Andrew Carnegie and the Making of US Steel
Background
Andrew Carnegie was born in Scotland in 1835, to his parents William and Margaret Carnegie. They moved to the United States of America in 1848, when Andrew was aged thirteen years. On arriving and settling in the Allegheny City, near Pittsburg, Andrew's father secured a job in a cotton factory, with Andrew playing the role of a bobbin boy in the same organization. One year after arriving in the United States, Andrew got a job with the Pittsburg Telegraph office as a messenger, a job he did very well, so well that he was promoted to the position of telegraph operator after only two years (Carnegie, 2014). He was poached by the Pennsylvania Railroad in 1853 with the help of Thomas Scott, who had seen his talents, and he was made a secretary at a salary of $35 a month, and $50 later, enabling him to afford a house for his parents. He was appointed to the position of assistant secretary in charge of transportation during the civil war, then the head of the western division of the Pennsylvania Railroad. He was a founding partner in the Woodruff sleeping car company and a silent investor in several iron companies. He even indulged in a bond selling practice, across England and America, where he is said to have made a whopping $1 million dollars. That enabled him to start the US steel company in 1870, by erecting the first blast furnace.
The US Steel Company
Andrew Carnegie used his experience in the railroad to predict the potential of steel as the new ‘iron’ that will be used in making rails and containers, as well as replace iron in all major uses. He used his proceeds from selling bonds and the oil trade he had done with William Coleman to start his steel business. He erected the first blast furnace in 1870, but the economic conditions could not allow him to start operations, so he waited for three years until 1873, when he joined hands with his brother and delivered the first order of 2000 steel rails that were designed to replace iron rails in the Pennsylvania rail company. Steel was expected to be stronger for the new heavy cars that were being rolled out in the railway industry.
Andrew gave the company the name Edgar Thomson Steel Company, in the honor of the president, Pennsylvania Rail Company. Between 1872 and 1880, Andrew grew his company with energy and vigor, driving competitors out of business by cutting prices, reinvesting profits and getting funds from a local bank. His company was renamed to Bessemer Steel Rail Company, as he had an idea of making the new metal alloy, steel, exclusively for the rail industry. His investments and dedication saw him fall out with his partners on the management of the company, and he disagreed and bought off some of them, increasing his share in the company to 59% by 1878. At this point, the company was valued at $1.25 million (Terrell, 2012).
Key partnerships and buy outs signified the next phase of growth for his company. The merger of his company with Henry Clay Frick, his main supplier of coal, enabled the company to grow at a faster rate than competitors because he controlled the raw materials that were used to make steel. Henry Frick was a tough man, known for his discipline and dedication. He had risen to prominence from his coal business, where he had bought out all his competitors in the period between 1873 and 1880, making himself a very successful multimillionaire. He agreed to merge with Andrew Carnegie because it offered him a very good opportunity to own a minority share in the Carnegie steel company, while giving Carnegie a majority share in his coal company. In addition to having 40,000 hectares of coal mining zones, Frick had more than 1000 coking ovens in Connellsville. Arguably, the merger with Frick was the biggest step taken by Andrew Carnegie, because it offered him a much needed tract to rule the steel company in the United States. Also, the coming on board of Frick gave Carnegie good company, because Frick was a self-made coal dealer who was hard working and ruthless in the way he carried out his business.
The next buy out was the Homestead Steel company, in 1883, where Carnegie made Frick the general manager. This expanded the Carnegie Company to a point of complete control of the whole steel industry in the USA. With Frick as the general manager, the capacity increased, mainly because Frick was talented in business negotiations and management of the factors of production. For instance, Frick understood the importance of vertical integration, in that, it was very necessary for the company to construct relationships and partners from the start of steel manufacturing to the end. In that front, Frick negotiated the leasing of the iron ore mines in the Lake basin, making it easy for the transportation of iron. The distance to Pittsburg was shorter, and it was helped by the railroad and Carnegie ships (Communications, 2014).
One of the most challenging period for Carnegie Company was the 1890's, a period of economic contraction. In that period, many companies closed down at the backdrop of unsustainable wages and poor pricing for steel. Carnegie drove down wages and forced employees to take pay cut, despite pressure from employee unions and the workers. The pay cut was not helped by the fact that his company had been accused of overworking laborers and paying them poorly. Just to note, the employees of Carnegie Steel worked for twelve hours in a day, and the need for the company to cut down competition had led to very little salaries to employees. Particularly disturbing were the employees of the Homestead Steel Company that Carnegie bought in 1883, as they were used to better pay and working conditions (Carnegie & Andrew, 2007).
The matters were not helped by Carnegie’s absence from the United States. He had married Louise in 1886, after the death of his mum, and he sacrificed six months of his time every year to his new wife, where they used to go to Scotland. At this period, Carnegie was keen on his writing and philanthropy, and most of the managerial work was done by Frick. In 1889, the labor problems had gone through the roof, forcing Carnegie to negotiate with the workers’ union. They agreed to set a minimum wage, upon which, additional wages would be paid depending on the movement of the price of steel. The deal was well received, but only for so long, as, in 1892, the workers’ union came back to the table, negotiating for better pay for its members.
The labor problems with the labor union were biting hard, and Frick made a counterproposal to lower the minimum wages, citing the recent developments that had made production capital intensive, as opposed to labor intensive. He noted that, there was a need for fewer skilled workers and the company was suffering from the agreements. The workers’ union remained adamant, and a strike at the Homestead mill brought the plant to a close in June 30, 1892. The situation at the Homestead was so bad that a fight ensued killing five strikers and leading to a military protection of the Homestead mill. The Pennsylvania governor sent 8000 militia to protect the company, with Carnegie remaining silent, and adamant, in a letter, that Frick must be supported and protected, with the plant shutting down for months. It was later reopened and military withdrawn, but on condition that the Carnegie company stayed out of the union for close to forty years (Shippee & Winkler, 1932).
The 1890's also posed a great competitive challenge for Carnegie and a disagreement with Frick led to the contemplation of selling the company. The problems with Frick had emerged during the strikes, where he had hired thugs and pinker tons to fight the striking employees, resulting in death of the ten people. In 1899, Frick was replaced by Charles Schwab, upon being paid $15 million for his interests in the Carnegie steel.
The new cartels in the steel industry, overcapitalized by J.P Morgan, were interested in price controls for profit maximization, and they tried to intimidate Carnegie into joining them and avoid the price wars that had killed competitors. Carnegie tried fighting off with the Cartels by expanding his company operations, by building a new plant in Conneaut. However, a new syndicated decision to cut down purchases of Carnegie steel made him lose his gas, and he sold the company, Carnegie Steel, to J.P Morgan, and the US Steel company was born in 1901. Carnage steel was worth $500 million, and Carnegie's individual share was $225 million (Schwartz & Writer, 2016).
J.P Morgan, the Moore brothers and other players in the steel industry were only interested in getting Carnegie out of the equation because he was the only person who was pushing for price determination by market forces. Thence, when they hit the final blow of undercutting purchase of Carnegie Steel, Andrew had to give in to their demands. The situation was not helped by the fact that the buyers were willing to buy Carnegie's company at his asking price (History.com, 2009).
References
Carnegie, A. (2014). The Autobiography of Andrew Carnegie. United States: Tantor Media.
Carnegie, A., & Andrew, C. (2007). The gospel of wealth. United States: Gardners Books.
Communications, S. (2014). Henry Clay Frick. Retrieved June 5, 2016, from http://www.nndb.com/people/944/000166446/
History.com (2009). J.P. Morgan - facts & summary. history.com. Retrieved from http://www.history.com/topics/john-pierpont-morgan
Schwartz, S., & Writer, C. H. (2016, April 28). Andrew Carnegie steel magnate and the richest man in the world. Retrieved June 5, 2016, from Education, http://history1900s.about.com/od/people/fl/Andrew-Carnegie.htm
Shippee, L. B., & Winkler, J. K. (1932). Incredible Carnegie: The life of Andrew Carnegie (1835-1919). The Mississippi Valley Historical Review, 19(1), 135. doi:10.2307/1896693
Terrell, E. (2012, December 3). Andrew Carnegie – man of steel. Retrieved June 5, 2016, from https://blogs.loc.gov/inside_adams/2012/12/andrew-carnegie-man-of-steel/
Schwartz, S., & Writer, C. H. (2016, April 28). Andrew Carnegie steel magnate and the richest man in the world. Retrieved June 5, 2016, from Education, http://history1900s.about.com/od/people/fl/Andrew-Carnegie.htm
Shippee, L. B., & Winkler, J. K. (1932). Incredible Carnegie: The life of Andrew Carnegie (1835-1919). The Mississippi Valley Historical Review, 19(1), 135. doi:10.2307/1896693
Terrell, E. (2012, December 3). Andrew Carnegie – man of steel. Retrieved June 5, 2016, from https://blogs.loc.gov/inside_adams/2012/12/andrew-carnegie-man-of-steel/
