Carl Herrmann
AHS Capstone Paper 4
12/17/2009
Andrew Carnegie
A Study of a Prototypical American Businessman
Andrew Carnegie’s success as a businessman cannot be attributed to one aspect of his business
acumen alone. It is only through understanding the variety of 19th-century business practices he was
engaged in that we can understand his success. He engaged in the same insider trading, rebate
practices, and conflicting allegiances that were typical of the era. Because he owed his phenomenal
success to his skill at using common contemporary business techniques to greatest effect, an
examination of his life offers insights into both the successes and excesses of nineteenth century
business.
Carnegie began his business career as Tom Scott’s personal assistant and protégé. Tom Scott held a
position as a superintendent on the Pennsylvania Railroad, the largest railroad in the country.
Impressed by Carnegie’s intelligence, he took it upon himself to teach him not only how to run a railroad
but how to use his position on the railroad for his own personal profit. These two objectives were
sometimes, although not always, in line with each other (Krass 62).
There were several ways for railroad executives to generate income outside of their salary provided
by the railroad. One way involved buying land known to be on a railroad route before this became
public knowledge. Buying shortly before the announcement became public, and selling shortly after the
land had become immensely more valuable, allowed executives to turn a quick profit. Although this is
now termed “insider trading,” and is illegal, at the time this was both legal and common business
practice (Krass 62).
Railroad executives also managed to use their position for personal profit through awarding of
construction contracts. These executives often owned or invested in the companies constructing the
rail lines. To some extent, these connections are logical; people familiar with the business of running
and building railroads would naturally diversify into other concerns they understand. On the other
hand, contracts were often padded to provide handsome profits to the contractors, at the expense of
the railroads themselves. While sometimes this cronyism resulted in a loss of profits to an otherwise
profitable railroad (the Pennsylvania awarded dividends handsomely during this time), at other times
these practices led to outright fraud. Thus, executives often found it more profitable to build a railroad
than to run it (Nasaw 129). When combined with federal subsidies for railroad construction, this
produced a massive economic incentive to build railroads, and created conditions for massive
improprieties. In the case of Credit Mobilier, unscrupulous investors Union Pacific more than double the
cost of construction, pocketing the $30 million difference (Martin ch 8, Krass 62).
Tom Scott brought Carnegie into this world, in fact loaning him the money to invest in several of his
first investments (Krass 52). With the returns from these “sure thing” investments, Andrew invested in
several other companies. Some were as diverse as investments in oil or shipping concerns (Krass 67).
Others, such as the Pipler, Shifler, & Co, were involved in railroad construction (Krass 68). This bridge
building company, with expertise from the Pennsylvania Railroad’s engineers, listed J Edgar Thompson
(President of the Pennsylvania Railroad) and Tom Scott as investors. Inside connections to the railroad
industry provided both the technical expertise and lucrative contracts, practically guaranteeing its
lucrative profits.
In 1863, Carnegie invested in another Pittsburg iron concern. A small firm, the Kloman brothers,
required capital to expand their operations, and offered Andrew part of their partnership in return for
capital. Andrew agreed, and thus entered the iron manufacturing business (Krass 74). Several aspects of
this transaction are important to note. The first is that it was an opportunistic event – Andrew did not
plan to invest in the iron business; he simply happened to be in the right place at the right time, with the
right resources to take advantage of it. Secondly, the money he used for this came from his other
investments; this expansion of his personal portfolio through reinvestment of returns allowed him to
expand without the burden of debt. Finally, this as was simply one of a variety of investments he was
involved in at the time; at this time he was as a capitalist and investor with fingers in many pots; he had
yet to become the monolithic leader focused on his particular industry.
Carnegie did not restrict his involvement in capitalism to simply investing in companies. In the 1870s
(Nasaw 127), Carnegie started on a decade-long adventure selling bonds to European bankers. His
connections with the railroad industry provided him with bonds to sell and favorable terms (Nasaw 128),
which complemented his skill at building and maintaining a diverse network of contacts served him well.
In addition to increasing his personal fortune, this experience allowed him to develop personal relations
with European banks. Later in his career, these skills provided Carnegie with the ability to personally
secure the capital to expand his business ventures, reducing the risk and making profitability more likely.
In 1872 Carnegie interrupted a European vacation to investigate a particular process for
manufacturing steel. Known as the Bessemer or Pneumatic Process, it differed significantly from
previous methods of creating steel. While other techniques typically relied on artisans to carefully
monitor small, man-sized batches of iron, the Bessemer Converters took multi-ton charges of molten
iron and converted them to pure, homogenous iron or steel in a matter of minutes (Misa 10-13).
Carnegie, upon seeing this in Europe, decided to focus on his various iron concerns.
Upon his return from the Continent, Carnegie laid plans for a new enterprise: a Bessemer steel plant
and rolling mill (Nasaw 143). From the outset, Carnegie did his best to ensure its profitability. He
named it after a personal friend and superintendent of the Pennsylvania railroad at the time, J. Edgar
Thompson, attempting to use flattery as a device to help secure orders (Nasaw 144). For its design, he
gave Alexander Holly, famed railroad engineer, free reign on a new space, allowing him to design it from
scratch for maximum efficiency. To run the plant and manage the workforce, he hired legendary steel
man “Captain” Bill Jones from the Cambria Iron (CITE).
These men were singularly qualified for their tasks. Before starting work at the Edgar Thompson
plant, Alexander Holly designed 8 previous Bessemer works (CITE), each one better than the last.
However, each of these had involved retrofitting a previous steelworks, which required making
compromises to turn into a Bessemer plant. With the Thompson works, he was given free rein to design
the building in whatever way would most suitably allow for the smooth flow of materials, reducing
costs. Before working for Carnegie, Captain Jones had already developed a reputation for inspiring his
workers, and running an efficient workforce. His views on dealing with workers greatly influenced
Carnegie’s.
“Captain” Bill Jones, the man who ran the Edgar Thompson plant initially, greatly influenced
Carnegie’s views on a workforce. By paying men well, Jones thought, he could retain their good will.
They would work correspondingly harder, more than earning better pay (Krass 131). Furthermore,
workers paid well took good care of expensive equipment, maintaining it well. Jones backed up these
assertions with knowledge of the industry, claiming to have labor costs far below other mills (Nasaw
182)
Captain Jones also introduced to Carnegie of “running full.” This idea encouraged Carnegie to run the
plant as much as possible, regardless of market price. Because the plant operated most efficiently at full
capacity, this represented the cheapest way to produce steel. Carnegie’s other improvements allowed
him to produce steel cheaper than his competitors, so he could better afford to keep producing with low
prices. His salesmen used times like this to “scoop” the market, undercutting competitor’s prices and
increasing their marketshare. While profits might suffer in the short term, after the economy improved
these sales put him in a position to reap larger profits. This allowed strategy helped Carnegie gain very
large market shares, paving the way for his concerns to become the most successful(Nasaw 131).
These preparations for success were tested sorely even before the Thompson plant became
operational. The failure of the Jay Cooke banking house in 1873 caused a national panic and depression
(Nasaw 143). When capital dried up, construction of the Edgar Thompson plans slowed down. Perhaps
worse, however, it dried up the capital markets that the railroads depended on to fund their expansion,
limiting the market for steel rails, and making its profitability a serious concern. Carnegie, however,
turned the situation to his long-term advantage, selling a portfolio of stocks and bonds to keep his iron
firms solvent (Nasaw 153). Furthermore, he used his reserve wealth to buy out troubled partners,
achieving majority control of the ET plant (Nasaw 173). While his good business judgment saw the
opportunity, his other investments and personal wealth allowed him to take advantage of it when
others were unable to do so.
Because of the careful attention brought to the Edgar Thompson plant, it achieved profitability
almost immediately, despite the nationwide depression. The plant design simply allowed it to produce
steel for less than its competitors could, ensuring profitability even in the worst of times. After five
years, the original investment of $.7 million produced total profits of $2.5 million.
While he concentrated his energies on creating a highly competitive steel industry, Carnegie was not
afraid to diversify into related fields when it felt necessary. In 1884, the Pennsylvania Railroad began
raising rates from the Carnegie’s coke suppliers. Carnegie complained against what he saw as biased
business practices, but his personal connections did not resolve the issue – the railroad controlled the
route to the coal mines, and knew it. To change the situation, Carnegie convinced William Henry
Vanderbilt, himself upset at the railroad, to construct another railroad along a similar route, to compete
with the Pennsylvania. As added incentive, Carnegie offered to use his skills selling bonds to rails $20
million towards the construction of such a road. While J.P. Morgan prevented the construction of the
railroad from taking place, it illustrates Carnegie’s willingness to engage in competition with an
established foe in when he felt necessary. It also illustrates how his ability to sell bonds and
independently find capital enabled him to engage in business ventures. (Nasaw 252-253).
Despite becoming a model of vertical integration towards the end of his career, Carnegie gave little
thought to this in the early years. Often investments in vertical integration were opportunistic – their
strategic importance became obvious only years later. For example, in 1881, he began investing in one
of his suppliers, the H.C. Frick Coke Company (Nasaw 289). Frick, short of capital to expand his
operations, invited Carnegie to invest in his coke company, and Carnegie obliged. Over the course of
several years, Carnegie became a majority investor in the firm. After the death of one of his most
trusted executives, Carnegie offered Frick an executive position with his steel concerns. Although Frick
lacked the capital, Carnegie offered him a share, with no down payment, and allowed Frick to repay the
loan with dividends (Nasaw 290).
These deals illustrate several interesting facts about Carnegie’s business strategy. Carnegie invested
in Frick Coke primarily because a good opportunity presented itself. Although the control of an
important supply would later become strategically important, Carnegie controlled these assets not by
careful planning but by taking advantage of opportunities as they presented themselves. Although the
deal stands as a model of cronyism, the deal also offered real benefits to Carnegie. By inviting Frick to
become an investor, Carnegie secured the talents of a very able manager who could watch over the
steel empire in Pittsburgh. It demonstrates both Carnegie’s willingness to take advantage of
opportunities as they come along, as well an understanding of how to recruit talented employees.
In 1892, Carnegie became aware of another problem. While he had acquired several iron ore mines
through opportunistic investments, he still purchased a significant portion of it from other suppliers.
Aside from the potential profits from the ore business, this left him open to price gouging should a
monopoly or trust take control of the ore, as had happened with oil refineries. Several of his
subordinates had been trying to convince him to invest in iron ore mines and shipping routes, predicting
that controlling his supply lines would enable him to greatly increase profits. Carnegie disagreed;
believing that focusing on his core business, steelmaking, would produce the highest profits (Nasaw
514).
Despite the advice of subordinates, he would not move to secure these supply lines until forced to. In
the panic of 1893, another capitalist, J.D. Rockefeller, came into the possession of most mines and a
good deal of shipping lines in the Great Lakes regions, offering him vast control of the ore market
(Nasaw 541). This control allowed him to charge exorbitant rates to any supplier, transferring their
profits to him. In order to prevent this, Carnegie signed an agreement with Rockefeller, agreeing to buy
his ore from Rockefeller mines and ship it along Rockefeller steam lines. In return for these large
guaranteed orders, Rockefeller greatly reduced prices per ton on the Ores. Both agreed to not compete
with each other’s core business for a 50 year time. Although conceived as a defensive measure to
prevent price gouging, the deal eventually cut his costs and further increased his competitiveness
against rivals (Nasaw 515).
In 1895, Carnegie faced a similar problem. A new superintendent at the Pennsylvania revoked his
(technically illegal) rebates, increasing the costs of his transportation. This he felt unfair, for two
reasons. First of all, his competitors received rebates. Secondly, the current rate schedule made it
cheaper to ship his steel to Ohio, and back through Pittsburgh than to simply ship straight to its eastern
destinations. Incensed by both of these, Carnegie set about returning the rebates to previous levels, by
whatever means possible. He threatened to build his own rail line, extending north to the great lakes
and their vast shipping network, and south to the Connellsville coke works, the source of a vital supply.
He managed to secure financing and quickly built the line north. Before completion of the south line,
however, the Pennsylvania Railroad gave in, and gave him his rebates (Nasaw 520).
In 1900, Carnegie faced another problem. J.P. Morgan had re-organized several steel plants into
larger corporations, operating on a scale that enabled them to compete with the Carnegie concerns.
Furthermore, several finishing mills had recently consolidated into giant firms. Before consolidation,
these firms purchased steel ingots from Carnegie concerns, turning it into wire, steel hoops, etc. After
consolidation however, they began investing in blast furnaces and steel plants (Nasaw 581) to provide
greater profits for themselves. In order to sidestep this maneuvering, Carnegie began to expand
forward into finished products, creating plans for the world’s largest and most technologically advanced
tube mill.
These actions aggravated J. Pierpont Morgan, the man who had organized the companies. Morgan, a
banker of great organizational skill felt that this cutthroat competition was wasteful and needlessly
interrupted industry and profits. In order to avoid going into this fight with Carnegie, which Carnegie
had a history of winning, he proposed instead to buy the Scotsman out. Carnegie agreed, thus ending
his career and making himself the world’s richest man (Nasaw 583).