The new company, named United States Steel, was to be capitalized at a staggering $1.4 billion. The federal revenues that year were only $587 million and the national debt stood at a mere $1.2 billion.
By John Steele Gordon
As the American economy exploded in size after the Civil War the banking industry exploded with it. But nothing brought home to the country, and indeed the world, the new power of the great American banks, epitomized by J.P. Morgan and Company, as did the creation of U.S. Steel in 1901.
Steel, known since ancient times, had always been a semi-precious metal, as it could only be made in small batches. But in 1857 Henry Bessemer of England invented the Bessemer converter, which could make steel ten tons at time. Steel quickly began replacing wrought iron for such items as railroad rails and building beams. By the end of the 19th century, steel production had become the measure of national industrial power.
Carnegie Steel was the largest American steel company. But it made mostly raw steel that it sold to other steel companies to turn into finished products. Newly consolidated Federal Steel, which made finished products such as tubing and sheet steel, wanted to start making raw steel and compete with Carnegie. But when the head of Federal Steel, Elbert Gary, talked to J. P. Morgan about the possibility of buying Carnegie Steel rather than expanding to compete with it, Morgan dismissed the idea out of hand. “I don’t believe I could raise the money,” he said with characteristic forthrightness.
But then Charles Schwab, the president of Carnegie Steel, spoke at a dinner in his honor in December 1900, attended by 80 leaders of the New York financial community. He outlined what the future of the American steel industry might be if it were consolidated from iron mines to finished products. Morgan, who sat next to Schwab at the dinner, changed his mind.
First, of course, Andrew Carnegie had to agree. Schwab arranged to play a game of golf with him, a game that usually put Carnegie in a good mood, especially as Schwab was careful to let him win. The next day, Carnegie agreed to sell for $480 million. Morgan accepted the deal immediately and congratulated Carnegie (who owned half of the stock) on becoming “the richest man in the world.”
The new company, named United States Steel, was to be capitalized at a staggering $1.4 billion. To get an idea of how much money that was in 1901, consider that federal revenues that year were only $587 million and the national debt stood at a mere $1.2 billion.
Morgan had to form a very large syndicate to handle such an underwriting. With his railroad syndicates, Morgan had partnered only with other banks. And this syndicate had plenty of those, including August Belmont and Co., Kuhn Loeb (Wall Street’s leading Jewish bank), First National, Lazard Frères, and Kidder, Peabody. But there were also numerous wealthy individuals, such as William Rockefeller, E. H. Harriman, Henry Flagler and Henry Clay Frick.
The syndicate had pledged to raise $200 million if necessary, but after they put up $25 million, the sale of the stock on the open market was so strong that they were not called on for more. Indeed, after paying back the $25 million to the syndicate members, they earned an additional $40 million fee, and J.P. Morgan and Company was paid a $10 million management fee.
In the first ten months of operation U.S. Steel made a profit of about $60 million, easily funding the dividends on the stock.
It’s no wonder a joke made the rounds of a teacher asking a little boy who had made the world. “God created the world in 4004 B.C.” he responded, “and it was reorganized by J. P. Morgan in 1901.”
