The United States steel corporation, a study of the growth and influence of combination in the iron and steel industry

Front matter

X g§ iE UNITED STATES STEit^^i^*^^ ^ CORPORATION iio

A Study of the Growth and Influence of Combination in the Iron and Steel Industry

BY

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 organization that little can be said of its history that is absolutely new. The works which have treated this subject, however, 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. The sources upon 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, particularly the Report of the Industrial Commission. The writer has also derived aid from interviews with oflicials 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.

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CHAPTER I Introduction PAGE

1 . Concentration in the iron and steel industry 1 1

2. Conditions producing concentration * 12

The Steel Corporation not a monopoly 17

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

5. 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

6. Cooperation of these influences evolved the Steel Corporation 52

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8 CONTENTS " [230

CHAPTER III The Beginnings of the Steel Corporation PAGE

1. 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

7. The organization of the Steel Corporation 66

8. Exchange of securities « 69

9. Mr. Carnegie's personal share in the exchange 70

JO. The total issues of stocks and bonds 71

CHAPTER IV ^ The United States Steel Corporation

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. Grov^^th of export and veestern 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

1 1. The Steel Corporation's share of the country's trade. 95

CHAPTER V The Capitalization of the Steel Corporation I . 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

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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 ill

9. Actual assets of the Steel Corporation 112

10. Capitalization based on future values of ore and coal properties 114

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

1. 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 1901-03 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

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

PAGE

10. The Steel Rail Association 167

11. The International Rail Association 168

12. Other associations 171

13. General influence of pools 172

14. The legal and economic aspect of pooling 174

Conclusion 175

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 character and operations of the so-called trust movement. The conditions which have contributed toward consolidation in iron and steel manufacture have in many respects been similar to those which have facilitated the formation of combinations in general; and the reactions of consolidation upon the conditions contributing toward this movement illustrate some of the most salient tendencies inherent in large-scale production.

The concentration of production which had been going on in the iron and steel industry during the closing decades of the nineteenth century — and especially during the closing years of that century — reached a climax in the formation of the United States Steel Corporation in 1901. The forces or conditions which evolved this organization cannot be stated in a few categorical sentences; nor can their influence be properly gauged by mere statement. In the development of this great consolidation several forces, immediate and remote, industrial and financial, co-operated. Some of these, though usual accompaniments of the evolution of large-scale production, have exercised only subordinate influence; others stand out prominently as determin- 233] II ing factors in the iron and steel situation. It is with reference 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 rise to other consolidations. In several characteristics, iron and steel goods resemble those which are ordinarily 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 extent of territory. They are most economically manufactured 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 transportation 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 demand for goods, have furthered the desire for consolidation. The protective tariff, too, by limiting the area of competition 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 influences and others which might be mentioned, are not peculiar to the iron and steel industry. The condi-

235] INTRODUCTION 1 3

tions, however, which exercised the most determining effects were pecuHar in magnitude and mode of operation. Such were the influences exerted by the existence and geographical distribution within the country of large ore and coal fields; by the superior efhciency 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 industry 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 production 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 Superioir ore districts and the Pennsylvania and West Virginia coking-coal areas. About • eighty per cent of the country's iron and steel is produced from ores mined in the region about Lake Superior. The localization of so much ore within such a limited area with cheap transportation over the Lakes to Ohio and Pennsylvania has favored combination. Dependence upon the same or adjacent sources oif raw material, commoin transpoirtation 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 growth of the industry in the United States, and have facilitated to a very appreciable extent the tendency toward concentration.

More potent even than geographical conditions in developing this tendency has been the superior efficiency of large capital. There are other industries which require a great outlay of capital for the most economical production, but the making of iron and steel is in a pre-eminent sense the industry of large capital. The proper equipment of a steel plant for effective competition involves extraordinary costs. Not only must the rolling mills be furnished with elaborate and adequate machinery, but the producer must be prepared to manufacture his own iron and steel, and even secure his own ore and coal fields. Such a condition is incompatible with mere individual or partnership management. It necessitates not only corporate control, but involves a consolidation of interests engaged in different stages 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.

Co-operating with these influences making for concentration there have been violent oscillations in the demand for iron and steel due to alternating periods of prosperity and depression. No other industry is more susceptible to general trade conditions or has been more influenced by such susceptibility. The fluctuations which have characterized the iron and steel industry explain much of the tendency toward consolidation and in no small degree the special character which consolidations have assumed. The demand for iron and steel is great or small according as the times are prosperous or dull. The opening up and shutting 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 1 5

Furthermore, this varying demand for iron and steel has influenced 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 possible their costs by securing the sources of their raw material 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 oscillations. Combinations, 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 resulting 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 constituent companies.

The influence of the tariflF has been not unlike that in other industries. In restricting foreign competition it has rendered control of the industry within the country easier of attainment. 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 l6 THE UNITED STATES STEEL CORPORATION [238

wire goods. The tariff 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 favorable to a considerable degree of concentration. Fundamentally, 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 protective tariff, by shutting out foireign competitio'n, 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 accentuate this growth toward concentration by increasing the desire among producers for some control over the industry.

The immediate cause of the formation of the Steel Corporation was a desire on the part of certain financial interests to secure some control over the iron and steel industry, 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 corporations. While some of these organizations had secured some measure 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 Carnegie Steel Company, the Federal Steel Company, the National Tube Company, and the American Steel and Wire Company. The outcome of this condition was a consolida-

239] INTRODUCTION 17

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. While the original purpose of the Steel Corporation was to avert threatened competition and exercise some measure of control over the steel industry of the United States, the conditions which fostered the tendency toward concentration have not operated, 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 considerable ore in other parts of the country under the control of independent companies renders any monopoly of the country'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 finished products. The iron and steel industry requires large capita! for the most economical production; but the principal economies seem to be achieved long before such a high capitalization as that of the Steel Corporation is reached. One of the officials of the Jones and Laughlin Steel Company 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 l8 THE UNITED STATES STEEL CORPORATION [240

United States, engaged in the manufacture of steel, is about two billion dollars, of which amount a bilHon and a half is represented by the Steel Corporation, and the remaining five hundred million by ten or twelve large companies. Notwithstanding the preponderating position of the Steel Corporation, its size apparently gives it no competitive advantage over its smaller rivals. During the six years of its history, it has absorbed other concerns, increased its holdings of ore and coal, and expended large sums on improvements and additions to plants. Yet its relative share of the country's output of iron and steel has shown no tendency to increase, and in some important lines of manufacture has even appreciably diminished. During its career its net earnings, while large, have not been extraordinary in comparison 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 sufficient to pay dividends on the common stock.

The Steel Corporation, while organized to avert a threatened competition, has been compelled to withstand not a little rivalry. Outside of a few lines of manufacture guaranteed by patents it has achieved no monopoly. Paradoxical as it may seem, it is less of a monopoly than were some of the companies out of which it was formed. These companies, 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. However, 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 ig

it birth, and its probable future evolution, we must remember its character as a great, but not monopolistic organization. Its financial integrity and its influence on trade conditions 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 tim.e the largest industrial organization in the world, the question of its financial stability is one of interest 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 aggregate 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 inflated 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 properties have greatly increased in value. Indeed, the principal asset of the corporation is held to be its ore properties which, on account of the increasing use of steel, are becoming 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 organization. Barring such contingencies as the discovery of new and extensive ore fields in other regions advantageously situated and cheaply worked, and the invention of new processes transforming the character of the steel industry, the holdings in the Lake Superior district will remain a most valuable asset. In capitalizing such a business, however, some discount should be made for the contingencies described. This is especially urgent in view of the fact that more than a. third of the corporation's capital consists of a bonded debt whose obligations must be met during a period of depression as well as in normal and prosperous times. When it is remembered that the iron and steel industry is exposed to great vicissitudes in trade and that new discoveries and inventions may change its character and places of operation, it can hardly be said that the financial stability of the organization is fully assured. Viewed in the light of existing conditions, however, the assets of the Steel Corporation are unquestionably of great value. The critics of the financial policies of the corporation have probably more frequently underestimated its resources than the defenders have overestimated them.

§ 5. The Steel Corporation, while not a monopoly, has, nevertheless, reacted upon the conditions which favored its growth. Its career has been too short to justify any very sweeping generalizations in regard to this influence, but certain facts stand out in considerable prominence. Since the formation of this organization, the fluctuations in the prices of iron and steel have been less marked than in any other period of similar length since i860. One of the most potent forces in the development of the tendency toward concentration of production has been these fluctuations incident to changes in demand. To reduce these oscillations in prices is an avowed purpose of the officials of the Steel Corporation. Controlling more than half the steel trade of the country, this organization has considerable influence on the policy of producers in fixing prices. In times of prosper-

INTRODUCTION ity it has pursued a conservative course in the matter of 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 companies control most of their sources of raw material; 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 market are virtually excluded. As a result of this policy there v/ould 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 appreciable 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 oflicials of this organization disclaim any intention of controlling the industry, it seems not improbable that they will seek to extend the corporation's influence. The holdings of the corporation in the Lake Superior region have been greatly increased since its formation; and efforts to augment them still further are likely to be made. This may indicate a desire ultimately to control the trade by controlling the sources of raw material. Such a consummation, however, .will be difficult of achievement. Much of the Lake Superior district is held by independent concerns which have no present intention of selling their holdings. These holdings and ore lands in other parts of the country are sufficiently extensive to make it difficult for any iron and steel consolidation to control the sources of raw material. Even were such control secured, the growing public sentiment against monopoly would probably show itself in a clamor for abolition of tariff duties on iron and steel.

§ 6. If the Steel Corporation secures fuller control over the iron and steel industry of the United States in the near future, it is likely to achieve this end in association with other producers. The industry is still exposed to great changes in the demand for commodities; and the desire to regulate production in accordance with these changes as well as to secure monopolistic advantages will incite to further attempts to gain control over the trade. Such attempts have been made in various lines in the past by means of pools or associations. These organizations have had a prominent place in the history of the industry; but in most cases they have been weak on account of the number of concerns involved, the consequent difficulty in securing harmony among the members, and the ease with which outside capital could enter the field and break up the pool. The relatively small number of companies in the United States now engaged in the steel trade on any large scale would facilitate the making and keeping of agreements in regard to production and prices. The small number of concerns engaged in the manufacture of steel rails accounts in large measure for the success of the steel rail association, which for six years has held the price of steel rails at $28.00 per

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INTRODUCTION ton. In this association, as in others, the Steel Corporation with its large share of the country's trade has had a preponderating influence. On account of the attitude of pubHc opinion and the more active enforcement of the anti-trust laws many of these associations have been nominally discontinued. Tacit understandings, however, in regard to prices prevail now as ever, and 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, agreements 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 associative action; but the attempt to raise them much above what market conditions would justify would in all likelihood weaken the ties of the association, induce outside competitors to enter the field, and provoke much public opposition. 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 recognition of the importance of a steady rather than fluctuating volume of trade. Unless the steel industry becomes monopolized by the Steel Corporation or some other combination having the sanction of the law, the interests of con- -sumers do not seem to be menaced by the attempt to reduce 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 a result of these tendencies, and that it has reacted upon the conditions that gave it birth. In the following pages an examination of this organization will be made with the theory above outlined in view.

CHAPTER II Determining Factors in the Iron and Steel Situation

§ I. 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. However, the movement toward consolidation and the most 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 control over the trade peculiarly desirable from the standpoint of producers; fourth, the protective tariff which shut out effective foreign competition and acted as an inducement to the great producers to combine for the purpose of monopolistic control.