The Menace of Privilege, by Henry George Jr.
We are pleased to present, in installments, a very rare yet significant book written by former Congressman Henry George Jr.
Earlier installments are available at the Progress Report Archive.
start of CHAPTER 4, FURTHER TYPES OF PRINCES
LIKE the Rockefeller fortune, the Carnegie fortune came from several kinds of privilege. It came mainly from land, transportation and tariff privileges. Secret rebate railroad rates and the acquisition of the most advantageous coal and ore beds enabled Mr. Carnegie to outdo domestic rivals, while a high tariff duty cut off competition from without. This gave to him and a few others a practical monopoly of the chief lines of an industry at a time when cheapening processes caused its enormous development.
Born in Scotland, and brought to this country when quite young, Mr. Carnegie was the son of poor, hard-working, thrifty parents. At the age of twelve he began to earn his living as “bobbin” boy in a cotton mill in Allegheny City, Pa., on a salary of $1.20 a week. Later he became a telegraph messenger in Pittsburg, then a telegraph operator in the Pennsylvania Railroad employ, and subsequently superintendent of the Pittsburg division of that company.
He made his start to fortune by obtaining an interest in three lines subsidiary to that railroad’s development. First, he was shown by the rising Thomas A. Scott, of the Pennsylvania Company, how he could buy at a low figure ten shares of the Adams Express Company, an interior corporation of the railroad. Later, he was “let in on the ground floor,” for a block of stock of the Woodruff Sleeping Car Company, which afterwards was absorbed by the Pullman Company (autobiographical introductory notes to Mr. Carnegie’s book, “The Gospel of Wealth”). This was the time when the Standard Oil Company was killing or swallowing its refining rivals, and absorbing the oil regions by use of the secret rebate, which it obtained, first from the Lake Shore and New York Central roads, and afterwards from the Pennsylvania, the Baltimore and Ohio and other roads.
Mr. Carnegie, with other of the Pennsylvania officials, early became interested in the Columbia and other oil companies. Old records of the Columbia Oil Company appear to indicate that stock for which Mr. Carnegie paid $637.50, he subsequently sold for $72,000. (See “Inside History of the Carnegie Steel Company,” by J. H. Bridge, p. 30.)
This rebate railroad principle was apparently tried to advantage for the inside railroad group in other directions, but in none to so marked a degree as in the rapidly growing iron and steel business. During and following the civil war there was a great demand for the metal, especially in railroad building. Pittsburg had both the coal and the ore close at hand, so that it was naturally adapted to iron manufacturing. Messrs. J. L. Piper and Aaron G. Shiffier of that city had for several years been building iron bridges for the Pennsylvania and other railroads, as substitutes for wooden structures.
Perceiving the likelihood of this development, and doubtless having a division-of-profits understanding, such as commonly exist between railroad managers and construction companies, Mr. Carnegie organized this Piper-Shiffler business into the Keystone Bridge Company, in April, 1865. Among the stockholders appeared the names of Mrs. J. Edgar Thomson, wife of the president of the Pennsylvania Railroad Company, Mr. Thomas A. Scott, vice-president, and several other high officials of that road. In other words, the Keystone Bridge Company was largely owned by the managing officials of the Pennsylvania Railroad Company, from which it obtained its chief business (see “Inside History of the Carnegie Steel Company” and “The Gospel of Wealth”). Moreover, it has been published, and apparently has not been denied, that Mr. Carnegie’s interest in the bridge company was given to him in return for services rendered in its promotion, possibly in getting the other Pennsylvania officials interested.
During this same year, 1865, Mr. Carnegie helped to organize the Union Iron Mills Company in Pittsburg, by uniting the Cyclops Iron Company with the Kloman-Phipps Iron City Forges. The Cyclops Iron Company was a new enterprise in which were heavily interested Mr. Carnegie and Mr. Thomas N. Mills, purchasing agent of the Pittsburg, Fort Wayne and Chicago Railroad. In the Kloman-Phipps Iron City Forges, Mr. Thomas M. Carnegie, Andrew’s brother and assistant in the Pennsylvania road, was interested. The Keystone bought most of its structural material from the Union Iron Company, and both companies had sure purchasers of their products in the Pennsylvania and Fort Wayne roads, besides getting “ground floor” rebate freight rates over both roads east and west.
Shortly after that Mr. Carnegie resigned from the Pennsylvania road and devoted himself to the iron trade. In 1870 the firm of Kloman, Carnegie & Co. was organized to manufacture pig iron for the Union Iron Mills and the trade. In January, 1873, was organized still another Carnegie firm. Its title was Carnegie, McCaudless & Co. Its business was to manufacture steel by the Bessemer process. In October, 1874, the name of this concern was changed to the Edgar Thomson Company, Limited.
A plant was erected on the site of Braddock’s defeat in the colonial days. The company was named after the president of the Pennsylvania road, who was a large stockholder. Vice-President Scott also held stock, as did Mr. David A. Stewart, president of the Pittsburg Locomotive Works, and Mr. John Scott, a director of the Allegheny Valley Railroad — two corporations close to the Pennsylvania.
The established system of rebates obtained from the Pennsylvania Railroad for the products of the Edgar Thomson Steel Company forced President Garrett, of the Baltimore and Ohio Railroad, to make similar rate concessions, and these reductions in traffic costs played a very important part in the rapid growth of this Carnegie establishment, as in all the other Carnegie concerns. The high protective tariff and the rail pool were also great factors in the Carnegie prosperity. (In 1877 the Edgar Thomson Company paid its first dividends — indeed three of them — amounting to 41 3/4%, paid in cash and stock. In 1878 the earnings were more than 31% on its capital, which had heen increased to $1,250,000; and in 1880 the clear profits are reported to have amounted to $1,625,000.
The high protective tariff and the steel rail pool enabled the various Carnegie companies to clear more than $2,000,000 in 1881, and more than $2,128,000 in 1882. The cost of making steel rails was between $34 and $38.50. The average price received during these years, owing to the tariff and the pool, was $56.26. See “Inside History of the Carnegie Steel Company,” pp. 99-102.)
In October, 1883, following a depression in the iron and steel trade, there was a strike at the rival works of the Pittsburg Bessemer Steel Company, Limited, at Munhall, in the suburbs of Pittsburg. The works were quite new, but the Carnegie group were able to buy them at a very low figure, paying, it was reported, little cash, and liquidating the notes out of the subsequent profits of the mills. A similar transaction is believed to have occurred in 1890, when the Carnegies are reported to have bought for $1,000,000 in bonds the New Allegheny Bessemer Steel Company works at Duquesne, which had been embarrassed by a strike. This million was probably met within a year out of the profits of the new plant and the facilities of the Carnegies.
Thus their railroad and other advantages, together with their natural abilities and industry and unbroken good fortune, made it possible for the Carnegie group to absorb their rivals. Short of any of these elements, they probably would have failed. A combination brought them a monopoly of the more important parts of the steel industry in the Pittsburg region, and gave them the means, in 1892, after a bloody strike conflict with their employees in the Homestead district, over a new scale that reduced wages, to crush the steel workers’ labor union to submissiveness. In that connection it is instructive to remember that the Carnegie group had been potent with the lobby at Washington, and through it had been among the most persistent and insistent beggars for a high customs tariff for this country, on the plea of “protecting” American workmen and of enabling employers to pay high wages!
In March, 1900, the various “Carnegie interests” were merged into one corporation — The Carnegie Company — with a capital stock of $160,000,000, and a bonded debt of a similar amount. Embraced within this new incorporation was the H. C. Frick Coke Company, having more than 10,000 coke ovens, and 40,000 out of 65,000 acres of Connellsville coal lands, producing the best coke coal in the world. This new incorporation also included interests in the Oliver Company, which had acquired ownership of two thirds, or 500,000,000 tons, of the highest-grade Bessemer ores in the Northwest. It likewise embraced certain railroad and steamship lines for the economical carriage of ore and products.
This $320,000,000 of capitalization and bonded debt was a gross inflation. The company was not worth above $126,000,000. At least it was so valued in sworn affidavits by Andrew Carnegie, Messrs. Schwab, Phipps and other partners, and their attorneys, in the H. C. Frick partnership suit in 1899, when Mr. Frick and Mr. Carnegie seemed about to separate. And yet at the formation, in 1901, of that gigantic balloon of inflation, the United States Steel Corporation (Steel Trust), the Carnegie Company received in exchange for its $320,000,000 of bonds and stock, $402,000,000 of the new trust’s bonds and preferred stock, and also $90,000,000 of common stock. Mr. Carnegie received, as his personal share, $217,620,000 in five per cent. gold bonds, which in fact constituted a blanket mortgage over all the plants of the trust.
Thus, starting with nothing, Mr. Andrew Carnegie, through the use of privileges of various kinds, became from this source of iron and steel more than two hundred times a millionaire. Getting into the growing Pennsylvania railroad system, he had obtained “ground floor” interests in dependencies of that system. Directly or indirectly, through the secret rebate principle, he had obtained interests in the developing oil and the developing iron and steel industries.
Securing and keeping a virtual monopoly of the steel trade in the Pittsburg district by absorption of rivals, laborers were compelled to compete as individuals for employment, union among them in the Carnegie works being destroyed and prohibited. Through direction of the pig, billet and rail pools, and of tariff legislation at Washington, domestic as well as foreign competition was kept down, output “regulated,” and prices put up. Then followed absorption of coke-coal fields and ore beds, with ownership of steamship lines for the carrying of raw materials and finished products, while there were also “advantageous” understandings with other lines. Lastly, in the launching of the huge steel trust, Mr. Carnegie had exchanged his Carnegie Company bonds and stock for $217,000,000 of 3 per cent. bonds in a $304,000,000 blanket mortgage covering not only the Carnegie plants, but all the other plants included in the trust as well.
From what did this $217,000,000 Carnegie fortune primarily proceed? Privilege. What were the privately owned railroads but privileges? Likewise what were the interior corporations of these railroads but privileges? What was the real or practical monopoly of oil lands and coal lands and ore, lands and gas lands but fundamental and underlying privilege? What was the tariff legislation that prevented competition from without but privilege?
More next week about the operations of Princes of Privilege.
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