Book Review of The Tycoons by Charles R. Morris

This Book Review of The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy by Charles R. Morris is brought to you from Garrett Bottlinger from the Titans of Investing.

Genre: Biography & History
Author: Charles R. Morris
Title: Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy (Buy the Book)

Prelude

The rise of the “Tycoons” is not exclusively a story of four individuals with boundless ambition, great intelligence, and a talent for “creative destruction” (save Pierpont Morgan); rather, it is the story of America in the post-Civil War years and the emergence of a new economy poised to rival its peers around the globe.

The prolonged American boom that persisted forty years after the Civil War was the greatest in history, at least until the late twentieth-century growth spurts in the “Tiger economies” of East Asia. Around the time of Lincoln’s assassination, the country was poised for a fundamental shift into modernity; from the explosion of banking, light manufacturing, and printing in New York to the Lake Erie port cities serving as collection points for the oil, coal, and iron industries of western Pennsylvania to large-scale mechanized farming experiments in Illinois. The accommodating, pro-development legislation passed prior to Lincoln’s death included the Homestead Act, which eventually helped settle ten percent of the entire land area of the continental U.S., and the Pacific Railway Act, a public land grant created to finance a railway line from the Missouri River to the Pacific Ocean. Lincoln would have been gratified, though not surprised, at the thought of an American superpower in the making.

Glorious Yankee Doodle

In the early 1800s, the Connecticut River Valley was the nineteenth century equivalent of today’s Silicon Valley—a region whose distinct “machine culture” drove innovation and inspired a new breed of entrepreneurs, the “machine geek,” hell-bent on innovation and a drive towards efficiency. Thomas Blanchard, akin to a modern Bill Gates, developed a solution to a general problem: how to machine any irregular shape at all, creating opportunities for machine– made products once produced exclusively by hand.

So why did many of these innovations occur in the Connecticut River valley? Just as in Silicon Valley, it was a semi-random consequence of basic predispositions and happy chance. It began with a large endowment of abundant natural resources, including unlimited power (from the river), direct water transport to New York harbor (rural roads were in horrid condition at the time), and convenient iron mines in Salisbury, Connecticut. In conjunction with these predisposing factors, mill profits from manufacturing in the first quarter of the 19th century created an ample supply of venture capital prospecting for opportunities in the region. Finally, there was the nearby Springfield Armory, the nerve center of the American military’s drive toward high-technology weapon making. Machining served as an enabling technology—like electricity in the early 20th century and information technology in the late 20th-early 21st century—that accelerated development across a very wide front.

The Valley’s influence reached far beyond metal fabrication. When British industrialists visited American steel plants, they were astonished—not just at the scale and speed but at the “very conspicuous absence of laborers”. These British sentiments paint a striking resemblance to comments from American automobile executives upon first visiting Japanese plants in the 1970s and 1980s. In 1860, the output of American factories was only a third of Great Britain’s; by the eve of World War, it was 2.3 times larger. American efficiency was continuing to improve; due largely to mechanization and improved work organizations. In conjunction with this, overall wages were rising, driven by the relative scarcity of labor, the country’s great natural resources, lack of resistance to innovation by workers, fewer barriers to organizing businesses, and the high national rate of literacy supported by a “cheap press.”

Another driver behind the American expansion versus Great Britain involved aggressive protectionism, especially in steel. From the late nineteenth century into the early 1900s, the United Kingdom’s decline was accelerated due to the lack of response by a British nation who steadfastly refused to deviate from its free-trade principles, despite the protectionist policies of their American counterparts. Certainly by the time of the formation of U.S. Steel, the Americans could easily undersell the British (the tariff had become irrelevant), but it is fair to assume this accelerated the process and contributed to the remarkable growth rate that America enjoyed.

Technology and innovation were leading to the emergence of a new demographic, the middle class, who were further driving the shift towards a mass consumer society. Upward mobility became attainable for almost any young person with energy and ambition. America was the only country at this time where “worker” was a job description rather than a badge of class. Products were being developed to satisfy this growing consumer base, making life simpler (safety razors, ice boxes) and more fun (bicycles, roller skates).

In America, the world’s most energetic people were paired with the boundless trove of natural resources. The drive for global economic dominance was fueled by the average citizen’s restless mobility, their lack of rootedness in place or class, the fevered striving, and the obsession with money.

America was developing a culture of invention, or at the very least improvement. Many technologies were actually stolen from British designs, yet greatly improved to make them faster and easier to operate. Driving all the countless innovations was an overall sense of opportunity, supported by a government and military that viewed advanced technology as a national priority. Armed on all fronts and poised for great opportunities in the new “American System,” the tycoons emerge to take center stage.

Carnegie

Andrew Carnegie, by all accounts, was the most irritating of tycoons. A five-foot-three man with what can best be described as a “Napoleon complex,” he was a tireless bundle of bouncing, gabbing energy, opinionated and obsequious, fawning and provocative, preternaturally quick in apprehension of anything that would advance his interests.

The son of Scottish immigrants, Carnegie’s rise is the canonical American rags-to-riches story. His mother dominated his childhood, imparting fierce class consciousness, a driving force behind his desire to achieve success. While he zipped through various jobs as a boy, he was relentless in self-improvement, a voracious reader, and constantly working to improve his accent and grammar.

He got his first big break when a railroad executive named Tom Scott took note of Carnegie’s abilities during his days as a telegraph operator. When Scott decided to open his own telegraph station to handle his operation’s workload, he took on young “Andy” as his new telegraph operator. This constant flow of messages allowed Carnegie to submerse himself in the railroad business. Carnegie demonstrated his abilities when, upon receipt of a message regarding a train accident, was able to issue a flood of orders under Scott’s signature. By the time Scott was finally reached, all operations were running smoothly.

Carnegie quickly advanced within the Pennsylvania Railroad. The qualities demonstrated by him during his time envelop his overall persona and enduring qualities: focusing on an objective and cutting brutally through any conventions, competitors, or ordinary people standing in the way. He took to such actions as burning stalled cars to clear lines, which within a few years became an industry-wide standard for clearing stalled trains.

By 1867, he had recapitalized previously failed investments, reorganized two iron companies, organized multiple bridge companies, and acquired and merged several large telegraph businesses. In all of these deals, Carnegie entered with a small stake, and then came in with both feet as he saw an opportunity to scale up—reorganizing, reenergizing, and recapitalizing—almost always emerging as the lead shareholder. Shortly thereafter, one of his closest allies earned him a board seat for Union Pacific after Carnegie managed to demonstrate superior abilities during one of the railroad’s refinancings. He had come full circle; from telegraph boy to director in only a short number of years. It was short lived, however. After arranging a quick-profit sale of his UP holdings, his resignation was quickly requested. It made little difference to Andrew; he had found his calling after visiting two giant steel works. The industrial scale made his heart leap and his life’s plan was suddenly clear.

Steel was Carnegie’s first full-time commitment to a business since his early days at the Pennsylvania, and an ideal platform for displaying his talents as a chief executive. He took a hard-nosed line with regard to cartels during his time as an executive. One such episode involves the origins of his Edgar Thompson Works (the largest and most efficient plant in the industry upon completion)—as the newest plant in the industry, the market-allocation was set to award ET the smallest share. Carnegie then demanded the same share as the Cambria, at 19%, leaping up and proclaiming, “Otherwise I shall withdraw from [the pool] and undersell you all in the market—and make good money doing it.” He was awarded the same proportion as his more established competitors.

The company’s competitive advantage, it appears, was mostly Carnegie—his relentless pressure, his hounding to reduce costs, his instinct to steal any deal to keep his plants full, his insistence on always plowing back earnings into ever-bigger plants, the latest equipment, the best technologies. While other companies went through cycles of rise and decline as founders became comfortable, Carnegie never let up.

For all his successes, Carnegie was a man with the drive to dominate—at all costs. Often pointlessly cruel to his associates, he manipulated his underlings, harping on their failures and taking credit for their successes. Also somewhat of a paradigm, Carnegie projected a persona of a pro-labor businessman, while frequently cutting employee pay to the lowest levels in the industry and engaging in brutal labor-management conflicts (including the Homestead Strike, in which as many as thirty-five people were killed).

He became one of Pierpont Morgan’s father’s favorite clients, but clashed with Pierpont throughout his career, most notably during his St. Louis Bridge endeavor (he came within hours of missing a Morgan financing contingency in the building schedule that may have ended his foray into the steel industry). Ultimately, he bested Morgan in the long run (selling his steel business at a fairly high premium), as he did with almost everyone else. Likely the only other tycoon who fully matched up with him was the man he liked to call “Reckafellows.”

Rockefeller

Shaped by his father’s unscrupulous behavior, Rockefeller was the most sober and industrious of young men. By the time he was twenty, he was already recognized as one of Cleveland’s outstanding young merchants—honest, reliable, and with a shrewd sense of the commodity markets. When the idea of oil profits caused Rockefeller to partner with Maurice Clark to open a refinery, he dove into the experience. Fortunately for both men, Clark had enough sense to recognize that as young as Rockefeller was, he should make the business decisions for the new organization. Rockefeller’s extraordinary ability to combine headlong expansion with fanatical attention to efficiency and cost led Excelsior to quickly become one of the largest and most consistently profitable refineries in the country.

Unlike many of his predecessors, Rockefeller had an appetite for debt to fuel the company’s continued expansion. As relationships soured with Clark over Rockefeller’s propensity to take on debt and risk, one of the other partners sided with John, who promptly outbid Clark for control of the organization. In 1865, John D. Rockefeller, a twenty-five-year old, had gained control of one the largest oil refineries in the country. The purchase was a steal. Rockefeller paid, in effect, $100,000 for an organization that brought in $1.2 million of revenue one year later.

As a man more than willing to play rough, he was surprisingly free of vindictiveness. When taking over another person’s business, he generally paid a fair price. But when a target remained obdurate, rejecting all reasonable offers, Rockefeller would unleash total warfare on every front—price, supplies, access to transportation, land-use permits—whatever created pain. When the target capitulated (which they always did), the fair price bid would still be available, often coupled with an offer to join the Rockefeller team.

As John was developing his Cleveland refineries, he found inherent opportunities through the Pennsylvania’s short-sighted policies designed to milk its Pittsburgh monopoly, leading to the emergence of Cleveland as a natural gateway for both Gould’s and Vanderbilt’s westward routes. Rockefeller soon began to expand Cleveland’s refining capacity, whose economics were spectacular, even compared to drilling. Typically, an investor could recover most of the cash investment with a single production run.

While Standard Oil (as Rockefeller’s refineries became known in 1870) was not a significant innovator in process sequences, heating cycles, or the use of chemicals to improve product performance, it was an early adopter of proven technologies and constantly on the prowl for talent (i.e. acquisition of Pratt’s cutting-edge refinery in 1874 and the recruitment of its distillation specialist, Henry Rogers).

Rockefeller pursued tightly integrated marketing and distribution operations from the earliest days, rapidly moving from contractual relationships to outright purchase and merger. His network acquisitions included pipeline-based crude gathering facilities, tank storage farms, tank- car-loading facilities, domestic and overseas wholesale shipping, and distribution operations, and coastal assemblage and ship loading facilities. Standard Oil was the only company positioned to balance refinery output, transportation, and distribution while improving ancillary revenues by selling more by-products and squeezing margins at every stage. The accumulation of minor efficiencies at so many points gradually amassed into a crushing profitability advantage. The last piece of the mosaic was the superior discounts from railroads and other shippers, due to volume- based rebates and other considerations, including free use of Standard storage tanks, freight smoothing agreements, and the Standard’s assumption of fire risk (very important in the early days of oil).

Standard soon coupled with a new corporation, the South Improvement Company. The SIC established a cartel with high uniform freight rates, helping the Standard achieve further increased profits until the dissolution of the cartel. By this point Rockefeller had essentially consolidated the entire Cleveland refinery industry, now controlling more than a fourth of the country’s refining capacity. Over the next eighteen months, most of the newly acquired businesses were sold for scrap, as a total of twenty-four refineries were consolidated in six large, state of the art facilities.

At its peak, Standard Oil may have been the only big business to ever control its entire value chain—from production and processing of raw materials down through distribution to wholesalers and in many areas even to retailers. The Standard controlled 90-95% of the refiners in the country. Large cartels that formed against the Standard were still unable to squeeze out the industry giant. But behind this behemoth was a man with great vision: John Rockefeller. Rockefeller did not need to cheat to win world oil dominance; he was simply better at the business than anyone else: both faster in apprehension and more deadly in execution than any of his contemporaries.

Rockefeller had the rarest of talents for adjusting to each new stage of the Standard’s growth. He seized the initial opportunity in oil in the 1860s with vision and energy, always seeming to have a future plan and relentless drive. Despite his abilities as a fantastic delegator, he always remained in close touch with operations, maintaining an organization that was uniquely both decentralized and unified all at once. A tycoon among tycoons, John Rockefeller’s brilliance and sheer tenacity eclipsed perhaps all other industrial giants of the day. But another tycoon was a genius in his own right, and his name was Jay Gould.

Gould

For all the indignation held against the Robber Barons of the ages, none had so dark a reputation as Jay Gould. He was the first master of the “bear raid,” attacking the stock of his own companies and reaping a profit from the destruction of fellow shareholders. His career coincided with the great epoch of American railroads—the first large, investor-financed, publicly traded corporations. But for the plentiful, sinister writings about Gould, he was perhaps the greatest embodiment of the Robber Baron’s propensity for “creative destruction.” He is credited with such feats as the creation of the national railroad map that prevails to this day.

His burning ambition was noticed at the age of twenty by an entrepreneur named Zadock Pratt who asked him to become a partner and manager of a new tannery. Soon, Gould’s relationship soured with Pratt, leading to a violent upheaval at the tannery, and destroying his reputation in the leather trade. However, Gould had an unusual ability to recover again and again from prior failures, as he would soon prove.

Failure although it was, the tannery episode highlighted the characteristics Gould would display his entire career: the ability to tackle any endeavor, master any field, and work prodigiously. Gould was a man with an impulse to expand in every direction at once, often beyond all reason and to the brink of destruction—until another opportunity presented itself, affording him the chance to capitalize on yet another endeavor.

Shortly after the tannery episode, he was introduced to railroading. When the market crashed following the onset of the war, a small railroad’s bonds had fallen to ten cents on the dollar, creating an opportunity for Gould to gain effective control of the line. Merging with another line shortly thereafter, the bonds were once again trading at par, leading to a valuable position.

Gould, still virtually unknown on Wall Street, was just beginning his ascent. In the next few years, the man in his early thirties managed to extract one of the country’s largest railroads, the Erie, from Cornelius Vanderbilt, who was at that time the richest and arguably the most powerful man in the country. He emerged victorious from the “Erie Wars,” using strategies he would use time and again—exploiting immature financial markets and then violently disrupting the comfortable business patterns of his competitors.

Gould’s ability to best competitors like Vanderbilt was displayed during one of the price wars on cattle shipping. Vanderbilt slashed rates to a penny a head, feeling victorious as his trains filled up with steers, until he discovered that Gould had cornered the cattle market and was making a fortune from Vanderbilt’s shipping losses.

The battle for control of the Erie began when Vanderbilt started purchasing stock in the open market, at the same time as Gould quietly created $10 million in convertible bonds which he deposited in his brokerage account. As Vanderbilt bought more shares, he would convert his bonds and leak the new shares into the market. The more stock Vanderbilt bought, the more stock seemed to be available. Cornelius began to feel the weight of his margin calls as the Erie stock price went into free fall, which eventually led to Gould’s ability to capitalize on his competitor’s weakness and take control of the railroad. For the next several years, the Erie would serve as Gould’s conduit to the capital markets.

Shortly after gaining control, Gould noted that many railroads were divesting their ownership in western connections (at a time the country was growing westward). He decided to go after four western legs simultaneously. He almost pulled off the ruse, but was thwarted by Pennsylvania’s home-state legislature, who tended to practice “state mercantilism,” outlawing Gould’s takeovers.

The episode that forever fixed Gould as the evil genius of Wall Street involved the 1869 Fisk-Gould “Gold Corner.” It demonstrates not only Gould’s self-destructive streak but also the fragility of America’s postwar financial markets and the openness of the corruption. He initially targeted the gold market as an opportunity to force up the price of gold to improve the Erie’s freight revenues. Because gold was the legal tender for world grain markets, he was hoping a higher gold price would result in greenback-priced grain looking cheaper to overseas buyers, causing exports to rise.

Because everyone knew Gould was the one pushing up the price, bears began shorting the gold market. With $20 million in available gold and $200 million in short positions (most owed to Gould and Fisk, who were lending out all the gold they bought), the price kept rising as bears got into a deeper hole. Once Gould received word the White House was not supportive of his gold position, he deserted his partner Fisk and began masking his larger gold sales with smaller purchases of gold to let him run off his holdings. In the end, although Gould didn’t collect on his trading windfall, the episode destroyed his reputation and delivered a knockout blow to his railroad strategy. The resulting failure of a brokerage ally holding many of Vanderbilt’s western connections gave Cornelius the chance to purchase these shares now available on the open market. Two years later, Gould was ousted from the Erie Railroad’s leadership. He was down, but not out.

Incredibly, two years later, Gould emerged in control of one of the nation’s greatest railroads, the Union Pacific. When a close ally became a UP insider, he turned Gould onto the railroad as an investment opportunity. Gould instructed his brokers to acquire anything available below 30. When his friend died in 1873, his brokers liquidated his holdings, causing a price drop—an opportunity Jay Gould seized, quickly finding himself in a controlling position.

In less than a year, Gould had revitalized the fumbling railroad—clearing up UP’s debt problems, bringing Pacific Mail firmly under UP control, cutting costs, and strengthening prices across the board. After four years of relentless assault on the industry, Gould emerged in control of virtually the whole center of the country’s railroad system. He also proved his diverse management abilities after gaining control of Manhattan’s rapid transportation system, several newspapers, and Western Union, the nation’s largest telegraph company. He was by all accounts, a great manager.

Unlike Morgan, he preferred to stay actively involved in the strategic management of the roads, often putting more money into the companies than he took out. For all of Jay Gould’s accomplishments, even he would likely admit he had two overall failures: he was never able to fully integrate his empire into a single consolidated entity, and his genius as a market manipulator undermined his achievements and tarnished his reputation. None stood against his ideologies more so than the pre-eminent financier of the day, Pierpont Morgan.

Morgan

Pierpont Morgan, unlike the other three tycoons, did not emerge from humble beginnings to achieve success. Rather Morgan came from a long line of bankers, beginning with his grandfather, who founded Aetna Insurance Company. More recently, his father, Junius Morgan, gained sole control over Peabody & Co., which was transformed into J.S. Morgan & Co., an already strong merchant bank that specialized in short-term trade finance.

Pierpont shared with his father a particular flair for numbers, but he did not share his appetite for risk. This allowed him to expand his father’s business into a banking empire, soon eclipsing banking giants including the Rothschilds. One early example of Pierpont’s propensity for risk involved an opportunity by Pierpont to take a large position in coffee beans when overseas. Pierpont, upon receipt of his father’s outraged telegram, calmly replied that the position had been sold out, and he was remitting a substantial profit for the firm.

Morgan was no stranger to innovation either. Traditional valuation practices focused primarily on book value: a business was worth no more than its actual investment in plant, inventory, and other hard assets plus undistributed profits, less liabilities and depreciation. These normal valuation deals were being turned upside down by Morgan’s highly capitalized deals in steel and other industries. He was among the first generation of a new breed of bankers whose clients were primarily private corporations instead of governments.

Of the four tycoons, he was the most fundamentally opposed to the storm of “creative destruction.” Rather, his drive was toward order and control, a man who detested “bitter, destructive competition” that he viewed as ruinous. He deplored Gould’s methods most of all the tycoons, but maintained a certain level of hypocrisy by continuing to seek his banking business despite his frequent public comments extoling the virtues of “cooperation over competition.”

Throughout the 1890s, Morgan was primarily a railroad banker, becoming the dominant figure in restructuring railroad finances after the crash of 1893-94. One such restructuring involved the Reading Railroad, which was deep in “floating,” or unsecured debt. Roads like the Reading were confirmation of Morgan’s unsettled conviction that reckless expansion was the root of all railroads’ troubles. Intellectually, he understood that disruptive price and technology competitions expanded markets and expedited growth, but given a choice, he came down on the side of cartels and stability every time.

Another of Morgan’s roles, de facto central banker to the United States, came during two separate instances of American institutional failure—the gold panic of 1893-95 and the stock market panic of 1907. In both cases, he was able to assume the role we currently expect of a strong Federal Reserve chairman, and did so without a shred of legal or institutional authority.

The gold panic was caused by political issues leading to foreigners dumping gold-based railroad bonds. The plummeting of U.S. gold reserves, which could easily have been resolved by a central bank with a few days of cables with the Bank of England, led to Morgan quietly proposing that he arrange a $100 million gold loan. After initially refusing the offer, the administration returned to request assistance a year later after failing to contain the crisis. In effect, Morgan promised to manage the greenback-sterling exchange rate, which required entering foreign exchange markets to buy greenbacks or to sell sterling anytime the U.S. dollar wobbled—an extremely risky move for a private partnership with no call on public resources. Thanks to the preeminent financier of the day, the crisis was contained.

The severe 1907 Wall Street crash came when Morgan was seventy and semiretired. Despite his age, Morgan put in twelve to fifteen-hour days, brusquely summoning the trust company presidents, the brokerage chairmen, the clearing bank members, and taking decisive measures to shore up that day’s weakest links. It was an extraordinary demonstration of sheer personal authority. When the crisis passed, and news of what Morgan had accomplished sunk in, lawmakers and citizens began realizing this instability was detrimental to the country’s overall welfare. The 1907 crisis was an important factor in building a legislative consensus for the creation of the Federal Reserve System in 1913.

In conjunction with his position as an informal central banker, Morgan can largely be credited for his role in the “Great Merger Movement” between 1895 and 1904. An estimated 1,800 companies disappeared during these consolidations, fueled by the Morgan gospel of replacing “ruinous competition” with “cooperation.”

The climax of this man’s vision and the drive was the formation of U.S. Steel. It began when Morgan was in attendance at a speech Charles Schwab was giving on the blueprint for a future steel industry: no wasteful competition or duplication of effort, just pure, frictionless efficiency. It coincided perfectly with Morgan’s “cooperation” philosophy he had been advocating throughout his career. Morgan allowed Schwab to broker a deal with Carnegie for the purchase of Carnegie Steel for $480 million. Morgan and Schwab then set out to acquire Rockefeller’s Great Lakes Ore facilities, securing its ore and ore shipping capabilities. In 1904, at a market capitalization of $1.4 billion (the largest company in history), U.S. Steel was born.

Armed with powerful intellect, great financial oversight, and enormous personal forcefulness, he enjoyed a growing following on Wall Street, already praised by Dun’s credit service for conducting a “first rate” business. As the last of the 18th & 19th century merchant bankers, he did what his father and other bankers had always done, but in broader strokes, on a bigger canvas. He was the “Jupiter” of the markets—he held a massive presence, was glowingly articulate, and conveyed a barely-restrained explosiveness.

Legacy of the Tycoons

It was no accident that these four men had emerged in the face of post-Civil War society and economic boom. The sheer size of America and its already impressive industrial base made it ripe for hyper-development and the emergence of a middle class. The tycoons embodied the innovative personality inherent in the new “American System.” Gould could personally be credited with forever changing the nature of American railroad competition. Rockefeller, despite being a frequent target among muckrakers such as Ida Tarbell (History of Standard Oil), was perhaps the largest driving force behind the new American style of efficiency, more so than any business leader before or after him. Carnegie laid the foundation for a steel industry that would thrive as the nation continued to expand in years to come. Morgan served as the “Jupiter” of the markets at a time when no Federal Reserve existed to provide stability to a bustling and often volatile economic system. Robber Barons or philanthropists, competitive mercenaries or fathers of a new age—whatever sentiment or emotional response these men solicit, few can argue that they shaped the growth and success of a nation that emerged as a world economic leader.

HookedtoBooks.com would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and that we can find treasure troves of the good stuff in books. We hope this audience will also express their thanks to the Titans if the book review brought wisdom into their lives.

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