Freeman

ARTICLE

Charles Schwab and the Steel Industry

SEPTEMBER 01, 1988 by BURTON FOLSOM

Burt Folsom is Associate Professor of History at Murray State University in Kentucky. This article is adapted from his recent book, Entrepreneurs vs. The State (available from FEE @ $14.00 postpaid).

When asked for the secret of his success in the steel industry, Charles Schwab (1862-1939) always talked about making the most with what you have, using praise, not criticism, giving liberal bonuses for work well done, and “appeal[ing] to the American spirit of conquest in my men, the spirit of doing things better than anyone has ever done them before.” He liked to tell this story about how he handled an unproductive steel mill:

I had a mill manager who was finely educated, thoroughly capable and master of every detail of the business. But he seemed unable to inspire his men to do their best.

“How is it that a man as able as you,” I asked him one day, “cannot make this mill turn out what it should?”

“I don’t know,” he replied. “I have coaxed the men; I have pushed them, I have sworn at them. I have done everything in my power. Yet they will not produce.”

It was near the end of the day; in a few minutes the night force would come on duty. I turned to a workman who was standing beside one of the red-mouthed furnaces and asked him for a piece of chalk.

“How many heats has your shift made today?” I queried.

“Six,” he replied.

I chalked a big “6” on the floor, and then passed along without another word. When the night shift came in they saw the “6” and asked about it.

“The big boss was in here today,” said the day men. “He asked us how many heats we had made, and we told him six. He chalked it down.”

The next morning I passed through the same mill. I saw that the “6” had been rubbed out and a big “7” written instead. The night shift had announced itself. That night I went back. The “7” had been erased, and a “10” swaggered in its place. The day force recognized no superiors. Thus a fine competition was started, and it went on until this mill, formerly the poorest producer, was turning out more than any other mill in the plant. (Charles M. Schwab, Succeeding with What You Have [New York: Century Co., 1917], pp. 39-41)

Schwab showed the ability to find solutions to problems even as a lad growing up in Loretto, Pennsylvania. According to one of his teachers, “Charlie was a boy who never said, ‘I don’t know.’ He went on the principle of pretend that you know and if you don’t, find out mighty quick.” Schwab knew early that he would have to live by his wits; his parents and immigrant grandparents weaved and traded wool products, jobs which put food on the table but not much money in the bank. Young Charlie, therefore, started work early in life. In one job he was a “singing cabby”: he drove passengers from nearby Cresson to Loretto and entertained them with ballads along the way. One of his passengers, impressed with the gregarious youth, gave him a travel book. Schwab later said, “It opened my eyes to the glories of the outside world, and stimulated my imagination tremendously.” Soon, Loretto, Pennsylvania, population 300, would be too small to contain the ambitious Schwab. With his parents’ blessing, he left home at age 17 to clerk in a general store in Braddock, a suburb of Pittsburgh.

Braddock was a steel town, varied in its cultural and urban life. Working in the store, young Charlie often pleased customers with his good looks, wit, and charm; one man whom he impressed was William “Captain Bill” Jones, the mill superintendent at Braddock for Carnegie Steel. Jones offered Schwab a job as a stake driver for the engineering corps who designed plans for building furnaces. Schwab accepted, proved himself capable, and soon became a draftsman. Here, he worked overtime to master his craft; within six months he became Jones’ right-hand man at the mill. As Jones’ messenger boy, Schwab came into contact with the mill owner, the Scottish immigrant Andrew Carnegie. Carnegie took a special liking to Schwab, who wisely spent some of his off hours playing Scottish ballads on Carnegie’s piano.

Schwab worked hard to please Jones and Carnegie. Doing so allowed him to advance in the Carnegie organization. Fortunately for Schwab, Carnegie did not recruit his leaders on the basis of wealth or family standing. He used a merit system; he wanted people who could make the best steel possible at the lowest price. To succeed under Carnegie’s system, Schwab would have to master the methods of steel production.

The Carnegie System

Carnegie stressed cutting costs: in fact his motto was “Watch the costs and the profits will take care of themselves.” This meant hard work in innovating, accounting, and managing. Purchases, for example, were made in bulk to achieve economies of scale. Also, Carnegie strived for vertical integration, the control of his steel business from the buying of raw materials to the marketing of finished steel.

At the heart of Carnegie’s system were bonuses and partnerships for those who excelled. Strong incentives were given employees who could figure out how to save on iron ore, coke, and limestone; or how to produce a harder, cheaper steel; or how to capture new markets for steel. Carnegie explained that success “flows from having interested exceptional men in our service; thus only can we develop ability and hold it in our service.” In fact, Carnegie said, “Every year should be marked by the promotion of one or more of our young men.”

Captain Jones had risen to mill superintendent this way. Among other things he had invented the Jones mixer, a device that cut costs in the transferring of steel from the blast furnace to the Bessemer converter. For his inventions and know-how, Carnegie paid him the highest salary in the business, $25,000—the same salary as that of the President of the United States.

Schwab rose through the ranks just as Jones did. He completed small tasks and was given larger ones. At age 23, he designed and built a bridge over the Baltimore and Ohio Railroad tracks; he saved time and money doing the job and received as a bonus ten $20 gold pieces from Carnegie himself. Other assignments followed: he installed meters in the factories and reduced waste of natural gas; he redesigned a rail-finishing department and saved 10 cents per ton of steel; he helped in calming down workers during a violent strike in the Homestead plant. When Captain Jones died in a blast furnace explosion in 1889, Schwab was the logical choice for superintendent at Braddock.

Gregarious and competent, Schwab became Carnegie’s problem solver. For example, the workers at Braddock were turning out “seconds,” or substandard rails. Schwab’s solution: give $20 cash bonuses to those steel-makers producing the fewest seconds. The quality of the rails shot up and the resulting increase in profits more than paid the bonuses given. No wonder that Carnegie soon gave Schwab a small partnership in Carnegie Steel, with the promise of more to come if he could keep producing. Carnegie even wrote one of his senior partners, Henry Clay Frick, that Schwab “gives every promise of being the man we have long desired” eventually to run the business.

Schwab idolized Carnegie and found him amazing to watch. Carnegie’s efficiency and his thorough knowledge of the industry made him a terror among fellow steel producers. He spied on them, used their annual reports against them, and even wrote them to secure information on costs of production. Meanwhile, Carnegie Steel was a closed corporation; he told outsiders nothing of his costs or his future plans. Carnegie disdained “pools,” secret agreements among competitors to divide up the market and keep prices high. Pools were for the weak; Carnegie wanted to “scoop the market [and] run the mills full.”

Not that Carnegie didn’t use friendships and other means to help him. In bidding on a large Union Pacific contract for rails, he may have outmaneuvered the veteran Scranton family. Joseph Scranton was a director of the Union Pacific as well as president of the Lackawanna Iron and Coal Company. But Carnegie had done a favor for Sidney Dillon, the president of the Union Pacific, and Dillon agreed to give Carnegie the contract if he would match the lowest bid.

Carnegie vs. the Scrantons

In the case of the Scrantons, Carnegie showed no mercy. When Carnegie went into the steel business in 1872, he was told that he could never compete against the Lackawanna Company; Joseph Scranton was a founding father of American rail-making; he had a generation of experience making rails. But that year Joseph Scranton died, and his sons William and Walter would be the ones to challenge Carnegie: first with the Lackawanna Company, then with their Scranton Steel Company. Carnegie and the Scrantons joined the Bessemer Steel Association in 1875, but their approaches were different: the Scrantons wanted a pool, but Carnegie told them and others that unless he got the largest share he would “withdraw from it and undersell you all in the market—and make good money doing it.”

The Scrantons and the others were bluffed by Carnegie and gave him his way. Carnegie then studied the Scrantons and learned their strengths and weaknesses. He discovered that they (and others) were discarding the thin steel shavings, called “scale,” that fell on the floor when the steel passed through the rollers. When he learned this, he regularly sent a man to Scranton to cart away tons of the Scrantons’ scale, almost free of charge, and brought it to Pittsburgh to use in making rails for Carnegie Steel.

As Carnegie moved to the top of the American steel business, Schwab watched, learned, and proved himself time and again. In 1897, the 35-year-old Schwab became president of Carnegie Steel and the two men ran the company together. Business was never better. Schwab put in 16 new furnaces at the Homestead plant, and costs per ton of finished steel fell 34 per cent in one year. To promote espirit de corps, Schwab held Saturday meetings with all of his superintendents to work out problems. Meanwhile, the results of large-scale production took hold: the cost of making rails fell from $28 to $11.50 per ton between 1880 and 1900, but the profits from the larger volume of business went from $2 million in 1888 to $4 million in 1894, to $40 million in 1900. Some people wondered if Carnegie Steel might soon capture the steel trade of the entire world.

Such speculating was premature. The next year, at age 65, Carnegie retired and, with Schwab as his emissary, sold Carnegie Steel to J. P. Morgan for $480 million. Morgan then combined Carnegie Steel with other companies to create U.S. Steel, the first billion-dollar company in American history. The choice for president of the company: Charles Schwab.

Reporters and critics condemned “The Steel Trust,” as they called U.S. Steel, for its size and its potential to monopolize. Who would be able to compete, they asked, with such a large vertically integrated company? At his disposal, Schwab would have 213 steel mills and transportation companies, 41 iron ore mines, and 57,000 acres of coal land—enough, critics charged, to dwarf competitors and keep prices high.

Schwab discovered, however, that he would not be able to use the Carnegie system at U.S. Steel. In fact, he would not have authority to run the company at all. Morgan and his friend Elbert Gary had organized U.S. Steel so that an executive committee, headed by Gary, and the board of directors would set the policies of the company; Schwab, as president, would carry them out. Morgan and Gary were interested in business stability, not in innovating or in cutting the price of steel. For example, when Schwab wanted to secure more ore land, Garysaid no. He also opposed price-cutting, aggressive marketing, giving bonuses, and adopting new technology. Schwab later said, “Gary, who had no real knowledge of the steel business, forever opposed me on some of the methods and principles that I had seen worked out with Carnegie—methods that had made the Carnegie Company the most successful in the world.”

Personal Problems

Schwab’s personal life, more than disputes over policy, seems to have led to his downfall at U.S. Steel. He showed he had the values of a dissipater as well as those of an entrepreneur. When Carnegie was in control, Schwab consciously restrained his extravagant tastes; Carnegie deplored living beyond one’s income, gambling, and adultery. But out from under Carnegie’s grip, Schwab engaged in all three and almost mined his marriage and his career. In New York City, Schwab built “Riverside,” a gargantuan mansion, which consumed one whole block of the city and $7 million of his cash. He also gambled at Monte Carlo, which made bad newspaper copy and cost him credibility. Finally, he had an affair with a nurse, which resulted in a child. Though Schwab hid this from the press, he could not do so from his wife, Rana. The strain of his adulterous behavior, combined with the pressure of Monte Carlo, the expense of Riverside, and the barbs from Elbert Gary wrecked Schwab’s health. He went to Europe to recover and, in 1904, resigned as president of U.S. Steel.

Schwab, the man who said, “I cannot fail,” seemed to have failed. He was depressed for months. Even Carnegie repudiated Schwab and this added to the pain. During his troubles he had insomnia, he lost weight, his arms and legs were regularly numb, and sometimes he fainted. His wife forgave him for his adultery and this no doubt eased the strain; but she was still not happy because she wanted a child of her own and never had one. She didn’t covet the extravagant life, so dear to her husband, and she spent many lonely days at Riverside.

Schwab was out at U.S. Steel, but he already had the makings for a comeback. When he was president of U.S. Steel, Schwab had bought Bethlehem Steel as a private investment. He was criticized for this, especially when he merged Bethlehem Steel with some unsound companies into an unprofitable shipbuilding trust. This merger eventually collapsed; but when Schwab stepped down at U.S. Steel, he still had Bethlehem Steel as his own property. The demotion from being president of a company worth over one billion dollars, to being president of one worth less than nine million dollars would have embarrassed some men, but not Schwab. He would have full control in running the company and would succeed or fail on his own abilities.

Before Schwab took over Bethlehem Steel, its future had not looked promising. It had been founded in 1857 and soon produced rails for the Lehigh Valley Railroad. This was more than coincidence because entrepreneur Asa Packer, who had built the Lehigh Valley Railroad, held a large interest in what was then Bethlehem Iron. Packer, a Connecticut Yankee, had the vision and ability to promote both of these investments and make them profitable. His rise from carpenter to railroad tycoon had made him a legend in Pennsylvania; he was worth $17 million by the late 1870s. When he died in 1879, his sons, sons-in-law, and nephews took over his investments, but did not have the success that Packer did. The Lehigh Valley Railroad floundered and went into receivership in the Panic of 1893. Bethlehem Iron almost shared the same fate.

Led by Philadelphians and the Packer group, Bethlehem Iron became very conservative after Packer’s death. The younger leaders single-mindedly produced rails, even though Carnegie was doing it cheaper, and they had the expense of importing most of their iron ore from Cuba. They escaped a price squeeze in 1885 when, reluctantly, they shifted from making rafts to producing military ordnance, which commanded a higher price per ton than rails. Such an imaginative strategy, as one might expect, did not originate within the Packer group; in fact, they resisted it until declining profits on rails presented them with no alternative.

From Rails to Armor Plate

The wise, if belated, switch from rails to gun-forgings and armor plate led to profits because Bethlehem Iron was the only bidder on its first government contract for ordnance in 1887. Other contracts were forthcoming and Bethlehem Iron “established a reputation for quality and reliability,” if not for aggressiveness and efficiency. Regarding the last, its operations were so inefficient that the company in 1898 hired Frederick W. Taylor, master of scientific management, to suggest ways of improving worker productivity. Yet the Packer group soon became hostile to Taylor’s cost-cutting ideas. Of one suggestion to reduce the number of workers handling raw materials, Taylor observed that the owners “did not wish me, as they said, to depopulate South Bethlehem.” He further commented, “They owned all the houses in South Bethlehem and the company stores and when they saw we [Taylor and his assistants] were cutting the labor force down to about one-fourth, they did not want it.” They also rejected Taylor’s suggestions to standardize job functions and give raises to key personnel.

Surviving, then, on government contracts, Bethlehem Iron stumbled into the twentieth century—a profitable operation in spite of itself. In the midst of this conservatism, Schwab came to Bethlehem in 1904 and boldly announced that he would “make the Bethlehem plant the greatest armor plate and gun factory in the world.” Taking the helm, Schwab “backed Bethlehem with every dollar I could borrow.” This backing included buying new branch plants and closing unprofitable ones, getting new contracts by selling aggressively, and reorganizing the company as Bethlehem Steel. Planning for the future, Schwab bought large tracts of land for the company east of South Bethlehem. He also bought or leased more ore land and mechanized the company’s Cuban iron fields to spur production there.

Schwab’s entrepreneurship clashed with the Packer group’s cautiousness right from the start. As one historian said, “Many of the veteran Bethlehem executives preferred the old, pre-Taylor and pre-Schwab way.” Soon after arriving in South Bethlehem, Schwab ousted the inbred Packer group from authority. In the new president’s remarkable words, “I selected 15 young men right out of the mill and made them my partners.” Two of these “partners” were Eugene Grace, the son of a sea captain, and Archibald Johnston, a local Moravian. They later became presidents of Bethlehem Steel.

After reorganization, Schwab wanted to diversify his company and challenge U.S. Steel. To do this, he began making rails and moving Bethlehem Steel away from its dependence on government contracts. Schwab adopted open-hearth technology because it produced better rails than the Bessemer system did. As historian Robert Hessen notes:


U.S. Steel, the nation’s largest rail producer, did not follow Schwab’s lead; it would have had to replace its Bessemer facilities with open hearth equipment. Being a late starter, Bethlehem enjoyed a clear advantage: with no heavy investment in obsolete equipment to protect, it could adopt the newest and most efficient technological processes. (Steel Titan: The Life of Charles M. Schwab [Oxford University Press, 1975], p. 169).

Schwab’s reorganization of the Cuban ore mines also improved Bethlehem’s competitive position at the expense of U.S. Steel.

Cuban ore was richer in iron and lower in phosphorus than was the Mesabi range ore used by U.S. Steel. It also had another advantage: it contained large amounts of nickel, so that Bethlehem could produce nickel steel at no extra cost. For a ton of iron Bethlehem’s cost was $4.31; U.S. Steel’s was $7.10. (Steel Titan: The Life of Charles M. Schwab, p. 171)

Now that Schwab was running an efficient, diversified company he turned his attention to cutting costs. He reasoned that employees would work harder if they knew it would result directly in a raise. Therefore, he set up a bonus system for productive laborers, foremen, and managers throughout the company. As Schwab described it, “Do so much and you get so much; do more and you get more—that is the essence of the system.” At U.S. Steel, by contrast, Gary tied bonuses to the overall profitability of the company, not to individual performance. Under that system, Schwab noted, a worker could toil hard and creatively, but receive no reward.

Improvements in Structural Steel

Schwab’s biggest move at Bethlehem was his challenge to U.S. Steel in the making of structural steel. Here he focused on an innovation in making the steel beams that went into bridges and skyscrapers. Schwab had been listening to Edward Grey, who had the idea of making steel beams directly from an ingot, as a single section, instead of riveting smaller beams together. Grey claimed that his invention provided “the greatest possible strength with the least dead weight and at the lowest cost.”

The other steelmakers rejected Grey’s theory; but Schwab was eager to try it even though it would cost $5 million to design the plant, build the mill, and pay Grey’s royalties. The problem was that the experts were so skeptical that Schwab had trouble raising money. In fact he almost backed out, but then jumped back in with the statement: “If we are going bust, we will go bust big.” He staked his own money, and that of his company, on the Grey beam, but still he needed more. So Schwab buttonholed wealthy investors for large personal loans and then, through remarkable salesmanship, persuaded his major suppliers, the Lehigh Valley and the Reading Railroads, to give him credit on deliveries of the new steel. Schwab then aggressively recruited big contracts for the “Bethlehem beam”: the Chase National Bank and the Metropolitan Life Insurance Company in New York were among them. The experiment worked. This cheaper and more durable beam quickly became Schwab’s greatest innovation and he captured a large share of the structural steel market from U.S. Steel.

Schwab’s actions had consequences for the American steel industry. From 1905 to 1920, Bethlehem Steel’s labor force doubled every five years. By contrast, U.S. Steel often stagnated; one officer noted after Schwab left that “works standing idle have deteriorated . . . the men are disheartened and a certain amount of apathy exists.” By the 1920s, the chagrined leaders at U.S. Steel secretly began making Bethlehem beams; as an official there observed, “The tonnage lost on account of competition with Bethlehem . . . is . . . ever increasing . . . we are obliged to sell at unusually low prices in order to compete.” Schwab discovered their ploy, however, and forced U.S. Steel to pay him royalties.

Schwab had transformed Bethlehem Steel. Even before World War I his company had become the second largest steelmaker in America. The New York Times praised Bethlehem Steel as “possibly the most efficient, profitable self-contained steel plant in the country.” By 1920, it employed 20,000 people in the Lehigh Valley and was among the largest enterprises in the world. In 1922, it absorbed Lackawanna Steel, the company that launched America’s rail-making industry 75 years earlier.

During World War I, Schwab’s abilities were needed by the U.S. government. In April 1918, one year after America entered the war, victory was uncertain. Delays in shipping cargo and troops from America to Europe threatened the Allies with defeat. More ships were needed; but in the U.S. shipyards few ships were forth coming. Within the Wilson administration some blamed the owners of the shipyards, others blamed the workers, still others blamed radical unions. In the midst of this finger-pointing, Franklin K. Lane, the Secretary of Commerce, posed a solution: “The President ought to send for Schwab and hand him a treasury warrant for a billion dollars and set him to work building ships, with no government inspectors or supervisors or accountants or auditors or other red tape to bother him. Let the President just put it up to Schwab’s patriotism and put Schwab on his honor. Nothing more is needed. Schwab will do the job.”

The Schwab Formula

That month Schwab became Director-General of the Emergency Fleet Corporation for the U.S. government. In his investigation, he discovered cases of laziness, incompetence, work slowdowns, and poor coordination of the ship building. As usual, though, Schwab said, “The best place to succeed is where you are with what you have.” He quickly rearranged incentives: he eliminated the “cost-plus” system whereby shipyards were paid whatever it cost them to build ships plus a percentage of that as a profit. Instead, Schwab tied profits to cost-cutting by paying a set price per ship. Cost overruns would be paid by the shipbuilders who would have to be efficient to make a profit. As usual, bonuses were part of the Schwab formula. He paid them, sometimes out of his own pocket, to shipbuilders who exceeded production goals.

Schwab enjoyed being a showman, so he went to the shipyards himself: he rallied the workers, praised the owners, and even drew applause in a speech to the Industrial Workers of the World, a radical union. Never one to ignore symbols for achievement, Schwab had Rear Admiral F. F. Fletcher head a group to award flags and medals to plants and workers whose work had been outstanding. By the fall of 1918, ships were being completed on time and even ahead of schedule. President Wilson and the leaders of the Shipping Board were astonished with the change and gave Schwab the credit. Carnegie, in the last year of his life, called it “a record of accomplishment such as has never been equaled.”

Not all of Schwab’s dealings with the federal government were so productive. The armor plate business is an example of this. The making of military equipment—armor plate for ships, gun forgings, ordnance, and shrapnel—brought Schwab into regular contact with government purchasers. Throughout his career, Schwab had problems with these government contracts. Even at Carnegie Steel, Schwab had quarreled with government officials over allegedly defective armor plate; the issue never was amicably settled.

The problem began in the 1880s when various officials began urging the United States to build a large navy. At the time the American steel companies were mostly making mils, so President Cleveland and others began urging the companies to diversify. Making military equipment was complicated and expensive, however; only reluctantly did Bethlehem Iron and Carnegie Steel shift into ordnance. Had the government not promised them Navy contracts they would not have switched.

Four things in the military supply business made for tension between the federal government and the steel companies. First, the federal government was the largest and sometimes the only buyer of military equipment; and the government’s notions of quality sometimes differed from that of the producers. Often both sides had legitimate points of view. Second, since the demand for military equipment was limited and the costs of building a factory to produce it were high, only U.S. Steel, Bethlehem Steel, and later Midvale Steel made armor plate. The potential for either a monopoly or for price-rigging bothered some government officials. Third, a ton of military equipment was more expensive to make than a ton of rails or a ton of structural steel; some purchasers thought that $450 for a ton of armor plate was price-gouging if rails sold for only $25 per ton. Finally, the ordnance producers sometimes made lower bids on foreign contracts than they did on domestic ones. To some in the American government, this was evidence they were being overcharged; to the steel companies, lower bids meant they had to cut their profit margins to almost zero to overcome tariffs in foreign countries. Also, when American needs were low, the steel men argued they had to get foreign business to keep their factories operating.

The government’s solution to these four problems was to threaten to go into the military supply business and build an armor-plate factory with Federal funds. Schwab countered that the government would not be able to make armor plate cheaper than he could. After all, Bethlehem had a veteran work force, a good bonus system, and could buy materials more cheaply in bulk. Any vertically integrated company would have an advantage over companies purchasing supplies in the open market. A government factory, Schwab insisted, would waste the taxpayers’ money.

Misdirected Incentives

If Schwab had been a mediator, not a participant, he might have been able to settle this dispute. Part of the problem was the same as that of the low productivity of the American shipyards during World War I: misdirected incentives. When the navy took bids for contracts from the three steel companies, it naturally accepted the lowest bid. But then Navy officials went to the two higher bidders and offered them part of the contract if they would agree to accept the lowest bid. They did this so that all three producers could survive; that way, a future monopoly of ordnance would be prevented. The problem was that this strategy gave the three companies an incentive to collude and fix prices high. Why should they bid low if all of them would get part of the contract anyway? A winner-take-all approach would have provided an incentive for lower bidding, but the Navy was unwilling to do this. Not surprisingly, then, year after year the steel companies submitted nearly identical bids for military equipment.

This problem reached a crisis during the Wilson administration. In 1913, Josephus Daniels, Wilson’s Secretary of the Navy, and Ben Tillman, Senator from South Carolina, investigated the armor business. Both men urged Wilson to back a government armor plant. They held hearings in Congress on the armor business but did not like what they heard. The leaders of the three steel companies all said their bids were reasonable. In fact, Schwab submitted figures showing that he and the others charged less for armor plate than did England, France, Germany, and Japan. If others didn’t believe it, then let the Federal Trade Commission look at the accounts and fix a price. Daniels and Tillman rejected this. They were convinced that the government could make armor plate cheaper: the head of the Bureau of Ordnance estimated that $10.3 million would build an armor plant and that plate could be made for less than $300 per ton, instead of $454 per ton, which was a typical bid from the steel companies.

In 1916, then, Daniels and Tillman began the campaign to convince Congress to spend $11 million for an armor factory. In the Senate, Tillman argued that the government would save money and no longer would be at the mercy of identical bids from the “greedy and hoggish” steel companies. President Wilson backed Tillman and said, “I remember very well my promise to help all I could with the bill for the construction of an armor plant and I stand ready to redeem my promise.”

Schwab led the effort to defeat the bill. He spoke out against it in public and ran ads in over 3,000 newspapers challenging the need for a government plant. He stressed the fairness angle. He said that years ago the government had asked Bethlehem to make armor; they had done so only when the government agreed to buy from them. Now, with $7 million invested in equipment, the government was planning to build its own plant and make Bethlehem’s useless.

Most Congressmen, however, bought the arguments of Tillman and Daniels. The bill passed the Senate and the House by about two-to-one margins, and Wilson signed it. As Senator Albert Cummins of Iowa said, “It is [one of] my profoundest convictions that the manufacture of armor-plate for battleships is a government function. I hope the private enterprises will be entirely eliminated.”

Dozens of cities lobbied to be the site for the new plant. From Rome, Georgia, to Kalamazoo, Michigan, city after city was put forth as being uniquely situated to produce armor plate. The winner of this competition was South Charleston, West Virginia. Congress soon raised the appropriation to $17.5 million and authorized the South Charleston plant to make guns and projectiles, as well as armor.

Construction began in 1917 on the new factory and on hundreds of houses for the workers. The war delayed the building, but it was continued later. Higher construction costs after the war meant an overrun of several million dollars. By 1921, the new plant was making guns, projectiles, and armor—an at prices apparently much higher than that of Bethlehem Steel. Within a year the whole plant was shut down, put on “inoperative status,” and never run again.

Looking Backward

Schwab turned 60 in 1921 and was beginning to look backward more than forward. There was much to see: whether he had made rails, beams, or armor plate, he had been successful. Even Carnegie, near death, had written Schwab, “I have never doubted your ability to triumph in anything you undertook. I cannot help feeling proud of you for having far outstripped any of my ‘boys.’”

In the 1920s and 1930s, however, Schwab seemed to lose his entrepreneurial spirit. Producing a better product at a lower price no longer seemed to dominate his thinking. Let’s “live and let live” Schwab told the steelmakers at the American Iron and Steel Institute in 1927. Next year, he urged them to fix prices and avoid cutting them. The year after this, Schwab, the father of the Bethlehem beam, urged the steel men not to expand but to use their existing plant capacity.

When the Great Depression took hold in the 1930s, Schwab’s public addresses were full of anecdotes and preaching that “the good . . . lies ahead.” One of Schwab’s remedies for the ailing economy was a high protective tariff. He had always favored a tariff on imported steel but usually settled for low duties. The Smoot- Hawley Tariff of 1930 created the highest duties in American history on many items.

Some writers have argued that the Smoot-Hawley Tariff triggered the Great Depression; others say it merely made the depression worse. One thing is certain: many nations retaliated against high American tariffs by closing their borders to American-made goods. The demand for American goods, therefore, declined and this put more people out of work. When Cordell Hull, Roosevelt’s Secretary of State, tried to lower American tariffs in 1934, Schwab opposed it. He was afraid of foreign competition.

During the 1930s, Schwab enjoyed his role as elder statesman of the steel industry. He was full of stories and ever ready to do interviews with reporters. He never became senile; his ability to memorize speeches and his knack for remembering names and faces was still amazing. He just preferred to let Eugene Grace and others run Bethlehem Steel, while he worked the crowd.

When Schwab retired as an entrepreneur, his fortune became jeopardized. He had earlier shown the traits of a dissipater and still had the potential to run through his $25 million fortune. Liberated from work, Schwab traveled, gambled, and flirted more than ever. He joined the New York Whist Club and played there for high stakes. He frequented the roulette tables in Monte Carlo with his favorite mistress. The art of speculation, an anathema to Carnegie, appealed to Schwab: he installed a ticker tape in his mansion to keep tabs on Wall Street; he also invested in a variety of companies and knew almost nothing about some of them. Gambling wasn’t the only drain on Schwab’s wealth: he co-signed one million dollars worth of notes—usually worthless—for “friends” and also gave monthly allowances to 27 people.

Schwab refused to cut back on expenses, even during the Great Depression. He still hired the most famous musicians of the era to give private recitals for him at Riverside. The mansion itself—complete with swimming pool, wine cellar, gymnasium, bowling alley, six elevators, and 90 bedrooms—needed 20 servants to keep it functioning. He also hired 300 men to care for his 1000-acre estate at Loretto. So Schwab desperately needed his $250,000 annual salary from Bethlehem, given for past services, just to pay his expenses.

From 1935 to 1938, a small group of rebel stockholders attended the company’s annual meetings; they challenged Schwab’s salary and told him he had “outlived his usefulness.” He finally stopped them by privately telling one of the critics that he desperately needed the money to live on. Actually he needed more. He couldn’t pay the taxes on Riverside and couldn’t sell it either, even at a $6 million loss. He couldn’t even give it away, when he offered it as the residence for the mayor.

Schwab’s last years were also marked by poor health and the death of his wife. After her funeral, Riverside was taken by creditors; Schwab moved into a small apartment. Schwab, who had shown the world a vision of entrepreneurship, now had only a vision of death. “A man knows when he doesn’t want to be alive,” he said, “when the will to continue living has gone from him.” Schwab died nine months after he said this, at age 77, with debts exceeding assets by over $300,000. []


For full footnote citations on quoted materials and other sources, see Entrepreneurs vs. The State. Readers are especially directed to Robert Hessen’s excellent study, Steel Titan: The Life of Charles M. Schwab (New York: Oxford University Press, 1975).

ASSOCIATED ISSUE

September 1988

ABOUT

BURTON FOLSOM

Burton Folsom, Jr. is a professor of history at Hillsdale College and author (with his wife, Anita) of FDR Goes to War.

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