CHAPTER XVI

THE MIDDLE PERIOD--1907-1914 Although the business depression consequent on the panic of 1907 seriously affected earnings of the Steel Corporation in the closing months of the year, the big company was able, as a result of the boom conditions that preceded the financial catastrophe, to report the largest earnings it had till that time shown. Total earnings were $160,964,673.72, and a net balance was left for dividends of $104,565,563.76. After the payment of the dividends, the common being maintained at the established rate of 2 per cent., and the appropriation of $54,000,000 for property additions, a net surplus of $15,179,836.76 remained. In the appropriations for additions was included a sum of $18,500,000 for the continuation of the work being done at Gary, making the total amount appropriated for this purpose to the end of 1907, $50,000,000. During the year the work of building the new steel city progressed rapidly and $19,316,555 was added to the $4,632,202 expended the previous year. The last two months of the year showed the effects of the business depression, earnings of the last quarter, net for dividends, being only $18,614,416, compared to $28,758,142 the three months preceding. But it was not until 1908 that the full force of the storm was to be seen. In the first quarter of this year net profits applicable to dividends dwindled to $8,854,297.37, compared with $27,031,008.20 a year previous, and second-quarter profits were $9,042,027.55 against $30,843,512.61 in the same period in 1907. A striking comparison of the difference in trade conditions that occurred in the twelvemonth is afforded by the following statistics. 1908 1907 Gross sales $482,307,840.34 $757,014,767.68 Steel ingot production 7,838,713 tons 13,342,992 tons Finished steel production 6,206,932 tons 10,564,537 tons Number of employees (avg.) 165,211 210,180 Net earnings $91,847,710.57 $160,964,673.72 Net for dividends $45,728,713.70 $104,565,563.76 No special appropriations were made out of 1908 profits and a surplus of $10,342,986.70 was thus shown for the year after the dividend payments. However, such an appropriation appeared to be unnecessary as the Corporation already had a large reserve fund for the most important work underway, the building of the city and plant at Gary. On January 1, 1908, the balance on hand for this purpose was $26,051,242.62, and there was spent on the work $18,848,472.19 during the year, so that at the start of 1909 there was a balance of sufficient size to continue the work for several months. During the year 1908 the bonded debt of the Corporation, which had been increased from $564,670,876 at the end of 1906 to $602,320,511 a twelvemonth later, chiefly on account of the issuance of securities for exchange for Tennessee Coal & Iron stock, was reduced to $594,865,534. Among the important items of expenditure for 1908 is found a sum of $3,460,993 which was employed in modernizing the plants of the Tennessee company acquired the previous year. This was the beginning of a series of large expenditures extending over many years, and all for this purpose. Up to the end of 1914 approximately $20,180,092 had been spent on this work, most of it coming from the general funds of the Corporation and not from the earnings of the southern subsidiary itself. To what extent the acquisition of the Tennessee company affected the Steel Corporation’s capacity is shown in a table submitted in the report to stockholders for 1908, the figures given being as of the end of the year: BLAST FURNACE STEEL FINISHED PRODUCTS INGOTS STEEL _Tons_ _Tons_ _Tons_ Capacity April 1, 1901 7,440,000 9,425,000 7,719,000 Purchase of Union and Sharon Cos. 1,228,000 1,258,000 1,103,000 Tennessee purchase 1,000,000 500,000 400,000 Additions made by different Cos. after acquisition 5,322,000 5,887,000 3,678,000 Capacity January 1, 1909 14,990,000 17,070,000 12,900,000 This report also states that although the total steel capacity of the Corporation had been increased by 2,306,000 tons during 1908 its capacity for the making of Bessemer steel had decreased 746,000 tons, open-hearth capacity increasing 3,052,000 tons. These figures illustrate sufficiently the change then occurring in the steel trade from the old Bessemer to the new open-hearth process. An even more striking illustration of the manner in which open-hearth steel has been displacing the older Bessemer process in recent years is afforded by the figures of the American Iron & Steel Institute. In 1880 open-hearth production was only 100,851 tons against 1,064,262 tons of Bessemer. A decade after Bessemer production was 3,688,871 tons compared with 513,232 tons of open-hearth, and in 1900, 6,684,770 tons of Bessemer were turned out by the steel mills of this country for 3,398,135 tons of open-hearth. By 1907 the two processes of steel making were running a close race for popularity with consumers, open-hearth production being 11,549,736 tons in that year, and Bessemer 11,667,549 tons. In every subsequent year open-hearth production has been the larger, as shown by the following figures of the country’s production: YEAR BESSEMER OPEN-HEARTH 1908 6,166,755 7,836,729 1909 9,330,783 14,493,936 1910 9,412,772 16,504,509 1911 7,947,854 15,598,650 1912 10,327,901 20,780,723 1913 9,545,706 21,599,931 1914 6,220,846 17,174,684 1915 23,679,102 8,287,213 1916 31,415,427 11,059,039 1917 34,148,893 10,479,960 1918 34,459,391 9,376,236 1919 26,948,694 7,271,562 Business conditions gradually bettered throughout 1909, although the so-called open market that existed in the steel trade resulted in an average of prices during the year somewhat lower than in 1908. Nevertheless, increased production caused a marked and gradual gain in the earnings of the big Corporation, which from $22,921,268.75 in the first quarter grew to $29,340,491.62 in the second quarter, $38,246,907.43 in the third, and $40,982,746.14 in the closing three months. Total earnings in 1909 were $131,491,413.94, and after all fixed charges had been met, dividends paid, and a special appropriation of $18,200,000 set aside for new construction, etc., a surplus of $15,321,918.04 was carried to profit and loss. The bonded debt of the Corporation in 1909 was increased by $12,718,639.43 to a total of $607,584,173.72, there having been issued by the subsidiary companies bonds to a total of $21,976,500, and bonds totalling $9,257,860.57 having been redeemed. The year’s operations resulted in a production of 13,355,189 tons of steel ingots and 9,859,660 tons of finished steel products. The total volume of business was reported at $646,382,251.29. On the steel plant and city of Gary $11,081,367.80 was spent, making the total expended on the project to December 31, 1909, $53,878,597.37. Gary was now a steel-producing centre. Early in the year steel rails were turned out there and shortly after the close of 1908 and later in 1909 several of the steel furnaces and other finishing mills had been placed in operation. About this time it was decided that two of the other constituent companies of the corporation, the Sheet Tin Plate and Bridge companies, should erect plants at Gary, which plants are now in operation and have been for some time. About the middle of 1910 the wave of improvement that had brought better business and profits to the steel companies began to slacken. The effect was not very immediate and the year, as a whole, was one of the best experienced by the Corporation prior to the war boom. Earnings reached a total of $141,054,754.51, but a fall in quarterly profits from $40,170,960.83 in the quarter ending June 30th, to $25,901,729.87 was sufficient to show the downward tendency in conditions affecting the trade. Gross business aggregated $703,961,424.41, and production reached its high-water mark, 14,179,369 tons of ingots and 10,733,995 tons of finished steel being turned out by the plants controlled by the Steel Corporation. Bonds to a total of $17,392,752.14 were redeemed and $6,945,237.50 issued making the outstanding bonded debt of the Corporation and its subsidiary companies on December 31, 1910, $597,136,659.08. Some $16,000,000 was expended in further work at Gary bringing the total outlay on the plant, city, and terminals there to $69,978,695.15, of which $60,203,189.22 was financed from the funds of the parent corporation and the balance by various subsidiary companies, including the Bridge and Wire companies, which began the construction of their new plants during the year. Several important purchases of coal properties in the states of Illinois and Indiana were made in the years 1909-1910. These gave the Corporation 742 acres of land and 55,624 acres of coal rights. The most important new development recorded at this period, however, was the beginning of work on the construction of another steel plant and city near Duluth, Minn. The site for this plant had been purchased as early as 1907, but the events of the year and the dullness that followed made it seem wise to postpone the project. The more favorable conditions at the beginning of 1910 warranted its being proceeded with, and so the matter was put in hand, and at the end of the year $1,715,517.70 had been spent on the new plant. In accordance with its policy of permitting its workers to share in the better earnings resulting from improved business conditions the Corporation, in 1910, announced another advance in wages, affecting the greater number of its employees who, throughout the year, averaged 218,435. The increase averaged something over 6 per cent. Several factors operated adversely against the Corporation, from a financial standpoint, in 1911. The decline in business noted in the late months of the preceding year continued through and well into 1912, tonnage fell off and prices dropped with it. In May, 1911, the Republic Iron & Steel Co. precipitated matters by announcing a drastic reduction in the price of bars, the most important steel product, and this led to general price cutting, affecting every steel maker. It is worthy of note, however, that the conditions that now prevailed had nothing of panic in them. The business world seemed merely to be hesitating, to be timorous about making new ventures, to question the future. Perhaps the real reason was the world situation ripening for the Great War, for it is noticeable that, although conditions over the end of 1912 and into 1913 were good, this hesitancy was still in evidence, something ominous seemed to hang over the world of business and finance. It is likely that some of the leaders of finance foresaw, even though dimly and uncertainly, the trouble that was brewing. Earnings of the Steel Corporation in 1911 were $104,305,465.87, the four quarters making a comparatively even showing. After the payment of dividends only $4,665,494.78 was left for surplus. Dividend requirements, however, were considerably larger than they had been in previous years. The rate of disbursement on the common issue had been increased to 4 per cent. in 1909, and to 5 per cent. in 1910, at which rate it continued until the latter part of 1914. Production in 1911 fell off to 12,753,370 tons of ingots and 9,476,248 tons of finished steel products, and the gross volume of business declined to $615,148,839.79. The number of employees also grew less, the average number employed in the period being 196,888. Another increase in the bonded debt was reported, new securities totalling $33,416,000 being issued, and $9,498,359.46 being redeemed. The bonded debt of the big company on December 31, 1911, stood at $621,054,299.62. Capital expenditures reported for the year included $7,939,813.46 at Gary, bringing the total for this project to $78,258,508.61; $17,707,280.79 expended for the acquisition of new coal properties in the Connellsville region of Pennsylvania; $5,069,983.65 spent on the Tennessee properties, and $1,437,518 spent on the new Duluth plant. The two most important events of the year were the decision of the directors of the Corporation to cancel the Hill Ore lease and the inception of the Federal suit for the dissolution of the big company under the Sherman Anti-Trust Law. Both of these events took place on the same day, October 26th. As the Hill lease has been discussed at length in a previous chapter, and the facts connected with the dissolution suit have already been told, they will not now be gone into. Toward the close of the year just reviewed there was a gradual increase in the volume of steel buying. The railroads, which had been consuming very little of the metal--and the roads are the largest customers of the steel companies--began to buy in something like normal proportion and continued to do so until the spring of 1913. Other consumption also showed more activity, and under the impetus of this buying prices for steel products gradually advanced. The Corporation’s earnings, however, did not immediately reflect this betterment, the first quarter of 1912 showing net profits from operations of only $17,826,973.28, but a steady advance was recorded until $35,191,921.82 was reported for the last three months of the period. For the year net earnings of $108,174,673.12 were made and a balance of $3,605,247.37 was carried to surplus. The bonded debt of the Corporation on December 31, 1912, showed an increase of $22,482,881 from a year previous, bonds and mortgages totalling $32,428,246.50 having been issued and $9,906,365.47 in funded debt having been redeemed. The bonded debt of the big company and its subsidiaries at the end of the year stood at $643,537,180.65. Production in 1912 amounted to 16,901,223 tons of ingots and 12,506,619 tons of finished steel. The total volume of business amounted to $745,505,515.48. Of this sum $494,637,808 represented sales of steel and other products to customers outside the Corporation, $189,257,318 inter-company sales, and the balance earnings from transportation and other sources. The main items in capital expenditures were as follows: Work at Gary, $1,725,052; Duluth plant, $2,676,066; Tennessee Coal, Iron & Railroad extensions, $1,833,094. The construction of the Gary plant was now practically finished and the plant produced 1,093,578 tons of pig iron, 1,669,389 tons of steel, and over 1,186,000 tons of finished products in the course of the year. In view of the general betterment in business conditions it was decided by the directors of the Corporation to erect a big plant across the Canadian border. A site for this plant had already been acquired at Ojibway, Ontario, opposite the city of Detroit. Work has proceeded and is proceeding slowly. The plant has not been completed but several millions have been expended in laying foundations and otherwise making general preparation for the big plant that will one day stand at Ojibway. An attempt was made about this time to reduce the working hours of some of the employees from the twelve-hour to an eight-hour day. Such a course had been recommended by a special committee of stockholders appointed at the annual meeting in 1911, but the attempt was by no means an unqualified success, as the movement met with considerable opposition from the men themselves. In the first nine months of 1913 generally satisfactory conditions prevailed in the trade, and earnings were consequently improved, although operating costs had again been increased by a general wage increase put into effect on February 1st of that year. The first quarter showed net earnings of $34,426,801.54; the second, $41,219,813.42; and the third, $38,450,400.03. A pronounced decline was reported in the final three months when profits fell to $23,084,329.84. The good results of the earlier months were largely due to the big carry-over of business from 1912 and to the comparatively high average of prices received. For perhaps the first time in the history of the steel trade the railroads placed their orders for rails for 1913 delivery as early as the summer of the preceding year, and this went a far way toward effecting the results shown. After a special $15,000,000 appropriation the Corporation showed a net surplus of $15,582,183.62 for 1913. No important bond issues were made in the period, and with $16,660,866.76 in bonds redeemed the total bonded debt was reduced to $627,366,681.47, a decrease of $16,170,499.18. The total volume of business amounted to $796,894,299, of which $518,999,605 represented sales to outside customers; $211,910,441 inter-company sales, and the balance transportation and other business. The average number of employees was 228,906, the highest recorded so far, and production totalled 16,656,361 tons of ingots and 12,374,838 tons of finished steel products. The principal expenditures for capital account included $2,960,124.92 spent at Gary, $5,912,027.44 at Duluth, and $1,274,440.84 on the Tennessee plants. Fee title was also acquired during the year to certain ore properties previously worked on a royalty basis. This cost $11,670,181.87, of which $2,283,677.63 was paid in cash, and the remainder in notes of the Oliver Iron Mining Co. We now come to 1914, the year which saw the beginning of the Great War, with its disastrous results on business generally, and on no line of activity more than the steel trade. The events of this year are too recent and too well known, too vitally important to all, to need repetition. Industry, in the middle of the year, was just beginning to struggle out from the depression that had begun in the latter half of 1913 when the sudden clash of arms paralyzed world money markets, closed the stock and other exchanges, closed or restricted operations at hundreds of plants of one kind or another, and threw thousands of workers out of employment. The demand for steel, never very active at any time since about July, 1913, fell almost to a vanishing point, and earnings of the Corporation in the last quarter declined to the lowest point in its history, $10,935,635.36. Total earnings for the year were only $71,663,615.17, and, although the dividend rate on the common stock was reduced from 5 per cent. to 2 per cent. annually in the third quarter, and the dividend for the last quarter was passed, earnings were not sufficient to meet charges, and a deficit of $16,971,983.83 was reported. The necessity for passing the dividend--and it was a pressing one--was keenly deplored both by the management of the big company and, naturally, by its stockholders. That payments would have been maintained had there seemed the slightest warrant for such a course seems to be beyond question as the directors realized that the wide distribution of the stock, and the fact that many of its shareholders were people of small incomes who looked to their Steel dividends almost with the feeling of security they would have reposed in good bonds, would make their action necessarily a great hardship to many. But there was no way out. Even had wages been reduced there did not, at the time, appear to be any hope that profits for a long time would meet requirements, and the conservation of resources was paramount. But wages were not cut. In the early part of 1915, with earnings running even lower than in the last quarter of 1912, the matter was considered, but a slight increase in business was seized upon as a warrant for the continuance of the old wage scale. The steel worker was saved, although the steel stockholder suffered. Sales to outside customers in 1914 totalled only $380,228,143, inter-company sales $129,565,729, and other receipts made a total of $558,414,933--a decrease of over $238,000,000 from the previous year. Ingot production fell to 11,826,476 tons, and finished steel output to 9,014,512 tons, equal to about 62 per cent. of the gross capacity. Practically no change was shown in the bonded debt, which on December 31st stood at $627,238,417.26. The number of employees averaged 179,353. So acute was the depression that the construction of the new Duluth plant was temporarily stopped in the fall of the year, and work was not resumed until well along in 1915. In December, 1914, production of the Corporation’s plants fell to the lowest point ever recorded. One of its largest subsidiaries operated through most of the month at only about 15 per cent. capacity and another at 18 per cent. The general average of operations for the month was probably hardly over 20. Thus we come to the close of the second or middle period of the Corporation’s existence. The years which made it up were generally trying ones. At no time between 1907 and 1915, except to some extent in 1910, was there anything like real prosperity. And the close of the period saw industry practically suspended, aghast at the conflict that was shaking Europe to its very foundations, and threatening world credit. But while these seven years, 1908-1914 inclusive, were not, on the average, prosperous for the Steel Corporation, neither were they years of stress. Industrial affairs over the greater part of the period proceeded along a rather monotonous level, but this was possibly an advantage. So far as United States Steel was concerned, these conditions gave it an opportunity to perfect its organization, work out economies, and extend its operations along carefully considered lines. So that when industry revived under the urge of war times the big company was able to take advantage of the situation and to reap large profits and pay big dividends to its stockholders. For the Steel Corporation and for American industry generally conditions at the end of 1914 were as dark as could be imagined, but it was the darkness that comes before brilliant dawn.