerable skill is re- quired to turn out good plates. By tin plate is meant a thin sheet of steel or iron coated with tin. The standard size of these plates is 14 x 20 inches. These plates are usually placed in boxes containing 225 sheets and weigh- ing 108 pounds each. What is called teme plate — an allied product — is a similar sheet of steel or iron covered with 269] DETERMINING FACTORS 4; an alloy of lead and tin, generally two-thirds lead anc one-third tin. Before the enactment of the McKinley Bill, the tin plat« industry in the United States had been maintaining a strug gling existence. Though protected by a duty of one ceni per pound on the foreign product, American tin plate was not in a position to withstand English competition. The competifive strength of the industry depended mainly upor three things: the price of pig tin, the price of steel, anc the labor cost. In regard to the price of pig tin, the Eng- lish manufacturer did not seem to have any special advant age over the American producer. Block tin was sold aboui as cheaply in New York as in London.^ The reason foi the high price in London, notwithstanding its proximit) to Cornwall, is that the Cornish mines did not supply the entire English demand, and the price was governed by th( quataitians of tin from Australia and the Strait Settlements Regarding the price of steel the advantage in 1890 was witl the English manufacturer. By the middle nineties, how- ever, Bessemer steel bars, which were used in both coun tries, sold about twenty per cent cheaper in the Unitec States than in England. The prices per ton in these twc countries in April, 1896, were $15.50 and $18.70 respec- tively. In the matter of labor cost the American manufac turer was handicapped in the early history of the indus try by the high price of labor and the lack of technica knowledge. These difficulties were partially overcome b) the middle nineties, as considerable technical skill had beer developed, and wages, owing to the depression of 1893, '^^.c fallen some fifteen per cent. Nevertheless, the disparity it 1 On Mar. 4, 1898, the quotations in London and New York wen $311.10 and $310.44 per ton respectively. Variations before and- afte this time seem to have been about th« same. 3 THE UNITED STATES STEEL CORPORATION [070 bor cost was great. According to Sir R. Giffen, the /elsh laborer in the tin plate industry received on the aver- g-e, in 1897, $5.46 (£1 2s 5d) per week, while the Penn- ^Ivania workman, whose efficiency was no greater, received 10.68 per week. The advantage, therefore, in respect to :bor cost was greatly in favor of the English producer. Taken all in all, the English manufacturer could make n plate nearly thirty per cent cheaper than the American, id this at a time when the expense of production in this xmtry was at a very low point. For the English producer, le price per box at the factory reached as low as $2.20; nd a box could be delivered in New York, freight paid, for bout $2.50. The cost of American tin plate of first class laterial was not below $2.75 per box. Without a tariff uty, therefore, the English product could easily undersell le American material; but in the middle nineties when rages in the United States were very low, a low duty was ufficient to enable the native producer to compete with le foreign merchant. In 1890, owing to the high price of steel bars and the igh wages of labor combined with a very imperfect knowl- dge of technical processes American tin plate sold in New ''ork City for $5.50 per box while the English product old for $3.88 plus $1.08 of tariff duty. The price of English tin plate was considerably above cost, but the American manufacturer being unable to offer any competi- ion, a price of nearly $5.00 per box was paid by the Ameri- an consumer for the imported product. With the enactment of the McKinley Bill, the duty on oreign tin and terne plate was increased to 2.2 cents per iound, or about $2.37 per box. For the first time in our listory, American tin plate was enabled to undersell the ilnglish product in the home market. The clause relating tin and terne plate in the McKinley law went into effect 27 1 J DETERMINING FACTORS 49 July I, 1 89 1. From that date the imported material was gradually supplanted by the native product. The imports of tin and teme plat«s in 1890 were 737,955,079 pounds; in 1891, 734,425,267 pounds. By 1897 the importations had declined to 230,073,683 pounds.^ Contemporaneous with this decline, was an increasing production of tin plate in the United States. In 1890, the amount produced was negligible. In 1892, it reached 13,646,719 pounds. In the following year, the native product increased to 99,819,- 212 pounds; and by 1897 the amount of tin and terne plate produced in the United States was 446,982,063 pounds. The tin plate industry in the United States may be said, therefore, to date from the time when the McKinley tariff act went into effect, and seems to have been intimately re- lated to it. It is to be remembered, however, that this tariff bill was one of three or four contributing causes of the growth of the industry. As has already been noted, the price of steel and labor cost declined greatly during the first half of the nineties. This decline enabled the American manufacturer to hold the home market when the Wilson Act of 1894 reduced the duty on tin plate to 1.2 cents per pound, or about $1.30 per box. In 1897 the Dingley Act raised the duty to 1.5 cents per pound, thus rendering the American manufacturer somewhat more se- cure. The tariffs, therefore, since 1890 have been suffi- cient to give protection to the industry in the United States, and may be said to have stimulated its growth. At the time when the price of steel and the cost of labor were very low in this country, the English manufacturer was still able, without the tariff, to undersell his American competitor. It was the tariff, co-operating with the declining price of 1 For effect on the Welsh tin-plate mills, see Consular Reports for May, 1896, pp. 67 and 68 ; November, 1897, p. 323 ; and May, 1898. 50 THE UNITED STATES STEEL CORPORATION [272 steel and low labor cost, which enabled the tin plate industry to take root on American soil. During the early and middle nineties the price of Ameri-. can tin plate steadily declined. Under the protection of the tariff the number of plants increased to over forty ; and competition among these, co>-operati]ig with improvements in processes, low wages, 'and cheap steel, brought the price of the American product down to $2.70 per box, at mill, in 1898.^ Toward the end of this year and the beginning of 1899, the cost of production was being raised on account of the increased prices of steel and pig tin. About the same time, the encouraging prospects of the industry incident to the revival of trade toward the close of the decade, seemed threatened by the competition of an increasing number of plants engaged in the business. Early in 1898 negotiations were opened to ascertain if it were possible to form a com- pany that could control all the plants of the country. As a result of these negotiations, the American Tin Plate Company was formed in December, 1898, embracing nearly all the plants of the country. This industry was now virtually in the hands of a mon- opoly. The new company endeavored to secure itself from outside competition by agreements with merchants and pro- ducers of raw material and by patents on the latest devices in machinery. In this attempt the company was for a time measurably successful. The Dingley tariff imposing a duty of 1.5 cents per pound on imported tin and terne plate pro- tected this monopoly from foreign competition. In January, 1899, the price of tin plate was increased from $2.70 per hundred pound box at the mill to $3.00^ and before summer it had been raised to $3.50. Imported tin plate could not be sold in this country for less than $4.00 1 Tin and Terne. Jan. 26, 1898. 273] DETERMINING FACTORS 5 1 per hundred pound box, although English plate was selling at Liverpool at $2.30 per box. The rise in the price of the American product cannot be attributed to any increase in labor cost, as wages and salaries remained low and in some cases were reduced/ The price of tin had increased, but not more so than for the English producer. While the price of steel was rising during the early months of 1899,, this rise did not greatly increase the relative cost of pro- duction for the American manufacturer. The English manufacturer was afifected by the rise, though to a less ex- tent. The principal element, moreover, in the expense of production was labor cost; and this had not yet increased. The increased price of American tin plate, therefore, must be attributed to a combination which had achieved a tem- porary monopoly, the power of which was in a measure safe-guarded by a protective tariff. The tariff was thus a contributing factor in the develop- ment of the American tin plate industry and an important aid to consolidation. It has not been, however, a com- plete protector of monopoly where the possibilities of home . competition have not been greatly reduced. This was shown in the later history of the American Tin Plate Com- pany. Notwithstanding the measures taken to control the domestic trade, by the time the Steel Corporation had formed in 1901, several independent tin plate mills were being built; and at present these independent concerns are increasing their trade at the expense of the older or- ganization,^ which has been merged with the American Sheet Steel Company. What has been said concerning the influence of the tariff on the tin plate industry and combination can be said with 1 Tin and Term, Jan. I2, 1899. 2 Iron Age, Jan. 3, 1907, p. 65. 52 THE UNITED STATES STEEL CORPORATION [274 certain modifications concerning other branches of the iron and steel trade. The tariff by shutting out foreign com- petition enabled the home industry to grow, and by limiting the field of competition facilitated the formation of com- binations whose object, if not achievement, has been mono- poly. The careers of these combinations, however, have been illustrations of the persistence of competition. No sooner were these organizations formed than new capital entered the industry in competition with them. § 6. Such are the determining factors in the iron and steel situation in this country. All these factors have co- operated to produce concentration of production. They have been potent influences in promoting or facilitating the development of the Steel Corporation, and to-day are help- ing to fix its character and operations. Other conditions may have helped toward the same end, but they seem to have been of minor consequence. The railroad rebate which played such an important role in the growth of cer- tain other capitalistic organizations exercised relatively little influence in developing the Steel Corporation and the consolidations out of which it was formed. These steel combinations were not due to the absorption by great cor- porations of smaller rivals which had been brought to terms by means of railroad discriminations, local underselling, and the like. They were unions of various establishments upon a certain plane of business equality formed for in- creasing productive efficiency or for controlling the market in their sev eral lines of manufacture. The iron and steel situation in the United States with its tendency toward concentration must be ascribed to the factors which have already been considered. The distribu- tion of ore and coal fields made the industry on a large scale in this country possible and to a considerable extent facilitated consolidation. The growth toward concentra- 275] DETERMINING FACTORS 53 tion was greatly influenced by the superior efficiency o£ large over small capital, which tended to limit the number of producers to large corporations, and by the protective tariff which put foreign manufacturers at a disadvantage in the home market. The fluctuation of the iron and steel trade still further accentuated this development by making the desire to control the industry peculiarly strong. / CHAPTER III The Beginnings of the United States Steel Cor- poration § I. In order to explain the nature of the Steel Corpor- tion it will be necessary to devote some space to a discus- ion of the organizations existing in the North and East /"hich became parts of the coirporatioai at the time O'f its jrmation or immediately thereafter. At the beginning of le last decade of the nineteenth century the large iron and ;eel establishments of the country had come to depend upon le Lake Superior region for most of their ore and upon le coal fields of Pennsylvania for their coke. The intro- uction of the use of coke and the opening of the ore fields f Michigan and Minnesota had already changed the center f trade activity from the region east of the Alleghanies to lat section immediately west. The growth of new mar- ets in the West as well as the relative proximity to the rincipal ore and coking-coal areas had already made the egion in the vicinity of the Great Lakes the great iron and teel producing section of the country. This pre-eminence le district has retained to the present time. In the same decade the individual and partnership basis f the industry had been supplanted in all the more im- ortant concerns by the corporate form of organization, 'his was due in the main to the growing need of large apital in the equipment of furnaces and mills. At least ne organization had already begun the policy of insuring ;s supply of raw material by securing control of ore and 54 [276 277] '^'-^-S BEGINNINGS 55 coal fields. This policy, afterwards followed by other con- cerns, iTecessitated an increasing amount of capital. As a natural result the industry was already tending strongly in the direction of concentration of production. The period from 1893 to 1897 was one of extreme de- pression in most branches of manufacture. It was especi- ally so in the iron and steel trade, where a large number of establishments went permanently out of business. It is sig- nificant of the tendency toward large-scale production that of the 123 establishments reported in the Twelfth Census as abandoned — most of which went out of business during this critical period — the average capital invested per es- tablishment was only one-fifth that of the organizations flourishing in 1900. It was the large concern well equipped and well situated with respect to ore and coal that was enabled^o survive the crisis of the middle nineties. ^^ — "^2. In 1897 and 1898 the country was recovering from the severe depression of 1893 ; and with this recovery the iron industry awakened to new life. In much of the in- dustrial field the new era of prosperity was marked by the formation of great consolidations. Among the most pro- minent in the iron and steel trade were the- Fcdcial Slctl - Company, the A merican ■ Stee l -aa d--W4fe—CQ'mpany, the /American Tin Flats - Company,* the -Natie*Kt}— Steei Com- " pany, the -J'lational Tube - Company, the Arricrican Stee l " ii©ep-€^S^ny, the AHieiiuau Glittt Steel Company, and the Amei iLan Bi idgc -Gom paH y. ^In the Pittsburg region of Pennsylvania was the Camegie-CoKipany, which, while not strictly speaking a consolidation, had for several years past been absorbing a number of establishments, making it the largest concern of its kind in the world. All these or- ganizations became parts of the United States Steel Cor- poration. I ^WMrtne exception of the Carnegie Company all these 6 THE UNITED STATES STEEL CORPORATION [27S jncerns were themselves consolidations of pre-existing cor- orations. J In September, 1898, the Illinois Steel Company, le STinnesota Iron Company, and the Elgin, Joliet, and astern Railroad Company were combined to form the Fed- ral Steel Company with an authorized capital of $200,- 00,000, of which only $99,743,900 were ever issued.^ hortly after the Lorain Steel Company of Ohio and the orain Steel Company of Pennsylvania were added to this smbination. On December 14, 1898, the American Tin late Company was organized with an authorized capital f $50,000,000, of which $46,325,000 were issued. This snsolidation, as has been seen, embraced about forty com- anies and some two hundred and sixty-five mills, produc- ig about ninety-five per cent of the total production of the Duntry.^ The American Steel and Wire Company, incor- orated under the laws of New Jersey, followed on Janu- ry 13, 1899. Tliis company was successor to the Ameri- in Steel and Wire Company of Illinois, formed in March f the preceding year.' At the time of its formation, it irtually controlled the production of wire goods in this auntry. Its capital was $90,000,000, all of which was is- ued. The National Tube and National Steel companies rere both organized in February, 1899. "^^^ former was apitalized at $80,000,006, and the latter at $59,000,000. 'he National Tube Company included over a dozen com- anies. At the time of its organization, it was the largest oncern of its kind in the world, and the third largest en- ged in the iron and steel business — the Carnegie Company nd the Krupps of Germany, alone being larger.* 1 Commercial and Financial Chronicle, Sept. 18, 1898, p. 530. Iron \ge, Sept. 15, 1898. ^ Iron Age, Feb. 16, 1899, p. 17. ' Commercial and Financial Chronicle, Mar. 12, 1898. *Iliid., July I, 1899; July 15, 1899. 279] ^^^ BEGINNINGS 57 On April 14, of the same year, the American Steel Hoop Company was formed with a capital of $33,000,000.^ In March 1900, the American Sheet Steel Company, embrac- ing over a score of companies, was incorporated with an authorized capital of $52,000,000,'' of which $49,000,000 were issued. In the following month the American Bridge Company was formed with an authorized capital of $70,- 000,000, of which $61,055,600 were outstanding. This consolidation absorbed twenty-six firms or companies, and at the time of its organization embraced over nine-tenths of the bridge building interests of the country." These consolidations which have just been described were regarded as industrial experiments. Their capitalizations were based upon the prediction of promoters that they would be successful. As much time would be required for a justification of such predictions, and as serious dangers from the competition of new enterprises threat- ened these organizations, their stocks sold at low prices. The organizers of these concerns relied upon the returning prosperity of the country and the monopoly which most of these organizations seemed likely to enjoy, for a consider- able period at least, in their several lines of trade. The future plans, moreover, of these corporations were generally far in advance of any early realization. These plans, in at least one instance, were reflected in an exces- sively large authorized stock. The Federal Steel Com- pany with an authorized capital of $20d,ooo,ooo — $100,- 000,000 preferred, and $100,000,000 common — had by October, 1899 issued only $53,000,000 preferred and $46,- 000,000 common.* The American Sheet Steel Company, too, held a considerable portion of its stock in reserve.^ '^ Iron Age, Oct. 19, 1899. - Ibid., Apr. s, 1900. » Ibid., May 17, 1900. ♦ Ibid., Oct. 26, 1899. " Ibid., Apr. s and May 29, igoo. ,8 THE UNITED STATES STEEL CORPORATION [280 § 3. With extensive plans for future growth and appar- ntly bright prospects for the immediate future, the tendency Dward over-capitalization was marked. A large propor- ion of the issued stock was without any tangible basis. It ras determined mainly by possible future gains. Accord- ig to testimony before the Federal Industrial Commis- ion, the book value of the constituent companies of the 'ederal Steel Company was placed by experts at $45,000,- 00, to which, however, should be added $10,000,000 cash nd the value of certain ore and coal properties.^ Accord- ig to Mr. Graham, a director of the American Tin Plate Company, only $18,000,000 — the amount of the preferred Lock — represented the actual value of the mills of the ampany.'' The iron and steel consolidations of 1898-1900 thus jnded toward over-capitalization. In this respect they ssembled the early period of railroad financiering. There ras, however, one important difference: a large part of le capital of railroads has always been represented by onds, while the industrials which we have just been con- idering had but little bonded indebtedness. Both had ventually to pass their dividends; but the railroads unable J pay interest on their bonds went into receivers' hands. The period embraced between the last half of 1898 and le first half of 1900 was an epoch of great prosperity in le iron and steel industry. During this prosperous period le steel combinations followed a policy which threatened leir ruin. In an industry subject to such extreme varia- ons in the volume of trade it is wise to build up a sub- :antial reserve during a period of prosperity. It is only y such a policy that the securities of new iron and steel ^ Iron Age, Oct. 26, 1899, p. 35. ^ Rep. Industrial Commission, vol. i and vol. xiij, p. 517. 28 1 ] THE BEGINNINGS 59 consolidations can eventually be brought up to an invest- ment level. Organized as these new combinations were, the pursuance of such a course would necessitate the pass- ing of dividends. This policy would temporarily lower the market value of their securities and render their sale more difficult; but the corporations would unquestionably have been strengthened^ The interests in control ai these various combinations failed to follow this conservative policy; and all of the companies paid regular dividends on their preferred stock from the dates of their organization to January, 1901. The Federal Steel, the American Steel and Wire, and the Na- tional Tube companies paid in addition good returns on their common stocks. The total dividends of the Federal Steel, the American Steel and Wire, the National Tube, the National Steel, the American Tin Plate, and the American Steel Hoop companies from their several dates of organi- zation to January i, 1901 were approximately $30,000,000. Their aggregate capital amounted to over $408,000,000. Their bonded debts were $31,341,271. The surplus re- serves at the close of 1900 aggregated $32,687,250, or seven per cent of the total capitalization.^ When it is remem- bered that the preferred stock of these combinations re- presented about the capitalized value of the average earn- ing power of the constituent plants in their separation, and that the common stock represented real or supposed mono- poly advantages, economies due to combination, and such working capital as was provided by underwriters, and that fifty-three per cent of the total stock capitalization of the six consolidations already named consisted of common stock whose value could not yet be demonstrated, it is seen that the financial position of these steel concerns after two 1 Iron Age Supplement, Dec. 27, 1900. 5o THE UNITED STATES STEEL CORPORATION [282 years of high prices and large profits was scarcely better than at the outset of their careers. With this exception the business of these organizations seems to have been ably and honestly conducted. Many improvements were made in their several properties and considerable economies effected. The policy of manage- ment in almost every direction was a distinct advance over former methods of trade. However, the lack of ample reserves unfitted these consolidations to withstand trade depression and serious competition. Such depression and threatening competition confronted them in the latter half of 1900. § 4. Before discussing the nature of this competition, it will be necessary to describe the business of the Carnegie Steel Company. In the Pittsburg district this organization had, during a period of four decades, grown from a small firm managed by the Kloman Brothers into a concern which owned the most complete and best managed steel plant in the world. ^ The change from the use of anthracite coal to that of coke in the manufacture of iron and steel had given the Pittsburg region peculiar advantages in the mat- ter of assembling material. The region, furthermore, was not far from the best markets. The mills of the Car- negie Company had also been well concentrated; and this fact gave them a pronounced advantage over the companies we have already considered whose mills were generally quite widely scattered. Nor did the advantage of the Carnegie Company stop here. As a result of a policy of large expenditure upon betterments persistently pursued for a number of years, the average excellence of its equipment was far above that of any of its rivals. " Every new pro- 1 For an interesting, though one-sided, account of the Carnegie Com- pany, see Bridge's Inside History of the Carnegie Steel Company. 283] THE BEGINNINGS 6 1 cess and every new machine which would in any way in- crease the efficiency, reduce the cost, and improve the pro- ducts of the Carnegie Company has been adopted, until this great concern has raised the physical condition of its mills to a point which is unsurpassed." ^ The labor force of the company was also strained to the utmost. Trade unions were banished in 1892, and work- men were encouraged to utmost exertion by high wages and the promise of advancement. Official rank was strictly the reward of merit. Every head of a department had an interest in the business apart from his salary.^ Every visi- tor was impressed by the intensity of effort displayed by the workers in each department. It has been said that the terrific speed made break-downs frequent at thirty-five, and old age common at forty-five. In the early eighties the Carnegie Company — or rather the Carnegie, Phipps and Company, as it was then called — had begun the policy which eventually issued in the con- trol of all the factors contributing to the production of steel, —from the ore and coal in the mine to steel billets and steel rails. A controlling interest in the stock of the H. C. Frick Coke Company, the largest owner of coal land in the Con- nellsville region was secured. This insured the Carnegie Company not only a majority share in the earnings from the sale of coke and coal, but also a supply of coke at prices very close to the cost of production. Notwithstand- ing Mr. Carnegie's repeated assertion that the best way to obtain ore is to buy it in the open market, ' ore supplies with accompanying transportation facilities were also ob- tained. In i8g6 a five-sixths interest in the stock of the ' U. S. Investor, Feb. 9, 190 1. ^ See Schwab's tesitimony, Report of Industrial Commission, vol. 13. * Bridge's Inside History. 62 THE UNITED STATES STEEL CORPORATION [284 Oliver Iron Mining Company was purchased ; and this pur- chase secured for the Carnegie Company large ore de- posits in the Gogebic and the Mesaba ranges. By a fifty year contract with the Rockefeller iron, mining, and trans- portation companies 1,500,000 tons of soft ore were sup- plied and transported to the lower lake ports annually. Thus an abundant supply of hard and soft ore at stable and cheap prices was secured. Controlling interests were also obtained in the Pittsburg Steamship Company, which owned, in 1900, eleven steamships and two tug boats, with six additional steamicrs under construction, and the Pitts- burg, Bessemer and Lake Erie Railroad extending from Conneaut, Ohio, to the Carnegie mills at Duquesne. By the close of 1897, the Carnegie Company was almost self- suiificient in all the factors of production. The profits which other steel companies were then adding to their costs, this concern was adding to its earnings. The example of the Carnegie Steel Company was not lost in the consolidations formed in 1898-1900. The Fed-" eral Steel Company, through the Minnesota Iron Company, came into control of large supplies of ore. The company also acquired a considerable acreage of coal land, and aimed to secure adequate means of transportation for the as- sembling of material. The National Steel Company in like manner obtained coritrol of the sources of some of its ore and coal supply. Indeed, it may be said that all the con- solidations of the period were organized with a view of be- comiqg-ultimately self-sufficient. Though organized and largely capitalized with such a purpose in view, the manufacturing companies which be- came constituent parts of the United States Steel Cor- poration at its beginning were, nevertheless, largely depen- dent upon one another. The companies may be divided on the basis of their principal products into two classes, the 285] THE BEGINNINGS 63 Carnegie, Federal Steel, and National Steel companies' were largely producers of steel billets, ingots, bars, plates, and slabs, materials not in their final form. The Na- tional Tube, American Steel and Wire, American Tin Plate, American Steel Hoop, and American Sheet Steel corpor- ations were, as their titles indicate, producers of fin- ished steel goods. These latter companies obtained most of their materials from the primary producers of steel, and converted them into wire, pipes, tin plates, sheets, structural— material and the UkfiJ ."--.-™-- These two groups of companies from their location and the nature of their products had extensive dealings with each other. The western plants of the American Steel and Wire Company and the Ohio plants of the National Tube and American Bridge companies were supplied with wire rods and steel billets by the Federal Steel Company, whose principal plants were located at Chicago. The National Steel Company supplied a portion of the demands of the Tin Plate, Sheet Steel, and Steel Hoop companies, whose financial control was identical with its own. The Carnegie Steel Company furnished material for the finishing mills of the Pittsburg district including representatives from all the companies of the second group. So' long as the various companies confined their trade to certain fields of the iron industry and to certain, terri- tories, the harmony of their interests was not seriously disturbed. However, as has been indicated, all these or- ganizations aimed to be ultimately self-sufficient J • When^ the primary producers were about to enter thb-4ffies of fin- ished material or the producers of finished material at- tempted to become independent by invading the fields of those who supplied them with pig iron and steel, a serious competition threatened their financial standing. Being large producers, the successful invasion by any one of the 64 THE UNITED STATES STEEL CORPORATION [286 companies of a field hitherto controlled by the others, meant serious injury, if not absolute ruin, to the original occupants. § 6. From the winter of 1898-99 to the spring of 1900 prosperity reigned in the steel industry. By the middle of 1900 a reaction in the steel market had set in; and it became evident that trade must adjust itself to a smaller margin of profits. If dividends were to be continued during the periods of reduced demand, every effort must be made to reduce expenses. In no other way could the companies engaged in the manufacture of finished material accom- plish this than by securing the largest measure of indepen- dence^ in the field of raw material. 1 The depression of l^PQ hastened the movement towards ultimate independence-jThe American Steel and Wire Company, a large customer of the Carnegie concern in the Pittsburg region and of the Federal Steel Company in the West, had already acquired two thousand acres of Con- nellsville coal, and also ore properties with an annual out- put of 916,000 tons. A fleet of twelve steamers had been acquired from the American Steamship Company. A large steel plant at Milwaukee which would supply raw material to the company's western mills was projected, and in the Pittsburg district there was begun the installation of a complete system of production from ore and coke to wire, wire nails, and springs.^ V The National Tube Company adopted a similar policy. rln the fall of 1900 it began the construction of a large open- hearth steel plant at Wheeling, West Virginia, designed to supply steel billets to all its plants in the Central West. The company, though owning no coal or ore, relied upon its friendly relations with the Federal Steel Company to secure its ore and coal on favorable terms. • Iron Age, Dec. 21, 1899. 287] THE BEGINNINGS 65 The National Steel Company which had hitherto relied very largely upon outside corporations for its supply of iron ore and coal now greatly increased its holdings of ore and coal properties. It purchased iron mines with an an- nual output of 1,300,000 tons and considerable tracts of coal land in the Connellsville and adjoining districts. It al- so began the installation of a furnace capacity sufficient to supply the total requirements of the Tin-plate, Sheet Steel, and Steel Hoop companies, whose financial control, repre- sented by William & J. H. Moore, was identical with its own.^ These threatening movements toward industrial indepen- dence led to counter movements on the part of the two chief primary companies. The Federal Steel Company threatened to build wire mills unless the American Steel and Wire Company should abandon the plan of producing its own raw material and renew its wire-rod contract with the Federal Steel Company. As there was nothing to be gained for the present from such a competition, the Steel and Wire Company abandoned its western extensions. In the Pittsburg district, the Carnegie Company began to expand in a similar fashion. In January, 1901, it was announced that the company would construct a large tube mill at Con- neaut, Ohio, sheet mills at Homestead, and mills for other finished products in the Pittsburg region. At the same time the Carnegie Company was preparing to secure an independent railroad to the sea-board. ^ These proposed movements caused serious anxiety to the leaders of the consolidations of the Middle West. In the Pittsburg district, the four Moore companies, the Na- tional Tube Company and the eastern trade of the Ameri- can Steel and Wire Company were threatened by the 1 /ro« Age, Dec. 28, 1899; Jan. 4, 1900. 66 THE UNITED STATES STEEL CORPORATION [288 Carnegie organization ; and in the Chicago region, the Fed- eral Steel and American Steel and Wire companies were naturally uneasy. f The results of this threatened competition would obvi- ously be ruinotis to most of the concerns involved. Heav- ily over-capitalized, as most of the companies were, and fortified by very iina:dequa;te reserves, such competition would mean decreasing profits and the passing of dividends. As a consequence of this there would be a heavy fall in the value of steel stocks. Industrial warfare, too, demands new appliances, and these could only be secured by issuing bonds or by increasing the floating debt. The interests in control of the consolidations strove in every way to avert the impending calamity. Coupled with these interests were the interests of underwriters and promoters who still held large amounts of stock which they had been unable to sell to the public, and thus to reap the large profits upon which they had counted. The decline in the value of these securi- ties, owing to the temporary reaction in the steel trade, made their sale still more difficult in the face of a competi- tion which threatened to overwhelm the new companies. The promoters, underwriters, and original owners of the plants, therefore, were all vitally interested in preventing a break in the harmony of the various steel interests. [ § 7. After the elecition of 1900, the tide again turned in favor of steel. Everything pointed to an upward move- ment in steel stocks ^ if the threatened competition among the new consolidations could be averted. Failure to come to some harmonious arrangement would issue in severe loss, and in addition, lock up cash resources at a time when 1 See quotations of steel stocks in Commercial and Financial Chron- icle during October, 'Novemiber and December, igoo, and January and February, igoi. 289] THE BEGINNINGS 67 projects of new consolidations promised large profits. The emergency was, therefore, a financial, as well as an indus- trial, one. The controlling interests in the steel trusts wished to protect their own holdings; while the promoters and underwriters not only desired to sell theirs at a good margin of profit, but also to retain their prestige with the speculative public. To do this they must prevent a gen- eral decline in stock values and avert the impending steel war. The course to be adopted by the interests involved was necessarily one which must not be construed as a reflection upon their credit. The Carnegie Company was unques- tionably the most powerful of the organizations which we have considered, and the one least likely to be seriously in- jured by the threatened rivalry. The other corporations might have surrendered to it; but such a course would have been a serious compromise of all plans for indus- trial independence, upon the attainment of which their capitalizations had been in part based. The course adopted was a plan by which all the conflicting interests were united into one corporation organized to own at least a majority interest in the various steel companies which it was necessary to control. In this way would competition be removed. This movement received the backing of the strongest financial houses in the United States. Mr. Morgan and his friends, who had been. instrumental in the formation of several of the trusts of the West, now did all in their power to avert the disaster threatened by the steel war, and to further the harmony of interests which was achieved in the formation of the United States Steel Cor- po rati^ n. The plan to combine embraced at first only four com- Danies — the Carnegie, the Federal Steel, the National Tube, ind the American Steel and Wire. It was principally o^er 68 THE UNITED STATES STEEL CORPORATION [29c these organizations that the threatened competition wa< impending^ A quick survey of the field, however, showed at least fourSther concerns which might offer inconven- iently active competition, but which could easily be per- suaded to enter the confederation. These organizations were the National Steel, the American Tin Plate, the Amerii can Steel Hoop, and the American Sheet Steel co nmaniea An attempt was made to purchase the Jones and Laughlir plant at Pittsburg for $30,000,000, but the offer was re- fused. The Rockefeller ore properties in the Lake Su- perior region were secured by the payment of $8o,ooo,ooc of stock — ^$40,000,000 preferred, and $40,000,000 com- mon; and the ore carrying fleet was purchased for eighl and one-half millions cash. This purchase gave to the new corporation about two-fifths of its ore and nearly one-hali of its ore fleet. The Steel Corporation w as orga nized on February 23 1901, under the laws of New Jersey with a capital oi $3000. This nominal capital was shortly afterward; increased to $i,io6,66"o7505^'"'oF'wEicK autli6nze3"~capita stock, $550,000,000 was to be preferred, and $5 50,000,00c common. The charter gives the corporation the right tc increase its preferred and common stock " in such amount; and proportions as shall be determined by the Board o: Directors, and as may be permitted by law." ' The hold ers of preferred stock are entitled, " to receive when, anc as declared, from the surplus or net profits of the corpor ation yearly dividends at the rate of seven per cent pei annum and no more, payable quarterly on dates to be fixec by the by-laws." The cumulative feature of the preferrec stock was also guaranteed to the holder in the charter 1 Charter of U. S. Steel Corporation. See also Iron Age, Feb. 2? 1901, p. 25. 291] THE BEGINNINGS 69 When all cumulative dividends are paid, dividends may be declared on the common stock. The United States Steel Corporation bought the stock of its constituent companies and controls these organiza- tions by virtue of being the single stockholder in each case. As has already been indicated the companies which became the first members of this consolidation were the Carnegie Steel Company, the Federal Steel Company, the American Steel and Wire Company, the National Tube Company, the National Steel Company, the American Tin Plate Company, the American Steel Hoop Company, and the American Sheet Steel Company. Shortly after its formation the American Bridge Company and the Lake Superior Consolidated Iron Mines entered the organization. The Lake Superior Consolidated Iron Mines had been in- corporated under the laws of New Jersey in 1893. Its purpose was to acquire and operate iron mines in the Mesaba Range, Minnesota. It owned valuable or e prop - erties in the Lake Superior region, some of which it leased to the Carnegie and other steel companies. It owned the Duluth, Mesaba, and Northern Railway, extending from Duluth to Iron Mountain, Minnesota. Its authorized capi- tal was $30,000,000, of which $28,722,000 had been issued at the time of the organization of the Steel Corporation. § 8. The exchange of securities between the Steel Cor- poration and the various constituent companies was af- fected in such a manner as to afford a bonus to most of the latter. Leaving out of account the Carnegie Steel Com- pany, the aggregate capitalization of the original con- cerns entering the new organization was $457,070,200. On becoming subsidiary members of the Steel Corporation, this capitaHzation was raised to $531,914,300, an increase of nearly $75,000,000. Concerning the ratio of exchange for the securities of the 70 THE UNITED STATES STEEL CORPORATION [292 Carnegie Steel Company no definite official statement has been published, although reports have been made which are apparently authentic. Mr. Morgan in an official an- nouncement declared that $304,000,000 of first mortgage bonds were issued to the holders of Carnegie bonds and sixty per cent of the company's stock. ^ The bonds are reported to have been exchanged at par; and it is further stated that for each $1,000 of Carnegie stock $1500 of first mortgage bonds of the new corporation were issued. As the capital stock of the Cai-negie Steel Company in 1901 was $160,000,000, and as these exchanges exactly fit Mr. Morgan's figures, these proportions are probably correct.' The remaining forty per cent of Carnegie stock-T-$64,ooo,- 000 — was exchanged for $98,277,120 in preferred, and $90,279,040 in common stock of the Steel Corporation.^ The entire Carnegie holdings were thus purchased for $492,556,160 par value of stocks and bonds. § 9. Mr. Carnegie's persooal share in this amount was paid entirely in bonds. Concerning his holdings, Mr. Bridge says, "At the time of the transfer of the Carnegie properties to the United States Steel Corporation, Mr. Carnegie personally held $88,147,000 of the Carnegie Com- pany's bonds. These were exchanged for the Steel Com- pany's bonds at par. He had also 86,382 shares of stock, for which he was paid in bonds at the rate of $1500.00 a share. He therefore acquired $217,720,000 of the bonds of the United States Steel Corporation." ' If Mr. Bridge's statement is correct, Mr. Carnegie held only a little over half of the bonds of his company and received for his stock 1 Circular of J. P. Morgan, March 2, 1901. '' Bridge,. /njid? History of Carnegie Steel Co. ^ Commercial and Financial Chronicle, Nov. 21, 1903, p. 2039. See also list of stock and bond holders in Bridge's Inside History of the Carnegie Steel Company, 4th edition, pp. 356-7. 293] ^"^^ BEGINNINGS 71 $129,537,000. Had he owned sixty per cent of the stock, as currently reported, he would have received $144,000,000. "":» § 10. The total issues of istock for the Steel Corporation were put in Mr. Morgan'sttircular of March 2, 1901, at $425,000,000 of seven per cent cumulative preferred and $425,000,000 of common. The new organization thus started on its career with a stock capital of $950,000,000, which, however, was soon increased to over $1,000,000,000. The bonded indebtedness of the Steel Corporation included the $304,000,000 ^ held by the Carnegie interests and some tens of millions of bonded obligations incurred by the con- stituent companies and assumed by the new consolidation. In addition to these obligations were various mortgage and money liabilities of the constituent companies. At the time the first annual report was issued the total capital as expressed in stocks, bonds, and other liabilities was as follows : ^ Capital stock — Preferred $510,281,100.00 Common 508,302,300.00 Total capital stock $1,018,583,600.00 Capital stocks of subsidiary companies not held iby the U. S. Steel Corporation 215,914.38 Bonded and debenture debt of the U. S. Steel Corpor- ation (U. S. Steel Corporation bonds $303,757,000) . . 360,754,326.77 Mortgage and purchase money obligations of subsid- iary companies 9,590,550.60 Current liabilities 49,826,251.78 Total capital and current liabilities $1,438,970,643.53 ' The boinjded debt ihelid by the 'Gamegie interests was slightly less than this amount. Sixty per cent of the stock of the Carnegie Company was acquired but only $159,450,000 of the bonds. Some more Carnegie tonds were later exchanged, but not the full $160,000,000. - Pirst Annual Report, Dec. 31, 1902. 72 THE UNITED STATES STEEL CORPORATION [294 ^,^„ ^J' The Steel Corporation, as has already been indicated, con- trols its constituent companies by virtue of its ownership of their stock. Immediately on its formation, it proceeded with the purchase of the securities of the companies to be controlled. By April 2, 1901, the corporation had acquired ninety-eight per cent of all the stock of the original eight compa nies. / A public offer having been made to the share- holders of the American Bridge Company and the Lake Su- perior Consolidated Iron Mines to exchange their shares for those of the new organization upon terms contained in Mr. Morgan's circular of April 2, practically all the securities of the former company, and eighty-five per cent of the stock of the latter, were acquired. Arrangements were also made for the acquisition of all outstanding interests in the Oliver Iron Mining Company and the Pittsburg Steamship Com- pany not already owned by the Carnegie Steel Company. These exchanges were all virtually completed by the end of April, 1901. rOTthis way the United States Steel Cor- poration came by stock ownership into direct management of ten corporations which were already among the largest in the world. A CHAPTER IV The United States Steel Corporation § I . In the short space of a single chapter, it is impossible to give in any detail a history and description of an or- ganization, the mere cataloguing of whose properties would itself fill a fair-sized volume. The Steel Corporation, furthermore, has been described by such writers as Wilgus and Moody,^ and certain features of its financial policy have been treated by Meade, Ripley and others. Its place in the development of the steel industry of the United States- has been discussed by Hermann Levy,^ who though a for- eign observer, has shown keen insight into the tendencies of the steel trade in this country during the last twenty- five years. It will be the purpose of this chapter to con- sider only the more salientfeatures of the organization and history of the corporation and certain aspects of its financial condition and T)usiness "standing which are of special inter- est from an^ economic point of view. § 2. It may be said that the United States Steel Corpora- tion is typical of a tendency among industrial consolidations to bring under one control all the characteristic lines of work related to a general industry. In the charter under ^ Wiligius, United States Steel Corporation; Moody, Truth about the Trusts, pp. 133-204. For a good, popular accoumt, see R. S. Baker, " What the United States Steel Corporation really is," McClure's, vol. 18, pp. 3-13- 2 Hermann Levy, Die Stahlindustrie der Vereinigten Staaten von Amerika. 295] 73 74 THE UNITED STATES STEEL CORPORATION [296 which it was organized, the purposes of the corporation are declared to be " to manufacture iron, steel, manganese, coke, copper, lumber and other materials, and all or any articles consisting or partly consisting of iron, steel, copper, wood, or other materials, and all or any products thereof," to ac- quire or lease lands containing these materials; to mine, ex- tract, or remove coal, ores, stone, other minerals, and tim- ber from any lands occupied or owned by the company or any other lands; and to buy and sell artides^ consisting, or partly consisting, of these materials/ /The United States Steel Corporation is thus an organization for the mining, manufacture, and buying and selling of whatever relates to the iron and steel industry. / T This development is "An outcome of the tendency noted m a previous chapter to integrate the productive forces of an iron and steel concernj The companies out of which the corporation was fOtrned were in the main producers of certain classes or grades of commodities. While they aimed ultimately to be self-sufiScient — to produce their own raw, crude, and finished material, — their immediate purpose was to control only special branches of the industry. The Tinplate Company, for example, endeavored to secure a monopoly of tin plate; and the Steel and Wire Company, of wire goods. The futility of such attempts and the de- sirability from the standpoint of producers of controlling a trade so exposed to variations of demand for commodities led to the formation of the Steel Corporation, combina- tion of all the principal branches of iron and steel produc- tion under one control. PWhile all monopolistic intentions ' are disclaimed by the officials of this consolidation, it has already been seen that the combination was formed to avert a threatened competition which would have lessened profits 1 Charier, art. iii. = See Fourth Annual Report. 297] ^^^ UNITED STATES STEEL CORPORATION 75 in the prosperous period which was coming, and would have proved destructive to several of the companies in a time of depression. The aim, therefore, of the new organi- zation was, in a measure at least, the control of the indus- try^' How far this object can be said to have been achieved wm be discussed later. It is to be noted in this connection that the Steel Corporation is largely the result of the na- tural vicissitudes of the trade and represents an attempt to control those vicissitudes. The organization by which the operations of the corpor- ation are carried ojinresents several features of interest and importance. (The Steel Corporation is not an operat- ing company, but what is known as a security-holding cor- poration. The ojEcmanies which became parts of it did not lose their identitj£_4 The Carnegie Steel Company and the National Tube Company are two distinct organizations, though parts of the same general combination. The cen- tral or governing corporation controls the subsidiary com- panies through ownership of their stock. If the officials of a subsidiary organization adopt a business policy in con- flict with that of the controlling body, the latter has simply a stockholder's right of removing the officials of such com- pany and electing others more amenable to its purposes. The subsidiary companies retain the management of their various manufacturing plants, and control suchoperations and policies as are not of common concern. \__^x;h com- pany, for example, pursues its own policy in the matter of recognizing labor unions. Wide latitude is allowed in fix- ing grices of products which vary with the producing com- pany. 7 One company buys of and sells to another ; and bar- gains are driven as shrewdly as ever. In the event of dis- pute, the executive committee acted, in the first year or two of the corporation's existence, as a sort of supreme court. At the present time conflicting interests between the com- 76 THE UNITED STATES STEEL CORPORATION [298 panics are harmonized by either the advisory or the finance committee. V^Wljile each subsidiary company maintains a sort of local or special jurisdiction over its own peculiar operations, those interests common to all or to several of the com- panies are usually combined in great general departm^ntsj The coke interests, the various branches of manufacture, and the like are united in such departments under single heads. A single agency distributes iron ore, coal, and coke among the various plants. By this means cross-shipments are avoided ; plants are supplied from the nearest sources of supply ; and material is sent to those places where it is most needed. In the matter of prices where two or more com- panies are concerned, arrangements are made at the con- ferences of the managers of sales of the subsidiary organi- zations. These price arrangements are much influenced by departmental officials and by the business policy of the cen- tral_^overning body. frhe^ teel Corporation is under the control of a board of twenty-four director^ZJThe direct management is vested in the chairman of the board of directors, the president, several subordinate officials, the finance committee, and the advisory committee.^ All these functionaries are ap- pointed by the board. The chairman of the board of di- rectors presides at all meetings of the stockholders and of the board, and has general supervision of matters designated to him by the board or finance committee. The president is the head of the manufacturing side of the corporation's activity, the chairman of the advisory committee, and an ex- oMcio member of the finance committee. The most import- ant executive body of the organization is the finance com- mittee, consisting of seven members, who as far as prac- 1 By-laws of the U. S. Steel Corporation, arts, iii, iv, v. 299] THE UNITED STATES STEEL CORPORATION 77 ticable, must be persons of experience in matters of finance. This body has special charge and control of all financial af- fairs of the company ; and during the intervals between the meetings of the board of directors it may exercise all the powers of the board. The advisory committee, consisting of three members besides the president of the corporation, is a body with powers to consider such questions relating to manufacturing, transportation, or operation, as may be submitted to the committee by the president. It is significant of the general policy of the Steel Cor- poration that the ruling power is financial. The leading executive body is the finance committee; and the presi- dent, who is at the head of the industrial side of the organi- zation, is subordinate in managerial power to the chairman of the board and the chairman of the finance committee. The board of directors, too, is composed mainly of finan- ciers. When the corporation was first organized only about one-third of the board were acquainted with the language of steel. ^ The banking interests were represented. by J. P. Morgan, Geo. C. Perkins, and Robert Bacon; the Stand- ard Oil, by the Rockefellers and H. H. Rogers. The Steel Corporation, therefore, has been at least as much a financial as a manufacturing organization. Most of the business and industrial policy of the consolidation is deter- mined by meetings of the heads of departments and various committees.^ Mr. Bridge, in his Inside History of the 1 The directors in 1901 were J. P. Morgan, J. D. Rocke- feller, H. H. Rogers, Chss. M. Sobwab, Elbetit H. Gary, Geo. C. Per- kins, E. C. Converse, Jas. Gayley, Marshall Field, D. G. Reid, J. D. Rockefeller, Jr., A. Gifford, Robt. Baooo, .Nathanielr Thayer, Abram Hewitt, C. S. Griscom, F. H. Peabody, Cihas. Steele, W. H. Moore, N. B. Ream, P. A. B. Widener, J. H. Reed, H. C. Frick, and Wm. Eden>- born. Cf. First Annual Report. ' First Annual Report, p. 21. 78 THE UNITED STATES STEEL CORPORATION [300 Carnegie Steel Company graphically describes the weekly meetings of the board of managers, superintendents, assis- tants, etc., of that company. Meetings of a somewhat simi- lar nature are periodically held by the ofificials of the larger organization. Friendly rivalries are encouraged. Inven- tions and improved processes are made the common prop- erty of all the plants which can use them; and all infor- mation concerning trade policy is discussed in common by repceseotatives of the plants concerned. §13. By the formation of the Steel Corporation two hun- dred and thirteen different manufacturing plants and trans- portation companies, forty-one mines, nearly one thousand miles of railroad connecting ore, coke, and manufacturing- properties, and a lake fleet of one hundred and twelve ves- sels constituting about one-third of the total tonnage of the Northern Lakes were united under one controlling iiitoest/_ Of the manufacturing plants, one hundred were in Penn- sylvania ; fifty-one in Ohio ; fifteen in Illinois ; twelve in In- diana; twelve in New York; and the rest scattered from Connecticut to California. The company also controlled seventy-eight blast furnaces,^ more than one-third of the entire number in the United States. Several of these fur- naces have a daily capacity of seven hundred tons. The coking-coal properties of the Steel Corporation, upon whose value Mr. Schwab placed such emphasis in his testi- mony before the Industrial Commission,^ comprised some 57,000 acres located in Westmoreland and Fayette Coun- ties, Pennsylvania. This area constitutes part of the fam- ous Connellsville region. In the fall of 1901 considerable additions to this area were made in Pennsylvania ; and the ''■Report of Industrial Commission, vol. xiii, p. 471. 2 Commercial and Financial Chronicle, Apr. 27, 1901, p. 171. ' Report, vol. xiii, pp. 464, 467, 472. 301] THE UNITED STATES STEEL CORPORATION 79 lease of 50,000 acres of the Pocahontas district in West Virginia was effected. Besides these properties in coking- coal a considerable area of steam and gas coal in Illinois came into the possession of the corporation. CThe most important asset of the Steel Corporation has been its valuable mines of iron ore in Minnesota, Michigan, and Wiscot^sihJ This region is generally divided into five " ranges " : the Menominee and Marquette, in Michigan ; the Gogebic, partly in Michigan and partly in Wiscon- sin; and the Vermillion and Mesaba, in Minnesota.^ All these ranges are within two hundred miles of the shores of Lake Superior. At the time of the organization of the United States Steel Corporation, the Vermillion range pro- duced approximately 1,700,000 tons of ore annually, nearly all of which belonged to the new corporation; the Gogebic range, 2,800,000 tons, 1,700,000 of which came under the control of the new organization ; the Menominee, 3,100,000 tons, of which the Steel Corporation controlled 2,000,000; the Marquette, 3,300,000 tons of which 1,400,000 belonged to the same organization; and of the 7,800,000 tons produced in the Mesaba range, the corporation would have 5,700,000 tons.^ Just what proportion of the Lake Superior ore fields came into the possession of the Steel Corporation is difficult to state, and has been variously estimated. At the end of the year 1902, when the first annual report of the Steel Cor- poration came out, it had shipped during that year over sixty per cent of all the ore production of the Lake Superior region, and controlled about forty-five per cent of the entire 1 See Ore Deposits of U. S. and Canada, by J. F. Kemp, Scientific PubHsfaing Co. ; also Mussey, Combination in the Mining Industry, in Ccclumibia Uiiiver!S.ity Series in History, Economics and Public Law. ^Age of Steel, ]&n., 1901, p. 115; April' 20, 1901. Iron Age; Feb. 21, 1901. So THE UNITED STATES STEEL CORPORATION [302 output of the country. Its proportion of the entire supply of workable ore in the ground has been placed very high. Mr. Schwab in his statement before the Industrial Com- mission estimated this proportion at not less than eighty per cent of the total deposits of the Lake Superior district. The ore fields of the Carnegie, Federal Steel, National Steel, and American Steel and Wire companies, were estimated to contain at least 500,000,000 tons.^ In addition to this the Rockefeller holdings were supposed to represent about one- half the iron ore of the Mesaba range, or approximately 250,000,000." If these estimates were correct the Steel Corporation would have come into possession of 750,000,- 000 tons of workable ore. The estimates may have been exaggerated as any calcula- tion of the amount of available ore in a district can at best only approximate the truth. What proportion of the ore fields came under the control of the corporation is hard to determine. The Hill holdings in the Mesaba Range which the Steel Corporation recently leased have been estimated to contain as much as 500,000,000 tons. Several indepen- dent companies have additional holdings. In view of these facts the Steel Corporation probably came into possession of not more than half the deposits of the Lake Superior district. In 1 90 1, however, mtich of this region was imperfectly known; and hence the holdings of the new steel consolida- tion were over-estimated. In view of the current opinion of the time, we can readily appreciate the feeling voiced by the New York Independent : It is quite plain that the corporation will soon own nearly all •■ Report of Industrial Commission, vol. i, p. 1023. ^ Age of Steel, Mar. 23, 1901, p. 15. Review of Reviews, May, 1901, p. s6o. 303] '^HE UNITED STATES STEEL CORPORATION 8 1 the northern ore supply. Its control is already so well estab- lished that the annual meeting of the ore-producers to make prices for the season has been postponed indefinitely, because prices will be determined by the corporation. This gathering- in of the iron mines by the new combination is a movement of great importance. It will make the corporation absolute master of the American iron and steel industry.^ While occupying a commanding position among iron and steel producers, the Steel Corporation did not monopolize the Lake Superior region. Nevertheless, it did obtain pos- session of much of the best ore regions in the world. But as the later history of the Lake Superior region has shown, independent companies have pre-empted large sections of this valuable district. No sooner was the Steel Corpora- tion organized than several companies, alive to their own interests, secured possession or leases of property in these fields. Among the most active was Mr. J. J. Hill, whose ore lands became nearly as extensive as those of the Steel Corporation itself, and whose railroad interests helped to make him one of its most formidable rivals.^ / ~§ 4.' During the six years of its existence, the Steel Cor- 1 poration has maintained the same general features which characterized it at the outset of its career. It has, how- ever, extended its control over some large independent con- cerns, and added to its holdings of coal and ore land ; it has reorganized some of the constituent companies ; it has trans- ferred much of its preferred stock into a bonded indebted- ness; it has introduced a novel scheme of profit-sharing; and it has shown some interesting vicissitudes in its earn- ings and in its relative share of the country's iron and steel trada 1 New York Independent, Apiril 11, 1901, p. 862. 2 See Iron Trade Review, Feb. 19, 1903. 82 THE UNITED STATES STEEL CORPORATION [304 Among the most notable additions to the Steel Corpora- tion since its organization have been the Shelby Steel Tube Company in 1901 ; the Union Steel Company in December, 1902 ; the Troy Steel Products Company in January, 1903 ; the holdings of the Chemung Iron Company of Duluth in August, 1903 ; the properties of the Clairton Steel Company in May, 1904; and the lease of the Hill holdings in the Lake Superior region in October, 1906. The Shelby Steel Tube Company, which became a part of the corporation about the time that the exchange of shares had been effected with the American Bridge Com- pany and the Lake Superior Consolidated Iron Mines, was the largest maker of seamless tube in the world. ^ This or- ganization, however, had been greatly overcapitalized. The basis of exchange of shares was $37,50 of the corporation's preferred for $100.00 of Shelby Steel Tube preferred, and $25.00 of the corporation's common for $100.00 of Shelby Steel Tube common. The Union Steel and Troy Steel Products companies were added in 1902 and 1903." The former organiza-^ tion had absorbed seven other companies and had a con- trolling interest in two others. Its bonds, amounting to $45,000,000, were guaranteed by the Steel Corporation. The Troy Steel Products Company was a much smaller concern, and the entire issues of capital stock and first mort- gage bonds were purchased for $1,100,000. The purchase of the holdings of the Chemung Iron Com- pany of Duluth added some extensive and valuable fields of iron ore. By this purchase there was acquired what the Iron Age describes as "the last really large and important block of Mesaba ore that was for sale." These holding's b-^ ^ Age of Steel, June 29, 1905, p. 15. ' First Annual Report, Dec. 31, 1902. 305] THE UNITED STATES STEEL CORPORATION 83 are, said to include " eleven more or less fully developed and as yet entirely unmined tracts, in all about 70,000,000 tons of ore of excellent quality, much of it of high grade Bes- semer, much of it cheaply mined and readily reducible. The lands are mostly leased properties on a basis of twenty-five cents a ton royalty." ' The Clairton Steel properties consisted mainly of a large manufacturing plant at Clairton, Pennsylvania, 2644 acres of coking-coal land in Fayette County of the same state, 20,000 acres in fee of mineral lands on .the Marquette range, and considerable railroad and limestone property.'' , Of the bonded debt carried by the Clairton Steel Company, $10,- 230,000 were guaranteed by the United States Steel Cor- poration, the remainder being mortgages on property in which the corporation had a part interest. In consider- ation for the transfer of the company's stock, there was paid to the vendors $1,000,000 par value of the United States Steel Corporation 10-60 year five per cent bonds. The transfer of the Hill holdings in October, 1906, has excited much attention as indicative of the policy of the corporation to control the northern ore supply. The con- ditions of this transfer are stated in the following announce- ment made by Judge E. H. Gary, Chairman of the Board of Directors of the Steel Corporation: After long negotiations, a contract has been signed for the acquisition on a royalty basis of the Hill ore proi)erties (so- called) by companies controlled by the United States Steel Corporation. The quantity of the ore has not been accurately determined, but it is a large body. The price to be paid is $1.65 per ton, delivered at the upper lake docks, with an in- crease of 3.4 cents per ton each succeeding year. The mini- ^ Commercial and Financial Chronicle, Aug. 22, 1903, p. 405. ^ Third Annual Report. Also Iron and Steel Directory, 1904, pp. 70-71. 84 THE UNITED STATES STEEL CORPORATION [306 mum agreed to be mined is 750,000 tons for the year 19P7, and increases of 750,000 tons per year until it reaches 8,250,000 tons, and thereafter it continues on that basis. It is believed that the consummation of this agreement will result in great benefit to both parties.^ In considering this notable addition to the ore lands owned or controlled by the Steel Corporation two questions naturally suggest themselves: What will be its effect upon the corporation itself? What will be its consequences to the iron trade at large? In securing the most extensive deposits of Lake Superior ore held by a single interest apart from itself, it has made an important addition to the num- ber of years of operation guaranteed to its blast furnaces and mills by the lake ores it previously controlled. It is probably assured of supplies outlasting by a great many years those of its principal competitors. It must be said, however, that it has paid no small price to the Great North- ern for the privilege of taking all the ore the latter has to offer. And furthermore, the transaction by increasing the cost of producing ore to the Steel Corporation has im- proved the position of some of its competitors. The effect on the iron and steel trade as a whole is likely to show itself in a general marking up of ore values. The position of the Southern producers of foundry and basic irons in competition with the merchant furnaces of the East and the Central West will doubtless be advanced. Eastern producers are likely to have an additional incentive for the use of foreign ores, and in some regions for the develop- ment of deposits at home. While the transfer of these properties is significant, it should be clearly stated that the Hill holdings leased to the Steel Corporation do not include the developed mines owned ^ Iron Age, Oct. 11, 1906, p. 953, 307] THE UNITED STATES STEEL CORPORATION 85 by the Great Northern interests. Such noted mines as the Mahoning, Stevenson, and others, Mr. Hill could not con- vey. With the exception of two newly opened mines no actual mining operations have been conducted on the lands leased. A considerable part of them has been thoroughly explored. It is said that 100,000,000 tons of ore are in sight on the property leased; but as much of these fields have not been tested, the actual tonnage is probably very much more,^ the estimates ranging from 300,000,000 to 500,000,000 tons. The acquisition of the Hill properties is in line with the policy which the corporation has pursued since its organi- zation. The Union Steel Company and the Clairton Steel Company on entering this consolidation added large areas of ore land. The purchase of the holdings of the Chemung Iron Company of Duluth and what is known as the Canisteo deal late in 1905 took into the Steel Corporation ownership more than 200,000,000 tons of ore.* All these additions show that the growth of the company's control over the northern ore land has been marked and rapid since its or- ganization in 1901. What proportion of the Lake Su- perior ore region is now owned or held by the Steel Cor- poration is difficult to state; but it seems probable that it is not less than three-fourths, and may be considerably more. § 5. While the United States Steel Corporation was ex- tending its control over other companies and properties, it was also making certain other extensions and internal changes. During the first three years of its existence the export trade was under the supervision of a departmental head. During the depression of 1903-4 this trade assumed ''^ Iron Age, Oct. 18, 1906, p. 1007. 2 /bid. 86 THE UNITED STATES STEEL CORPORATION [308 an importance greater than in 1901-2. Early in 1904 there was organized the United States Steel Products Export Company with general offices in New York City. " This Company does not manufacture finished or unfinished pro- ducts of any kind, but has for its object the extension and development of the export trade of the United States Steel Corporation." ^ As the United States is to-day the larg- est producer of iron and steel in the world, the export trade of its greatest producer is important to the country. The direct control of the new company is vested in the Federal Steel Company. Another development is the organization of the Indiana Steel Company, also to be directly controlled by the Federal Steel Company. The formation of this concern is due to the rapid growth of the steel trade in the West, and the inability of the mills in Illinois to meet the increased de- mand for their commodities. We are told by the officials that: in consequence of these conditions, it has 'been decided to con- struct and put in operation a new plant, to be located on the south shore of Lake Michigan, in Calumet Township, Lake County, Indiana; and a large acreage of land has been pur- chased for that purpose. It is proposed to construct a plant of the most modem standard and to completely equip it for the manufaoture of pig iron, Bessemer and open-hearth steel, and a great variety of finished steel products. The total cost will be large.'' It is the purpose of the corporation to make this plant the largest and best equipped of its kind in the world. Furnaces and rolling mills will cover a square mile in ex- ' Iron and Steel Works Directory, 1904, p. 39. 2 Fourth Annual Report, December, 1905. 309] THE UNITED STATES STEEL CORPORATION 87 tent; and in addition thousands of acres owned by the Indiana Company will be used for a town site. This town, the name of which will be Gary, will form a large indus- trial community dependent mainly upon the steel plant. The plant, which is to cost $75,000,000, is being built pri- marily to serve the Western market, but is so located that its product can be marketed advantageously in the East as well as in the West* § 6. Coincident with these extensions the constituent com- panies themselves have undergone some noteworthy changes. In March, 1903, the Carnegie Steel Company of New Jersey came into existence through a combination of the original Carnegie Steel Company of Pennsylvania, the National Steel Company, and the American Steel Hoop Company. The capital stock was fixed at $63,000,000, all of which is common.^ A similar merger took place in De- cember, 1903, between the American Sheet Steel and the American Tin Plate companies. This combination is now known as the American Sheet and Tin Plate Company.* The capital stock is fixed at $49,000,000 of which $24,500,- 000 is seven per cent cumulative preferred, and $24,500,000, common. This merger was part of a plan of enforced economy due to the depression of the latter months of 1903.* In these months occurred a dismantling of several of the least productive mills and a removal of the head- jquafters of nearly all the subsidiary companies to Pittsburg. After these extensions and reorganizations, the United States Steel Corporation may now (March, 1907) be said to control directly the following companies, which in turn control numerous other subsidiary interests: ^ Iron Age, Apr. 26, 1906, p. 1417. * Iron and Steel Directory, 1904, p. 3. " Ibid., p. S3. * Commercial and Financial Chronicle, Nov. 14, 1903, p. 1877. 88 THE UNITED STATES STEEL CORPORATION [310 Carnegie Steel Company (of New Jersey). Federal Steel Company. National Tube Company. Shelby Steel Tube Company. American Steel and Wire Company (New Jersey). American Sheet and Tin Plate Company. American Bridge Company (New Jersey). Union Steel Company. Clairton Steel Company. Lake Superior Consolidated Iron Mines. Of these companies, the Steel Corporation owns practi- cally all the stock./' It also owns one-sixth of the stock of the Oliver IrSfi Mining Company and of the Pittsburg Steamship Company, the remaining five-sixths of both be- ing owned by the Carnegie Steel Company. In the Lake Superior region through its subsidiary companies, it owns or has a controlling share in sixty-five active mines,^ besides extensive fields containing large quantities of ore not yet mined. Its coking-coal area embraces over 113,000 acres, and its tracts of steam coal, over 32,000 acres.^ It owns over eleven hundred miles of railroad, including branches and spurs, and operates under trackage rights, 297 miles more.* Its blast furnaces number ninety-three, and its iron and steel mills over seven hundred. § 7. On January i, 1906, there was a capital stock of $868,583,600 and a bonded indebtedness of $570,472,264- 93.* Of the capital stock, $508,302,500 is common, and $360,281,100, preferred. At the close of the first year of the corporation's existence the preferred stock amounted to $510,281,100. Its contraction is the outcome of a plan by which $150,000,000 preferred stock was converted into a bonded indebtedness. ^ Fourth Annual Report. ^ Ibid. * Ibid. * Ibid. 31 1 j THE UNITED STATES STEEL CORPORATION 89 § 8. Of the business policies of the Steel Corporation none has probably excited more attention and received more severe criticism than has this conversion plan proposed in the spring of 1902. Under the date of April 17, the Steel Corporation announced a plan for the exchange of $200,- 000,000 of the preferred stock for a like amount of second mortgage collateral trust bonds, and asked the stockholders for authority to create a mortgage on the property, limited to $250,000,000, of which $50,000,000 was to be sold for cash, the remainder being exchanged in the manner above indicated. The announcem'ent created great surprise, es- pecially as the earnings of the previous nine months showed a most surprising surplus. However, at a special meeting, the proposition was voted on and approved by the stockholders representing $374,574,100 par value of the preferred stock and $395,855,700 par value of the ■common stock. Within a few days of the ratifica- tion of the conversion plan, suit was begun by certain owners of stock to prevent the proposed issue of bonds and retirement of preferred stock. An order was granted on June 9, by a New Jersey court to show cause why the cor- poration should not be restrained from changing stock into bonds. This temporary injunction was made permanent on June 16; and the case was appealed to the Court of Errors and Appeals at Trenton, and awaited its turn on the ■calendar. On September 26, 1902, the court handed down its decree reversing and disolving the injunction. Other legal complications arose, but the legality of the conversion plan was upheld. The motives which led to the proposed plan have been a ■subject of much controversy. The alleged motive of the corporation was the need of money for proposed improve- ments. It was further urged that the payment of five per cent interest on $250,000,000 of bonds in place of seven 90 THE UNITED STATES STEEL CORPORATION [312 per cent dividends on preferred stock of $2O0,O00,ooo> would result in an annual saving of $1,500,000. In view of the large earnings of 1902 and the early part of 1903, these motives were seriously questioned ; and the plan with its provisions for the underwriting syndicate met with such criticism that the arrangement was closed when $150,- 000,000 of preferred stock had been exchanged and $20,- ooo,ooQ_Qf_bonds sold.^ § 9.1 Another plan of the' corporation which excited much comment, favorable and unfavorable, at the time of its first publication was the famous profit-sharing scheme. Under the date of December 31, 1902, two circulars, one ad- dressed to the stockholders and another to the officers and employees, were issued in which a plan was proposed where- by the officers and employees might be given an opportunity to become stockholders. Two million dollars of preferred stock were to be set aside for purchase by employees of the corporation. ■ The stock was to be sold for $82.50 a share, and a bonus of five dollars a share for five years was. to be added to the regular seven per cent dividend. The workers were divided into six classes according to annual salary, beginning with those receiving $20,000 or over, who- embraced the first class. The sixth class included those receiving $800 or less; the other classes embraced those re- ceiving intermediate amounts. The proportion of stock which could be owned by these several classes varied in- versely with their salary. The members of the first class; could own stock to an amount not exceeding five per cent of their annual income. The second class was limited to eight per cent of their yearly income ; the third class to ten ^ For a defense of the bond conversion, see editorials in Comtnerciat and Financial Chronicle m the summer of igo2. For a criddsm, see Meade in Quarterly Journal of Economics, vol. 18, p. 22; also Ripleyv Quarterly Journal, Feb., 1905. 313] THE UNITED STATES STEEL CORPORATION 91 per cent; the fourth to twelve per cent; the fifth to fifteen per cent; and the sixth to twenty per cent. [The object of the provision was to interest the large number of young and able employees in the work of more closely organizing and systematizing the business in all its branches and ramifications — as an integral part of the Steel Corporation as an harmonious whole; to in- terest these men in reducing general expenses as well as the particular cost of manufacture; to offer to these men an in- ducement to remain permanently in the Corporation's service ; and to avoid the tendency of a profit-sharing plan pertaining solely to a constituent company.^ , To this proposition the Amalgamated Association of Iron and Steel Workers made no opposition, and a large number of the employees availed themselves of the oppor- tunity to buy shares. During the period of declining earn- ings in the latter half of 1903, many of the workmen who had invested in the shares of the company complained of the possibility of losing their investments. The corpora- tion then voluntarily promised to buy back in 1908 the shares of any of its employees who might then wish to sell and who were still in its employ at the price at which the shares were purchased. By this agreement, the Steel Corporation virtuall^y guaranteed the integrity of the work- men's investments. The settmg aside of shares for employees has been re- peated each year since the introduction of the plan; and the conditions of the offer, except in the matter of price, have been substantially the same. Under the offer made at the end of 1905, " subscriptions were received from 12,256 em- ployees, for a total of 23,989 shares." ^ By the close of the 1 Circular to Stockholders, Dec. 31, igo2. " Fourth Annual Report, p. 24. ^2 THE UNITED STATES STEEL CORPORATION [314 year 1905, there had been issued to employees of the cor- poration over 120,000 shares of stock. The differences in the price paid for stock due to varia- tion in market value from year to year have been a source of some complaint among workmen. The employees who purchased stock at the time of the first offer secured their shares at $82.50 per share; at the end of 1903, the price was fixed at $55.00; a year later, at $87.50; at the end of 1905, at $100.00; and in December, 1906, at $103.00.^ The workmen, however, in most cases have recognized that these variations are due to market conditions, and that in each case the stock has been offered them at some discount. This profit-sharing scheme represents an attempt on the part of the company to interest employees in the success of the business by giving them an interest in the profits. In this particular it does not differ essentially from other pro- fit-sharing schemes. Making employees, however, a part of the corporation by making them stockholders, is a de- parture from the usual forms which profit-sharing plans Tiave assumed in the past. It is not, indeed, the first at- tempt of the kind ever made. The National Steel Com- pany before becoming a part of the Steel Corporation had persuaded many of its workmen to become investors in its preferred stock, and in the Carnegie Company the policy of giving officials and departmental heads an interest in the business outside of their usual salaries had long been pur- sued. The scheme, however, is none the less significant. How far it will make employees feel that their interests are identical with those of the corporation remains to be seen, and its outcome promises to be of more than ordinary economic and sociological interest. § 10. The earnings of the corporation have exhibited ^ New York Evening Sun, Dec. 14, 1906. 315] THE UNITED STATES STEEL CORPORATION 93 some interesting features both on account of their magni- tude and variation. Starting out as the organization did with a capital in round numbers of $1,400,000,000, it was a question whether the earnings would justify this huge capitalization. While it cannot be said that the income has come up to the sanguine expectations of the organizers, the returns have nevertheless been large. It must be remem- bered, however, that the period since the organization of the company has on the whole been one of great prosperity. The corporation has not yet been compelled to weather a time of depression comparable to that of the middle nine- ties, and until it has experienced such an epoch, its strength and stability will remain problematical. While the period since 1901 has been on the whole one of prosperity there has been sufficient variation in trade considerably to affect the income. The total sales of the corporation for 1902, the year for which the first annual report was issued, amounted to $560,510,479. The magni- tude of this income will be appreciated when it is remem- bered that our national i^evenues for the fiscal year ending June 30, 1905, aggregated $543,423,859, or $17,086,620 less than the gross earnings of the corporation for 1902. During the year 1904 the gross receipts fell to $444,405,- 430.56. This decline was due to the depression which set in in the latter part of the year 1903 and lasted through most of 1904. Near the close of the latter year a revival in the iron and steel trade began which has continued to the present time (March, 1907). With this revival the gross receipts of the corporation have greatly increased, those for 1905 being nearly $25,000,000 more than the gross earnings for 1902. The variation of the trade was more forcibly reflected in the net earnings. Net earnings in the corporation's an- nual reports signify that part of the total income remaining 94 THE UNITED STATES STEEL CORPORATION [316 above cost of manufacture, operating expenses, interest on bonds of subsidiary companies, taxes, and debts incurred for ordinary repairs. Out of the total net earnings are paid the interest on the corporation's bonds, dividends, ap- propriations for additional properties, extraordinary re- pairs, and sinking funds. The amount remaining after these obligations have been met constitute the " balance of surplus " for the year ; and these surpluses constitute a re- serve fund (the undivided surplus). The total net earnings of the Steel Corporation for the years 1902-1906 ^ with the yearly balances of surplus have been as follows: Net Earnings. Balance of Surplus. 1902 $133,308,76300 $34,253,65675 1903 109,171,152.35 12,304,916.59 1904. ■• 73,176,521.73 5,047,852.19 1905 119,787,658.43 17,065,815.15 ■ 1906 156,624,273.18 12,742,859.94 It will be seen from this table that the banner year of the corporation was 1906. Owing to large appropriations for improvements and extensions the surplus remaining for the corporation's reserve fund is less than half that for 1902, the year of the next largest net earnings. During the six years of the Steel Corporation's history the net earnings have been sufficient for the payment of the annual dividends of seven per cent on the preferred stock. Down to October, 1903, the annual dividends on the com- mon stock had been four per cent. They were then cut in half; and in April, 1904 they were passed. On July 31, 1906, it was announced that dividends on the common stock would be resumed. Since then quarterly dividends of one half of one per cent have been paid. ' Annual Reports of the Steel Corporation', and- Iron Age, Jan. 31, 1907. P- 354- 317] THE UNITED STATES STEEL CORPORATION 95 The net earnings of the corporation have thus fluctuated considerably during the six years of its existence. The company during part of that time has been compelled to forego dividends on much of its stock, and fortify itself against outside competition by making large appropriations for improvements and extensions. This fact indicates that the organization is as yet far from controlling the condi- tions of iron and steel production. Concerning the depres- sion of three years ago, the Iron Age declares : It has been truthfully said that in 1904 the United States Steel Corporation passed through the worst year in its history from every standpoint ; and this being true of this great interest, it naturally follows that it is also true of all other leading iron and steel concerns. It is a matter of congratulation that the Corporation, in spite of the aidverse conditions existing, was able to maintain and pay regular dividends upon its preferred stock and at the same time keep up and improve the physical condition of its plants. And yet this depression lasted but little over a year and was mild compared with such periods as the middle nineties and the middle seventies. When it is remembered that the iron and steel trade is peculiarly subject to the fluctuations of business and that the company carries a bonded debt of half a billion dollars, it can hardly be said that the financial stability_of the Steel Corporation is fully assured. 1 y § II. Of allied interest and of even more significance is the corporation's relative share of the country's trade. Perhaps no industrial combination excited such apprehen- sion of monopoly power and tyranny as did this company at the time of its formation.^ This apprehension is readily accounted for by its great size — its immense capital and large property holdings. While controlling a large share of 1 For a dark picture of such indtisitrial tyranny, see quotatioir from London Standard in Iron Age, Mar. 28. 1901, p. 4. g6 THE UNITED STATES STEEL CORPORATION [318 the country's iron and steel trade, the Steel Corporation ex- ercises no such dominating influence over the industry as do the Standard Oil and American Sugar Refining companies in their respective fields. Nor has its relative share of the country's production tended to increase. In- dependent concerns have maintained a vigorous activity and have even gained on their great competitoi, J When the Steel Corporation was first organized it was estimated that the company's control of the country's out- put of Bessemer ore would be about ninety per cent/ and of the iron ore lying in the ground, fully seventy-five per cent.' Wilgus in his work on the United States Steel Corporation stated that it would make eighty per cent of the Bessemer steel ; fifty to sixty per cent of the open-hearth ; two-thirds of the steel rails made in the United States, Canada, and Mexico; sixty per cent of the steel beams; two-thirds of the wire rods; ninety-four per cent of the wire; ninety-five per cent of the wire nails; all the woven wire and barb- wire fence; ninety-five per cent of the steel in tubes;. ninety- five per cent of all the tin plate; and ninety per cent of all the bridge material. While some of these estimates ap- proximate the truth, most of them proved extravagant. However, very conservative calculations gave the corpor- ation sixty per cent of the output of pig iron and from eighty to eighty-five per cent of rolled or finished products. Considering the size of the Steel Corporation, the pro- portion of its trade has, at no period, been very startling. In 1901, it produced 43.9 per cent of the iron ore of the country, 42.9 per cent of the pig iron, 66.2 per cent of the total steel ingots and castings, and 50.1 per cent of the rolled products. In addition to this it controlled 65.8 per '^ New York Independent, Apr. 11, 1901. 2 Review of Reviews, May, 1901, p. 560. 319] THE UNITED STATES STEEL CORPORATION 97 cent of the output of wire nails/ It may be said, however, that its control of the higher grades of ore, pig iron, and rolled products was larger than these figures would indi- cate. Of the 20,589,237 tons of ore shipped from the Lake Superior region, the Steel Corporation shipped 12,692,213 tons, or 61.6 per cent. It produced 58.5 per cent of the Bessemer and basic pig iron, and 70.2 per cent of the Bes- semer steel ingots and castings. Among rolled products, the corporation produced 59.9 per cent of the Bessemer steel rails; 62.2 per cent of the structural shapes; 64.6 per cent of the plates and sheets; and 77.6 per cent of the wire rods. Of certain wire goods like woven and barb wire the Steel Corporation had practically a monopoly by virtue of patent rights. Since 1901 the proportion of the trade controlled by the company has not varied to a very marked extent. In 1902 the aggregate of that trade was large; but independent con- cerns secured a due share of it. The most noteworthy changes were in regard to steel rails which increased from a proportion of 59.9 per cent to 65.4 per cent and wire rods which declined from a percentage of 77.6 to one of 71.5. The year 1903 marks a relative decline in the proportion of raw and crude material and a slight advance in the percentage of finished and rolled goods. The increase, how- ever, was followed by a noticeable decline in 1904 and 1905. The proportion of pig iron and open-hearth steel produced by the corporation has held its own. With these and a few other exceptions, the company's share of the total production from 1902 to 1905 (inclusive) shows a small but appreciable decline. The amounts of iron and steel produced by the Steel Corporation and independent concerns for 1905 and the per- centages of the total for each year from 1902 to 1905 are shown in the following table : " * Iron Age, Jan. 2, 1903. * Taken from figures in Iron Age. 98 THE UNITED STATES STEEL CORPORATION [320 u u Oh •5 ■* ro 00 00 CI 00 f^ •<*• ? 00 i'^ o\ m •* CO S O ■ji « K tS BO- m w O CO mm O '^ 6\Q ^ 0\ ^ in 0000 in o O "1 00 !-•' ^^ VO m 00 invo OS o\ o« M \0 COW 000 rooo cfoo mo irjoo 00 q "I-VO OOQ OOM VO rf ^ " S "0 9' o.§ 00 O ON mm N *X So O f*^*D m-^ O M « M 00 C4 M CO N m VO m mro i>-m W M 00 ^ 000 VO »:. t^Tj- 00 0^ -^ t^m •«*• 00 VO K ^t^ •^ •^ ^ 00 ro u S o •9 -S 6" ■'^ _S K WVO 0\ *^mo 00 ^c^ i^vo cT m-* Th C4 00 N 00 •-• 00 VI dsvo" tOvO en 00 M O OH t-* « o 00 m « vO VO O « O to fo W : o : p ! I .!:j A MO , .2 8 "&. ..go O • ft) • figi o o i o '^^ -'H r^ >^ C 5 '^ « S rt m C u rS in ctf 'M Q. n CD a a ri, o u> US 0.9 .S 8 ■» t: a-? no M : a" « oJ " fl - w "zj -^ .5 w 3 -.2 t S S5 "s « ■ a • • o • •..as §■§ ' rt TU * OJ V \o d\ o\ o\ «R m «9. o o 8 8 8 8 o « =5 t^ 0\ x^ M ^ ^ Ov 0- ^Ti m i» * ^ ■* NO f m •^ § § § § ° g 8 u 0* TP ■* PI f^ « VO 8 8 8 ^S «9. »n so t^ « «a a « o U o O U -3 U CJ a) t-^ '/) 9 -u 5 W H o w ^ <-> I iz; ^ E < ■c u I •a u o o w e2- 325] CAPITALIZATION OF STEEL CORPORATION 103 From, this table it will be seen that at the formation of the United States Steel Corporation the stock of the ori- ginal companies, with the exception of the American Steel Hoop and American Sheet Steel companies, was consider- ably augmented on the exchange of securities. The dif- ference between the old and new issues of stock was $102,- 929,195, to which should be added $144,000,000 of first- mortgage bonds — making a total increase in the capital of the original eight companies of $246,929,195. This rep- resents an increase of capital due to transfer of stock of more than forty per cent. The capital stock of the American Bridge Company and the Lake Superior Consolidated Iron Minesi— both of which entered the Steel Corporation soon after its organization — was likewise increased on the exchange of securities. The old issues of stock outstanding of these two companies was $92,212,049. On the transfer of shares, this stock was. in- creased to $147,705,632, the difference being $55,493,583. Adding this difference to the increase in the stock of the original eight corporations, we see that the capitalization of the United States Steel Corporation was $302,422,778 more than the total capitalization of the ten great com- panies of which it was first formed. The aggregate stock capital issued to the ten companies mentioned amounted to $867,705,027. There was issued in addition to this amount $50,000,000 stock — $25,000,000 preferred and $25,000,000 common — in payment for $25,- 000,000 cash. The remaining stock of the authorized issue of $1,100,000,000 was left for the pay of the syndicate and as treasury stock for future use. The capital stock issued at the time of the first annual report was $1,018,583,600, of which $508,302,500 was common and $510,281,100 prgferre^. This capitalization' was greater thaw that of any other reterrec I04 THE UNITED STATES STEEL CORPORATION [326 industrial concern in existence and attracted much public attention. The question naturally arises, how far is this huge capitalization justified? Regarding the basis of the capitalization of companies and combinations, two general opinions are held : First, that the amount of capital should be limited by the actual value of the property owned, or should be strictly related to such value; Second, that it should be dependent upon the earning capacity of the com- pany. The second basis of capitalization is the one pre- ferred by most business men. Under competitive condi- tions, however, these two bases will tend to correspond. It is only under advantages, monopolistic in nature, that the capitalization of earnings is likely to exceed in any consid- erable degree a capitalization based upon the value of the properties^^wnedTj It has already been noted that the Steel Corporation was organized in a period of prosperity. Just previous to this organization, the eight original constituent companies were paying full dividends on their preferred stock and managed to make payments on the common stock. During the year 1900, the latter half of which was a period of depression, the different interests consolidated made the following profits : ^ Carnegie iSteel iCompany $39,000,000 Moore Compapiues 22,000,000 Fed«ral Steel Company 15,000,000 National Tube Company 13,000,000 American Steel & Wire Company 7,000,000 Total $96,000,000 A capitalization of a billion dollars on net earnings of $96,- 000,000 does not seem excessive. Notwithstanding a tem- porary depression during the summer and fall months, the ''■Iron Age, Feb. 28, 1901. 327] CAPITALIZATION OF STEEL CORPORATION 105 year 1900 was on the whole a prosperous year. The early months constituted a period of exceptionally large demand for iron and steel goods; and the high prices of the latter part of 1899 continued. The smaller earnings and lower prices of the latter half of the year, though an im- portant factor in the formation of the Steel Corporation, did not serve to make the gains of 1900 typify a season of depression or even of normal earnings. The net earnings of the Steel Corporation during one of its most prosperous years (1902), which was also one of the mOiSt prosperous in the iron and steel trade of the country, were $133,308,- 763.72;^ and at that time the Lake Superior Consolidated Iron Mines and the American Bridge Company had been added to the corporation. When the incomes of these two years are compared, and allowance is made for the earn- ings of the companies added to the Steel combination since its formation, we readily see that the net income of the eight companies in 1900 typify a year of great prosperity. § 5. In so far as the capitalization of the Steel Corpora- tion was based upon earnings, it was so based in a period of good times. What the several constituent companies could earn during normal times, or during an epoch of de- pression, was a matter of uncertainty. In 1896 and 1897 the Carnegie Steel Company is said to have earned between one-sixth and one-sevemth of its net inconie in 1900;* while during the same period the Illinois Steel Company passed all dividends and was reported to be falling behind in meeting current expenses.' As these two companies were among the most powerful then existing, they may be said to typify conditions which must be taken into consideration in capitalizing an iron and steel combination. I Mr. Car- ^ First AnKual Report, 1902. « Moody's Truth About the Trusts, p. 200. * Iron Age. Io6 THE UNITED STATES STEEL CORPORATION [328 negie, when referring to the great vicissitudes in the iron and steel trade, declared that steel is either prince or pauper. It seems clear from what has been said that in the formation of the United States Steel Corporation steel was capitalized while it was a prince, and that its periodical descent to the status of pauper was ignored.^ The capitalization of the constituent companies them- selves was also much in excess of their tangible assets. The consolidations of the Middle West which became parts of the Steel Corporation were, like that corporation, formed during a period of rising prices and prosperous outlook. The firms entering these combinations exchanged their se- curities in accordance with the outlook for increased earn- ings.^ [As m other cases, in the division of stocks into com- mon and~p?5ferred, the former came to represent what is vaguely called " good-will " and " future gains due to com- bination," while the preferred stock alone stood for tangible ass etsT^y rhis division was by no means definitely made in all cases. Nevertheless, the common stock of these corpor- ations represented, in whole or in part, intangible property; In at least one case, good will was included in the preferred stock — the common stock representing only anticipations of future profits and pay of the promoter. One of the clearest cases of this tendency toward inflated capitalization is that of the American Tin Plate Company. Mr. Reid, the president of that company, testified before the Industrial Commission that $28,000,000 common stock and $18,000,000 preferred stock entered into the capitaliza- tion of that corporation ; that the $18,000,000 preferred was supposed to represent the cash value of the plants as going concerns, including ordinary good-will, and that all the common represented hope of future success and pay of the 1 Report Industrial Commission, vol. i, pp. 857, 863, 864, 883, 885. 329] CAPITALIZATION OF STEEL CORPORATION 107 promoter.'' He staifced further, that as the establishmenits were bought as going concerns at a time when business was prosperous, and when the vendors felt themselves in a posi- tion to make good terms, the prices for which they sold were high, so that all the stock taken together would prob- ably represent from three to five times the cost value of the plants themselves under ordinary conditions. It was testi- fied by Mr. Graham, one of the vice-presidents of the same company, that in the transfer of securities, when the com- pany was formed, the vendors had the option of receiving $100 cash for each share of stock, or accepting $100 each, in preferred and common stock. As a result of this option two hundred dollars of stock was preferred to one hundred dollars cash. The National Tube Company seems to have been capi- talized in a manner very similar to that of the Tin Plate Company. In the capitalization of the National Steel, the American Steel Hoop, and the American Sheet Steel com- panies ^ the preferred stocks alone represented tangible as- sets, and the common stock, good will, expectation of future profits, and pay of promoters. As more than half the stock of these companies was common it will be seen that their capitalization represented very largely intangible assets. The American Steel and Wire Company was capitalized at $80,000,000. Mr. Gates, in his testimony before the Industrial Commission, stated that probably $50,000,000 to $60,000,000 might be considered the actual value of the plants.' This estimate, however, was probably too large, as the value placed upon some seventy per cent of the plants in 1897 and 1898 by Mr. Morgan was $28,000,000. It is 1 Report of the Industrial Commission, vol. i, pp. 866, 884. 2 Ibid., vol. i, pp. 944, 957. 958, 959. 962, 963, 967. 3 Ibid., vol. i, p. 1021. I08 THE UNITED STATES STEEL CORPORATION [330 more probable that the actual value of the plants of the company was represented by about half the full capitali- zation. The Federal Steel Company was in like manner capital- ized beyond the value of its plant and property holdings. Before the close of 1899 some $99,000,000 of stock had been issued by this corporation. The book value of all the property of this organization was placed by experts at $45,000,000,^ although some allowance must be made for an appreciation in the value of its ore and coal properties and for its cash assets.^ The constituent companies of this corporation with their issues of stock at the time of the formation of the Federal Steel Company were as follows: Illinois Steel 'Company $18,650,000 Minnesota Iron Company 16,500,000 Elgin, Joliet, & Eastern R. R 6,000,000 Lorain Steel Company (of Ohio) 9,000,000 Lorain Steel Company (of Penn.) 3,000,000 Total $53,150,000 On this combined capitalization some $53,000,000 of pre- ferred and $46,000,000 of common stock were issued.^ § 6. From what has been said concerning the seven com- panies mentioned, it will be seen that at the time of their formation practically all the common stock represented such intangible things as good will and expectations of future success. Some $240,000,000 of the stock of these com- panies thus stood for intangible assets. On entering the United States Steel Corporation, the capitalization of these ^ Iron Age, Oct. 26, 1899, p. 35, and Report of the Industrial Commis- sioH, vol. i, pp. 986, 987. * Report of the Industrial Commission, vol. i, pp. 986, 987. ■ See terms of exchange for each share in Commercial and Financial Chronicle, Sept. 10, 1898, p. 530. 331] CAPITALIZATION OF STEEL CORPORATION 109 consolidations was still further increased over $74,000,000. If there had been no material improvements and exten- sions in the plants of these combinations and no increase in the value of their ore and coal properties, it could be said that of the $531,000,000 of stock issued to these companies, more than $300,000,000 represented no visible form of property. The Carnegie Steel Corporation and the Lake Superior Consolidated Iron Mines had no preferred stock. Their capitalizations were not so disproportionate to the value of their plants and property holdings. Indeed, considering the growing value of the ore property in the Lake Superior region, it may be questioned if the second of these com- panies was not under-capitalized. The securities of both these organizations, as has already been noted, were pur- chased at a heavy premium; and thus was added to an al- ready inflated capitalization an increased issue of stock which stood for something other than visible assets. fs'TTviewed, however, in the light of conditions existing in the years from 1898 to 1901, this enormous capitaliza- tion was the outcome of certain influences which forced matters to take the turn they did. It has been popularly pointed out that Mr. Morgan of his own volition brought the various steel consolidations of the Middle West and East together in a larger combination, then overloaded the whole aggregation with half a billion dollars or more of watered capitalization, then ordered dividends to be paid on this capitalization, and that as a result of this wild finan- ciering there followed inevitably the crash of 1903 and 1904. The public forgets that this financiering was closely related to the conditions under which the Steel Corporation and its constituent companies were organi zed.] After the depression of the middle nineties there was ushered in a period of almost unexampled prosperity in the iron and no THE UNITED STATES STEEL CORPORATION [332 steel trade. The prosperous outlook gave an impetus to the formation of combinations, and at the same time enabled companies entering these combinations to exact a good price for their securities or properties. This was especially true of the larger and more flourishing of these firms or com- panies. The capitalization of both the Steel Corporation and the combinations of which it is composed was influenced by the relatively high earning capacity consequent upon an egofih-of great demand and high prices. j The conditions in the steel trade situation in the opening Lflionths of 1901 which operated to produce an exaggerated capitalization were briefly as follows: The stability of the leading steel interests of the country was threatened by what promised to be a disastrous competition. To prevent this competition and secure the full benefits of the promising outlook for large gains in the immediate future, a union of some sort had to be formed. The device resorted to was that of a holding company.^ In order that the new con- solidation should fulfill its purpose, all the larger corpora- tions must be controlled, and particularly the Carnegie Com pany..! The prosperous times and consequent large profits enabled these interests to exact a good price for their securities. The Carnegie Steel Company, the purchase of whose securities has been a theme of much comment, may serve as an example. In the year 1900 this company's net earnings were $39,000,000.^ Such earnings enabled Mr. Carnegie to exact a price which he could not have secured a few years before when the profits of the company were only six or seven million dollars. It was absolutely neces- sary that the Carnegie interests should be controlled. " To control the Carnegie interests meant to purchase them; and to purchase them meant to pay Mr. Andrew Carnegie's. 1 See chapters iii and iv. ^ Iron Age, Feib. 28, 1901. 333] CAPITALIZATION OF STEEL CORPORATION m price for ithem,"' and Mr. Gamegiie's price was nearly half a billion dollars. An era of prosperity in giving a stimulus to the forma- tion of great consolidations therefore acts in a way to pro- mote undue capitalization."^ In an industry characterized by great variations of trade the earning capacity in such a period is likely to be greatly in excess of the income under normal conditions. It was the high earnings of a prosper- ous period that were in a sense capitalized in the larger organization of the iron and steel trade. It is thus seen that the vicissitudes of the industry were an important factor in the high capitalization of the Steel Corporation and the consolidations of which it is composed. § 8^/what has been' said concerning the large capitaliza- tion of the Steel Corporation and the consolidations of which it is composed refers to the periods of their organization. Since that time there have been material additions to their plants and cash on hand. The value of^ their ore and coal lands has also very greatly augmentedj This increase in property holdings has unquestionablybrought the tangible assets of the corporation nearer to its nominal capitaliza- tion. How much is to be credited to this increase is a mat- ter of individual judgment. Between the years 1899 and 1901 the values added to the property controlled would, ac- cording to officers of the corporation, amount to no less- than $175,000,000. This, of course, includes mainly an increase in the value of real property and, to a much less extent, additions to plants and cash on hand. Thus in the case of the Federal Steel Company the book value of the properties of the corporation, estimated at $45,000,000, did not include $10,000,000 cash on hand, nor increases in the value of real property. Some coal land which was 1 Moody's Truth About the Trusts, p. 200. 112 THE UNITED STATES STEEL CORPORATION [334 put in at $500 an acre was later sold for twice that amount, and for a mine costing the company $75,000 as much as $600,000 was subsequently offered. Since the Steel Corporation was organized there have been large appropriations for the acquisition of new mineral properties and additions to the existing plants. Besides the ordinary expenditures for maintenance of plant, this or- ganization during the first four years and a quarter of its history paid out in such improvements and acquisitions $184,500,000 ^ or between five and six millions more than had been paid out in dividends. Some seventy-five mil- lion dollars are to be appropriated for the equipment of the steel ^ants at Gary, Indiana. § g ^ Wh at the present value of the properties of the Steel Corporation is, is a question on which considerable diver- gence of opinion exists. What is held to be its most im- portant asset consists of ore and coal property of rather indeterminate, though great, value. It is this property which is the doubtful factor in asce rtain ing the extent of the visible assets of the corporationjTln Mr. Schwab's opin- ion the question whether oriiotthe company is over-capi- talized depends upon the value that is to be placed upon its unmined ore and coking cQ^Ci The value of ore and coal, in his judgment should be considered greater from the fact that the Lake Superior ores and the Connellsville coking coal are apparently limited, and so far as one can judge from the present outlook, iron in this country will be ex- hausted within a comparatively short time.^ It should be said, however, that the addition of a large capitalization representing values of unmined ore is not usual, although it may have a certain basis of justification. ^Iron Age, Oct. 5, 1905, p. 884. iSee reports of Steel Corporation, 1902-05. 2 Report of the Industrial Commission, vol. 13, pp. 464, 467, 472. 335] CAPITALIZATION OF STEEL CORPORATION 113 In 1902 when the plan for converting $200,000,000 of preferred stock into bonds was announced, the question of capitalization became one of the determining points in suits brought to prevent the proposed conversion. In one of the suits an affidavit was made to the effect that the plants and properties of the corpoiraition could be duplicated for about $300,000,000 and that the total properties including good will and organization were not worth $500,000,000. An- other affidavit stated that the plants of the Carnegie Com- pany, representing 44 per cent of the productive capacity of the Steel Corporation, had been valued on March 12, 1900, by the partners of the Carnegie Company at $75, 000,000. This statement was made in answer to Mr. Prick's bill of complaint, and said it was a " full, fair, and accurate valuation of these assets." The value of all the properties of the corporation was declared to be not more than $200,000,000. In behalf of the corporatioin, Mr. Schwab made a de- tailed statement of the value of its properties. In valuing these assets he employed two leading principles, — the cost of duplication, and the profits derived from their possession. No allowance was made for good-will, patents, trade- marks, and the like. The items, grouped under eight gen- eral divisions, are as follows : 1. Iron'-ore properties $700,000,000 2. Plants, mills, fixtures, equipment 300,000,000 3. 'Coal and coke fields (87,589 acres) 100,000,000 ( after deducting 4. Transportation propenties 80,000,000 } $40,340,000 of ( banded debt. 5. Blast f urnacesi. 48,000,000 6. Natural gas fields 20,000,000 7. Limestone properties 4,000,000 8. CasJi and' cashi assets 214,278,000 Total $1,466,278,000 114 ^^^ UNITED STATES STEEL CORPORATION [336 The valuation placed upon the properties in Mr. Schwab's statement exceeded the capitalization by over $100,000,000. Regarding the statements sworn to in connection with the Carnegie-Frick litigation of 1900, that $75,000,000 rep- resented a " full, fair and accurate valuation " of the Car- negie Steel Company's assets, it was shown by Mr. James J Campbell, auditor and assistant secretary of the Carnegie Company, that the properties of that organization had been carried on the books for many years at original costs ; and that no allowance had ever been made for money expended for improvements, some of which far exceeded the original outlay. The real property of the company had also with the increased demand for iron and steel goods risen in value. In the above statement, the figures given for the value of plants, mills, equipment, transportation properties, and blast furnaces are probably conservative. The item of cash and cash assets is, at least, doubtful ; and the items of coal and ore properties, are not much more than guesses. It is to be noted that more than half the assets, as given by Mr. Schwab, is ore and coal land, — the ore land alone being figured at $700,000,000. In this latter estimate, Mr. Schwab capitalizes unmined ore, of which he believes there is a rather limited quantity which will at no very remote day be exhausted. In not a few instances, he has insisted upon the importance of this property as the greatest asset of the Steel Corporation. § lO.pThe capitalization of natural mineral resources is a subject 'rm-which financiers, captains of industry, and in- vestors hold widely divergent views. It is one thing to mortgage the future and quite another to value property at its present earning capacity. If the possession of a min- eral deposit or a group of deposits confers a monopoly, its valuation will be determined by considerations radically dif- ferent from those governing the appraisal of raw material 337] CAPITALIZATION OF STEEL CORPORATION 115 in the ground whose possessor must compete with the own- ers of other deposits. Even where a supposed monopoly exists, the condition may suddenly change by the rise of competition in some distant part of the globe. It is not very long ago since the Lake Superior mines of copper were deeply affected by the outpouring of great quantities of rich ore from Butte. The flood of cheap iron ores from the Mesaba range affected not only the Eastern iron work- ers, but iron producers all over the world. The risk of new discoveries is one which established owners of mineraLprop-— . erty always run; and this risk should be reckone d with ;_J Furthermore, the acquisition of a monopoly in the case of iron ore is rather remote, and out of the question in the case of coal. The control of the most favorably located deposits from an economic point of view is another matter. It may be figured that the ownership of Lake Superior iron ore mines is equivalent to so much a ton on steel under the cost of producers drawing their supply of raw material from other sources. Even such figuring has its element of dan- ger. Technical progress may render natural advantages less important. The monopoly of Bessemer ore, for ex- ample, was deeply affected by the introduction of the basic process. Risks like these should find an expression in some dis- count of the capitalization of mineral deposits. A cardinal question, however, is whether or not it is wise to capitalize future earnings at all, assuming that they are secure. Capi- tal implies interest or dividend obligations; and charges on a future output of metal may necessitate a forced utiliza- tion to meet such obligations. This may become a serious menace to the industry itself and the collateral branches of manufacture depending upon it. It has been computed, too, that it would require about five dollars per ton of steel out- put to pay interest on the Steel Corporation's nominal capi- Il6 THE UNITED STATES STEEL CORPORATION [338 talization at the rate of seven per cent, whereas other com- petitive concerns can get ofif with about a dollar and a half per ton of steel produced ^ — the latter's capacity of output in relation to nominal capital being much greater. If the Steel Corporation has stores of raw material relatively greater and better than others, this fact justifies a larger capitalization per unit of manufactured product. The capi- talization, however, should not be disproportionate to this difierential advantage. [ Nevertheless, it must be said that ore properties all over the world are rapidly growing in v ^lue. j The ore question is assuming a dominant place ; and'mehigh estimate placed by Mr. Schwab upon the value of the holdings of the Steel Corporation in the Lake Superior region will probably ap- pear modest within a very few years. The importance at- tached to rich deposits of ore is indicated not only by the action of domestic producers securing their sources of raw material, even at considerable expense, but by the action of foreign governments in their attempts to conserve the home supply. It is only last year that Germany, after some an- xiety over a proposal by Spain to impose a tax on exports of Spanish ore to Germany, concluded an arrangement by which the threat was withdrawn in return for some reci- procal benefits. The governments of both Norway and Sweden have proposed steps for the limitation of iron ore exports; and it is very possible that the latter government will take under its control the north Swedish ore proper- ties. Owing to the increasing difficulty in obtaining Scandinavian ores, prominent Rhenish Westphalian pro- ducers of iron and steel have asked the German Ministry of Public Works for special rates for transport of ore from ''■Report of the British Iron Trade Commission on American Condi- tions, iby J. S. JeanS', p. 191. 339] CAPITALIZATION OF STEEL CORPORATION ny the French district of Briey.' These measures are all in- dicative of a fear of future scarcity of iron ore; and this fear is giving rise to serious concern in political as well as industrial circles. Upon the world's apparently limited supply of ore the demand for steel is pressing with increasing urgency. Go- ing back twenty-five years we find that the steel rail was not only the back-bone of the steel industry but its body and bulk. In 1 88 1 production of steel rails in the United States was 1,210,285 gross tons, while in the same year the Bes- semer steel ingot production amounted to 1,374,247 gross tons, or only 163,962 tons more, and the output of open hearth ingots was 131,202 tons. To-day, not only is the steel rail production nearly three times that of 1881, but even this production is only a fraction of the entire steel trade. The increased use of wire nails and barb wire is making the manufacture of wire rods nearly as important as that of steel rails. The production of structural shapes amounted to 360,005 tons in 1894. In 1902 it had in- creased to 1,300,326 tons. The tonnage of vessels built of steel in the ten years beginning with 1880 averaged 35,000 tons of new capacity a year. In the next ten years the aver- age was 86,000 tons a year. In the five years beginning with 1900 the average was 248,000 tons a year. The use of the steel car is adding some eight or nine hundred thous- and tons to the steel consumption of the country. The im- portance of the steel tie as a feeder to the industry, once its use is established, can hardly be overestimated. The pro- duction and consumption of iron and steel are increasing faster than population. In terms of pig iron, the per capita increase of production in this country may be shown as follows : ^ Iron Age, Mar. 7, 1907, p. 75. Il8 THE UNITED STATES STEEL CORPORATION [340 1880 171 pounds. 1890 329 1900 399 " 190S 619 1906 662 " (estimated) . Barring the possibility of the discovery of very extensive and cheaply worked ore fields in other regions, the ever- widening stream of iron and steel consumption will add greatly to the value of the holdings of the Steel Cor- poration in the Lake Superior region. Even the high price to be paid for the Great Northern properties recently trans- ferred to the corporation is probably small in proportion to the future value of those properties. Nevertheless the con- tingency of radical changes in the industry due to new dis- coveries or invention remains. While time may justify the sagacity of the men who attached a high value to the sources of ore supply, there nevertheless remains a consider- able element of danger in the capitalization of a future asset. § II. That ithe United States Steel Corporation has been enabled to face not a little competition, and during a year at least of considerable depression to meet its interest obliga- tions on some $500,000,000 of bonded indebtedness and to pay in addition seven per cent dividends on $360,000,000 of preferred stock argues in favor of the high value of its plants and properties. We may dismiss without comment the contention of one of the witnesses in the Hodge suit brought to test the legality of the bond conversion that the tangible assets of the company should not be valued ait more than $200,000,000. The earning capacity of the ■ corporation during the six years of its existence is at least some index to the value of its assets. If the amount paid out in interest on bonds and in dividends on stock during 1904, the most trying year of its existence, is capitalized at 341 ] CAPITALIZATION OF STEEL CORPORATION ng five per cent the capitalization would amount in round num- bers to $974,759,000. The dividends of the Standard Oil Company in 1905 capitalized in the same way would amount to nearly $800,000,000.^ A conservative estimate of the value of Standard Oil property, exclusive of monopoly ad- vantages places it at about $300,000,000. The Steel Cor- poration is not the monopoly that the Standard Oil Com- pany is, and yet its dividends and interest payments during the darkest year of its history capitalized at five per cent amounts to $974,759,000. It must be said, however, that during more than two years no dividends were paid on $508,300,000 of common stock, and only two per cent is being paid at the present time. How much of this stock represents tangible property is diffi- cult to determine. From what has been said concerning the consolidations which became parts of the Steel Cor- poration, the common stock must be looked upon as rep- resenting in large measure good will and future gains. It is essentially capitalization of future returns. It should be remembered, however, that the Steel Corporation, as was shown in the preceding chapter, has been steadily adding to its previous holdings of ore and coal lands. As the de- mand for iron and steel has greatly increased in recent years and gives promise of further increase in the future, these lands are likely to be a very considerable addition to t he asse ts of the company. \_The market value of the outstanding securities of the Steel Corporation, if taken through a long series of years, would tend to give a fairly accurate measure of the value of its properties. But the corporation has been in exis- tence only six years; and more than two-thirds of that period has been exceptionally prosperous. Although it ex- 1 Commercial and Financial Chronicle. I20 THE UNITED STATES STEEL CORPORATION [342 perienced an epoch of depression in the latter part of 1903 and during the year 1904, it has not yet been compelled to withstand, hard times comparable to those of the middle nmedesTT Nevertheless, it is of some interest to compare the par and market values of the corporation's securities. The par value of the securities of the United States Steel Corporation at the close of the year, 1906, was in round numbers $1,340,000,000. In the first year of its existence, it was slightly less. In April, 1901, the approximate mar- ket value of all the outstanding securities was $1,265,- 000,000. By December, 1903, this value had shrunk to about $760,000,000.^ During the closing months of 1904 there was some revival in the iron and steel trade with a consequent rise in value of the corporation's securities. During 1905 and 1906 the earnings steadily increased, and the latter of these years showed the largest net income of any year in the corporation's history. This period of pros- perity has continued to the present time. As a consequence of this prosperity the stocks and bonds of the company have been quoted at high figures. During the month of Febru- ary, 1907, the market value of the outstanding securities of the Steel Corporaition' approximated $1,170,000,000.^ The quotations of these securities, it must be remembered, rep- resent their value during a period of " good times." § 1 2. {The future stability of the Steel Corporation will de- pend not a little upon the character of this, huge capitaliza- tionT] Reference has already been made to the conversion oTpreferred stock into bonds. In the spring of 1902, when the conversion of preferred stock into bonds was first pro- posed, the bonded debt of the corporation and its constitu- 1 Based upon quotations in the Commercial and Financial Chronicle. See also Moody's Truth about the Trusts, p. 201. 2 Based upon stock and bond quotations in New York Sun. 343] CAPITALIZATION OF STEEL CORPORATION 121 ent companies was, in round numbers, $350,000,000. As. indicated in a previous chapter,^ the plan was to exchange $200,000,000 of preferred stock for a like amount of five per cent second mortgage bonds, and to issue $50,000,000- additional bonds for the same amount of cash. The osten- sible motive which prompted this proposal was the need of money for additions and improvements in the plants of the corpoirationi. It was further urged that such a conversion would result in an annual saving of a million and a half dollars. In view of the large surplus remaining to the com- pany after paying all charges and dividends at the end of th& first year, the need of saddling the corporation with such an increase in its debt has seemed questionable to many. The argument, too, that by the conversion, $1,500,000 a year would be saved has seemed almost ludicrous to some for an organization whose net income for the same year was over $133,000,000. It was contended by the executive committee, however, that the expenditure of about $25,000,000 for improvements would add from $10,000,000 to $15,000,000 to the yearly profits. The committee further stated : " That these ex- penditures could be met gradually from surplus earnings the management does not doubt; but this would necessitate ex- tending them over a period of years, and correspondingly would postpone the realization of the profits which, by the immediate use O'f money, could be obtained promptly." ^ The proposal as originally announced was never fully carried into effect. Of the proposed $200,000,000, only $150,000,000 of the preferred stock was exchanged for bonds. The bonded debt, however, of the corporation and its subsidiary companies was increased to over $500,000,- 1 Cf. ch. iv. ^ Circular to Stockholders, Apr. 17, ig02, p. ,2. 122 THE UNITED STATES STEEL CORPORATION [344 OCX), and has thus become considerably more than one-third of the total capitalization. [ jA/'he ther or not the financial stability of the corporation has been affected by the bond conversion depends partly upon the value of the company's properties and partly upon the steadiness of its income. That the assets of the cor- poration are great and that all indications point to an in- crease in the value of its ore properties, we have already spenTT* When it is remembered, howrever, that the iron and steel trade is peculiarly subject to fluctuations, this exchange of securities must seem a rather doubtful expedient of cor- porate financiering. That the management of the organi- zation is confident of its ability to secure a large volume of trade, even in dull times, is shown in the contract trans- ferring the Hill holdings which pledges the corporation to a minimum output of 8,250,000 tons of ore from these prop- erties in 1917 at a royalty of $16,417,500. This royalty must be paid, if the properties are retained, irrespective of trade conditions. Here, however, the corporation is safe- guarded in a measure by the reservation to itself of the option of terminating the lease on January i, 1915.^ In the case of the bonded indebtedness incurred by the con- version of preferred stock the corporation is to §ome ex- tent protected by the provision which allows a lapse of two years after failure to pay interest, before foreclosure pro- ceedings can be commenced. This provision, however, while by no means an unimportant safeguard, would hardly preserve the integrity of the corporation in a period of pro- longed depression, like the middle nineties. While the Steel Corporation may be said to have had a steadying ef- fect upon the industry, the vicissitudes of the trade are nevertheless so great that a liberal margin should be al- ^ See Fifth Annual Report. 345] CAPITALIZATION OP STEEL CORPORATION 123 lowed between normal earnings on the one hand and fixed charges and operating expenses on the other. As is well known it is a fixed policy of good railroad fin- anciering that earnings should never fall below fixed charges and operating expenses. As far as possible, it has been the policy of successful railroads to reduce fixed charges and replace bonds by preferred stock. The Chicago, Milwaukee and Saint Paul Railroad, for example, has up- wards of $40,000,000 of seven per cent preferred shares. The conversion of this respectable sum of capital into five per cent bonds would save that company $800,000 annu- ally and enable it to pay nearly two per cent extra on its common stock. Instead of embarking upon such a policy, the company made some old mortgages convertible into stock, and has converted $30,000,000 of its funded debt during the last twenty or thirty years. The opposite policy on the part of the Steel Corporation, engaged in a busi- ness far more specialized and more exposed to changes in trade conditions than railroad traffic has excited much at- tention and not a little criticism. It is a business principle that it is never wise to substitute fixed charges which must be met for dividend payments which can be postponed. Such an axiom, it would seem, even so powerful a corpor- ation cannot afford to disregard. Whether or not the bond conversion has seriously en- dangered the future integrity of the Steel Corporation is a question which is difficult to answer. In 1903 Mr. James H. Bridge said that the revenues of the corporation could be reduced by one-third without necessitating a re- duction in the present rate of dividend on preferred stock.^ It should be noted, however, that Mr. Bridge spoke in view of the prosperous conditions existing in the year 1902 and ^ Commercial and Financial Chronicle, 1903, pp. 2039-2109. 124 ^^^ UNITED STATES STEEL CORPORATION [346 the early part of 1903. The net earnings for 1902 were $133,308,000, and for 1903, $109,177,000. In the year 1904, these earnings had declined to $73,176,000, making a decrease of over $60,000,000 from the net income of 1902. When it is remembered that the annual dividends on the preferred stock amount to only $25,219,677, and that in the year 1904, after the payment of this dividend, the interest on the bonded indebtedness and the various charges for de- preciation, replacement, and sinking funds, only $5,047,800 remained as a surplus, it can be seen how near to the dan- ger limit a year of severe depression may bring the corpor- ation. § 13. In summary of this chapter it may be said that the tendency toward consolidation is most marked in times of prosperity. Such periods are periods of more than normal earnings, and this is especially the case > with the iron and steel industry. fThe^capitalization of a combination formed in such a period is largely based upon the extraordinary earnings of the time, and thus tends to be in excess of the tangible assets of the organiz ationT^ The Steel Corporation and the consolidations of which it is composed were formed in years of exceptional prosperity and were thus largely overcapitalized. fTnL a rough way it may be said that the preferred stock represented the value of plants and prop- erties; and the common stock stood for supposed future val ues J The capitalization of the Steel Corporation was much in excess of the total for all its constituent companies, most of which were already over-capitalized. {_AI1 these or- ganizations expended large sums in the improvement and extension of their plants and thus added to their real capi- taiTT^iis capital was still further increased by the grow- ing,^emand for iron and steel goods, which gave additional value to ore and coal properties?^ These properties are now considered the most valuable asset of the Steel Corporation, 347] CAPITALIZATION OP STEEL CORPORATION 125 and in Mr. Schwab's estimate are worth $800,000,000. This imputed value, however, is based upon a supposed scarcity of ore and coal in the not-far-off future. The pos- sibility of the discovery of new ore fields, as well as changes in the technical requirements of the iron and steel industry renders such imputed valuation rather uncertain. The in- creasing use of steel for building purposes, etc., makes it probable, however, that these lands will continue to be a great asset to the corporation. It is difficult to determine the value of the plants and properties of the Steel Corpora- tion; but it is undoubtedly greater than many of the esti- mates made by those contesting the validity of the bond con- version. While the value of the properties of the company is unquestionably high and its resources great, its bonded debt, increased by the conversion of $150,000,000 of pre- ferred stock, is a possible menace to its future financial integrity. CHAPTER VI The Steel Corporation and Prices § ij The most important, economically speaking, as well as the most interesting question concerning a consolidation or trust is its influence on prices. The nature of this in- fluence depends in large measure on the control which the organization exercises over the industry in which it is en- gage3!~jLike the pool, the consolidation owes its origin to attempts to restrict competition; and its success in this endeavor is indicated by its influence on market condttioh^ Whether or not a business organization exercises such a control, and what is the extent of this control, assuming it to exist, are questions difficult to answer and involving a multitude of considerations. Changes in the demand for goods, variations in technical processes, vicissitudes in la- bor cost, the limitation or opening up of sources of raw material, and legislation limiting the field of competition by imposition of tariff duties, are all factors in increasing or diminishing prices independent of any direct influence from monopolistic control. In the attempt, moreover, to estimate this influence, price quotations, which furnish the most important data, must be accepted with considerable reserve. Real and quoted prices are not invariably the same, nor in all cases are the prices to large and small customers. Quoted prices, often inexact, have been notoriously so on a declining market; and at all times the temptation to favor the large customer has been great. In a period, too, of rising demand not only 126 [348 349] ^^^ STEEL CORPORATION AND PRICES 127 will the quoted prices be paid, but also premiums for prompt delivery. These considerations make any attempt to gauge the influence of a large combination on market conditions rather hazardous. This is especially so when the object is to determine how far a consolidation has been influential in raising or lowering prices. In any very exact estimate of this influence, allowance for these discounts and premiums should be made; and yet it is difficult to measure even ap- proximately these variations from quoted values. In the iron and steel industry this difficulty is enhanced by the fact that discounts and premiums seem to have been more frequent before than since the formation of the Steel Cor- poration. § 2. It may be said, however, that price quotations taken through a series of years do indicate with some approach to accuracy real variations. In so far as they are given for purposes of trade they do, in general, tell what the ordinary consumer has to pay for his goods. In the iron and steel trade they give an adequate idea of the fluctuations to which prices are subject. Notwithstanding numerous deviations from quoted schedules in a declining market, there is a strong disposition to adhere to quoted figures in times of rising prices, and to give fairly accurate quotations in periods of long and extreme depression. They form, there- fore, a fairly reliable index of the fluctuations characteris- tic of the trade. In ordep to form some estimate of the influence of the Steel Corporation on prices, it will be necessary to give some attention to iron and steel prices in general. During the last thirty years, in which the industry in the United States has grown to its present predominant position in the mar- kets of the world, the prices of iron and steel have greatly declined. From 1870 to 1900 this decline on the average, according to the Twelfth Census, was considerably more 128 THE UNITED STATES STEEL CORPORATION [350 than fifty per cent.^ The course of prices is well typified by those of steel rails, which until recently formed the bulk •of the country's steel trade. The price per ton of this com- modity averaged $92.91 in 1870; $67.50 in 1880; $31.75 in 1890; and $32.29 in 1900.^ Late in 1900 the price sank to $26.00. During the depression of the middle nineties prices were lower than ever before or since — steel rails selling as low as $17.00 per ton in June, 1898.^ Since April, 1901, steel rails have been quoted at $28.00. jAs~has already been noted, the prices of iron and steel goods are subject to great fluctuations; and quotations for single years may lead to mistaken conclusions. It may be said, however, that the three decennial years chosen to il- lustrate price changes were all years of prosperity; and 1900 was especially so, notwithstanding the mild depression of the fall months. During thirty years, therefore,-p»ces can be said to have undergone a remarkable redu ction. \ The consumer in the first decade of the twenitieth century gives less than half the price paid by the buyer of 1869 and 1870 for most of his iron and steel. § ;j;_This price reduction was due in part to the opening up of new sources of raw material, and in part to improvements in technical processesTjln 1870 the country relied for most of its ore on Penns^t^Sma and other eastern states. It is true that during the ten preceding years upwards of 3,000,000 tons of iron ore had been shipped from the Lake Superior region; but this amount formed a small percentage of the total product of the country. The eastern ore while more expensive to mine, and more limited in quantity had the advantage of being located near the coal region of the coun- try and within easy distance of the principal markets. ^ Twelfth United States Census, vol. x, p. 8. " Report of the Industrial Commission, vol. xiii, p. 625. ' Iron Age, June 30, 1898. 35 1 J THE STEEL CORPORATION AND PRICES 129 The change from the use of eastern to Lake Superior ore is associated with the introduction of the Bessemer pro- cess. As was indicated in a previous chapter/ the Lake Superior material is largely suited to this process. During the eighth and ninth decades of the last century the demand for steel in the place of iron for railroads, bridge construc- tion', etc., was groiwing; and this demand had to be satisfied. Steel had been manufactured east of the Alleghanies largely out of imported pig iron, but at an expense too great for general use. With the introduction of coke as a fuel and the cheapening of rates for transportation of ores over the Great Lakes, the cost of manufacture was much reduced for the producers west of the Alleghanies, who were in close proximity to the coking-coal areas of the country. The decline in freight rates to eastern markets still further enabled these producers to undersell their competitors east of the Alleghanies.^ While all these influences conspired to lower prices, not a little of this reduction is to be attrib- uted to the presence of competition from the new ore re- gion, leading to the final displacement of the eastern product by the more cheaply mined ores of Lake Superior. Tak- ing the country as a whole, the average cost per ton of iron ore at blast furnaces was approximately $4.60 in 1880, $3.70 in 1890, and less than $3.00 in 1900. Contemporaneous with the opening up of new ore re- gions was the development of new processes of manufac- ture. Allusion has- just been made to the cheapening of costs by the use of coke. The installation at modern plants of the latest labor-saving machinery and the employment of ^ Cf. supra, ch. ji. " For an excellent accounit of the effect of .the dieclining freight rate and *he protective tariff upon tlhe steel industry of eastern Pennsylvania, see Levy, Die Stahlindustrie der Vereinigten Staaten von Ameriha, chap. ii. 130 THE UNITED STATES STEEL CORPORATION [352 skilled managers and workmen have also helped to lower prices. This cheapening of manufactures may be illus- trated in the case of pig iron. Between the years 1890 and 1899 the average daily product of pig iron at a typical blast furnace plant in Pennsylvania had increased 63.3 per cent. The yield of iron per ton of ore diminished about three per cent. The amount of fuel needed to manufacture a ton of iron declined three per cent; and the requirement of lime- stone, 25.5 per cent. The cost of ore per ton of iron dimin- ished some 25 per cent; labor cost, 38.9 per cent, and office and incidental expenses, 29.4 per cent. The total cost per ton of iron declined 34.2 per cent.^ When it is remem- bered that the costs and conditions of producing pig iron are important factors of price determination in the iron in- dustry, the significance of such an instance, which is fairly typical of the country, can readily be understood. I In^steel manufacture there has been a similar cheapening oi gostsT/ According to, the records of the United States Census, the average cost of materials per ton of finished product was $37.00 in 1880 and $26.00 in 1890. The aver- age output per employee in the same years were respectively 2,7 and 60 tons; and the average wages per ton of product were $12.10 and $9.40. These figures show that the steel industry made considerable progress during the decade end- ing with 1890. Great strides were also made in the clos- ing decade of the century. Mr. Kirchhofif, in an address to the American Institute of Mining Engineers, in Feb- ruary, 1899, stated that the cost of producing Bessemer steel ingots had diminished by about one-half between 1887 and 1898. The total cost of producing Bessemer steel in- gots declined in the proportion of 100 to 64.39 between the years 1891 and 1898. ''■Report of the British Iron Trade Commission, p. 116. 353] THE STEEL CORPORATION AND PRICES 131 § 4^ Enojig-h has been said to indicate a great cheapening in the cost of iron and steel g-oods resulting from the use of cheaper ores and improved technical processes!!) It would not be correct, however, to attribute all this change to in- vention and discovery. Hu>st- varies to a considerable ex- tent with the oscillations of trade. A period of depression, for example, is a period of low money wagesj The low costs of the middle nineties were due in part to the rela- tively low wages incident to the hard times of that period. Labor cost, while playing a smaller part in the determina- tion of price in an industry like that of iron and steel than in a trade where little or no machinery is used, is neverthe- less a material element. How far this price tendency was afifected by the growth of consolidations in the closing years of the nineteenth cen- tury and by the organization of the Steel Corporation at the opening of the twentieth is difficult to estimate with any degree of accuracy. These organizations were formed in a period of extraordinary prosperity. There was a great de- mand not only for old standard products, but also for mate- rial to be put to new uses. New forms of structural mate- rial, steel cars, new varieties of wire goods, and the like came into vogue. Demand for all these commodities tended to raise prices far above the level of the middle nineties notwithstanding the low cost of production. In any esti- mate of the influence of combinations, therefore, allowance must be made for the prosperity of the period. That the consolidations of the time were a factor influ- encing prices can be seen in the cases of the American Tin Plate and the American Steel and Wire companies. These companies had something of a monopoly of the market in their respective lines; and this monopoly was reflected in the prices of the period. Shortly after the organization of the American Tin Plate Company in December, 1898, the 132 THE UNITED STATES STEEL CORPORATION [354 price of coke tin plate (14x20) was raised from $2.70 per ■hundred pound box to $3.00 at mill. Quotaltions in the leading centers of trade in the northeastern part of the country were upwards of $3.20 per hundred pound box. During February, 1899, the average price was $3.55. By the end of the year it was $4.84, and it remained at this figure during a large part of the following year.^ In like manner after the organization of the American Steel and Wire Company there was a great rise in prices. Wire rods which sold for $20.00 to $22.50 per ton in 1898 were quoted at steadily increasing prices during 1899. By Jan- uary, 1900, the price had reached $50.00 per ton. Wire nails, which had been quoted at $1.40 to $1.50 per 100- pound keg in 1898, were steadily raised in price during 1899 until they were quoted at $3.20 in the early months of 1900 ^ — a higher figure than that reached under the regimie of the notorious wire-nail association of 1895 and 1896. J It is true that the period under consideration was one of mcreasing demand for iron and steel goods and that rising prices were general. The rise, however, in each case was most marked immediately after the organization of the manufacturing consolidation. ( The difference, too, between English and AttrericaTr'prices was increased notwithstand- ing the fact that the English as well as the American in- dustry was enjoying a period of great prosperity and rising prices. In the case of coke tin plate the price per hundred pound box at New York City during the last seven months of 1898 ranged from twenty to thinty-fivie cents above that of the English product — excluding tariff duty — at the same place. While prices in both England and the United States ^ Iron Age, 1898-99, op. cit., passim. 2 Report of the Industrial Commission, vol. xiii, p. 558. 355] THE STEEL CORPORATION AND PRICES 133 were rising, immediately after the formation of the Amer- ican Tin Plate Company the difference between the figures for the two countries became very pronounced. At the organization of the trust this difference was increased to sixty cents, and two months later to $1.30. From the time the Tin Plate Company was organized to the time the Steel Corporation was formed, the difference in price per hundred pound box between English and American cdke tin plate was more than one dollar. While the conditions of the time favored high prices, these figures indicate that consolidation influenced the situation very appreciably. Previous to this era of consolidation prices had been in- fluenced by pooling combinations; but this influence was not so general. One of the most extraordinary cases of price manipulation in any industry was that of the wire nail , association alluded to above. In the spring of 1895 a wire nail pool or association raised the price of wire nails from $1.45 a keg to $1.80. A month later the price was raised to $2.15. In another month it rose to $2.65, then to $2.85, where it remained to the end of February, 1896. Another rise brought the price up to $3.00, where it stayed for two months. From the first of May to the end of October the quoted price of wire nails per keg was $3.15. During all this period the producers of cut nails co-operated with the association in raising the prices of cut nails in the same proportion as those of wire nails, so that the consumer was unable to save himself from this extortion by substituting one commodity for the other. In November the pool broke and the price soon fell to $1.50. Just before the pool was formed the difference in price between wire nails and No. 1 1 wire, out of which the nails are made, was about twenty- five cents per one hundred pounds. After the pool was organized this difference increased to $1.90, although the price of No. 11 wire varied but little during the whole period. 134 THE UNITED STATES STEEL CORPORATION [356 The wire nail association was one of the most flagrant instances of price manipulation in the history of combina- tions. It was especially so in view of the low cost of the material out of which wire nails are manufactured. Con- cerning this pool the Iron Age says : The managers of the Nail Association can take to themselves the credit of having developed a stronger sentiment against combinations than any other single agency. They have aroused an intensely bitter feeling among all classes and conditions of people, which could only have been awakened by making ex- orbitant prices on an article of such universal consumption as nails.^ \ From what has been said concerning the course of prices ip general it is seen that improved processes of manufac- ture and the cpening-up of new sources of raw ma;terial have reduced the cost of iron and steel to the consumer. This general trend in the direction of lower prices has at times been interfered with by the formation of pools and combinations^especially during the later nineties^ As has already been indicated, sorne of the consolJdations formed during the period from 1898 to 1900 virtually controlled for a time the output of their special commodities. When the United States Steel Corporation was organized, embracing as it did these combinations, the new organization seemed like a consolidation of monopolies. The force of competi- tion which had given consumers the benefit of new inven- tions and discoveries seemed, for the time at least, com- pletely destroyed. \ ihe London Engineer voiced a feeling very widespread on both sides of the Atlantic when it said : Mr. Morgan and his immediate partners can fix the price of iron and steel. They are for the moment, at all events, be- * Iron Age, Dec. 3d, 1896, p. 1086. 357] ^^S STEEL CORPORATION AND PRICES 135 yond the sphere of competition. They can have no competi- tors in their own country. The American consumer is abso- lutely in the hands of the trust. They can have no European competitor because the tariff .defends them. In attempting to gauge the influence of the Steel Cor- poration on prices, it may be well to form some estimate of the validity of this gloomy predictieir-^As was noted in a previous chapter, the corpoirafion was organized tO! avoid a threatened competition between concerns engaged largely in different lines of manufacture and to a considerable ex- tent mutually dependent upon one another. These com- panies were at least quasi-monopolies at the time of their organization. Some of these concerns, like the American Steel and Wire Company, the American Tin Plate Com- pany, and the American Bridge Company, were estimated to control, about ninety per cent of the country's output of their principal commodities at the time of their formation. However, during the prosperous period of 1899 and 1900 competing establishments were being organized, and some of these were of formidable proportions. Except where patents had been secured, these independent plants, by the opening of 1901, were making their influence felt in the industrial field. The Steel Corporation did not, therefore, xesttltyin a combination of monopolies. j Nor did the Steel Corporation achieve monopoly by securing control over the country's output of iron ore. As was indicated in a previous chapter, its present holdings in the Lake Superior district, although several large additions had been made since its formation, are still in all probabil- ity not greatly in excess of two-thirds of the visible supply. As there are large deposits in other parts of the country, complete control over the ore supply is far from having been secured. 136 THE UNITED STATES STEEL CORPORATION [358 § 5.)The fear that the formation O'f the Steel Corporation would result in a g-eneral marking-up of prices due to monop- oly control proved unfounded. Prices in general were rising in the early months of 1901 ; but no very marked advances seem to have taken place as a result of the organization of the new consolidation. A consideration of the general trend of prices immediately before and after the formation of the Steel Corporation will show this^ Bessemer pig iron, which sold for $24.90 per ton in the latter part of 1899 and the early months of 1900, dropped to $13.00 per ton in October of the latter year. It then gradually rose again to $15.50 in March, 1901. In Novem- ber, 1899, steel billets were quoted at $39.50 per ton, from which abnormal figure they gradually declined to $16.50 in October, 1900, rising again to $21.50 in March, 1901. The price of steel rails, which had risen to $35.00 per ton in 1899 and remained at or near that figure during the first seven months of 1900, fell to $26.00 in November, where it stayed until after the organization of the Steel Corpora- tion. Wire rods which had reached the high figure of $50.00 per ton in January, 1900, were selling at $30.00 in July, and at $33.00 to $35.00 in the opening months of 1901. The low prices of the latter half of 1900 were due to a mild depression which had set in just previous to the presi- dential election of that year. The opening months of 1901 were characterized by a revival in trade and rising prices. It was in this period of rising prices that the Steel Corpora- tion was organized. Soon after its formation the price of Bessemer pig iron advanced to $16.75 P^r ton; that of steel billets to $24.00; that of steel rails to $28.00; and that of wire rods to $38.00. With the exception of steel rails, the prices of none of these commodities remained permanent through the year. Bessemer pig iron declined 359] ^^^ STEEL CORPORATION AND PRICES it^j to $15-75 P^r ton ^ind rose again to $16.50. Steel billets dropped to $23.50 per ton and then rose to v$27.oo. Wire rods were quoted .at $39.00 in May and June, but declined to $34.25 in December. In these quotations it is worthy of note that the most conspicuous advance in price was that of steel billets, of which the Steel Corporation sells but little; and that there was an appreciable advance in pig iron which was not sold by the corporation at all. The year 1901 was a year of great prosperity, and the advance in prices was a natural outcome of the increased demand for goods. In no case were the quotations marked higher for the commodities which the Steel Corporation sold in large quantities than for those which it did not sell at all or only in small quantities. \. /"The year 1902 was one of the most prosperous in the Aiistory of the iron and steel trade._ Until 1906 it was the banner year of the Steel Corporation. \ Notwithstanding its great prosperity, prices by no means reached the high level they had attained in 1899 ^^'^ 1900. The brisk trade of 1902 was followed by the depression of 1903 and 1904. During these years prices declined to relatively low levels, though not so low as during the middle nineties. Near the end of 1904 there was a revival in the iron and steel trade, followed by the prosperous years 1905 and 1906. Prices rose to higher figures than at any time since 1902, and those of crude materials to figures higher than any since the Steel Corporation was organized. Quotations taken from the Iron Age, showing the highest and lowest prices of standard materials in the six years preceding and the six years succeeding the formation of the Steel Cor- poration, are given in the following table: 138 THE UNITED STATES STEEL CORPORATION [360 sa o o* J3 O- its ^ O .2.- Sot o o ON CJ> 3,a « r o > ON O o a ISO en o - 04 en 1^ o o q q to N MO 14 M O Pi A< O U iJ pa Q ri B •2r 00 o o\ o 00 ON 8,06 cf ^ S 8* -^"^ ^w .&•■" *.^ °^. ""^ ind" O O O »o « O Q O -^ *^ C4 M rotH n •-• P- B 13 o (3 -o O O c -oo^oH og.. o M M o- M a,^ M a S M 2S.S.§S.SgS.S^S. 5r*n*i*S d-'i in u)*:'^ in ^ Qa w in_C « "^ 9 £m 9 P HI (ft •o-o c e 9 3 O O (0(0 (A .. B (3 ■• C Qjg B 9 «l 9 »r o c "5 o .3 B.p.|,a » jg O o "oj O > t^ O O 'O o 'S " "^ " L M P- a.P^ ^ (n 1A (O BO B B B O 00 O4,, 0.0. O bJOO O O SO ° M B »-• M h (A ^ 14 c-^ Co- (ft .jr V (ft CO ai OT en ? en 361 J THE STEEL CORPORATION AND PRICES 139 y From the preceding table it will be seen that the high- j est prices quoted in the period succeeding the organization \ of the Steel Corporation did not reach the high level of 1 1899 and 1900, except in the case of foundry pig iron, which the coi-poration does not sell. Nor are the lowest quotations as low as those of 1897 ^nd 1898. The Steel Corporation has followed what business men would call a conservative policy. This policy has doubtless been due to a recognition that control of the productive forces of the industry has not been achieved, and that any attempt to raise prices much above what market conditions will jus- tify would increase the number of competitors already in thp^ ^ i pld - — IL The Steel Corporation, however, does produce a large percentage of the wire goods of the country. Almost sev- enty per cent of the wire rods are manufactured by this organization, and from sixty-five to seventy per cent of the wire nails. The prices of these commodities do not seem to have been greatly influenced in any way detrimental to the interests of the consumer. Immediately after the or- ganization of the Steel Corporation wire rods were raised in price to $38.00 per ton and then to $39.00, ^fter which they gradually declined to $34.25 in December, 1901. Dur- ing the year 1899 the average price of wire rods accord- ing to the quotations in the Iron Age was $36.50 per ton. During the prosperous year 1902 the price averaged $35.80. During the same years the average prices of wire nails were respectively $2.45 and $2.00. Other wire prod- ucts show similar differences in price which are more favor- able to the period succeeding the formation of the Steel Corporation than to the one preceding it. As in the case of iron and steel products in general a conservative policy has b een followed. I The wisdom of this moderate policy may be illustrated I40 THE UNITED STATES STEEL CORPORATION [362 by the case of steel plate. In February, 1899, the price of steel plate at Pittsburg was $1.30 per one hundred pounds. In view of the growing- demand for this commodity the steel-plate pool raised the price to $3.00 in August of that year. This price attracted several competitors. With the lessened demand of 1900 the rolling mills fought to secure business; and in July, 1900, the ruinous price of $1.05 was reached. Several mills were compelled to go out of busi- ness. With the revival of trade in 1901 and 1902 there was another great demand for steel plate, due largely to the steel-car and steel-ship industries. This price was raised by the Steel Corporation to $1.60, and maintained at or near that figure in face of a greatly increasing de- mand. New rivals were thus kept out of the industry. Throughout most of the depression of the latter half of 1903 and 1904 this price continued in force. ', The main- tenance of a profitable price during a period of slackened trade was thus made easier by the policy of a reasonable price in good times. I § 6. In line wrfh this general policy is the attitude of the Steel Corporation toward the prices of raw materials. The Steel Corporation is engaged primarily in the manufacture and sale of rolled or finished products. Owning, however, a large percentage of the best ore fields in the country, its influence on the price of ore is important. In 1901 it fixed the price of iron ore at $1.25 less per ton than was paid during the season of 1900. The reason for this action is not clear. Mr. Schwab vaguely intimated that this act showed that there was no attempt at securing excessively high prices.^ It may be said in this connection that the Steel Corporation at this time purchased much of its crude iron; and in thus lowering the price of ore there may have '^Report of the Industrial Commission, vol. xiii, pp. 471, 472. 363] THE STEEL CORPORATION AND PRICES 141 been an element of reciprocity. It has been, however, the purpose of the corporation and other steel concerns owning their own ore fields to keep the price of ore high. This policy is due to the desire to raise the cost of production for rival steel mills not owning, or owning very little, ore property. In 1903 the price of Bessemer ore was $4.50 per ton.^ The Meixhant's Ore Association wished to make the price for 1904 between $3.25 and $3.80, while the Steel Corporation demanded that $4.00 be made the price, threat- ening to sell ore itself. In wishing to make the lower price the Ore Association was actuated by a desire to sell the largest possible amount of product. The price was ulti- mately fixed at $3.50, although several of the members of the Association made long-term contracts to deliver at a sliding scale price fluctuating with the price of pig iron.'' In this instance the influence of the Steel Corporation did not prevail; but its attempt to hold up the price of ore is typical of its general attitude toward the prices of raw products. A somewhat similar attitude seems to be maintained to- ward the prices of crude and unfinished material. The quotations, for example, of pig iron show greater fluctua- tions than those of finished products. During the closing months of 1906 the prices of crude iron soared higher than they had ever done since 1899, whereas those of finished material did not in general reach the level of 1902. Steel billets, out of which a variety of finished commodities are manufactured, and among them steel rails, were quoted at $32.00 per ton in June, 1902, and at $29.50 during the closing months of 1906 and the opening months of 1907. During both these prosperous periods, however, the price of steel rails remained fixed at $28.00. 1 Journal of Commerce, Now York, Apr. 22, 1904. 2 Iron Age, May 5, 1904. 142 THE UNITED STATES STEEL CORPORATION [364 These instances, and others which might be cited, in- dicate a conservative policy with regard to the sales of finished material and a disposition not to discourage any " leveling up " of the prices of raw and crude products. By pursuing this business policy, steel makers discourage competition from the outside ; and the steel industry tends to be confined to those already in the field and owning their own sources of raw material. Prosperity, therefore, brings little inducement to outsiders to enter the steel trade. This policy has given rise to much criticism on the part of in- dependent producers ; ^ but it has saved the consumer from paying very high prices for goods during those times when he needed them most. § 7. A comparison of the prices during the present boom and those of igoi and 1902 further illustrates the tendency toward moderation in the case of finished commodities. The fall and winter months of 1906 and 1907 mark the most prosperous period in the history of the iron and steel trade and the highest levels reached by prices since 1902. The highest quotations during these two periods for cer- tain standard products are as follows : igoi-igos- Sept. igo6 to Feb. 1907. Foundry pig iron. No. 2, Philadel- phia, per ton $23.00 $26.50 Bessemer pig iron, Pittsburg, per ton. 21.75 23.85 Steel .billets, Pittsburg, per ton. . . . 32.50 29.50 Wire rods, Pittsburg, per tom 39.00 37.00 Bar iron, Pittsburg, per 100 lbs 1.80 1.80 Tank plate, Pittsburg, per 100 lbs. 1.85 1.70 Wire nails, Pittsburg, per 100 lbs. 2.30 2.00 With the exception of foundry and Bessemer pig iron, the prices of these materials were either lower or nob. higher during the later boom than during the earlier oneJ This * Evening Post, New York, Dec. 31, 1906. 365] THE STEEL CORPORATION AND PRICES 143 is worthy of note as the volume of trade for 1906 was greaterthroughout the world than in any previous year. § STfTjs seen therefore that one marked effect which the Steel Corporation has had on prices has been to render them more steady. It has been compelled to meet considerable competition; and it has been driven to a policy of modera- tion during times of prosperity in order to save itself from I the results of a cutthroat rivalry in periods of depression. \ More than any other steel company the United States Steel Corporation must maintain a large volume of business with- out interruption in order to meet heavy charges. Control- ling as it does over half the steel trade of the country, it has been able during periods of prosperity to check the num- ber of rivals entering the trade by keeping prices from rising abnormally high. By this policy competition is rendered less severe in times of depression. A further consideration in this purpo se O'f the corpora- tion is the steadying of trade. \Whil e it is true that fluctuations in prices are due to fluctuations in demand, it is also true that prices react on demand. It is well known, for example, that on a declining market the consumer is tempted to wait for prices to get lower. He is furthermore inspired with fear concerning the future; and dela yed de- mand results in a depression more or less prolon ged^ Oscil- lations in prices therefore have their psychological effect which is shown to some extent in the vicissitudes of trade. No explanation of such a phenomenon as a commercial panic is adequate without due consideration of this psycho- logical element. In reducing the fluctuations of prices we may thus look forward to an appreciable steadying of the volume of trade. Not that variations in demand will be done away with, but that the more extreme phases of these oscillations will be considerably reduced. The economy of steady as opposed to varying produc- 144 "^^^ UNITED STATES STEEL CORPORATION [366 tion has been indicated in a previous chapter.^ With the same amount of trade more is wasted in meeting a fluctuat- ing demand than in satisfying a steady and moderately strong demand. /The shutting down and opening up of mills and furnaces mvolves a consumption of energy which in a technical sense is unproductiveTl The attempt, more- over, to curtail expenses in times '01 depression by lower- ing wages generally meets with more or less opposition from workmen, which not unfrequently results in strikes and lockouts. To reduce these and other wastes is itself a powerful motive in the efifort to steady jrade. | § 9. A subject which has received consicterablepublic atten- tion in recent years is the prices charged by the Steel Cor- poration and other companies in the foreign market. This question has arisen in connection with investigations con- cerning the influence of the tariff on home prices and cer- tain allegations that foreign consumers are favored at the expense of domestic purchasers. In 1901, after the Steel Corporation had been organized, steel rails were quoted at $28.00 per ton for the domestic consumer and delivered to the European buyer at $23.00.^ Plain wire during the same period was quoted to the Canadian dealer at $11 -oo per ton less than to the home dealer ."T Tt is reported that Mr. Schwab informed Mr. Joseph Lawrence, M. P., that the Steel Corporation could deliver steel billets in England at $16.50 per ton.^ The price oif steel billets in the United States at the same time was $24.00. Such discriminating charges have naturally aroused public curiosity in regard to the reason why the domestic consumer shoul d be com pelled to pay more than' the foreigner for the same goods./ ^ Gf. supra, ch. ii. ^ Report of the Industrial Commission, vol. xiii, pp. 454, 464. ^ Report of the British Iron Trade Commission, p. 123. 367] THE STEEL CORPORATION AND PRICES 145 ^ That these differences have existed at times is admitted DyThe officials of the Steel Corporation and other steel companies, but are defended on the ground that these lower prices brought no profit and represented only attemp'ts tO' capture the foreign market. It has been further urged that it is desirable to keep plants running at their full capacity; and when the home demand is not sufficient to do this, it is necessary to dispose of surplus product at relatively low prices abroad. If the plants are not kept running to their full capacity, it is contended that the cost of production would be so much increased that the price to the home con- sumer would on the whole be higher than if the export goods were sold at the lo wer rate.^\ Whatever may be thought of the validity of these contentions, it is true that goods are often sold in foreign or distant markets at, or even below, cost in order to capture trade. The price of $16.50 per ton for steel billets delivered in England, re- ported to have been named by Mr. Schwab, was probably not above the cost of manufacture to the Steel Corporation. In 1894 the Bethlehem Steel Company entered into a con- tract with the Russian government for the sale of armor plate which was much below the price charged to this gov- ernment. The action was defended on the ground that the price was below cost and entered into solely to secure trade. Recent investigations by a board appointed by the Secretary of the Navy have shown the justice of the defense;^ and later contracts with Russia by this and the Carnegie Com- pany at prices of one hundred to one hundred and fifty dollars more per ton of armor plate than the previous price charged have justified the policy as a matter of business, figuring prosperous periods when the demand at home is * Report of the Industrial Commission, vol. xiii, pp. 454, 455, 464. ^ Iron Age, Dec. 13, 1906, p. 1604. 146 THE UNITED STATES STEEL CORPORATION [368 strong, it is usually affirmed by steel producers that the prices which they charge in the United States are no higher than those which they charge abr oad. \ That the Steel Cor- poration to-day is selling at lower prices in Europe, Canada, and Mexico than at home is emphatically denied. This denial seems to be confirmed in the case of steel rails in Europe by the export prices fixed by the International Rail Syndicate. This organization was formed in 1904 of the leading steel rail producers of Germany, England, France and Belgium. When the syndicate was first formed it put the export price of rails at £4-53 to £4-103 per ton at port of shipment. Lately, however, the price has been fixed at £5-153 to £6. From these figures it is seen that steel rails are selling as high in Europe to-day as in the United States, while the cost of production is probably lower than here. § 10. Connected with the subject of domestic and export prices is the much discussed case concerning the charges made to the home and foreign governments for the sale of armor plate. lAllusion has already been made to the contract entered into in 1904 by the Bethlehem Steel Company for the sale of 1 500 tons of armor plate to the Russian government at a price much below that charged to this government. Last spring a special board appointed pursuant to an act of Congress made an investigation of the prices charged to this and other governments for armor plate and its actual cost of production. The following table as given in the report of the board shows the prices paid by the leading countries of the world for all types of armor and the maximum price paid for Krupp armor : * 1 Iron Age, Cec. 13, 1906, p. 1604. 369] THE STEEL CORPORATION AND PRICES 147 Average price of all armor. Price of Krupp armor. Austria Italy Germany France England United States., )er ton It tt (( tt $400.00 449-00 521.00 per ton $400.00 557-00 550.00 450.00 450.00 It tt 569-00 572.00 tt It 626.00 681.00 tt tt 345-00 346.00 From the board's investigations it appears that the manu- facturers of this country are practically alone in demanding of the home government no greater and even lower prices for armor than those charged to foreign customers. Very generally abroad home prices rule higher than those to for- eign purchasers. There are three armor-plate mills in the United States — the Carnegie, the Bethlehem, and the Midvale. Of these the Carnegie mill is the largest. The board made a careful investigation of the cost of producing armor plate at all three places and then divided its 'estimated costs into two kinds: production cost, and full cost. The former in- cludes the price of all raw material, cost of labor, cost of up-keep of plant, the current repairs, salaries of superin- tendents, and interest on capital. Full cost includes in ad- dition taxes, insurance, and a host of other expenses which cannot be readily itemized. The board estimated that the cost of armor plate of grade A (armor five inches or more in thickness) would be $244.27 per ton, production cost, and $296.89 per ton, full cost. Armor plate of grade B (armor less than five inches in thickness) costs $221.76, production cost, and $273.78, full cost. The board em- phasizes the fact that cost depends largely on output. Working to the full capacity is the most economical. In general it may be said concerning domestic and ex- port prices that producers in all countries have endeavored to secure foreign trade and have often lowered prices to the 148 THE UNITED STATES STEEL CORPORATION [370 foreign consumer to attain this end. In dull years so-called surplus product has been disposed of in foreign markets in order to keep prices relatively high at home. A high pro- tective tariff, by shutting out foreign products, has enabled the producers of such countries as the United States and Germany to keep prices high in the home country while sell- ing to foreigners at very low rates. For reasons which will be indicated in the following chapter this practice seems likely to disappear in the future. In reference to the attitude of steel companies to the gov- ernment, particularly in the matter of armor plate, there seems to be no reason to believe that the American producers have made a practice of favoring the foreign purchaser. Certain indications, however, point to the Carnegie and Bethlehem companies having combined to raise the charges made to the United States government. In December, 1903, when a contract was made with the Midvale company for 6080 tons of armor of class A for the American navy at $398.00 per ton, the Carnegie and Bethlehem companies both put in a bid at $420.00. Again in April, 1905, when a second proposal for armor plate was made, the bids of the Carnegie and Bethlehem companies were the same — ^400 to $420 per ton, while those of the Midvale company were from $385 to $398. A recent contract has awarded the making of armor plate to all three companies notwith- standing the higher bids of the Carnegie and Bethlehem companies. This rather strange award was made on the threat that the mills of the latter companies would be dis- mantled, leaving the Midvale establishment the only one in the United States manufacturing armor plate. Whatever in general may be said of the relations existing between these organizations and the United States Government, their charges seem to compare very favorably with those made by foreign manufacturers to their own home governments. 3^1] THE STEEL CORPORATION AND PRICES 149 The practice of demanding more of the home government than of foreign purchasers has probably been greatest in those nations. where it has been least denounced. § 1 1 .1 The influence which the Steel Corporation is likely to exert ttpon the general level of prices will depend in part upon the preservation of competitive conditions. Aside from the increasing control which it is securing in the Lake Superior region, there is no evidence of any drift toward monopoly conditionsSi^ There is very little reason to believe that it is able by virtue of mere size to manufacture more cheaply than its best equipped competitors. It has, how- ever, certain advantages in the location of mines and in transportation facilities, which in the lower stages of pro- duction greatly cheapen cost. The Steel Corporation owns its own means of transportation from the ore mines of Minnesota and Michigan to the furnaces of Pennsylvania and Ohio. On its leased properties it has paid royalties of fifteen to thirty-five cents per ton for some of its best ores. These rates are cheaper than those charged for most of the ore mined by its competitors. By its superior transporta- tion facilities and low royalties on ore the cost of this ma- terial to the Steel Corporation at its blast furnaces in Penn- sylvania and Ohio has been on the average from seventy- five cents to a dollar and a half cheaper per ton than for independent companies. These advantages, however, are likely to be neutralized in part by the higher royalties which the corporation will be obliged to pay for recent additions to its ore properties. As has been seen in a former chapter, the acquisition of the Hill holdings will cost the corporation $1.65 per ton for ore mined during the year 1907 with an increase of 3.4 cents per ton for each succeeding year.^ The minimum ^Iron Age, Oct. 11, igo6, p. 953. I50 THE UNITED STATES STEEL CORPORATION [^^2 agreed to be mined is 750,000 tons for 1907 and thereafter 750,000 tons additional for each succeeding year until the output reaches 8,250,000" tons. What the cost to the Steel Corporation will be if the minimum tonnage is mined each year until 1917 is seen in the following table: Year. Minimum tonnage. 1907. 750,000 1908 1,500,000 1909 2,250,000 1910 3,000,000 1911 3,750,000 1912 4,500,000 1913 1 5.250,000 1914 6,000,000 191S 6,750,000 1916 7,500,000 1917 8,250,000 Price Cost to the er ton. Steel Corporation $1,650 $1,237,500 1.684 2,526,000 1.718 3,865,000 1-752 5,256,000 1.786 6,697,500 1.820 8,190,000 I.8S4 9,733.500 1.888 11,328,000 1.922 12,973.000 1.956 14,670,000 1.990 16,417,500 The price of the ore given in the above table is that for the standard based on 59 per cent iron contents. The royalty is reduced as the quality falls below the standard in propor- tion to iron contents. Below 48' per cent the royalty will be a matter for future negotiation, with recourse to arbi- tration. The Steel Corporation, therefore, will pay the Great Northern a high price for taking all the ore it has to offer. While this transaction has greatly increased the holdings of the corporation, it will add much as years go on to the previous cost of supplying raw material. The marking-up of ore values will doubtless improve the position of indepen- dent producers already owning their sources of raw ma- terial. The increasing value of mining properties, how- ever, and the policy of the Steel Corporation in keeping down the prices of finished products in prosperous times will make it harder for the outsider to enter the field and 373] ^^^ STEEL CORPORATION AND PRICES 151 for the companies not conitroling their supplies of ore to maintain their position. § I2J In^eneral, it may be said that the most obvious influ- ence of the^Steel Corporation on market conditions has been in the direction of steadying, rather than raising prices. One of its objects has been to lessen the fluctuations of the iron and steel trade; and this purpose it has striven to accom- plish by making prices relatively un iform. \ It has been enabled to exercise this influence through its large share of the country's trade. The Steel Corporation in attempting to steady prices has recognized the wastefulness of inter- mittent production. Its general policy from a hminess man's standpoint has been a conservative one. (Jts ma nd for reasonable prices in times of great demand helps to check the number of competitors who would otherwise enter the field; and this policy operates to prevent cutthroat com- petition in a period of depression. Since its organization the general level of prices do not seem to have been above what market conditions would justify. In attempting to influence prices its power has been limited by the fact that it does not c ontrol the productive forces of the iron and steel industry. The means by which this control may be secured will be considered in the following chapter. CHAPTER VII Monopoly and Iron Associations § i^sIn the formation of the United States Steel Corpor- ation, indiJBtrial centralization reached a climax. The cap- ital of this company far exceeded that of any other indus- trial organization in the world. Notwithstanding its com- manding position among combinations, it has not, as we have ^en, secured control of the country's output of iron and s teelj It exercises no such influence over the manu- facture of iron and steel goods as does the Standard Oil Company, for example, over the refining and distribution of oil. During the six years of its existence it has produced less than forty-five per cent of the country's ore and pig iron, and has manufactured less than sixty-five per cent of its steel ingots. Of rolled and finished material — exclud- ing wire nails and tin plate, — it has controlled the output of less than half. Of wire nails and tin plate the cor- poration has manufactured between sixty-five and seventy- five pey cent. I The corporation's share of the country's trade cannot, tlierefore, be said to constitute it a monopoly. In every consolidation, however, there inheres some element of mon- opoly. A great combination is organized primarily to re- gulate or restrict competition; and this, as has been shown in an earlier chapter,, w^s the immej liate cause which gave birth to the Steel Corp oration. ^ T^ object of such a con- solidation is not so much a better adaptation to market con- ditions, as control of those conditions. In so far as this IS2 [374 375] MONOPOLY AND IRON ASSOCIATIONS 153 latter end 'has been attained, a ccwnbination may be said to haye^ reached the position of a monopoly. I lore § 2. Monopoly results from one or more of the follow- ing conditions : creation by law ; ownership or possession of ' the sources of raw material; control of transportation; or ownership O'f trade^marks or brands which have secured great popular favor. To these may be added certain means by which competition is restricted or throttled by concerns which have already secured a large share of the country's trade. These means have been carefully discussed by Pro- fessor Clark in his Problem of Monopoly. They are fac- tors' agreements, local underselling, and the underselling of one or a few lines of goods by a company engaged in trading in a large number of products. A combination of all the firms or companies of a country engaged in an in- dustry will also, of course, produce a monopoly; but the control of trade established by such a combination is likely to be of short duration unless supported by one or more . of the conditi ons which have just been given. The old form of legal monopoly by which a particular trade was guaranteed to a certain concern in return for a stipulated tax has virtually disappeared. At the present time the chief monopolies created by law are in the form of patent rights and local franchises. The former and gen- erally the latter are limited as to time; and their creation is due to real or supposed public benefits to be derived from such grants. A local franchise is not always intended to give a concern complete control O'f local trade or traffic ; but in such cases as gas, telephone, and street-car companies, it often does this. The possession of the sources of raw material enables a concern to control in large measure the production, and therefore the prices, of goods dependent upon those sources^ This possession in the case of most commodities is difficult 154 THE UNITED STATES STEEL CORPORATION [376 to secure. Monopolies due to this condition are rare in this country, and confined almost entirely to mining pro- ducts. The control of transportation has been an effective means of building up and maintaining organizations monopolistic in nature. By the phrase, control of transportation, is here meant not only the possession of a means of convey- ance not enjoyed by others, as in the case of the Standard Oil Company and its pipe line system, but also railroad favoritism, by which a large corporation secures certain transportation rates and facilities not granted to smaller rivals. This control in the United States has generally taken the form of railroad discriminations in favor of cer- tain large shippers. In putting small or competing con- cerns at a disadvantage, this condition has been a potent i nflue nce in the development of monopoly. I The influence of favorite brands and trade-marks is psy- chological in its nature. Clever advertising induces people to demand certain brands or trade-marks ; and the exclusive possession of these gives the holder a great advantage over rivals producing commodities equally good, and enables him to exact monopoly prices. Such an advantage is due to the mental attitude of the buyer. Take away his prejudices and the monopoly i s eone. / The other means by which monopoly power is secured and competition is restricted or repressed are means which can generally be resorted to only by organizations which have already built up a very large trade. Factors' agree- ments are used to secure and conserve for a consolidation or trust the exclusive trade of a wholesale or retail estab- lishment. Such contracts help to confine trade to the arti- cles manufactured by the trust. The agreements between the American Sugar Refining Company and the Wholesale Grocers' Association, the American Tobacco Company and the concerns selling its products, seem to be of this nature. 7,yy^ MONOPOLY AND IRON ASSOCIATIONS 155 Local underselling and the underselling of a particular line of goods have been used by large producers to crush local competition or competition in a particular branch of manufacture. Where a large producer meets competition in a certain locality the goods of the large concern are sold within that area at a price below the cost of production and ruinous to the rival firm. Losses which the larger organi- zation suffers are made good by high prices in other places. In like manner competition in a single line or grade of goods is crushed by lowering prices below cost in that par- ticular line or grade, and recouping losses by high prices on other goods. i^jfComparing these conditions of monopoly growth ana conservation with the conditions obtaining in the iron and steel industry, it may be observed that the Steel Cor- poration from the nature of its trade is not likely to resort to certain of these means in order to secure a monopoly controLl The purchasers of steel rails and steel plate, for example, are not as a rule affected by those prejudices which enable the manufacturers of other commodities to create an artificial demand for particular brands and trade- marks. These devices, so potent in many industries, would have little influence in enlarging the control exercised by the corporation over the iron and steel trade. Nor are factors' agreements likely to play any important role in promoting monopoly, as a large proportion of the goods manufactiirgd by the steel consolidation is sold directly to customers.^ Local underselling cannot be employed as a means for xrushing competition because the strongest inde- pendent companies sell their commodities to more than local areas. The selling below cost of a single line of goods in order to ruin a rival concern is not likely to be extensively resorted to in view of the fact that the strongest compet- itors of the corporation are engaged in several branches of 156 THE UNITED STATES STEEL CORPORATION [378 manufacture. I This practice has been indulged in by iron and stedTOTIcerns in the past, and rumors are not wanting that it has been employed in recent times. When the Car- negie and Bethlehem companies were underbid by the Mid- vale Steel Company in the sale of armor plate to the United States government, it was rumored that these concerns threatened " to slash prices " and destroy the armor plate trade of the Midvale Company.^ The threat, however, if made, was not carried out. For the reason already given this practice is not likely to be employed by the Steel Cor- poration to destroy competition. The Steel Corporation has enjoyed a monopoly in certain lines of wire goods by virtue of patent rights.'' This monopoly, however, has covered but a small proportion of the company's trade, and could contribute but little to its dominance in the iron and steel industry. The possible control of transportation by the Steel Cor- poration demands some attention. The corporation owns most of the railroad and steamship lines over which its ores are carried from the mines of Minnesota and Michi- gan to the furnaces of Ohio and Pennsylvania. No inde- pendent company has as complete facilities for assembling its raw material as has this organization. By means of this control the cost of ore to the corporation at its blast furnaces in Ohio and Pennsylvania is from seventy-five cents to one dollar and a half cheaper per ton than for its competitors. This control, however, is limited to facilities for the assembling of ore and coal. In regard to the shipment of commodities from plant to market or to consumer, the corporation enjoys no special advantage over independent companies. Whether or not ^ The Times, New York, Dec. 27, 1904. * See First Annual Report. 379] MONOPOLY AND IRON ASSOCIATIONS 157 it has to any appreciable extent received favors from rail- roads is difficult to determine. In December, 1905, an in- dictment was returned by the Federal Grand Jury in Chi- cago against the Chicago, Burlington and Quincy Railroad, the first vice-president of the road, and its foreign freight agent for having granted rebates to the United States Steel Products Export Company of New York, the company under whose management the export trade of the Steel Corporation is carried on. In this indictment twenty-six offences were charged. It was alleged in the indictment that the rebates amounted to about thirty per cent of the sched- uled tariff. Under this charge the defendants were found guilty and fined. It is worthy of note, however, notwith- standing this rather flagrant case, that early in the corpora- tion's history independent organizations seem to have felt little concern about their ability to compete with the new ■company; ^ and at the present time the fear of railroad discrimination does not prevail to any considerable extent among the corporation's competitors. The attitude, more- over, of some of the leading officials of the corporation has been friendly toward those measures of Federal I'egulation which are calculated to do away with railroad favoritism.^ The increasing stringency of legislation against railroad discrimination will make the rebate a less potent factor in promoting the growth of monopoly in the future than it has been in the past. § 4. If the Steel Corporation obtains control of the coun- try's output of iron and steel, it is likely to do so by securing possession of the principal deposits of ore in the United 1 Report of the Industrial Commission, vol. xiii ; see testimonies of King et al. " See remarks of Judgfe Gary on Federal regulajtion, New York World, Mar. 24, 1907. 158 THE UNITED STATES STEEL CORPORATION [380 States. The control of the nation's ore supply will not be easy to secure owing to the great extent of deposits. Nevertheless, the corporation has been increasing its hold- ings in the Lake Superior region to such an extent that it may now be said to control the output of that district. Just what proportion of the ore of this region is now held by the Steel Corporation cannot be stated very definitely, but it is probably not much less than eighty per cent. When it is remembered that this northern field probably contains over half the visible supply of workaible ore in the country, the significance of the large holdings of the corporation, can be readily appreciated. As a result of recent additions to its properties the company's share of the country's output of ore will probably increase, and it is not unlikely that further efforts will be made to secure ore lands in other parts of the country. The annual report for 1906, just recently issued, after speaking of the large additions made to its properties by the transfer of the Hill holdings, says very significantly : " It is, however, doubtful if the quantity of new ore so ob- tained will prove sufficient to meet the constantly-increasing demands upon the ore reserves made by the country's grow- ing requirements for steel products." It has already been observed that for much of the pro- duction of this district a high royalty must be paid. In the case of the Great Northern properties recently trans- ferred to the corporation this royalty for standard ore (59 per cent iron contents) delivered at shipping port on Lake Superior will be, as we have seen, $1.65 per ton in 1907 (85 cents royalty plus 80 cents haulage), with an increase each year of $.034, which royalty is to apply to a minimum tonnage increasing each year until 1917, when the annual production is to be at least 8,250,000 tons. The price paid by the Carnegie Company for its ore holdings before the Steel Corporation was organized ranged from fifteen to 38lJ MONOPOLY AND IRON ASSOCIATIONS 159 thirty-five cents per ton for standard grade. It will thus be seen that high-grade ore is commanding a much higher royalty now than in the closing years of the last century. The whole transaction seems to have been based on the belief that the bulk of the iron ore in the United States that can be carried at reasonable freight rates to advantageous assembling points for fuel and ore is known to-day, and that if other ore deposits are found they will be at such distances from the chief steel-making and steel-consuming sections of the country as not to compete on equal terms with the Lake ores. It seems to be based also on the con- viction that the demand for iron and steel will continue to increase, and consequently that the high price paid for the late additions to the corporation's holdings is reasonable, if not low, in comparison with future values. That the demand for iron and steel is pressing hard upon the ore supply of the country seems to be indicated by the general trend of prices during the last six or eight years. In the spring of 1900 Old Range Bessemer ore sold as low as $2.75 per ton at furnace. This price was lower than for 1899, when all iron and steel goods sold at unusually high figures. It was not, however, considered very low. Four years later the price of Old Range Bessemer ore was $3.25 per ton, which was considered almost ruinous. In the fall of 1906 it was $5.15.^ Non-Bessemer Mesaba ore, which sold for $2.75 per ton at furnace in 1901, sold at the latter date for $4.10.^ These prices indicate that there has been a marking up of ore values during recent years. The high price paid by the Steel Corporation for the Hill hold- ings is but a recognition of the general trend of values. I TK^Steel Corporation is thus in possession of large areas tof ore land which are steadily increasing in value. It is » Iron Trade Review, Feb. 28, 1907. ^ Ibid. l6o THE UNITED STATES STEEL CORPORATION [382 furthermore in control of the district from which nearly all the Bessemer ore of the United States comes, and may therefore^ be said virtually to control the output of this material. " It is well known that Bessemer ore is getting scarcer the worlcLoj^^T] The Bilbao district of Spain, which has supplied Europe with a large proportion of this mate- rial, will, according to all accounts, soon be exhausted. The large ore fields of Asturias, which are not yet fully opened up, will not produce ores suitable for the acid Bes- semer process. The Bessemer ore of Lake Superior is not likely, therefore, to experience much foreign competition. In this country Bessemer ore still commands a higher price than the non-Bessemer product. As long as this is the case the control of the Lake Superior region will give the Steel Corporation a marked advantage over its competitors. It has been pointed out, however, in a former chapter that the open-hearth process is gaining favor with manufacturers and seems to be displacing the Bessemer mode of produc- tion. This fact has been recognized by the Steel Corpora- tion itself; and most of its new plants have been equipped for the open-hearth process of steel manufacture. The new rail mills to be built at Gary, Indiana, will manufacture rails from open-hearth steel. The introduction of the basic mode of producing steel, both in the form used in Germany and England, and in the form used in this country in con- nection with the open-hearth process, has already destroyed the monopoly once enjoyed by Bessemer steel. Notwith- standing the fact that this latter product is still preferred to other kinds of steel, the growing demand for the open- hearth material seems calculated to neutralize whatever ad- vantage Bessemer steel may now possess. While the Steel Corporation now holds the most valuable ore fields in the United States and has certain advantages in its control of the output of Bessemer ore, it is meeting 383] MONOPOLY AND IRON ASSOCIATIONS 161 increasing competition. Its advance to virtual control of the Lake Superior region, especially as marked in the Great Northern deal, has been signalized by increased activity in the South. Northern capital in increasing amounts is being invested in the iron industry of the South; and the Ten- nessee Coal, Iron and Railroad Company and the Southern Steel Company are increasing their holdings in the Ala- bama region. An extensive program of new construction has been laid out by the former company involving the expenditure of at least $7,000,000. " The Hill deal," says the Iron Age, " suggested to men of large capital that the psychological moment had arrived for investment in Ala- bama ore and coal, and in the plants already existing to turn them into steel." ^ Competition from the South is thus likely to become more aggressive in the future. Up to the present time there has been little competition from this region, notwith- standing its great natural advantages. Its comparative remoteness from the great steel-consuming centers of the North and East has held back its development, and its pro- duction has been confined largely to iron materials. The general marking up of ore values shown in the Hill deal has given an impetus to the industry in this region; and present indications point to more intense rivalry with the steel producers of the North. It is in the interests of this region that the Steel Corporation is likely to meet its most fopnidable competitors in the future. pThe Steel Corporation has an advantage over independ- ent companies in possessing deposits of ore which will prob- ably long outlast th(ltrs.\ It dominates the Northern ore region; but its large possessions here do not enable it to control the country's output. In order to secitre such a 1 Iron Age, Nov. 22, 1906, pp. 1388, 1389. 1 62 THE UNITED STATES STEEL CORPORATION [384 control the corporation would, in addition to its present holdings in the Lake Superior district, have to gain posses- sion of the Alabama region. Rumors are not wanting that appraisals of the value of important iron and steel companies have been made with a view to an ultimate merger with the Steel Corporation.^ Companies in possession of important ore fields would be the natural subjects of such appraisal. Were such organi- zations as the Republic Iron and Steel Company, the Ten- nessee Coal, Iron and Railroad Company, the Colorado Fuel and Iron Company, the Southern Steel Company, and the Sloss-Sheffield Company to be merged with the Steel Corporation on the basis of their present capitalization, something like $200,000,000 would be added to the stocks and bonds of the Corporation. A merger of this kind would by no means be so great as that which took place when the Steel Corporation itself was organized, and it would give the organization practically a control of the iron and steel trade of the country. Under such a combi- nation the output of ore from Lake Superior, Alabama, Colora^oand Utah would be regulated by one organization. § 5/The strength of a monopoly based upon control over the sources of raw material within the country would de- pend upon the protection given it by the tarifif. Prices of iron and steel have until recently been lower in Europe than in the United States. The prices of finished material in bond at New York City are generally a few dollars per ton lower than those of the corresponding goods in this coun- try. Ore and pig iron can also be imported at prices below those usually charged for the domestic product. The tariff would thus be an important factor in safeguarding any monopoly dependent upon control acquired over the sources ^ The Times, New York, Mar. 6, 1906. 385] MONOPOLY AND IRON ASSOCIATIONS 163 of raw materialj In the present state of public opinion witH itsmtense feeling agains,t anything savoring of mo- nopoly the tariff protecting such a combination would be the first object of attack. § G.rThe United States Steel Corporation is not a mo- nopoIy7~l/Vhatever may be its developments in the direction of ultimate control of the country's sources of ore supply, it at present meets considerable domestic competition, and may be compelled to meet not a little f oreign^niMlry , A To say, however, that no one consolidation controls the iron and steel industry of the country is not to say that the situation is not influenced by combinations of another character, and that the Steel Corporation is not an influential force in such combinations. As has already been indicated, prices have often been agreed upon by pools or associations. Owing to the hostile attitude of public opinion toward price agree- ments, and to the more rigid enforcement of the anti-trust act, many of the old pools and associations have been form- ally ■discontinued. Understandings in regard to prices, however, persist, and the influence of former associations is still a living force, and seems likely to continue so. The full details of some of the best known pools are difficult to ascertain. Most of these associations have come to life and have died without attracting public attention. Pooling agreements long preceded the era of great consoli- dations. The trust, or big corporation, which was intended to do more effectually what the pool attempted to do, can hardly be said to have supplanted that form of organiza- tion. In fact, pools or understandings in regard to prices seemed to have been strengthened and extended simulta- neously with the growth in size of our manufacturing com- panies. The growth of large consolidations by rendering the number of producing organizations fewer has tended to strengthen the pool. The recognition of the difficulties 1 64 THE UNITED STATES STEEL CORPORATION [386 involved in attempting to control the trade situation by means of a single corporate organization has also led to a revived interest in pools. 1 Inthe iron and steel industry there are certain funda- I mental features common to nearly all forms of pooling. An unincorporated organization is formed by all manufac- turers of a certain class of commodities; and these agree to maintain a schedule of prices fixed by the association. In order to maintain these prices, production is limited according to the conditions of the market. Each manufac- turer is allowed to .produce or sell only a specified percent- age of the total output — a percentage which is determined by the capacity and advantage of his plant. I The agreement is often fortified by a money deposit, which is forfeitable to the association in case of violation. Where production is greater than the alloted percentage a fine is imposed ; and a corresponding bonus given to plants producing less than their share in the allotment. Owing to the nature of the industry, territorial division of the market, which was a feature of railroad pools, has not been adopted. Prices, however, are made uniform by adopting a common base point, as" Pitt.sburg for example, where the price would be the factory price, and adding to this figure the freight rate to obtain the price at other points. In this case shipments from Pittsburg would increase in price, and toward it, would suffer loss. I TKesuccess of certain pools in the iron and steel industry Tias been mainly owing to the large capital now required to produce cheaply, some of the most important commodi- ties, and the consequent small number of corporations which can engage in the industry on any considerable scale. J It was noted in a previous chapter that the number of iron and steel establishments had declined during the last thirty years, notwithstanding the enormous increase of capital 387] MONOPOLY AND IRON ASSOCIATIONS 165 invested. The possession of sources of raw material which is now necessary to any organization expecting to compete with the largest steel corporations has also tended to limit the number of producers. In 1906 the number of steel companies capitalized at more than twenty million dollars was only about a dozen. The consolidations which entered the Steel Corporation had united into single corporations a great number of competing concerns. These concerns were then absorbed into a still larger combination. These conditions by limiting the number of independent plants have facilitated the formation of pools, or associations of considerable strength. Those associations have been most powerful which have regulated the price of commodities produced by the fewest plants. Bessemer steel rails in the United States are produced by less than a dozen different plants, and the steel rail association is the strongest in the trade. § 7- [Tlifi-price of iron is regulated as soon as the ore is dugj The independent producers and sellers of ore have organized the Merchants' Ore Association of Cleveland. The United States Steel Corporation is not a seller of ore; but as it is a producer of this commodity, its influence is. felt in the regulati_onjii-p«ce.A. With the Steel Corporation the price is largely a matter of book-keeping. Neverthe- less, its endeavor is to keep it high in order to raise the cost of production for rival mills not owning mines. As the Ore Association desires to sell the largest possible amount of product it has contended for low prices. This conten- tion has led to compromises between the Steel Corporation and the Association, not very satisfactory to either party. ^ This attitude of the Steel Corporation toward the price of ore is characteristic of its policy with regard to prices i/ro;i Age, May 5, 1904. 1 66 THE UNITED STATES STEEL CORPORATION [388 of most crude material. This organization is, as we have seen, more disposed to favor high prices in prosperous times in the cases of ore, pig iron, steel billets, and the like, than in those of steel rails, steel beams, or steel plate. The object of this policy, as was indicated in the preceding chapter, is to limit the number of manufacturers of finished product by keeping up the cost of crude material. §8. Pig iron, and steel ingots have been the subject of price agreements. The attempt to pool steel-ingot produc- tion has been on the whole unsuccessful. The Bessemer Pig Iron Association is an organization of furnace men by which the price and production of pig iron are regulated; As in the cases of pools generally, allotments are made to different producers in percentages. The Association has had appreciable influence on prices; but the relatively in- creasing use of pig iron, not of Bessemer grade, has helped to limit this influence. § 9. The first steel billet pool was formed in April, 1896, as an attempt to reduce the great fluctuations in price which marked the year 1895.^ The Bessemer Ste'el Associa- tion, as this pool was called, alloted the percentages in the usual manner, and imposed a fine of two dollars per ton for any excess produced. The selling price was fixed at $21.50 per ton. As this price was higher than was justified by the demand at this time, outside firms took orders at $19.50, Within the Association there was much selling contrary to the agreement, and the larger concerns, also, evaded the agreement by converting billets into finished shapes. The pool was therefore weak from the beginning and soon failed. Re-organization was attempted without much suc- cess.^ In 1901, a sliding scale device was resorted to by which the price of steel billets was kept $6.50 above that of ^ Iron Age, vol. i, p. 895; vol. ii, pp. 223, 967. '^ Ibid., Jan. 3, 1901. 389] MONOPOLY AND IRON ASSOCIATIONS iSy pig iron. This scale was adopted by the larger manufac- turers ; and the attempt to raise the price directly was not made very seriously. In July, 1903, an agreement was entered into by certain companies by which the Pittsburg price was fixed at $27.00 per ton. Some of the prices at other places were, $28.75 in New York, $28.00 in Chicago, $40.25 in Pueblo, Colorado, and $39.25 in San Francisco. The members of this pool were the United States Steel Corporation, the Jones and Laughlin Company, the Wheel- ing Steel and Iron Company, the Cambria Steel Company, the Pennsylvania Steel Company, the Lackawanna Steel Company, and the Maryland Steel Company.^ This price agreement, however, did not last. In the depression of the latter months of 1903 and of 1904 prices were cut. In the spring of 1904 the Pittsburg price had been reduced to $23.00 per ton, and the prices at other places lowered cor- respondingly. The Billet Association has not been able to control prices to any considerable degree. The outside supply has always been elastic, rendering billet manufacture essentia lly com petitive. § lo.Vrhe strongest and be st known pool in the iron in- dustry w'that of steel rails/ Organized in 1887,^ it has named prices, with a few interruptions in the nineties, for nearly twenty years. The original pool consisted of fifteen members. To each of these members was alloted a per- centage of the total yield. A penalty of $1.50 to $2.50 per ton was imposed for all excesses beyond this allotment ; and thus the firms were kept from cutting prices in order to secure more business. The pool disbanded in February, 1897, and was not re-organized until 1899, from which time dates the present pool. At the time of the dissolution of the old pool, in 1897, the members with their alloted per- 1 Iron Age, July 23, 1903. 2 Ibid., Nov. 16, 1893. 1 68 THE UNITED STATES STEEL CORPORATION [390 centages were as follows: The Carnegie Company, 53.50; the Lackawanna, 19.00; the Cambria, 8.25; the Bethlehem, 8.25; the Pennsylvania, 8.25; and the Maryland, 2.75.^ Since the organization of the Steel Corporation, the Steel Rail Association has been able to maintain a uniform price for six years. This pool has probably had more permanent influence in naming prices than any other combination in the iron and steel trade. The most important member of this Association is, of course, the Steel Corporation, \yhich is the main infl.uence in shaping its policy. The attempt to fix the prices of rolled or finished products at moderately high figures and hold them there irrespective of the fluctu- ations of the trade, is an avowed purpose of the Steel Cor- poration ; and this endeavor seems to have been most clearly realized in the case of steel rails. It must be said, however, that the price, $28.00 per ton, has not been much above what market conditions would seem to justify. In 1902, when the price of steel billets rose to $32.00 per ton, the Association kept the price of steel rails at $28.00, and thei'e- fore below what would then have probably been the price had conditions been strictly competitive. This moderation in times of prosperity enabled the Association to keep the price up during the depression of 1904. The fact that the Association has been obliged to exercise its power with moderation in order to prevent the rise of possible com- petitors shows that it is monopolistic in a very limited sense. § II. The Steel Rail Association has excited consider- able interest on account of its relations with the Interna- tional Steel Rail Pool. In the fall of 1904 a meeting of the representatives of the leading rail-making concerns of Great Britain, Germany, Belgium and France was held in Lon- don.^ The object of the meeting was to arrive at an under- ^Iron Age, Feb. 11, 1897, p. 18. ^ Ibid., Nov. 3, 1904, p. 45. 391] MONOPOLY AND IRON ASSOCIATIONS 169 standing as to export orders, and prevent the ruinous cut- ting of prices that had hitherto taken place in this industry. A provisional arrangement was entered into by which the four countries named were to export 1,300,000 tons per annum for three years in the following proportions :^ British works 53-50 German works 28.83 Belgium works 17.67 French works. . .First year 4.8 parts out of 104.8 parts. Second year. .5.8 parts out of 105.8 parts. Third year .-..6.4 parts out of 106.4 parts. It will be seen that the allotments are based upon propor- tions of 104.8, 105.8 and 106.4 parts for the three years, and that the share of France increases slightly from year to year. This agreement was subject to the approval of the works of the countries interested. In the summer of 1905 it was "known in. trade circles that the leading steel rail manufacturers in this country and Europe have been working together quite closely." " Details of an arrangement were published whereby it was stated that the American manufacturers were to be given the steel rail trade of the American continent, and that European manufacturers were to be free from American competition in all parts of the world except South Africa. The English and French works were to have the prior right of furnishing rails to their colonies, while German works were to have the prior right in Norway, Sweden and Den- mark. Other international trade was divided among Eng- lish, German, Belgium and French establishments. How far these arrangements are being seriously carried 1 Iron Age, Nov. 3, 1904, p. 45. ^ Jbid., July 6, 1905, p. 22. lyo THE UNITED STATES STEEL CORPORATION [392 out it is difficult at present to say. Assuming the announce- ments to be true, some interesting points suggest them- selves. If pAiropean competition for steel rail orders in this country is removed by such an international pool, the reduction or even complete abolition of the tarifif on steel rails would not serve to lower prices. Assuming that the agreement is adhered to, such a pool would be even more effective in limiting the area of competition than a high tariff itself. This assumption is, of course, extravagant, as pools are notoriously weak in dull times; and an inter- national association would probably be less effective than a national one. Another result likely to follow the formation of such a pool is that countries producing no rails would have to pay higher prices than they now do. Under existing conditions it is the producing countries which are generally protected by tariff regulations, and within which high prices are charged. Countries not producing steel rails are generally open to the widest competition ; and prices are often at cost, and not infrequently below cost. An international pool guaranteeing certain territories to the manufacturing inter- ests of particular nations would enable national pools sa to operate as to reduce the necessity of cutting the prices of exported commodities in order to secure foreign trade. Such an outcome cannot be said to be undesirable. It is indeed an anomaly that a country producing steel rails should have to pay several dollars per ton more than a country not manufacturing such a product situated thous- ands of miles away. Such a condition is a contravention of the natural laws of trade. If the rail buyer in South America, South Africa or Arabia should be compelled to pay the going price in the United States, England or Ger- many, plus freight to destination, he would not be treated unfairly. Nor will the home consumer be making extreme 393] MONOPOLY AND IRON ASSOCIATIONS 171 demands in expecting some of the consideration which pro- ducing concerns have shown themselves able to accord to foreign consumers. It is yet too early to measure the probable outcome of the movement in the direction of international pooling. The great area covered and the number of establishments included would tend to make an international pool exceed- ingly difficult to maintain. The complexity of the legal and political situation under which the pool would have to operate would certainly enhance this difficulty. Industrial 'combinations, however, have shown a disposition in late years to overstep national boundaries ; and it is not unlikely that this disposition will show itself in several of the more important lines of the iron and steel trade. § 12. The Rail Association is the strongest combination ' of its kind in the iron and steel industry. While it has been compelled to act with moderation, it has been able to hold prices at a fairly high level. This strength and mod- eration have also been shown by the beam pool, which, next to the Rail Association, seems to be the most firmly estab- lished pool in the trade. It was organized late in the eighties ; and like other organizations of a similar character at first set prices far above what market conditions would justify. After some breaks, the present pool was formed in 1898 by six leading firms. These firms were the Carnegie Steel Company, Jones and Laughlin Company, the Cambria Steel Company, the Pennsylvania Steel Company, the Pas- saic Iron Works, and the Pencoyd Iron Works.^ In 1899, when billet prices rose, the beam manufacturers advanced prices by leaps and bounds. With the depression of 1900 prices fell. After th€ organization of the Steel Corpora- tion the price of beams was fixed at $1.60 per hundred 1 Iron Age, Jan. 12, igo2. 172 THE UNITED STATES STEEL CORPORATION [394 pounds, Pittsburg, and kept there. During the prosperous year of 1902 the steadiness of the price of steel beams was in marked contrast with the fluctuations of 1899. This <;hange of policy on the part of the pool was certainly due to the influence of the Steel Corporation. § 13. Some other associations, like that of the steel plate pool, have shown considerable strength. In general, how- ever, these associations while numerous seem to show great stability only when the number of producers to be combined is small. Even then their power must be characterized by moderation. The influence of the Steel Corporation seems to have been directed towards this end. This conservative policy has probably been due to a realization of the essen- tially unstable character of a pool. In Germany a similar disposition toward moderation in prices is noted by Professor Jenks in the case of the great coal combination of Westphalia. During the late nineties when the demand for coal exceeded all previous demands, prices remained uniform. It was claimed by the syndicate that moderate prices in good times prevented low prices in periods of depression. In the steel trade of the same coun- try a like tendency is noticeable. During the prosperous months of the summer of 1906 the German Verband re- fused to advance the price of billets, sheet-bars, slabs, skelp, and o'thier half-rolled material five per cent.^ The career of this combination shows that its attempt has been to steady rather than to raise prices. The influence of the German government has probably been responsible in part for this moderation. Aside from this governmental influ- ence, however, the effect of abnormally high prices seems everywhere to be disastrous to the permanent business wel- fare of any combination. 1 Iron Age, Aug. 16, 1906, p. 418. 32S3 MONOPOLY AND IRON ASSOCIATIONS 173 j That the general level of prices is higher than would ifave been the case if pools or mutual understandings in regard to prices did not exist is probably true. These organizations have had an appreciable influence on market conditions. JThe persistence of competition, however, re- duces this power to comparatively narrow limits. A writer in the Iron Age says : It is very doubtful if an agreement as to prices has ever been faithfully kept. While the established price in one particular product may, to all intents and purposes, be faithfully kept, concessions are made on closely allied manufactures in the buyer's favor. In the closing months of the nail pool, while the established price of $2.55 on wire nails was probably kept^ prices of smooth and barb wire were cut to ridiculous figures in order to stimulate sales of nails.^ Even in the case of the rail pool the maintenance of the agreed price has gone hand in hand with great reductions in the prices of allied material. During the depression of 1904, rail makers while adhering to the pool agreement made concessions to the buyers of steel rails in the shape of low prices on angle bars, bolts, and spikes.'' In the case of crude material, pools are often rendered inoperative for other reasons. The number of producers is relatively large, and pools are therefore more difficult to maintain. The temptation, too, on the part of the members to evade agreements by converting crude into finished mate- rial is also great. It has been the yielding to this tempta- tion which has weakened all pools for the control of billet and ingot prices. On the whole, the influence of pools on prices in general seems much less than is generally sup- 1 Iron Age, Jan. 7, i8g7, p. 12. 2 Ibid., Jan. S, 1903, p. 82. 174 THE UNITED STATES STEEL CORPORATION [396 posed. For short periods of time, and in particular lines, their influence may be great. Their power, however, to exert a permanent control over market conditions seems at present ratl^e r limited. § 14. 1 The laws with respect to pooling are not entirely satisfactory. If all the anti-trust laws on the statute books were enforced, thousands of members and hundreds of offi- cers of these associations would be defendants in civil or criminal suits. Yet pools are as numerous as ever. This condition is not a healthy one, as obedience to the law is a cardinal prerequisite to good citiz enship. / It is not possible by law to prevent all price agreements, nor is it advisable to attempt it. In an industry like that of iron and steel, subject to great fluctuations of trade, the high prices of prosperous times afford a powerful inducement to enter the field on the part of outsiders, who in periods of depres- sion must themselves be driven out, or drive out older pro- ducers. Such a condition is conducive to great waste. Manufacturers would seem to be justified in making some agreement to protect themselves, and to prevent wasteful industrial warfare. It would seem that some statutes might be devised enabling manufacturers to co-operate for self-protection, and at the same time prohibiting the forma- tion of conspiracies to exact tribute. CONCLUSION In the light of what has been said in the preceding pages some mention may be made of the Steel Corporation in its relations to the trust movement in general. During the last eight or ten years this movement has bulked large in the industrial affairs of the United States. VThe apparent success of several of the larger combinationsEas led some of the ablest business men and economists to the conclusion that the trust has become an established factor in the indus- trial life of the nation, and that trusts are economically beneficial. Some, however, have vigorously disputed this conclusion, and have contended that the larger business combinations have grown and maintained their ascendency, not by superior efficiency as producers, but by the employ- ment of means giving them advantages monopolistic in nature over independent concerns^ How far the alleged econofmes of consolidation really lower their cost of production and improve their competi- tive efficiency depends in large part upon the industry in which the combination is formed. It has been noted that the iron and steel industry is characterized by conditions which make large-scale production economical. Though this condition has tended to limit the number of producers to a relatively few large companies, it is doubtful if the competitive strength of such a combination as the Steel Corporation is greater by virtue of mere size than that of some of the more important independent companies with only a fraction of its capital. The reports of the American 397] 173 176 THE UNITED STATES STEEL CORPORATION [398 Iron and Steel Association certainly do not show that the larger organization is gaining on its smaller rivals in its share of the country's trade. While " trusts are taken to mean manufacturing corporations with so great capital and power that they are at least thought by the public to have become a menace to their welfare and to have, temporarily at least, considerable monopolistic power," ^ it must be said that the Steel Corporation, the largest of the trusts, is meet- ing a considerable, and probably growing, competition. r~~Wliatever question may be raised as to the efficiency of the trust as a producer, there is little reason to doubt its power to steady prices. It has already been seen that one of the most potent factors working for consolidation in the iron and steel industry has been the violent fluctuation in the demand for goods resulting in great variations in prices.^ These price variations have been greatly reduced sinee-th^ formation of the Steel Corporation. While this organiza- tion has no monopoly control over market conditions, it has been enabled appreciably to steady market values by virtue of its large volume of trade, and has been impelled toward this policy by business considerations. Such an influence can hardly be said to be prejudicial to public welfare. The uncertainties and wastes due to alternating periods of pros- perity and depression, while greater in the iron and steel industry than in most other lines of business, have been considerable in all departments of industrial activity. ' An organization, however, whose trade is sufficiently large to influence market conditions will strive for a fuller and more monopolistic control over these conditions. The advance of the Steel Corporation in the Lake Superior region seems indicative of a desire for ultimate possession ' J. W. Jeiiks, The Trust Problem, p. 8. 399] CONCLUSION lyy of the country's best sources of iron ore, and through this for more absolute control of the steel trade. The posses- sion of these deposits of ore will be difficult to secure; and as we have seen, the influence which the Steel Corporation is likely to wield over market conditions in the near future will probably be in association with independent producers. What effect monopoly power would have upon the policy of the Steel Corporation is difficult to say. There is no reason, however, to believe that it would have a radically different effect upon this organization than upon any other. As has been noted in the preceding pages, the business policy of the company has thus far been characterized by a judicious conservatism. Prices, as we have seen, have not tended to increase. ||^3»2%he fifth annual report of the corporation it is stated that the average prices received dur- ing the year 1906 for all steel products shipped to the domestic trade exceeded by five and three-tenths per cent the average received in 1905, but were eight per cent lower than the prices which prevailed in 1902. / This comparison of the prices of 1906 with thosE~tTf^902 is significant. These years were the two most prosperous years in the history of the iron and steel industry of this countrvj In 1906 the price of ore was greater than in 1902 ; the wages of labor were higher; freight rates had been raised; and the demand for iron and steel was greater than in any previous periodl^ Notwithstanding all these conditions, prices were eight per cent lower than in 1902. It is un- likely that such a showing would be made by an organiza- tion relieved from the pressure of actual or potential com- petition. It should be noted in closing that the Steel Corporation has set a worthy example to other combinations in its an- nual reports. These reports are issued to the stockholders, and give with considerable detail the income and expendi- 178 THE UNITED STATES STEEL CORPORATION [400 tures of the organization.C^Such an acknowledgment of the rights of stockholders to more detailed information con- cerning business operations than is usually supplied by large consolidations has inspired much public confidence in the corporation. fKecent exposures have shown the possible menace to public welfare in the secret and unqualified exer- cise of the power lodged in great capitalistic organizations. 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P. juDSON, University of Chicago F. J. GooDNOW, Columbia University B. F. Shambaugh, Univereity of Iowa . AIM The advancement of the scientific study of Politics, Public Law, Administra- tion and Diplomacy in the United States. MEMBERSHIP Any person may become a member upon payment of $3.00 annual dues. Life membership $50. Libraries eligible to annual membership. Members entitled to all publications of the Association issued during membership. PUBLICATIONS Proceedings An annual cloth-bound volume, containing papers read at the annual Decem- ber meetings of the Association. The American Political Science Review Published Quarterly. Each number containing: 1 Leading articles. 2 Notes on Current Legislation. 3 "Notes and News," National, State, Municipal, Colonial, Foreign, Personal, and Miscellaneous. 4 Reviews. 5 Index to Political Publications, Books, Periodical Articles, and Govern- ment Publications. Each number contains approximately 176 pages. The first number issued November, 1906. Annual subscription price to persons not members of the Asso- ciation, $3.00. New members paying dues for 1907 will be sent the November number of the Review. Members desiring to complete their sets of publications of the Association may obtain Volumes I and II of the Proceedings for one dollar each. Specimen copy of the Review sent upon request. Address all remittances and communications to W. W. WILLOUGHBY Secretary of the American Political Science Associatiom. JOHNS HOPKINS UNIVERSITY and Managing Editor of the Review BALTIMORE MD ^?VORK:S BY THE FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY. JOHN W. BURGESS :— Political Science and Comparative Constitutional law (2 vols.), GiNN & Company, 1890-1891. The Middle Period, 1817-1858 : The Civil War and the Constitution, 1859-1865 (z vols.); Seconstruction and the Constitution, 1866-1S77 ; American History Series, Charles Scribner's Sons, 1897, 1901, 1902. RICHMOND MAYO-SMITH :— Emigration and Immigration, Charles Scribner's Sons, 1890. Statistics and Sociology ; Statistics and Economics ; — Columbia University Press (Macmillan), 1895, '899. MUNROE SMITH : — Bismarck, Columbia University Press (Macmillan), 1899. FRANK J. GOODNOW :— Comparative Administrative Law {2 vols.), G. P. Putnam's Sons, 1893; one-volume edition, 1902. Municipal Home Rule; Municipal Problems, Columbia University Press (Macmillan), 1895, '897. Politics and Administration, The Macmillan Co., 1900. City Govern- ment in the United States, The Century Co., 1904. Principles of the Administrative Law -of the United States, G. P. Putnam's Sons, 1905. Cases on the Law of Taxation ; Cases on American Administrative Law ; Cases on the Law of Officers ; Chicago, Callaghan & Co., 1905, 1906. EDWIN R. A. SELIGMAN :— Railway Tariffs and the Interstate Com- merce Act, GiNN & Co., 1888. 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Extradition and Interstate Rendition (2 Tols.); American Notes on Conflict of Laws ; Boston, The Boston Book Co., 1891, 1895. History and Digest of International Arbitra- tions (6 vols.), published by the Government, 1898. American Diplomacy, its Spirit and Achievements, Harper & Brothers, 1905. A Digest of International Law (8 vols.), published by the Government, 1906. FRANKLIN H. GIDDINGS :— The Modem Distributive Process (in col- laboration with J. B. Clark), GiNN & Co., 1888. The Theory of Sociol- ogy, American Academy op Political and Social Science, 1894. The Principles of Sociology, The Macmillan Co, 1896; Seventh Edition 1902. The Theory of Socialization ; Elements of Sociology ; Democ- racy and Empire; Indactive Sociology; Readings in Descriptive and Historical Sociology; The Macmillan Co., 1897, 1898, 1900, 1901, 1906. ;OHN B. CLARK :— The Philosophy of Wealth, Ginn & Co., 1886, Second Edition, 1887. The Modem Distributive Process (in collaboration with F. H. Giddings), Ginn & Co., 1888. The Distribution of Wealth; The Control of Tmsts, The Macmillan Co., 1897, '9°i- The Problem of Monopoly, Columbia University Press (Macmillan), 1904. JAMES HARVEY ROBINSON:— The German Bundesrath; The Protest of the Cour des Aides of Paris, 1775, Univ. of Pa., 1891, 1899. Petrarch, the First Modem Scholar and Man of Letters (in collaboration with H. W. Rolfe), G. P. PuTNAM'.s Sons, 1898. The History of Western Europe ; Readings in European History (2 vols.), Ginn & Co., 1902, 1904, 1906. WILIJAM M. SLOANE :— The French War and the American Revolution, American History Series, Charles Scribner's Sons, 1893. The Life of Napoleon Bonaparte (3 vols.), The Century Co., 1896. The French Revolution and Religious Reform, Charles Scribner's Sons, 1901. HENRY ROGERS SEAGER :— Introduction to Economics, Henry Holt & Co., 1904; Third Edition, igo6. WILLIAM R. SHEPHERD :— History of Proprietary Government in Pennsylvania, Columbia University Press (Macmillan), 1896. GEORGE N. BOTSFORD :— The Development of the Athenian Con- stitution, 1893. A History of Greece, 1899. A History of the Orient and Greece, 1900. A History of Rome, 1901. An Ancient History for Beginners, 1902. The Story of Rome as Greeks and Romans Tell It. 1903. All published by The Macmillan Co. VLADIMIR G. SIMKHOVITCH :— Die Feldgemeinschaft in Russland,, Fischer, Jena, 1898; The Case of Russia, Fox, Duffield & Co., 1905. EDWARD T. DEVINE :— Economics, The Macmillan Co, 1898. The Practice of Charity, Second Edition, Dodd, Mead & Co., 1904. Prin- ciples of Relief, The Macmillan Co., 1904. FACULTY OF POLITICAL SCIENCE nicholas Murray Butler, LL.D., President. J. W. Burgess, LL.D., Professoi of Political Science and Constitutional Law. Unnroe Smith, LL.D., Professor of Roman L.aw and Comparative Jurisprudence. F, J, Goodnow, LL. D., Professor of Administrative Law and Municipal Science. E. R. A. Seligman, LL.D., Profes- sor of Political Economy and Finance. H. 1. Osgood, Ph.D., Professor of History. Wm.A. Dunning, LL.D., Professor of History and Political Philosophy. J. B. Moore, LL.D., Professor of International Law. F. H. Giddings, LL.D., Professor of Sociology. J. B. Clark, LL.D., Professor of Political Economy. J, H. Robinson,Ph.D., Professor of History. W. M. Sloane,L.H.D., Professor of History. H. R. Seager, Ph.D., Professor of Political Economy. H. L. Moore, Ph.D., Ad- junct Professor of Political Economy. W. R. Shepherd, Ph.D., Adjunct Profes- sor of History. J. T. Shotwell, Ph.D., Adjunct Professor of History. G. W. Botsford, Ph.D., Adjunct Professor of History. V. G. Simkhovitch, Ph.D., Adjunct Professor of Economic History. E. T. Devine, LL.D., Professor of Social Economy. Henry Johnson, Ph.D., Professor of History. S. McC. Lindsay, Ph.D., Professor of Social Legislation. G. J. Bayles, Ph.D., Lecturer in Ecclesiology. A. A. Tenney, Ph.D., Tutor in Sociology. E. E. Agger, Lecturer in Economics. SCHEME OF INSTRUCTION GROUP I. HISTORY AHD POLITICAL PHILOSOPHY. Subject A. Ancient and Oriental History, nine courses. Subject B. Mediae- val History, six courses. Subject C. Modern European History, eight courses. Subject D. American History, eleven courses. Subject E. Political Philosophy, three courses. Courses in church history given at the Union Seminary are open to the students of the School of Political Science. GROUP II. PUBLIC LAW AND COMPARATIVE JURISPRUDENCE. Subject A. Constitutional Law, four courses. Subject B. International Law, four courses. Subject C. Administrative Law, seven courses. Subject D. Roman Law and Comparative Jurisprudence, seven courses. Courses in Law given in the Columbia Law School are open to the Students of the School of Political Science. GROUP III. ECONOMICS AND SOCIAL SCIENCE. Subject A. Political Economy and Finance, twenty courses. Subject B. Sociology and Statistics, ten courses. Subject C. Social Economy, three courses. Courses in Economics and Social Economy given in the School of Philanthropy are open to students in the School of Political Science. Most of the courses consist chiefly of lectures ; a smaller number take the form of research under the direction of a professor. In each subject is held at least one seminar for the training of candidates for the higher degrees. The degrees of A.M. and Ph.D. are given to students who fiilfil the requirements prescribed by the University Council. (For particulars, see Columbia University Bulletins of Information, Faculty of Political Science.) Any person not a candidate for a degree may attend any of the courses at any time by payment of a proportional fee. Three or four University fellowships of ^650 each, the Schifi fellowship of $600, the Curtis fellowship of $600, the Garth fellowship in Political Economy of {650, and University scholarships of $150 each are awarded to applicants who give evidence of special fitness to pursue advanced studies. Several prizes of firom JS50 to $250 are awarded. The library contains over 400,000 volumes and students have access to other great collections in the city. Studies in History, Economics and Public Law Edited by the Faculty of Political Science of Columbia University VOLUME I, 1891-2 2nd. Ed., 1897. 396 pp. Price. $3.00. 1. The Divorce Problem. A Study In Statistics. By Walter A. Willcox, Ph.D. Price, 75 cents. 3. The History of Tarllf Administration In the United States, from Colonial Times to the McKlnley Administrative Bill. By John Dean Goss, Ph D. Price, |i.oo. 3. History of Mnnldpal Land Ownership on Manhattan Island. By George Ashton Black, Ph.D. Price, $1.00. 4. Financial History of Massachusetts. By Charles H. J. Douglas, Ph.D. (Not lold separately.) VOLUME II. 1892-93. 503 pp. Price, $3.00. 1. The Economics of the Russian Village. By Isaac A. Houbwich, Ph.D. (Ottt offrint.') 5. Bankruptcy. A Study in Comparative Lieglslatlon. By Samuel W. 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