http://k7moa.uh.edu/carnegie.htm
Andrew Carnegie

born: 25 November 1835
died: 11 August 1919
Entrepreneurs and American Economic Growth
ANDREW CARNEGIE
Sources for the Lecture:
Berck, Peter (1978). "Hard Driving and Efficiency: Iron Production in 1890." Journal of Economic History, 38, 879-900.
Bridge, James H. (1903,1991). The Inside History of the Carnegie Steel Company. Reprinted by University of Pittsburgh Press.
Casson, Herbert N. (1907). The Romance of Steel: The Story of a Thousand Millionaires. New York: A.S. Barnes & Co.
Folsom, Burton W. Jr. (1991). The Myth of the Robber Barons: A New Look at the Rise of Big Business in America. Herndon, Virginia: Young America’s Foundation.
Hendrick, Burton J. (1932). The Life of Andrew Carnegie. Garden City, NY: Doubleday, Doran & Co. Inc.
Hughes, Jonathan (1986). The Vital Few: The Entrepreneur and American Economic Progress. New York: Oxford University Press.
Livesay, Harold C. (1975). Andrew Carnegie and the Rise of Big Business. Boston: Little, Brown and Co.
Wall, Joseph F. (1970,1989). Andrew Carnegie. Reprinted by University of Pittsburgh Press.
Warren, Kenneth (1996). Triumphant Capitalism: Henry Clay Frick and the Industrial Transformation of America. Pittsburgh, PA: University of Pittsburgh Press.
Youth

Born 25 November 1835 in Dunfermline, Scotland. His father, William Carnegie was a master handloom weaver like his father and grandfather before him. He was a weaver who made fine damask linen with elaborate designs. {Aside – damask linen means a linen fabric with a woven design. Linen thread comes from the fiber of the Flax plant.} By 1835 the invention of the Cotton Gin in 1793 – which made cotton cheap and a readily available alternative to both linen and wool -- and the development of power looms meant that the days of the master handloom weaver were numbered. Carnegie’s mother, Margaret, was frugal, neat, hard-working, with a strong and determined personality. Emotionally, she was a stronger person than her husband, William.

Andrew Carnegie did not go to school until the age of 8. Indulged by his parents, they had foolishly told him that he did not have to go to school until he decided to do so. At age 8 the local schoolmaster persuaded Andrew that schooling was a good thing. By the time the Carnegie family emigrated to America in 1848 Andrew had had only 5 years of formal education (and this in a classroom with up to 180 children in it!). He could read, write, perform basic arithmetic, and knew a little Latin and a few poems.

By Andrew’s birth in 1835 there were already over 100,000 power looms in the British cotton textile industry and the technology was rapidly spreading to the other textiles. The amount of work done by the hand weavers slowly declined until nearly all were out of work by the mid 1840s. Carnegie’s family had to move to a smaller house and his Mother began running a little shop in the house where she sold food and sewed shoes on consignment in the evenings. Finally, in 1847 a large steam power weaving factory opened in Dunfermline ending for good the handloom weaving business. This, coupled with the potato blight, only worsened conditions in Scotland.

Margaret Carnegie decided during the winter of 1847 that the family must migrate to America. Two of her sisters had migrated to Pennsylvania in 1840 and, after writing discouraging letters for several years, began encouraging the Carnegie family to migrate. They sold all their possessions (the loom at a considerable loss as it was no longer valuable) and with a loan from a friend of Margaret’s, sailed for New York City from Glasgow on 17 May 1848. From New York City, the Carnegie family went by boat up the Hudson river to the Erie Canal, traveled up the canal to Buffalo, by lake steamer to Cleveland, down the Ohio canal to the Ohio River, down the Ohio River to Beaver, PA, and finally by steamboat from Beaver to Pittsburgh. They settled in Allegheny, PA (now part of Pittsburgh’s "north side").

Early Business Career: 1848-1852

At the age of 13 Carnegie went to work as a bobbin boy in a local textile mill owned by a fellow Scot. He made $1.20 a week. Shortly thereafter he got a better paying job in a bobbin factory of yet another expatriate Scot. His job was dipping the bobbins into an oil bath and firing the factory boiler. He also got to work in the Company office on occasion where he decided he needed to learn double-entry bookkeeping. Consequently, in addition to working 12 hour days, he went to night school across the river in Pittsburgh.

Carnegie’s big break came in 1849 when he got a job at the O’Reilly Telegraph Company as a messenger boy (his Uncle knew the owner, yet another expatriate Scot). {Aside – Carnegie’s experience was fairly typical. The more daring emigrated to America first. They would send letters home recounting their experiences. The more timid would then emigrate and rely upon the informal networks of fellow countrymen – Scots, Irish, German, etc. – for help in finding housing and work. The consequence was ethnic concentration – especially in the eastern cities.} Carnegie delivered messages to all the important businesses in the city and soon knew a great deal about Pittsburgh’s commercial affairs. He also came to appreciate the importance of the telegraph to the new economy that was then emerging. He worked long hours and learned telegraphy on his own time. In 1851 he became a full time telegraph operator and picked up the talent of being able to read a message in his head. {Aside – The early telegraph used the opening and closing of "relays" to send the Morse Code – all you heard were these "clacks" the spacing of which determined whether it was a dot or dash.}

The Pennsylvania Railroad: 1852-1865

Carnegie’s big break in life came at the age of 17 when Tom Scott of the Pennsylvania Railroad hired him. Carnegie had come to Scott’s attention because of his reputation as being the best telegraph operator in town and Scott needed a personal telegrapher and secretary.

Thomas A. Scott (1823 - 1881)
Scott had just been placed in charge of the Pittsburgh division of the Pennsylvania Railroad. The Pennsylvania, arguably the best managed railroad in the country ("the standard railroad of the world"), was at that time applying telegraph control – pioneered by Daniel McCallum of the Erie – to the movement of trains. (This was particularly important for the Pennsylvania given that it was a mountain railroad and had to run numerous smaller trains.) Carnegie soon became Scott’s right hand man and was awarded with greater and greater responsibilities. One day he even issued orders using Scott’s name to get traffic on the railroad moving again after a derailment. In 1855 while on a 10 day trip Scott even left the 20 year old Carnegie in charge of the Division.

Pittsburgh Division Pennsylvania Railroad
Carnegie happened to come onto the scene just as J. Edgar Thomson was perfecting a cost accounting system for the railroad based on highly detailed statistics. Implementing this system was Scott’s job who was promoted to General Superintendent in 1855. Scott took Carnegie to the Altoona headquarters where Carnegie helped Scott perfect the system.

John Edgar Thomson (1808 - 1874)
In 1859 Carnegie was appointed Superintendent of the Pittsburgh Division at the age of 24! This was the most important and difficult Division of the railroad and Carnegie did an outstanding job. Indeed, Carnegie was so good that if he had chosen to make a career of it he would have been an important Railroad President in his own right. Carnegie showed his abilities by perfecting the system of statistical control even further and introducing management innovations. He ordered the telegraph stations be kept open 24 hours a day and appointed night time dispatchers thereby greatly increasing the efficiency of 24 hour movements of traffic. To clear away wrecks more quickly he ordered the cars blocking the track to be burned and he even had temporary tracks laid around wrecks to put the railroad back in service more quickly.

At the beginning of the Civil War in 1861 he helped Scott open the railways into the Capital. He also helped organize the Telegraphers Corps for the Union Army.

Summary: Some of the qualities that were to mark his later career had emerged by 1865.

•	1) Hard working (at least when he was young – this would change by the 1870s)
•	2) ability to master the details of a business very quickly
•	3) daring and forceful – not afraid to make decisions and follow through. 

Financier: 1863-1872

In 1856 Scott persuaded Carnegie to buy some stock and even loaned him the money to do so. Carnegie bought the stock primarily because he admired Scott and regarded him as a father figure. The experience of receiving dividends changed Carnegie’s attitude and he became an enthusiastic investor.

Carnegie’s investments were primarily with Scott and Thomson and were in firms that did business with the Pennsylvania railroad. At this time business practices which today would be unethical and illegal were quite common. In particular, they often invested in firms that they could then contract with – in their roles as managers of the Pennsylvania railroad – to do business with the railroad. For example, they invested in a sleeping car company and then contracted with the company to run its sleeping cars over Pennsylvania track. Often these investments required little up-front cash because the subscription could be paid off by the dividends.

In 1861 Carnegie and William Coleman – a wealthy Pittsburgh iron maker – founded the Columbia Oil Company to get in on the oil drilling boom in the Oil Regions north of Pittsburgh. They made a substantial amount of money but Carnegie grew tired of the messy and chaotic state of the oil business and sold out in 1865.

In 1862 Carnegie, Scott, and Thomson and a number of other Pennyslvania Railroad managers started the Keystone Bridge Company. Carnegie had been convinced that the trend in railroading was towards heavier locomotives and cars and longer trains in order to increase productivity (this is also why he got into steel railroad rail manufacturing a few years later). Consequently, the wooden bridges used by railroads, in addition to being a fire hazard, would eventually have to be replaced by sturdier, iron and steel bridges. Not surprisingly, the Pennsylvania Railroad could be counted upon to turn to the Keystone Bridge Company for its iron bridges.

Carnegie quit the Pennsylvania Railroad in 1865 both to concentrate on the bridge business which he was confident would boom after the War (the transcontinentals and rebuilding the railroads in the South) and to pursue investments. Keystone landed several major contracts to build bridges across the Mississippi and Missouri Rivers. Typically, major bridges were built by independent companies that floated stock to pay for the construction and then the bridge itself would be leased to a railroad. In addition, sometimes the bridge company contracted with a separate construction company to actually build the bridge. This opened even more avenues for profitability in securities transactions as the construction company usually was paid in stock at an inflated rate. This paved the way for multiple commissions for Carnegie in his role as securities salesman.

In 1867 Carnegie moved from Pittsburgh to New York City and began travelling regularly to Europe to sell bonds. By 1869 Carnegie and his perennial partners Scott and Thomson had made small fortunes by starting up their own telegraph company (which conveniently used the PARR right-of-way and had contracts with the PARR) which Carnegie was later able to quietly sell at a big profit. The trio also made an alliance with Pullman to provide the Union Pacific Railroad with sleeping cars. In 1871 the same group arranged a $600,000 loan to the Union Pacific in exchange for UP stock. The stock promptly rose because investors thought Thomson – who ran "the standard railroad of the world" – would take over the UP management. Instead, Carnegie began selling their "cheap" UP stock at a substantial profit.

In 1869 Carnegie met Junius Morgan (J. P. Morgan’s father) in London. Junius Morgan was one of the leading investment bankers in London and his word "was as good as gold". If Morgan endorsed a bond issue, it would be easily placed. Carnegie made substantial fees (typically 2.5%) selling bonds in Europe. He placed issues for various bridge construction projects and several railroads. By 1872 he was a rich man.

Iron: 1861 - 1872

Carnegie had gone into the iron business as early as 1861 when he and Thomas Miller had made an investment in a local iron company. Carnegie and Miller and two other partners later founded the Cyclops Iron Works in Pittsburgh in October of 1864. This firm was later merged with another firm in 1865 to form the Union Iron Works. After buying Miller out (at Miller’s request), Carnegie’s partners were his brother Tom, Henry Phipps, and Andrew and Anthony Kloman.

Henry Phipps (1839 - 1930)
Carnegie’s aim was to ensure his Keystone Bridge Company a reliable and cheap supply of iron beams and plates -- in short, vertical integration. This was something new in the iron business. Before Carnegie the business was highly specialized – one mill produced the pig iron; another converted the pig iron to bars and slabs; other mills then rolled railroad iron, manufactured plates, nails, and so on. Transferring the iron from one establishment to another significantly slowed down the production of finished goods and added to the costs because of all the middlemen. His training on the Pennsylvania railroad was crucial. With the high fixed costs of railroading, to make money it was essential to: 1) have a good cost accounting system; and 2) once the costs were known, speed the flow of traffic through the system and increase its volume. His great innovation was applying these principles to the iron and steel business.

After some initial resistance, Carnegie was able to impose a rigorous cost accounting system which including installing weighing scales at all points in the mills to see where material was saved or not saved, and every man in a particular job was compared with all other men in that job. Cost accounting was the most important factor thereafter in personnel, marketing, and investment decisions.

In terms of speeding up the flow and increasing the volume, combining the production of iron beams and plates with the bridge company, he drastically cut the time and labor required to move material from operation to operation.

When Carnegie felt that he had successfully blended the two businesses he moved to expand further. In 1870 he built his own blast furnace (called the "Lucy" after Tom Carnegie’s wife) to guarantee supplies of pig iron that he controlled. The furnace went into blast in 1872 and Carnegie was determined to increase its efficiency. He was amazed when he first went into the iron business that the owners of blast furnaces knew very little about what went on inside the furnace. It was literally a "seat-of-the pants" "rule-of-thumb" operation. 

Now that he owned his own blast furnace Carnegie hired a German chemist to find out what was going on within the furnace. His chemist was able to tell him how good his iron ore was and how to improve the charge in the furnace. Andrew Kloman figured out a way to remove the slag from the furnace more rapidly thereby increasing the output. With the cost accounting system, Carnegie and his associates soon realized that they could hard drive the furnace. Hard Driving (increasing the flow of hot air through the bottom of the furnace at high pressure) wore out the furnace lining very rapidly, but the increased output more than justified the relining costs and the reduced life of the furnace. Indeed, Peter Berck ("Hard Driving and Efficiency: Iron Production in 1890") shows that in 1890 "the pure profits of a hard-driven furnace would be enough to pay for the furnace in two years!" An American style hard driven furnace had to be relined every 3 years as opposed to 12 years for a British style furnace. Even with the cheaper capital available in Britain, the increased output of an American style hard driven furnace produced capital savings if output exceeded the (low) figure of 45,000 tons a year. Carnegie’s men eventually got the Lucy to produce 100,000 tons a year!

Cost Analysis Harddriven Furnace: Berck, Table 1
Bessemer Converter
The Bessemer Volcano
Such high quality iron ore lay in abundance in the Upper Peninsula of Michigan. It was discovered in 1845 and its exploitation made possible with the construction of the canal at Sault Ste. Marie in 1855. However, it was not until 1868 that the ore was tested for its phosphorus content and its usefulness in the Bessemer steel process determined. And it was not until 1870-71 that the transportation facilities were good enough to funnel large quantities of the ore down to the lower Great Lakes.

Given all these facts, it is not surprising that during his tour of the Bessemer plants in England during 1872 Carnegie determined that simply expanding his existing iron mills was too limited a venture. He decided he had to build a brand new, large plant devoted solely to making Bessemer steel railroad rails. This was to be The Edgar Thomson Works.

Henry Phipps and Tom Carnegie declined at first to participate in Andrew Carnegie’s "daring" new venture and Carnegie was forced to set up a separate partnership to build the new works. He was able to persuade a number of influential Pittsburgh businessmen to participate and he put up $250,000 of the total $700,000 capitalization of the venture himself and his old partners from Union Iron -- Phipps, Tom Carnegie, and Kloman each chipped in $50,000 apiece. His old allies Tom Scott and J. Edgar Thomson also came in for small amounts via Carnegie’s share. Land was acquired at the site of Braddocks’ field on the Monongahela River. (This was the battlefield where the British General Braddock was defeated and killed during the French-Indian War. One of his officers, Col. George Washington, led the retreat taking the troops to the south towards Maryland.) The location was ideal because it was near two railroads – the B&O and the Pennsylvania – and it was near the Youghiogheny River which ran through the nearby coal regions.

To supervise the construction Carnegie hired Alexander L. Holley who had a contract with Bessemer for the exclusive use of his process in America. Holley already had built several Bessemer plants and had made considerable improvements in the process. Carnegie paid only $11,000 in patent fees and a $5000 fee to Bessemer (and a $2,500 per year salary) to construct the works.

Shortly after construction was started the financial Panic of 1873 began that September and the country was plunged into depression. Some of his partners were unable to come up with their shares in the project and Carnegie himself was pressured by Tom Scott to help bail him out of his problems with the Texas & Pacific Railroad. Carnegie wisely refused, Scott went bankrupt, and their friendship ended. To keep the enterprise afloat Carnegie took Holley with him to London in the summer of 1874 and the two were, with the aid of Junius Morgan, able to sell $400,000 worth of bonds to London investors.

The Edgar Thomson works were completed in 1875 and the business was an immediate success. Carnegie was very fortunate that Holley recruited Captain William Jones from the Cambria Iron Works in Johnston to help run the new mill as the superintendent at the beginning of the project. Jones in turn recruited many talented men and it was Jones and his Lieutenants that made the works such a smashing success.

Captain William R. Jones (1839 - 1889)
Jones had worked closely with Holley and was an expert iron and Bessemer steel man. He introduced many improvements in the mill and was a fiercely competitive man. He enjoyed a challenge and his personality meshed perfectly with Carnegie’s obsession with costs and the speed of production. Jones was a mechanical genius and made numerous improvements to the mill. He invented many important processes and devices to speed the flow of the metal through the various stages of the production process before it cooled. This resulted in huge savings and increased output because the metal did not have to be re-heated at the various stages of processing.

For example, he invented the Jones mixer, a giant "tea kettle like" box that could hold up to 150 tons of molten pig iron fresh from the blast furnace and later transfer it to the Bessemer converter. He also shared Carnegie’s basic philosophy of always using the best tools for the purpose at hand and even if a tool or machine was not worn out it was to be discarded in favor of a better one if that was cost efficient. Finally, the workers in the plant respected Jones and he often argued for their interests when he felt that Carnegie made unrealistic demands for reductions in labor costs. Nevertheless, Jones worked his men hard – 12 hour days seven days a week with only the 4th of July off.

Because Carnegie always had majority control in the partnership, he insisted upon plowing almost all the profits back into improving the works – always upgrading, always in search of the littlest efficiencies. He was always concerned more with building and improving than spending dividends. Carnegie liked to promote from within. If he found a particularly outstanding young man in his works he would offer to make him a partner (at a fraction of 1% but that was still worth a lot of money). The other side of the coin was Carnegie’s ruthlessness when it came to partners he felt were no longer performing to his standards. Those men were forced out of the partnership and by the "iron-clad" partnership agreement they had to cash in their shares at the "book" value. Since the partnership was grossly undervalued this meant that the man forced out would walk away with a fraction of the true value of his share of the firm.

Carnegie became the chief salesman. Here his experiences working on the Pennsylvania railroad and selling bonds meshed perfectly. He knew most of the railroad leaders in the United States and worked in his usual tireless fashion to sell them his Bessemer steel rails. As a consequence, the output of the Edgar Thomson Works steadily rose from 21,674 tons in 1875 to 536,838 tons in 1889. During the same period his costs fell from $58 to $25 a ton with the profits rising accordingly.

Charles M. Schwab (1862 - 1939)
In October 1883 Carnegie bought the Homestead Works from a group of Pittsburgh investors. It was a highly efficient steel rail works but it had been plagued with labor troubles for some years. Carnegie expanded the plant and installed large new open hearth furnaces and by 1885 converted Homestead to rolling beams and angles in order to diversify his products. In 1886 Carnegie – on Jones’ recommendation – made Charles Schwab (at the age of 24) general superintendent of the Homestead Works.

Producting Steel Rails c. 1940
In October 1886 Thomas Carnegie died of alcoholism. Tom Carnegie was an unhappy man who had lived his whole life in Andrew’s shadow "minding the store" for his great brother. By this time Andrew Carnegie was traveling for pleasure and taking long vacations. In addition he was engaged to be married and finally did marry the next year. He relied on the cost sheets that were provided to him no matter where he was to oversee his holdings. However, the sheer size and complexity of the business meant that he had to have high quality managers at each of his works and he increasingly felt the need to have a single top manager to oversee all the mills. He solved his problem temporarily by making Henry Phipps the head of Carnegie Brothers Company (which was separate from Carnegie, Phipps Company, Limited) and by bringing Henry Clay Frick into the partnership.

Henry Clay Frick (1849 - 1919)

Carnegie had purchased an interest in Frick’s Coke company in 1881 and by 1883 Carnegie Brothers controlled a majority of the Frick Coke Company stock. Carnegie wanted to ensure himself a guaranteed supply of high quality coke and did so by his usual route – vertical integration. The Frick coke was from the Connelsville region southeast of Pittsburgh and was of unusually high quality. (Connelsville coal was high grade, soft, and easily worked. It was very low in ash and sulfur and when it was turned into coke it was a fine, hard, dense fuel.) Carnegie admired Frick’s abilities and after 1886 he needed Frick’s help with the management of his vast steel interests.

Frick became head of Carnegie Brothers in January 1889 after an initial falling out with Carnegie over the handling of a strike in the Coke fields in 1887. Frick eventually was coaxed back into the active management and with Henry Phipps’ request to withdraw from active management and the death of David Stewart – Phipps successor – the way was cleared for Frick. Frick was an immediate and huge success. Profits rose from $2 million in 1888 to $3.5 million in 1889 to $5.4 million in 1890.

In November 1890 Frick was able to buy the Allegheny Bessemer Steel Company located in Duquesne south of the Edgar Thomson Works. The Duquesne Works were superior to the Carnegie mills in that the ingots were rolled into finished steel railroad rails with no reheating. The Carnegie people had disparaged the process implying that it produced defective rails. After gaining control of the works, a careful cost analysis persuaded Carnegie, Frick, and all the top managers that the Duquesne direct rolling process was indeed superior to the method they were using. Accordingly, they converted both the Edgar Thomson Works and the Homestead Works to direct rolling.

In 1892 Frick persuaded Carnegie to merge Carnegie Brothers and Carnegie, Phipps, Company into one vast company – Carnegie Steel. It was formed on 1 July 1892 with a capitalization of $25,000,000 which was far below the actual value of the company. Carnegie owned 55%, Frick 11%, Phipps 11%, and nineteen other partners 1% each. The remaining 4% was held in reserve to reward successful young men in the plants.

The Homestead Strike of 1892

The same day that Carnegie Steel came into existence – 1 July 1892 – the strike began at Homestead. Labor trouble at Homestead was nothing new. Indeed, the previous owners of the Works sold out to Carngie in 1883 because they had grown tired of dealing with labor problems at the Works. The transfer of Homestead to Carnegie, Phipps, & Co. did not end the labor problems. A strike in July of 1889 was settled by William Abbott – vice chairman of the company – on terms favorable to the union – the Amalgamated Association of Iron and Steel Workers (organized in 1876). In exchange for recognizing the union as the sole negotiating agent for Homestead, the union accepted the company’s wage offer. Wages were linked to the price of billets (a slab of iron/steel) with a minimum wage below which the workers’ wages could not fall. If the price of billets rose, wages rose, and vice versa. Carnegie and Frick did not appreciate Abbott’s actions – Carnegie thought Abbott had surrendered to violence – and Abbott retired in 1892.

To Carnegie and Frick labor was just another input – like iron ore, limestone, coke, etc. – to the steel making process. As such, they were just as concerned with holding down and controlling labor costs as they were with any other cost. And like any other input, they wanted to increase the productivity of labor. This was done by introducing machinery and reducing the number of men in the Works as well as increasing the speed of labor. Hard Driving the furnaces wore out the linings and the men faster but increased the output of steel and the resulting profits.

Carnegie and Frick agreed upon a two-point plan before Carnegie sailed to Scotland in April of 1892. First, the floor of the sliding wage scale would be lowered from $25 to $22; and second, Carnegie Steel would no longer recognize the Amalgamated as the bargaining agent. Homestead was the only Carnegie plant that was unionized and Carnegie and Frick were determined that, henceforth, all of the Carnegie mills would be non-union.

The Amalgamated represented only 800 of the 3800 employees at Homestead. The union had originally been based upon skill and the ordinary laborers – the Slavs, Italians, and Hungarians – were not welcomed to the ranks. These men at the bottom of the heap worked 12 hours a day seven days a week or more in appalling conditions. Death and injury rates were very high and the pay was 15 cents or less an hour. But the laborers supported the Amalgamated in the strike because the union was not "the company" and at least the Amalgamated treated them like men and not cogs in the steel-making machine.

Carnegie felt that the right way to deal with a strike was simply to shut the Works down and wait out the strikers. He had used this tactic successfully in 1888 at the Edgar Thomson Works and recommended it to Frick before his departure in April of 1892. However, Carnegie and his partners seemed to have been in agreement that Frick was to handle the situation and Carnegie – quite uncharacteristically of his usual style – went into seclusion in Scotland where he could not be reached. Harold Livesay puts it well: "He pulled the covers over his head to shut out the sounds of conflict, hoping that when he pulled them off, all would be well, his own reputation as the workers’ friend preserved by his absence, and blame (if any) attached to Frick."

In any event, Frick emerged victorious but at a very high personal price both for himself and Carnegie. He broke the Amalgamated and the men were eventually forced to sign individual labor contracts in order to return to work. The beating of the Pinkertons after their surrender and the attempted assassination of Frick had turned public opinion temporarily against the strikers but it permanently damaged Carnegie’s reputation.

The Homestead strike was just one of many violent confrontations that took place between management and labor until the rights of labor to unionize and collectively bargain were finally and fully legalized by the Wagner Act (National Labor Relations Act) of 1935. What Carnegie and Frick did not understand was that the industrial economy with its mass production had changed the nature of the relationship between employer and employee. For the men who worked in the mills 72 hours a week the job was their life. Their wives and children depended upon their labor. Without expressing it exactly in those terms, they workers felt that they had property rights in the mills. They did not own the mills, but by living most of their waking lives there and being responsible for running the machines that produced so much wealth, they felt that they had earned the right to a bigger share of the pie. They were not Socialists, they did not want the owner’s mill, rather, they wanted property and freedom of their own in the form of more control over their working conditions and wages. They were fighting for dignity and a better life, not for a "Worker’s Revolution".

Carnegie Exits: 1892-1901

The Homestead strike temporarily sidetracked Carnegie’s inclinations to retire from business. His last decade in business was in many respects his finest.

Carnegie’s first challenge was the financial panic of 1893 that led to a Depression that did not end until 1896. Carnegie responded in his characteristic way. Cut costs, meet any price, run the mills full. Most of the mills were totally rebuilt between 1893 and 1898. At Duquesne new, much larger blast furnaces were installed with automatic loading machines so efficient that the furnaces set production records and lowered labor costs 50 percent. Schwab, who took over as President in 1897, installed 16 new furnaces at Homestead and increased the efficiency of the plant to such an extent that costs fell 34 percent in one year.

Before Frick stepped down as President in December of 1894 (he become Chairman of the Board in January 1895), he had begun acquiring rights in the Mesabi range of Minnesota. Frick’s judgement on the Mesabi iron ore had been better than Carnegie’s who had initially resisted making any investments. John D. Rockefeller had had no such hesitation. During the Depression years of 1893 and 1894 he acquired huge holdings, built a railroad to the Lake, and built a large fleet of huge ore carrying lake steamers to transport the ore. Carnegie and Rockefeller negotiated a deal in 1896 whereby Carnegie Steel leased the Rockefeller ore properties for 50 years and agreed to ship at least 1,200,000 tons of ore annually over Rockefeller’s railroad and ore boats. This deal assured Carnegie of virtually an unlimited supply of cheap, high quality iron ore.

Determined to control the transportation of the ore down from Lake Erie, Carnegie acquired the Pittsburgh, Shenango, and Lake Erie Railroad that ran from Conneaut, Ohio, on Lake Erie, to Butler, Pennsylania, just north of Pittsburgh. The railroad was upgraded and rebuilt. Renamed the Pittsburgh, Bessemer, and Lake Erie, it was extended down to the Edgar Thomson Works where it was connected with the Union Railroad. (Frick had built the Union Railroad to connect all the Carnegie mills so that the Company had total control over all its internal traffic. The 100 miles of track handed 16,000,000 tons of traffic in 1899 that was equal to the combined volume of the Northern Pacific, Union Pacific, and Missouri Pacific railroads!)

By 1900 Carnegie Steel was an industrial colossus. It was vertically integrated controlling its own ore, coke, limestone, and shipping facilities on the Great Lakes and from the Great Lakes to Pittsburgh. Under Schwab’s leadership it had adapted to the changing steel market by opening permanent sales offices in major cities where so much steel was being used to construct new office buildings. Profits climbed steadily from $6 million in 1896 to $21 million in 1899 to $40 million in 1900 after the H.C. Frick Company was combined with Carnegie Steel.
Carnegie had long wanted to sell out and Phipps and Frick were even more anxious to do so. The problem that the partners besides Carnegie faced was the "Iron Clad" (ironically enough it had been devised by Phipps) and the undervaluation of the stock. In 1899 the firm’s book capital value was $50,000,000 which was only about 20% of what Phipps and Frick estimated its true value to be ($250,000,000). If Phipps wanted out he would have to sell his 11% to Carnegie and the others for a mere $5.5 million. In 1899 Phipps and Frick tried to arrange the financing to sell Carnegie Steel and Frick Coke for combined total of $320,000,000. They failed and Carnegie pocketed the $2,000,000 option that they had put up from their personal funds.

This plus a number of other incidents brought an open break between Frick and Carnegie in January 1900. Carnegie tried to force Frick out "at the book" but Frick brought a lawsuit in Allegheny County Court to stop it. Cooler heads eventually prevailed and a peace treaty was signed in March 1900. Carnegie Steel and Frick Coke were combined and capitalized at $320,000,000. Carnegie’s share was $174,529,000, Frick’s worked out to $31, 284,000, and Frick was ousted from the management.

Carnegie now turned his energies on the competition. He and Schwab planned to build a huge steel tube plant at Conneaut. He was determined to enter into manufacture of nails, wire, tubes, hoops and anything else made of steel with brand new, integrated plants. As the coup de grace, he began planning the construction of his own railroad due south from Pittsburgh to West Virginia, then due east through Maryland to the Atlantic Ocean to settle with the Pennsylvania Railroad once and for all. Like Don Corelone, he was going to finish off all his rivals at one fell swoop.

The panic of his competitors and his own desire to finally retire produced the famous handwritten sales offer of $480,000,000 to J. P. Morgan and the formation of U.S. Steel in March 1901.

When Carnegie died in August 1919 he had given away nearly $325,000,000.

Summary: Business Style:

•	1) Hard working (when he was young)
•	2) ability to master the details of a business very quickly
•	3) daring and forceful – not afraid to make decisions and follow through
•	4) ability to pick gifted associates who reflected his style of management.

Was Carnegie a Schumpeteran entrepreneur? Yes. He clearly changed "the stream of the allocation of resources over time by introducing new departures into the flow of economic life" by creating the modern steel industry. His training on the Pennsylvania railroad was crucial. With the high fixed costs of railroading, to make money it was essential to: 1) have a good cost accounting system; and 2) once the costs were known, speed the flow of traffic through the system and increase its volume. His great innovation was applying these principles to the iron and steel business. Like Rockefeller, he used modern chemistry to improve his products and increase productivity. He set the standard and forced the entire iron and steel industry to adopt his methods to the long run betterment of the entire American economy. Cheap steel greatly increased the productivity of railroads and many other industries. This was his great accomplishment. Finally, the breadth and the usefulness of his benefactions continue to honor his name almost 80 years after his death. 
Copyright © 1999 KPoole@uh.edu <mailto:KPoole@uh.edu> Keith T. Poole
All Rights Reserved
Quotations and concepts may be used for review or academic purposes only if proper credit is given to the author. Unauthorized use or reproduction is prohibited.
Other Major Entrepreneurs:
John D. Rockefeller <entrejdr.htm>
William F. Gates <gates.htm>
James J. Hill <jjhill.htm>
Cornelius Vanderbilt <vanderb2.htm>
Courses and Home Page:
Keith Poole's (K7MOA) Home Page <default.htm>
American Economic History <aeh.htm>
Railroads, The First Big Business <railroad.htm>
Entrepreneurs and American Economic Growth <entrep.htm>