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United States Steel: A Corporation with a Soul. Arundel Cotter
Trimble secretary. Elbert H. Gary became chairman of the Executive Committee, and with him were Charles Steele, Percival Roberts, and Edmund C. Converse. A Finance Committee was also appointed with Robert Bacon at its head, and H. H. Rogers, Norman B. Ream, Elbert H. Gary, and P. A. B. Widener as the other members. The salaries of the president and of the chairman of the Executive Committee were placed at $100,000 each.
It is hardly to be wondered at that many prophets declared the new company was foredoomed to failure. Its very size, they claimed, would render it unwieldy, and it would collapse of its own weight. And there was a matter of something like half a billion dollars of common stock represented by no tangible assets, pure water it was claimed. It was questioned if dividends could ever be paid on this.
How could Morgan ever have been induced to back so great and so impracticable an enterprise? Many asked this question, and found no satisfactory reply. Some thought the banker had over-reached himself at last, but the majority were convinced that the organization of the Steel Corporation was merely a prodigious stock-jobbing scheme to put money into the pockets of Morgan and his associates—and that, as such, it would prove eminently successful. Few there were who had faith in the “Steel Trust” as a practical business proposition.
But incredible as it may have seemed to those accustomed to the vagaries of high finance as it was often practised in 1901, the promoters of the United States Steel Corporation did not regard it as a mere venture in financial legerdemain. They had the greatest faith in it as a straightforward business enterprise. They believed in its future. Judge Gary, who took an active part in the organization, has always insisted that it would be successful and the enterprise justified. And the reader of the history of the big company must judge for himself whether it has justified its organization, not only from an economic, but more particularly from a sociological standpoint.
Morgan, it has been said, considered the financing of the Steel Corporation the crowning achievement of his career. Was he mistaken? Or did he, in making possible this giant Corporation, erect himself a monument more lasting than brass?
It has been admitted that a large part of the Steel Corporation’s original capital was water. Just how much will never be decided. Herbert Knox Smith, Commissioner of Corporations under President Roosevelt, estimated that substantially half of the Corporation’s total issue of securities was not based on any tangible property assets. Other critics have gone further, while some have placed the amount of over-capitalization at a lower figure. Mr. Smith’s figures, so far as they go, are probably approximately correct, except that they made little or no allowance for the enormous value of the Corporation’s ore holdings.
But does the cost of tangible assets indicate actual value? Does the cost of erecting a factory or a business indicate the value of that business? Manhattan Island was originally purchased for twenty-four dollars. A business that is losing money is seldom worth the investment put into it, and conversely a money-making concern must be valued on its earning power. Many of the companies merged into the United States Steel Corporation were immensely profitable, and even though they themselves may have been over-capitalized, their value to the new corporation and to their stockholders was greater than their capitalization.
The actual plant cost of the Carnegie Steel Co., to take one instance, had been placed at about $75,000,000. That is, these plants in 1901 could have been duplicated for that sum. But the organizers of the Steel Corporation bought not only the Carnegie plants; they purchased an organization that was at the same time the most efficient steel-making and steel-selling machine in the world, an organization that the best-qualified witnesses have declared was worth anything from $250,000,000 up. An organization, moreover, that had earned $40,000,000 in a single year. And what was true in the case of the Carnegie company was, in part at least, applicable to most of the other concerns which went to make the United States Steel Corporation.
Further, in organizing the big company, there were many conflicting interests to be brought into harmony. It was necessary to secure control of various enterprises in order to obtain the rounded-out organization aimed at by Gary, Schwab, and the others. And each seller, naturally, was holding out for all he thought it possible to get. It was, therefore, a matter of bargaining and without doubt the result was that in more than one case the final price was above the value of the thing purchased.
In this connection it is related that shortly after the corporation had been formed the old Iron Master and Morgan met on a steamship on their way to Europe, and Carnegie in the course of conversation intimated that he considered he had driven a shrewd bargain with the corporation interests. To which the banker is said to have replied: “I would have paid another hundred million if you had asked it.” The story, the accuracy of which cannot be vouched for, concludes that Carnegie never forgave himself for his too-modest demands.
The general consensus of opinion is that the Corporation’s bonds and preferred stock were both amply protected by assets at the time of its organization but that the junior stock had nothing behind it but “blue sky.” Admitting the justice of this claim, which has never been denied and probably cannot be, this state of things no longer exists. Whatever water once permeated the capital of the Steel Corporation has been squeezed out. Year by year the directors have voted large sums out of earnings for the erection of new plants, the extension of old ones, until approximately $900,000,000 has been expended in this manner, this providing adequate—more than adequate—protection for the common stock and putting the Corporation beyond reach of criticism to-day on the charge of over-capitalization.
Not long ago Judge Gary, testifying at Washington before a Senate committee, asserted that the Corporation’s properties then—October, 1919—were actually worth $2,200,000,000 in round figures, or well over $700,000,000 more than its entire funded and stock capital. He asserted they could not be replaced for that sum. And other steel men declare his statement is justified.
When the Corporation began its existence the plants of its subsidiary companies, as we have seen, had a capacity of more than 9,000,000 tons of steel ingots, while its furnace capacity was only 7,740,000 tons. It was compelled to purchase a large proportion of its pig iron requirements in the open market. To-day its plants are capable, if worked at full, of producing 22,350,000 tons of steel ingots and its pig iron capacity is 18,400,000 tons. Practically all this gain in production has been attained by “plowing” profits back into additions and improvements with the object of putting actual plant value behind every dollar of stock issued.
This consummation was arrived at about seven years ago and it was then made known that the policy of using profits for building new mills and furnaces or acquiring additional property had been abandoned and that future expansion would be financed by the issuance of bonds, which would permit stockholders to share more liberally in profits than they had in previous years.
But although the Corporation, since the new policy was announced, has put more than $400,000,000 into new plant, practically all expenditures for extensions have been from earnings. The war, bringing about a boom in steel, brought to the Corporation such large profits that it was possible to use surplus earnings for extensions and yet pay big dividends to stockholders, making new financing both unnecessary and unwise. At present the Corporation is so strongly entrenched financially that the possibility of borrowing for plant additions becoming necessary has been put into the distant future, possibly eliminated forever.
We have seen how the Corporation was formed as a consolidation of ten of the most important steel-producing concerns in the United States, with a combined capacity of nearly two thirds the country’s possible output. So great an operation cannot be considered merely as a matter of finance. The biggest of trusts must of necessity contain enormous potentialities affecting the general welfare of industry and of the State. Its organizers and managers, in consequence, cannot resent fair-minded investigation into the use it makes of its powers. Has the Steel Corporation’s existence been prejudicial to the interests of its competitors, its customers, its employees, or the general public? These questions will be treated in more or less detail in the course of this history, but it might not be out of place to point out a few salient facts on this subject at this point.
Since the Corporation began its existence a number of new steel companies have sprung into being, grown and expanded, while the older so-called independents have