CHAPTER III

EARLY HISTORY AND GROWTH--1901 TO 1907 It was perhaps natural that the early years of the big new corporation were not entirely without their troubles. The work of bringing together and making into one harmonious whole a number of different companies, with the smoothing out of mutual jealousies and dispelling of distrust, was a far greater task than the actual financial organization. And it was only with the passage of years that this was successfully accomplished. It will be remembered that Schwab, in his speech at the Simmons dinner, had pointed to the advantages of integration which would be possible in a big steel merger, and the fact that a concern like the Steel Corporation, and such a concern alone, could successfully invade foreign markets and develop, in competition with European manufacturers, a permanent outlet for American steel. This was the same thought held by Gary when he had previously urged Morgan to finance a big steel combine. Briefly, these were the principal reasons for the Corporation’s existence; and these were the objects which its founders immediately set themselves to attain. The early history of the Steel Corporation, therefore, will naturally be found to have concerned itself largely with achieving these ends. It is to a great extent the narrative of the various steps taken to coördinate the more or less divergent units brought together in the new Colossus of Steel, of the work that had to be accomplished, the difficulties that had to be overcome, before it could fulfil its _raison d’être_ and win the place it now occupies as the most important business enterprise in the world. Many dangers faced the new-born Corporation. Not the least of these, although it was not realized at the time, was that, glorying in its giant’s strength, it might use that strength mercilessly, like a giant. Had it chosen so to do there is little doubt that it would have reaped some immediate financial benefits, but events of later years proved conclusively that it would have but laid the seeds for its own eventual destruction. That the Corporation chose a different policy, and up to that time one almost unknown in business, was due to the insistence of Judge Gary. And here it might be said that he did not have by any means an easy time in convincing all of his co-directors that the policies he advised should be adopted. For years he had a constant struggle, but gradually he won over all of his opponents to this point of view. Another of the dangers that beset the path of the new Corporation lay in the fact that it was not an operating company with a number of plants controlled by one central management, but a holding company controlling by stock ownership a number of industrial units which had previously been owned by utterly conflicting interests and each of which continued necessarily to operate under a separate management. The natural corollary of this state of affairs was that the management of each constituent, or subsidiary company, troubled itself solely about the success of its own particular unit and took little interest, if any, in the affairs of the other subsidiaries or the success of the Corporation as a whole. And had this condition continued the attainment of the ends for which the Corporation was organized would have been rendered impossible, its very existence made vain. To illustrate: the Carnegie Steel Co. and the Illinois Steel Co., a subsidiary of the Federal Steel Co., had widely separated plants, and, because of the important item of freight rates, sold for the most part in different territories. But the two companies competed in a middle ground and each had succeeded in encroaching on the other’s natural territory, in some instances had attached to itself certain customers therein. To retain these customers each company was compelled to sell in a locality adjacent to the other’s mill at the same price as its competitor was willing to offer. The Carnegie company, for instance, might have achieved the custom of a railroad whose Eastern terminus was Chicago. To supply the orders of this road it would have to pay freight tariffs from its mills near Pittsburgh and deliver the goods to the road at Chicago at the same quotation the Illinois company was naming for deliveries from its mills in the very suburbs of Chicago. It is extremely doubtful if such a situation was really advantageous to either company in the long run. It is certain that its continuance would have been distinctly disadvantageous to the Corporation that owned the stock of both concerns; it simply meant that the Corporation would have to pay freight for carrying steel hundreds of miles when it was able to deliver it from a mill practically at the customer’s door. The officers of each company were naturally unwilling to hand over custom they had built up by years of effort to a concern long regarded as a competitor. Even from the standpoint of the then-existing conditions each must have felt that it was his job to make a good showing for the company he managed; he had no concern elsewhere. But, for the good of the whole organization, it was absolutely necessary that these officers should be brought to realize that they were working first of all for the United States Steel Corporation, that inter-company jealousies must be buried for the common good and the interests of the party made subservient to the welfare of the state. And the way to do this was to make the interests of the Corporation, the controlled company, and the individual worker identical. Andrew Carnegie had built up the greatest steel company of its time by appealing to the loyalty of his men through self-interest. Like Napoleon’s soldiers, each man under him carried a potential marshal’s baton in his knapsack. The Napoleon of Steel held dangling before the eyes of his subordinates the hope of a partnership in the great Carnegie company as a reward for meritorious service, and most of his later partners won their way upward from the ranks. And the scheme worked out by the Corporation’s management to bring about the desired harmony, to assure loyalty to the United States Steel Corporation first and last, was modelled to some extent on Carnegie’s method. It became known as the Stock Subscription and Profit-Sharing Plan. Before going into the details of the plan an example of its effects may be illuminating. Journeying over the Corporation’s plants and mines the author was impressed by this very spirit of loyalty and coöperation on the part of officers and workers alike, and commented on it to William A. McGonagle, president of the Duluth, Missabe & Northern Railroad. And Mr. McGonagle related the following instance of this spirit of coöperation: When we were planning the big ore concentrator at Coleraine the engineers and other officers of the various companies concerned were called together in consultation and certain differences of opinion arose regarding the plans, each of the men present urging changes which he thought would be of benefit to the company he represented. While the discussion was at its height somebody rose and said, “Gentlemen, it is not a question of what is best for the Duluth, Missabe & Northern, the Oliver Iron Mining Co., or any other company; the whole question is, what is best for the interests of the United States Steel Corporation!” That settled it. All differences were smoothed out and a harmonious plan quickly agreed on. This result was due to the plan referred to which was devised to give each employee the stimulus of personal ownership, an incentive not confined, as it had been formerly, to a few individuals, but distributed throughout the organization. The plan, as finally worked out and put into operation, was designed to accomplish three main objects: first, to interest employees in the Steel Corporation as a whole and not merely in the operations of the subsidiary for which they worked; second, to give them an incentive to do everything possible to reduce expenses and correspondingly increase profits; third, to offer them an inducement to stay with the Corporation and identify themselves with it. It is with the first, or stock subscription part of the plan, that the public is most familiar. The benefits of this are extended to all employees of the Corporation who desire to take advantage of it. It is simply an effort to increase their interest in the Corporation and at the same time encourage thrift by enabling them to purchase stock at an attractive price and to pay for it in small instalments, with the additional incentive of a bonus for holding for a certain time the stock purchased. Usually the offering price has been a point or two below the market, but in 1920, for the first time, the subscription price was set slightly above it. In effect the stock subscription plan makes for a capital-labor partnership. It benefits both the worker and the employing company. It, in a small way, makes the worker a capitalist himself and enables him to see something of both sides of the case in capital and labor disputes. This plan, and others more or less similar adopted by other companies, have done more to bring into accord the relations between capital and labor than thousands of sermons and theses by theoretical reformers. It is a hard-headed, practical solution of the great problem. The late George W. Perkins has generally been credited with the conception and perfection of this plan. And unquestionably he had much to do with it, and took a leading part in its consummation. He always took a keen interest in anything that tended to better the conditions surrounding the worker or to reduce the friction that, unfortunately, exists between capital and labor. But, as a matter of fact, the plan was largely Judge Gary’s, as was brought out in the testimony in the Steel dissolution suit, and--to quote Perkins himself: “Two men have been my especial inspiration--one of them Judge Gary, the actual operating developer of corporation progressiveness as we have it at its best; but he has a positive passion for doing good things and big things behind the screen of somebody else’s personality; and credit that belongs to him--tremendous credit--lands elsewhere. Over and over he has made me protest against his insistence that I or another should accept applause for accomplishment directly belonging to himself; for instance, in employees pensions and profit sharing.” In its application the stock subscription plan has been an unqualified success. Particularly in recent years employees of all classes from common labor to executives have shown eagerness to avail themselves of its terms to acquire a personal financial interest in the big Corporation. Subscriptions for years have far exceeded the amounts of stock offered and all over-subscriptions have been honored. The figures of the annual subscriptions to stock under the plan speak for themselves: =================================================================== | PREFERRED | | COMMON | | NO. OF YEAR | SHARES | PRICE | SHARES | PRICE | EMPLOYEES | TAKEN | | TAKEN | | SUBSCRIBING -----+-----------+-------------+-----------+----------+------------ 1921 | ---- | ---- | 255,308 | $81.00 | 81,710 1920 | ---- | ---- | 161,298 | 106.00 | 63,324 1919 | ---- | ---- | 155,098 | 92.00 | 59,792 1918 | ---- | ---- | 93,488 | 92.00 | 41,991 1917 | ---- | ---- | 66,519 | 107.00 | 38,326 1916 | ---- | ---- | 49,538 | 85.00 | 24,631 1915 | | No offering | | | 1914 | 42,687 | 105.00 | 47,346 | 57.00 | 45,928 1913 | 34,418 | 109.00 | 25,583 | 66.00 | 35,687 1912 | 30,613 | 110.00 | 30,528 | 65.00 | 36,575 1911 | 19,324 | 114.00 | 29,072 | 70.00 | 26,305 1910 | 24,679 | 124.00 | ---- | ---- | 17,381 1909 | 17,953 | 110.00 | 15,380 | 50.00 | 19,116 1908 | 30,398 | 87.50 | ---- | ---- | 24,527 1907 | 27,150 | 102.00 | ---- | ---- | 14,163 1906 | 24,001 | 100.00 | ---- | ---- | 12,192 1905 | 18,180 | 87.50 | ---- | ---- | 8,494 1904 | 31,644 | 55.00 | ---- | ---- | 9,912 1903 | 47,551 | 82.50 | ---- | ---- | 26,399 -----+-----------+-------------+-----------+----------+------------ NOTE: Above figures differ slightly from those given in annual reports, a few employees having failed each year to go through with their subscriptions. Besides being given as much as three years to pay for stock purchased employees who hold their stock receive an annual bonus for five years. At first, when only preferred stock was issued, the bonus was $5.00 a year. Later, when the common stock began to have a real investment value, this, too, was offered with an annual bonus of $3.50. But in recent years the investment value of the common stock still further increasing, and it having become impossible to purchase any considerable amount of preferred stock at a reasonable price, only the junior security has been offered employees and the bonus on the common has been raised to $5.00 a year. Latest figures show that there are now more than 66,000 employees and their families interested in the plan, that is, that number are either paying for stock or, having paid, are drawing their annual bonuses. As it is likely that there are still more employees not now on these lists but owning stock bought more than five years ago it seems fairly safe to assume that the number of employees who, as stockholders, have an interest as part owners in the great organization that they work for is not less than 70,000. And in this number are included employees from all ranks, including workmen, so-called office boys, elevator operators, and executives. The plan was designed to be, and is, catholic in its scope. Naturally, the stock subscription plan has not been regarded with favor by those whose interests lie in fomenting dissent between capital and labor and the plan has been attacked in many ways. One of these is the charge that it is a money-making scheme under which the Corporation purchases its own stock cheap and sells to the workers at a profit. As a matter of fact, the operation of the plan is a continual source of expense to the Corporation which has so far spent on it an aggregate of $9,160,000. It has, however, profited from the plan in one way--increased loyalty, efficiency, and coöperation. Only “the men who occupy official or semi-official positions and who are engaged in directing and managing the affairs of the Corporation and of its several subsidiary companies” were concerned in the profit-sharing portion of the plan, generally designated as special compensation. This was more or less an adaptation of Carnegie’s method of rewarding his assistants for good service, with the difference that it held out no allure of return for effort selfishly directed, but only that done for the good of the entire organization. It was a yearly distribution to the men above described of a small percentage of the profits above $80,000,000, part of the bonus being paid in cash and part in stock of the Corporation. At the time of the promulgation of the plan it was made plain that there would be no increases in salaries of officials. All additions to salary would come through these bonuses, and in basing them on the profits of the Corporation and not of the separate subsidiary companies a powerful motive for loyal and harmonious effort for the good of the Corporation was created. Why did not the workmen generally share in this bonus distribution? It would have been impossible to make anything like an equitable distribution among the employees of every class, especially in view of the fluctuating character of a large mass of the labor employed in the industry. But the worker with his hands did share in profits in a more definite way. His wage was increased time and again and he received the benefits of these increases whether profits were large or small. This was more satisfactory to him. And in the stock subscription part of the plan, with its attached automatic bonus, he had an equal opportunity with the men above him in authority. But long before the Stock Subscription-Profit-Sharing Plan was perfected steps had been taken to coördinate the work of the Corporation and to bring about economies. First of these was the institution of a system of comparative cost sheets immediately after the Corporation began its existence. The earning of profits for stockholders was the first object of the big company, as it is in every business, and its formation had been undertaken largely with the idea that the magnitude of its operations would make greater economies possible, with a gain rather than a sacrifice of efficiency and quality. In the old steel days the calculation of costs had been more or less haphazard, at least in most instances. Too often the entire operating expense of steel making, from mining to the turning out of the finished product, had been “lumped” at the end of the year, and there was no means of arriving at the knowledge of just where profits, if there were any, were made, while if they were non-existent or unsatisfactory it was equally out of the question to fix the blame on any one department. Moreover, such secrets of economy as were discovered by those in charge of a furnace or mill were rigidly guarded as giving an advantage over competitors; all of which did not contribute to a general high average of efficiency and economy. The Corporation’s management first set to work to ascertain the exact cost of running each and every mine, furnace, or other department, the costs being tabulated for the information of the whole organization. The cost tables were made up in the most minute detail, the blast furnace cost sheets alone containing more than 8,000 different items, and by their aid the several departmental superintendents could see at a glance what item in their operations was below the average, was too costly, and could take the necessary steps to remedy matters. These tables also created a spirit of emulation, of friendly rivalry, between the various departmental units, which alone was a potent incentive toward economy. So immediate and so marked was the result of this system of cost checking that, according to Charles M. Schwab, a saving of $4,000,000 was effected in the blast furnace department alone in the first year of the Corporation’s existence! As this history does not pretend to be a technical treatise on the manufacture of steel detailed discussion of the many ways and means adopted by the Corporation to achieve economies would be out of place. But some of them are particularly worthy of mention. One example of economical methods, interesting because of the fact that is was possible only to a company engaged in operations on a tremendous scale, is concerned with distribution of iron ore to its furnaces. Steel, although much alike to the uninitiated, differs greatly in quality and suitability for different uses. The difference lies not alone in treatment during manufacture but in the kind and character of ore used. And a plant that has large orders for a particular kind, or analysis, of the metal, would find itself handicapped greatly if its receipts of ore included a mixture of the many grades often found deposited in the earth in close juxtaposition. The right ore for the right use at the right time means better and cheaper steel. Hence the Corporation maintains in the regions from which it receives its ores well-equipped chemical laboratories for testing and sorting the several varieties of ore. Probably the most important of these is at Hibbing, Minnesota, on the line of the Duluth, Missabe & Northern. As the long ore trains run through Hibbing small samples of the ore are taken out of the cars and subjected to careful analysis. The trains go on their way to Proctor where the extensive yards of the railroad are located, but before they reach that centre the chemical analysis of the ore in different cars has been ascertained and wired ahead, so that the cars composing the train can be sorted and distributed in sidings in accordance with the classification of the ores they contain. At Proctor new trains are then made up and proceed to the ore docks at Duluth where vessels are waiting to convey the ore to Gary, Chicago, or, by further trans-shipment, by rail to Pittsburgh. And each ship gets the kind of ore needed at the furnace to which it is destined. This means not only better and more uniform quality in the finished product; it means a saving of several hundreds of thousands of dollars annually to the Corporation. The Proctor yards themselves are interesting. Stretching two miles with seventy-five miles of track and capable of accommodating 5,400 cars at one time, as many as 469,555 fifty-ton cars of ore have passed through them in one season destined for the Corporation’s hungry furnaces all over the country. Not least among the economies following in the wake of the Corporation’s organization were the conservation effected and additional profits earned by manufacturing into merchantable products what had formerly been waste. The manufacture of the so-called by-products of the steel industry had been practised in Germany for many years, and to a limited extent in this country as well. But to get the best results not only was a considerable outlay for new plant equipment required, but the services of a corps of trained and experienced chemists had to be engaged. And this meant such an expense that, especially as the whole by-product idea was in a somewhat experimental stage, companies even of a moderate size as steel companies go hesitated to undertake it. With the Corporation’s vast resources, many subsidiaries, and large output the expense of experimenting and investigating was spread out so as to be hardly felt, a careful study of the subject was made, and necessary plants were erected. This has borne fruit not alone in increasing profits for the Corporation and its stockholders but in blazing a path for the steel trade of the United States as a whole (all the larger steel companies have by-product plants to-day), and finally in effecting an important conservation of the natural resources of the country. Nor, as events of the last few years have shown, have the benefits of the developments of by-product manufacture been confined to the Corporation, the steel trade, or even the United States. Chemicals derived from coke by-products are necessary in modern warfare. They form the basis of high explosives, gases, etc., and when the European war broke out the world at large realized that Germany, in protecting and fostering her by-product industry, had really been preparing for war. The benzol, toluol, and other chemicals manufactured at the coke by-product plants of the Steel Corporation and other companies in this country played an important part in stopping the German hordes and in saving civilization. Coke, the fuel used to make steel, is obtained, as is probably universally known, from coal. In the old days of the trade, and to a great extent still, the coal was burned in brick ovens with open tops, known as bee-hive ovens, which produced about sixty tons of coke from each 100 tons of coal and blew out in smoke into the air the oils and gas contained in the coal. Even to-day, in the great coal fields that lie near Pittsburgh, may still be seen the dense smudge that arises in the air from thousands of these ovens. But their day is surely, if slowly, passing. In the modern by-product coke ovens sixty-five to eighty tons of coke are obtained from 100 tons of coal, a gain of nearly 25 per cent. in the case of low volatile and about 8 per cent. with high volatile coals. Nor is this saving all. The gases with their oil content instead of being blown out into the air and burned are conducted through pipes to an intricate apparatus where coal tar, ammonium sulphate, a valuable fertilizing agent, ammonia, and benzol, an important base for high explosives and dyes and also usable as fuel for motor cars, as well as other products are extracted, and the gas itself is made available for use in motor engines or in illuminating. More than one city to-day lights its street with the gas from by-product coke plants. As it requires more than one ton of coke to make a ton of steel it is plain that the 25 per cent. saving in the amount of coke obtained from coal by use of the modern by-product ovens means an enormous economy to the Corporation which produces from seventeen to twenty millions of tons of steel a year, and the saving of four to five millions of tons of coal to the country. Nor are the profits derived from the sale of the by-products themselves immaterial. How profitable is the manufacture of coke by-products is indicated by the fact that for years before the World War, and possibly even to-day, the patentees of one by-product process were usually willing to erect a plant in connection with a steel plant, at a cost of several millions, and to take their pay for it from the profits of the by-products alone, handing the plant over to the steel company at the end of a stated period. They said in effect: “You give us the coal and we will hand you over the coke produced from it; and in twenty years we will give you the plant.” The Corporation, however, has always erected its by-product coke plants at its own expense. Another important economy in its saving of both labor and material is found in the generation, from what were formerly the waste gases of blast furnace operations, of electric power for running the entire steel mill. Still another by-product of the steel industry, and one that means material profits from waste, is Portland cement. In this is utilized blast furnace slag, formerly not merely a waste but a source of expense as it had to be freighted away from the mills and “dumped.” The manufacture of cement from slag had been carried on before the Steel Corporation was formed by the Illinois Steel Co. but only in a small way. The big company extended the cement industry as a side line to steel and erected several new plants, the largest being at Buffington, Indiana. It now has a capacity of about 45,000 barrels a day. Greater earnings for the Corporation, larger profits for its stockholders, are represented by the extension of the manufacture of these by-products. But, beyond this, the cultivation of this part of the industry means an appreciable reduction in the cost of manufacturing steel, and consequently lower prices to the consumer and the possibility of higher wages to the worker, as well as the elimination of waste and the conservation of the natural resources of a continent. Besides integration and the achievement of economies the early history of the United States Steel Corporation is largely a narrative of expansion, the building of new plants, and the acquisition of other companies. First of these acquisitions was the purchase, consummated about a month after the Corporation was organized, of the Bessemer Steamship Co., a Rockefeller concern engaged in traffic on the Great Lakes and which had been closely affiliated with the Lake Superior Iron Mines. This company had a fleet of 56 vessels (included in the number of vessels given as taken over by the Corporation in a previous chapter). The new organization paid $8,500,000 for the stock of the company, or about $150,000 for each vessel of the fleet. In the same year control of the Shelby Steel Tube Co., a New Jersey company owning the principal basic patents for the manufacture of seamless tubes, and having an outstanding capital of $5,000,000 of preferred and $8,150,000 of common stock, was secured, the exchange of securities being made on the basis of one share of U. S. Steel preferred for 2⅔ shares of Shelby preferred, and one share of Steel common for four shares of Shelby common stock. Practically all the stock of the Shelby company--$4,776,100 preferred and $8,018,000 common--was acquired, giving the Corporation a substantial controlling interest. In 1901 also the Corporation purchased by exchange of stock one-sixth interest in the Oliver Iron Mining Co. and the Pittsburgh Steamship Co. The Carnegie Steel Co. already owned the other five sixths of the securities of both these concerns and this gave the Corporation complete ownership. In December, 1902, an important deal for the absorption of the Union Steel Co. was consummated. This company was a merger, effected only a month or so previous to its absorption by the Steel Corporation, of the Union Steel Co., a $1,000,000 concern owning a large plant for the manufacture of wire rods, wire, and nails at Donora, Pa., and the Sharon Steel Co., a $6,000,000 company making a similar line of products and located at Sharon, Pa. The merged company had an authorized capitalization of $50,000,000 and a capacity of 750,000 tons of pig iron and 850,000 tons of ingots yearly. The purchase was carried out on the following basis: The Steel Corporation guaranteed an issue of bonds on the Union-Sharon properties amounting to $45,000,000, of which $29,113,500 were issued to pay for the properties, $8,512,500 were purchased by the interests controlling the properties, $3,500,000 were reserved to retire bonds outstanding on the property of the Sharon company, and the balance was reserved to provide for future construction and improvements. The actual cost to the Corporation was fixed at $30,860,501, as follows: bonds guaranteed and issued, $29,113,500; underlying bonds assumed, $3,591,000; cash $497,990; total $33,202,490; less liquid assets taken over with the properties, $2,341,989; net cost, $30,860,501. [Illustration: Down in a Coal Mine] By this transaction the Corporation acquired five blast and twenty-four open-hearth furnaces, two blooming and slabbing mills, four rod mills, two wire and nail mills, one skelp works, one tube works, one plate mill, one tin plate plant, one sheet plant, a by-product coke plant of 212 ovens, two modern ore steamers, 4,750 acres of coking coal, 1,524 acres of steam coal, and the ownership of two mines and leases on another two in the Mesaba Range with an estimated ore deposit of 40,000,000 tons. [Illustration: Open Pit Mining--Canisteo Mine] The absorption of this entirely solvent and “going” competitor has been criticized on the allegation that its only purpose could have been to strengthen the larger company’s supposed control of the industry, and to eliminate competition. The reasons for the purchase, testified to by Judge Gary, in the Government suit were twofold. The Union Steel Co., he said, owned blast and open-hearth furnaces the securing of which obviated the necessity of the Corporation building others in the same territory, which it needed, and its wire mill was particularly well located for export business, a prime consideration with the Steel Corporation; and perhaps a more cogent reason was to be found in the desire of the Corporation’s management to centre the interests of H. C. Frick in the Corporation. Mr. Frick was heavily interested in the Union-Sharon concern and on this account, although a director of the Corporation, he did not take a prominent part in the big company’s affairs. His experience and ability made his full coöperation in the directorship desirable and this had a great deal to do with the purchase. Seventeen months later, in May, 1904, the Clairton Steel Co., which operated three blast and fifty open-hearth furnaces, a rolling mill, billet mill, and blooming mill at Clairton, Pa., was absorbed. The company, controlled by the Crucible Steel Co., was then in the hands of a receiver and its stock was acquired by the payment to the owners of $1,000,000 in U. S. Steel bonds (bought in the open market and costing the Corporation $813,850), and the guaranteeing of bonds to the amount of $10,230,000 outstanding against the Clairton company and its subsidiaries. The purchase also brought to the Corporation a half interest in one ore mine and a lease of another in the Mesaba Range, about 20,000 acres of mineral lands in the Marquette Range, 2,644 acres of coking coal lands, and working assets of nearly $3,000,000. Smaller acquisitions by the Corporation in the early years of its existence included the Troy Steel Products Co., which owned works at Troy, N. Y., with a capacity of about 200,000 tons of slabs and skelp a year, and the Trenton Iron Co., operating a rod mill with a capacity of some 18,000 tons. The Troy company was bought in 1902 and operated a very short time, it having proved unprofitable. Hardly had the United States Steel Corporation commenced operations than the directors found themselves faced with the necessity of raising additional working capital. The $25,000,000 cash provided by the under-writing syndicate proved insufficient for the needs of the giant industry. Obligations entered into by the constituent companies before the merger, it was discovered, called for the expenditure of approximately $15,000,000, and fully $10,000,000 was needed to refund what were classified as “purchase money obligations.” It was also thought desirable that expenditures should be made for improvements and additions which, it was estimated, would increase the big company’s earning power at least $10,000,000 a year. Furthermore, it was deemed advisable to add from $10,000,000 to $15,000,000 to the Corporation’s fluid assets to provide for further expansion and to strengthen reserves, as it was obvious that if the Corporation were to need ready cash in a time of stress the amount wanted would not be a matter of a million or so but of many millions and it would be impossible to obtain a very large sum at such a time except at a great loss. By increasing fluid assets the probability of the need for borrowing would be minimized. The issuance of $15,000,000 new preferred stock or second mortgage bonds was discussed at length, but these courses were not favored as either, aside from initial expense in commissions to underwriters, would have increased fixed charges against earnings--a stock issue permanently and a bond issue for the term of its life--while an increase in capital in either of these two ways so shortly after the formation of the Corporation would almost certainly have attracted unfavorable comment and might have severely affected the value of their holdings to owners of its stock. Eventually what was known as the Bond Conversion Plan was adopted and promulgated. It provided for the issuance of $250,000,000 new second mortgage bonds and the redemption of $200,000,000 of the outstanding preferred stock, holders of the stock being given the opportunity to subscribe for the bonds to the extent of 50 per cent. of their holdings, 40 per cent. through deposits of stock and 10 per cent. in cash. A syndicate, headed by the Morgan firm, was formed and guaranteed to turn in not less than $80,000,000 in stock and $20,000,000 in cash in exchange for $100,000,000 of the bonds to be issued. For its work the syndicate was to receive 4 per cent. on the total value of the bonds actually issued under the plan, the house of Morgan receiving one fifth of the commission, or four fifths of one per cent. An actual, though not immediate, money saving, it was pointed out, would be effected under the plan. Although the commissions to be paid the syndicate, $10,000,000, would be larger than in the case of either of the two other ways suggested for raising the new capital required, the net saving in annual interest charges would be $1,500,000, which would not only refund the commission in a comparatively short time but would be more than sufficient to meet sinking-fund requirements for paying off the entire second mortgage issue when it became due, or in sixty years. The actual gain in working capital, should the plan prove a success, would be $40,000,000. (Redeeming $200,000,000 of 7 per cent. preferred stock would save dividend charges of $14,000,000 yearly, for which would be substituted a charge of 5 per cent. on $250,000,000 bonds, or $12,500,000. The amount required for the sinking fund would be slightly more than $1,000,000 or less than the net annual saving. And a permanent capital reduction would be effected at the end of sixty years.) No other action of the Corporation’s management, it would be safe to say, has met with such widespread disapproval as did the bond conversion plan, much of the criticism coming from financial experts who questioned the propriety of increasing the bonded debt of the company to so great an extent with so small an actual gain in working capital or resources. It was characterized as dangerous financing and it is known that not all the Corporation’s directors were themselves in full accord with the operation. At a meeting held on May 19, 1902, the plan was submitted to a vote of the stockholders and here considerable opposition developed which led later to the bringing of four suits to prevent its consummation. One of these suits which attracted a good deal of attention was brought by J. Aspinwall Hodge, a New York lawyer. But the Court of Errors and Appeals of New Jersey eventually dismissed these suits and the offer to exchange stock for the bonds--delayed by the suits--was finally made to stockholders in the spring of 1903. In view of the fact that its avowed object was the raising of $40,000,000 new cash capital, said to be necessary, the plan can hardly be said to have been an eminent success. Exclusive of the syndicate operations only $45,200,000 of preferred stock was exchanged by stockholders for the bonds and the cash subscriptions for the issue from the same source amounted to the insignificant sum of $12,200. The syndicate, at its dissolution, turned in a total of $150,000,000 in preferred stock and $20,000,000 in cash (this, of course, included the $45,200,000 stock and $12,200 cash of the outside stockholders), a total of $170,000,000, and instead of the desired $40,000,000, the actual cash gain to the Corporation from the transaction was $20,000,000 less a syndicate commission of $6,800,000, or $13,200,000 net. As the Corporation has been able to meet its full preferred dividend requirements since its formation, however, it is obvious that as matters turned out it has saved $2,000,000 a year in interest charges or in eighteen years since elapsed $36,000,000, more than five times the commission paid the syndicate. The yearly saving is also approximately double the $1,010,000 which the sinking fund calls for, so that the net gain to stockholders from the reduction of the preferred capital is $990,000 a year. Looking into the distant future the saving after the bonds are paid off in forty-two years will be $10,500,000 annually. One of the criticisms hurled at the plan was that its real object was to enable the syndicate, and especially the banking house of J. P. Morgan & Co., to make a profit at the expense of the stockholders. The facts were that the syndicate took a big risk of the bonds selling at less than par after issuance, which they did, and while it is impossible to ascertain the exact gains or losses incurred, the understanding is that Mr. Morgan and his associates in the syndicate actually suffered a loss of something like $8,000,000 from the deal. It was perhaps natural that the management of the Steel Corporation, in its early existence, should have been more or less divided against itself. This danger was one of the factors urged by its critics against the possibility of its success. Among its directors were Phipps, Frick, and Schwab, old Carnegie partners, and firm believers in the Iron Master’s policy of getting your competitor before he got you. Gary was the prominent figure in another faction that had the foresight to perceive that a new day was dawning in industry, an era of coöperation between manufacturer and manufacturer, to realize that the very size of the Corporation rendered it subject to the enmity of smaller concerns and to legal attack and public disapproval, and that the only way of overcoming this danger was to gain the good will of all by an open and straightforward policy. As the years passed these differences were gradually smoothed out. The directors, as a whole, came to see that Gary’s policy was right, in fact the only one to pursue, and harmony was gradually brought out of the conflicting elements and opinions. With the passing of the years Gary gained the ascendency in determining the courses of action of the Corporation. Always its chief executive officer he eventually became potential. And it is a high tribute to his judgment and foresight that all of those who disagreed with him at first have later admitted, as did Schwab, in a published speech, “He was right and I was wrong.” Charles M. Schwab did not long remain as president of the Corporation. His health broke down shortly after its formation and, in 1903, he resigned his position and sailed for a long rest abroad, later coming back to America to purchase control of a small independent concern and to build up an organization of his own that to-day ranks next to United States Steel among the steel-making companies of the United States. At the time of Schwab’s resignation the Executive Committee was abolished, the position of chairman of the Board created, and Gary was elected to that office. William Ellis Corey, President of the Carnegie Steel Co., was chosen President of the Corporation to succeed Schwab, on the latter’s recommendation, and continued in this capacity until the end of 1910, when he resigned to be succeeded by James A. Farrell, the man who had built up the Corporation’s export trade and who was then president of the United States Steel Products Co. Before the new-born Corporation had passed the first anniversary of its birth Robert Bacon resigned as chairman of the Finance Committee and was succeeded by George Walbridge Perkins, another Morgan partner. Mr. Perkins continued in this office for several years, but later retired, and since then Judge Gary has filled the offices of chairman of the Finance Committee and chairman of the Board. He is by the Corporation’s by-laws named “chief executive officer in general charge of the affairs of the Corporation.” In the first nine months of its operations the United States Steel Corporation reported net profits of $84,779,298. After the payment of sinking fund and interest charges on the bonded debt $61,420,304 was left for distribution to stockholders. Dividends of 5¼ per cent. (at the annual rate of 7 per cent.) on the preferred stock, and 3 per cent. (at the annual rate of 4 per cent.) on the junior issue, were paid, the balance after these disbursements, $19,414,497, being carried to surplus account. In 1902 a gross business of $560,510,479 was done and the net profits therefrom were $133,308,764. The year was a fairly profitable one and although a special appropriation of $10,000,000 for new construction was made and more than $14,000,000 was put aside for depreciation and extraordinary replacement, the big company was able to show the full dividends earned on its stock of both classes and a surplus balance of $34,253,657. The following year was one of general business depression and the steel industry, the barometer of trade, was seriously affected. The result to the Corporation is shown best by the simple fact that on December 30, 1903, unfilled orders on the books of the subsidiary companies aggregated 3,215,123 tons, against 5,347,253 tons a year previous. This falling off in orders was accompanied by declining prices, and the directors of the Corporation were impelled to reduce the quarterly dividend on the common stock for the third quarter from 1 per cent. to one half of 1 per cent. and to eliminate the junior dividend altogether in the final quarter. Gross sales for the year were $536,572,871 and net profits $109,171,152, the surplus for the period being $12,403,917. Several changes in the make-up of the subsidiary companies occurred in this year. The most important was the incorporation of the United States Steel Products Export Co. (the “Export” was later dropped from the title), headed by Farrell, to conduct the Corporation’s foreign business. The Carnegie and National Steel companies and the American Steel Hoop Co. were merged into one concern, known first as the National Steel Co., the name being later changed back to the Carnegie Steel Co. Lastly, the American Tin Plate Co. and the American Sheet Steel Co. were consolidated as the American Sheet & Tin Plate Co. The depression that began in 1903 lasted well into the year following and affected earnings of the Corporation to such an extent that, for the first and only time in its history, the wages of the men employed in the plants were reduced. (Incidentally wages were quickly restored.) Gross sales for the year were only $444,405,431, and net profits, $73,176,522. No special appropriation for new construction was made and, despite the small profits, the Corporation managed to show a surplus after the payment of the full preferred dividend of $5,047,852. But the wave of prosperity was returning. The first signs made themselves felt in the late months of 1904 and the Corporation’s earnings showed marked improvement in 1905. Gross sales amounted in value to $585,331,736 and net profits of $119,787,658. A surplus of $43,365,815 was reported after the preferred dividend payment, but $26,300,000 was deducted for new construction in contemplation so that the net amount added to surplus was $17,165,815. In this year production reached the highest mark so far recorded by the big company, the output of pig iron being 10,172,148 tons, of ingot steel nearly 12,000,000 tons, and of rolled products 9,226,386 tons. In the annual report for 1905 is found the following statement by Judge Gary: “It has been decided to construct and put into operation a new plant to be located on the south shore of Lake Michigan, in Calumet Township, Lake County, Indiana, and a large acreage of land has been purchased for that purpose. It is proposed to construct a plant of the most modern standard....” About the time those words were being written work on the new plant was being started and the foundations of a new city, now having a population of 56,000, were being laid. It is appropriate that the name chosen for this town should have been Gary, although Judge Gary had nothing to do with the selection of the name. All previous records for production and profits were shattered in 1906. The betterment in steel conditions that started in 1905 continued throughout the ensuing year, and, indeed, until the latter part of 1907, when the disastrous panic occurred. The Corporation’s report for 1906 showed that it had increased its capacity for pig iron production more than 63 per cent. and its steel capacity nearly 57 per cent. between the date of its organization and January 1, 1907, and this increase enabled it to take advantage of the business betterment and to profit thereby. In 1906 the Corporation’s blast furnaces poured out 11,267,377 tons of pig iron, while its steel plants produced more than 13,500,000 tons of ingots and 10,578,000 tons of finished material. The gross sales of the year amounted to $696,756,926, and the net profits to $156,624,273. These large earnings justified the resumption of dividends on the junior stock and 2 per cent. on the issue was paid. The balance after dividends was $62,742,860, but special appropriations for proposed expenditures on the Gary plant and for other purposes were made, calling for $50,000,000, this making the net carried to surplus account only $12,742,860. Another important event of the year in the Corporation’s history was the incorporation of the Universal Portland Cement Co., which was formed to take over the cement plants operated by the Illinois Steel Co., and to erect new plants for the manufacture of this profitable by-product. The production of cement had grown from 486,357 barrels in 1902 to 2,076,000 barrels in 1906. The Universal Company immediately started work on the erection of two new plants, one at Buffington, Indiana, within a few miles of the Gary plant, and the other at Universal, Pa., near Pittsburgh. The results of this enterprise have entirely justified the expectations of the Corporation’s management, and the manufacture of the by-product has increased until an output of 11,197,000 barrels was reached in 1913. But the most notable event of 1906 was the negotiation of a lease by the Corporation on the ore properties owned by the Great Northern and Northern Pacific Railway companies. This was commonly known as the Hill Lease. That the Corporation would eventually make some arrangement to secure control of the mining rights on the Hill ore properties had long been believed in the steel trade. It was pointed out by trade authorities that the big company did not have ore reserves commensurate with its immense output, and the obvious conclusion was that it would not fail to secure such reserves sooner or later. The vast properties in the Mesaba Range owned by the railroad dominated by James J. Hill constituted, it was claimed, the only commercially valuable supply of importance which had not yet been appropriated by one steel company or another, so the natural conclusion was that the Corporation must eventually attach to itself these supplies of ore. Negotiations leading up to the lease went on for several years before the matter was finally brought to a head in December, 1906. The lease, which was probably the most voluminous document of its kind ever written, gave the Corporation the right to mine the Hill ores until exhaustion, or, at the Corporation’s option, until January 1, 1915, the exercise of this option being contingent upon a two-year notice to be given before that date. The Corporation positively declined to enter into the lease unless it contained provision for cancellation, and it later exercised this right, the directors at the close of 1912 serving notice of their intention to abandon the lease in two years. Comprised in the Great Northern ore land were some of the richest and best iron deposits in the country. Of a total area of more than 65,000 acres owned or leased by the Hill interests, 39,296 acres with an estimated ore content of something like half a billion tons were included in the lease to the Great Western Mining Co., a Steel Corporation subsidiary and the nominal lessee. The volume of ore to be mined and the royalties to be paid were arranged on an ascending scale. In 1907 the Western company was to take out 750,000 tons of ore and this tonnage was to be increased by as much again every year the lease continued up to 1917, when the tonnage to be mined was fixed at 8,250,000 tons, at which figure it was to remain thenceforward until the contract expired by reason of ore exhaustion. Royalties on the ore mined were based on a price of eighty-five cents per ton of dried ore with a metallic content of 59 per cent. for the first year of the lease, this base price being increased by 3.4 cents a ton each year--i.e., to 88.4 cents in 1908, 91.8 cents in 1909, etc. To this royalty was to be added transportation charges of 80 cents a ton to the docks at Superior, Wis., the contract providing that all the ore was to be shipped via the Great Northern Railway. For each variation of 1 per cent. above or below the 59 per cent. metallic content, it was further stipulated, the base price was to be increased or diminished by 4.82 cents a ton. Critics of the Corporation have charged that the Hill lease was entered into with a view of giving the big company a practical monopoly of the ore reserves of the country. Those responsible for the deal have strongly asserted that their sole object was to ensure an adequate ore reserve for the future. The question resolves itself into one of motives and is therefore not susceptible of proof. But whatever were the motives of the Steel Corporation’s management the fact remains that, according to the opinions of the best-qualified experts outside the Corporation itself, the big company, at the time the lease was made, did not have a supply of ore such as its vast output demanded, and probably does not now have such a necessary supply although it has acquired large reserves in Cuba and elsewhere. Further, it is doubtful if, outside of the Hill holdings, a large enough reserve of commercially available ore is to be obtained in the United States. The claim that the royalties paid under the Hill lease were too high is supported by the undisputed fact that royalties paid on other ore deposits in the same territory at the time of the signing of the contract were much lower than those paid under the lease by the Corporation. Unusual conditions governed this transaction, however. The lessors were well aware of the Corporation’s need of ore and that they were probably the only ones in a position to fill this need. They were therefore able to drive a hard bargain. The price originally demanded by Mr. Hill and his associates, it is understood, was one dollar a ton and it took some years’ negotiations before a price which both parties to the matter would accept could be arrived at. What was the reason for the cancellation of the lease? It is generally thought that the directors of the Corporation were impelled to their decision by the report of Commissioner of Corporations Herbert Knox Smith, who conducted a searching investigation into the Corporation’s activities and severely criticized the lease, and by the fear that it would be made much of by the Federal Government in its suit for the dissolution of the “Steel Trust.” This suit, it is true, had not actually been filed when the lease was abandoned; but it was so imminent that the Corporation’s directors must have believed it was about to be instigated. And these considerations did have weight in bringing about the decision. But the more cogent reason was a purely business one--the lease had not proved as profitable as had been hoped. The iron content of the Hill ores had not measured up to expectations, the cost of concentrating the ore proved too high, and on the whole the deal had become rather a burden than otherwise to the lessee. Up to the end of 1906 the United States Steel Corporation had spent more than $200,000,000 in the acquisition of new properties, the construction of new plants and the extension of old. Its productive capacity had been increased enormously. Its plants were now in excellent shape, its organization in perfect working order. Prices were high and it had, at the close of the year, nearly 8,500,000 tons of business on its books. Its early difficulties were past and it seemed about to enter into the heyday of its prosperity.