BUSINESS NEGOTIATIONS
Complete success attended a negotiation which I conducted about this
time for Colonel William Phillips, president of the Allegheny Valley
Railway at Pittsburgh. One day the Colonel entered my New York office
and told me that he needed money badly, but that he could get no house
in America to entertain the idea of purchasing five millions of bonds
of his company although they were to be guaranteed by the Pennsylvania
Railroad Company. The old gentleman felt sure that he was being driven
from pillar to post by the bankers because they had agreed among
themselves to purchase the bonds only upon their own terms. He asked
ninety cents on the dollar for them, but this the bankers considered
preposterously high. Those were the days when Western railway bonds
were often sold to the bankers at eighty cents on the dollar.
Colonel Phillips said he had come to see whether I could not suggest
some way out of his difficulty. He had pressing need for two hundred
and fifty thousand dollars, and this Mr. Thomson, of the Pennsylvania
Railroad, could not give him. The Allegheny bonds were seven per
cents, but they were payable, not in gold, but in currency, in
America. They were therefore wholly unsuited for the foreign market.
But I knew that the Pennsylvania Railroad Company had a large amount
of Philadelphia and Erie Railroad six per cent gold bonds in its
treasury. It would be a most desirable exchange on its part, I
thought, to give these bonds for the seven per cent Allegheny bonds
which bore its guarantee.
I telegraphed Mr. Thomson, asking if the Pennsylvania Railroad Company
would take two hundred and fifty thousand dollars at interest and lend
it to the Allegheny Railway Company. Mr. Thomson replied, "Certainly."
Colonel Phillips was happy. He agreed, in consideration of my
services, to give me a sixty-days option to take his five millions of
bonds at the desired ninety cents on the dollar. I laid the matter
before Mr. Thomson and suggested an exchange, which that company was
only too glad to make, as it saved one per cent interest on the bonds.
I sailed at once for London with the control of five millions of first
mortgage Philadelphia and Erie Bonds, guaranteed by the Pennsylvania
Railroad Company--a magnificent security for which I wanted a high
price. And here comes in one of the greatest of the hits and misses of
my financial life.
I wrote the Barings from Queenstown that I had for sale a security
which even their house might unhesitatingly consider. On my arrival in
London I found at the hotel a note from them requesting me to call. I
did so the next morning, and before I had left their banking house I
had closed an agreement by which they were to bring out this loan, and
that until they sold the bonds at par, less their two and a half per
cent commission, they would advance the Pennsylvania Railroad Company
four millions of dollars at five per cent interest. The sale left me a
clear profit of more than half a million dollars.
The papers were ordered to be drawn up, but as I was leaving Mr.
Russell Sturgis said they had just heard that Mr. Baring himself was
coming up to town in the morning. They had arranged to hold a
"court," and as it would be fitting to lay the transaction before him
as a matter of courtesy they would postpone the signing of the papers
until the morrow. If I would call at two o'clock the transaction would
be closed.
Never shall I forget the oppressed feeling which overcame me as I
stepped out and proceeded to the telegraph office to wire President
Thomson. Something told me that I ought not to do so. I would wait
till to-morrow when I had the contract in my pocket. I walked from the
banking house to the Langham Hotel--four long miles. When I reached
there I found a messenger waiting breathless to hand me a sealed note
from the Barings. Bismarck had locked up a hundred millions in
Magdeburg. The financial world was panic-stricken, and the Barings
begged to say that under the circumstances they could not propose to
Mr. Baring to go on with the matter. There was as much chance that I
should be struck by lightning on my way home as that an arrangement
agreed to by the Barings should be broken. And yet it was. It was too
great a blow to produce anything like irritation or indignation. I was
meek enough to be quite resigned, and merely congratulated myself that
I had not telegraphed Mr. Thomson.
I decided not to return to the Barings, and although J.S. Morgan & Co.
had been bringing out a great many American securities I subsequently
sold the bonds to them at a reduced price as compared with that agreed
to by the Barings. I thought it best not to go to Morgan & Co. at
first, because I had understood from Colonel Phillips that the bonds
had been unsuccessfully offered by him to their house in America and I
supposed that the Morgans in London might consider themselves
connected with the negotiations through their house in New York. But
in all subsequent negotiations I made it a rule to give the first
offer to Junius S. Morgan, who seldom permitted me to leave his
banking house without taking what I had to offer. If he could not buy
for his own house, he placed me in communication with a friendly house
that did, he taking an interest in the issue. It is a great
satisfaction to reflect that I never negotiated a security which did
not to the end command a premium. Of course in this case I made a
mistake in not returning to the Barings, giving them time and letting
the panic subside, which it soon did. When one party to a bargain
becomes excited, the other should keep cool and patient.
As an incident of my financial operations I remember saying to Mr.
Morgan one day:
"Mr. Morgan, I will give you an idea and help you to carry it forward
if you will give me one quarter of all the money you make by acting
upon it."
He laughingly said: "That seems fair, and as I have the option to act
upon it, or not, certainly we ought to be willing to pay you a quarter
of the profit."
I called attention to the fact that the Allegheny Valley Railway bonds
which I had exchanged for the Philadelphia and Erie bonds bore the
guarantee of the Pennsylvania Railroad Company, and that that great
company was always in need of money for essential extensions. A price
might be offered for these bonds which might tempt the company to sell
them, and that at the moment there appeared to be such a demand for
American securities that no doubt they could be floated. I would write
a prospectus which I thought would float the bonds. After examining
the matter with his usual care he decided that he would act upon my
suggestion.
Mr. Thomson was then in Paris and I ran over there to see him. Knowing
that the Pennsylvania Railroad had need for money I told him that I
had recommended these securities to Mr. Morgan and if he would give me
a price for them I would see if I could not sell them. He named a
price which was then very high, but less than the price which these
bonds have since reached. Mr. Morgan purchased part of them with the
right to buy others, and in this way the whole nine or ten millions of
Allegheny bonds were marketed and the Pennsylvania Railroad Company
placed in funds.
The sale of the bonds had not gone very far when the panic of 1873 was
upon us. One of the sources of revenue which I then had was Mr.
Pierpont Morgan. He said to me one day:
"My father has cabled to ask whether you wish to sell out your
interest in that idea you gave him."
I said: "Yes, I do. In these days I will sell anything for money."
"Well," he said, "what would you take?"
I said I believed that a statement recently rendered to me showed that
there were already fifty thousand dollars to my credit, and I would
take sixty thousand. Next morning when I called Mr. Morgan handed me
checks for seventy thousand dollars.
"Mr. Carnegie," he said, "you were mistaken. You sold out for ten
thousand dollars less than the statement showed to your credit. It now
shows not fifty but sixty thousand to your credit, and the additional
ten makes seventy."
The payments were in two checks, one for sixty thousand dollars and
the other for the additional ten thousand. I handed him back the
ten-thousand-dollar check, saying:
"Well, that is something worthy of you. Will you please accept these
ten thousand with my best wishes?"
"No, thank you," he said, "I cannot do that."
Such acts, showing a nice sense of honorable understanding as against
mere legal rights, are not so uncommon in business as the uninitiated
might believe. And, after that, it is not to be wondered at if I
determined that so far as lay in my power neither Morgan, father or
son, nor their house, should suffer through me. They had in me
henceforth a firm friend.
[Illustration: JOHN PIERPONT MORGAN]
A great business is seldom if ever built up, except on lines of the
strictest integrity. A reputation for "cuteness" and sharp dealing is
fatal in great affairs. Not the letter of the law, but the spirit,
must be the rule. The standard of commercial morality is now very
high. A mistake made by any one in favor of the firm is corrected as
promptly as if the error were in favor of the other party. It is
essential to permanent success that a house should obtain a reputation
for being governed by what is fair rather than what is merely legal. A
rule which we adopted and adhered to has given greater returns than
one would believe possible, namely: always give the other party the
benefit of the doubt. This, of course, does not apply to the
speculative class. An entirely different atmosphere pervades that
world. Men are only gamblers there. Stock gambling and honorable
business are incompatible. In recent years it must be admitted that
the old-fashioned "banker," like Junius S. Morgan of London, has
become rare.
Soon after being deposed as president of the Union Pacific, Mr.
Scott[31] resolved upon the construction of the Texas Pacific
Railway. He telegraphed me one day in New York to meet him at
Philadelphia without fail. I met him there with several other friends,
among them Mr. J.N. McCullough, vice-president of the Pennsylvania
Railroad Company at Pittsburgh. A large loan for the Texas Pacific had
fallen due in London and its renewal was agreed to by Morgan & Co.,
provided I would join the other parties to the loan. I declined. I was
then asked whether I would bring them all to ruin by refusing to stand
by my friends. It was one of the most trying moments of my whole life.
Yet I was not tempted for a moment to entertain the idea of involving
myself. The question of what was my duty came first and prevented
that. All my capital was in manufacturing and every dollar of it was
required. I was the capitalist (then a modest one, indeed) of our
concern. All depended upon me. My brother with his wife and family,
Mr. Phipps and his family, Mr. Kloman and his family, all rose up
before me and claimed protection.
[Footnote 31: Colonel Thomas A. Scott left the Union Pacific in 1872.
The same year he became president of the Texas Pacific, and in 1874
president of the Pennsylvania.]
I told Mr. Scott that I had done my best to prevent him from beginning
to construct a great railway before he had secured the necessary
capital. I had insisted that thousands of miles of railway lines could
not be constructed by means of temporary loans. Besides, I had paid
two hundred and fifty thousand dollars cash for an interest in it,
which he told me upon my return from Europe he had reserved for me,
although I had never approved the scheme. But nothing in the world
would ever induce me to be guilty of endorsing the paper of that
construction company or of any other concern than our own firm.
I knew that it would be impossible for me to pay the Morgan loan in
sixty days, or even to pay my proportion of it. Besides, it was not
that loan by itself, but the half-dozen other loans that would be
required thereafter that had to be considered. This marked another
step in the total business separation which had to come between Mr.
Scott and myself. It gave more pain than all the financial trials to
which I had been subjected up to that time.
It was not long after this meeting that the disaster came and the
country was startled by the failure of those whom it had regarded as
its strongest men. I fear Mr. Scott's premature death[32] can
measurably be attributed to the humiliation which he had to bear. He
was a sensitive rather than a proud man, and his seemingly impending
failure cut him to the quick. Mr. McManus and Mr. Baird, partners in
the enterprise, also soon passed away. These two men were
manufacturers like myself and in no position to engage in railway
construction.
[Footnote 32: Died May 21, 1881.]
The business man has no rock more dangerous to encounter in his career
than this very one of endorsing commercial paper. It can easily be
avoided if he asks himself two questions: Have I surplus means for all
possible requirements which will enable me to pay without
inconvenience the utmost sum for which I am liable under this
endorsement? Secondly: Am I willing to lose this sum for the friend
for whom I endorse? If these two questions can be answered in the
affirmative he may be permitted to oblige his friend, but not
otherwise, if he be a wise man. And if he can answer the first
question in the affirmative it will be well for him to consider
whether it would not be better then and there to pay the entire sum
for which his name is asked. I am sure it would be. A man's means are
a trust to be sacredly held for his own creditors as long as he has
debts and obligations.
Notwithstanding my refusal to endorse the Morgan renewal, I was
invited to accompany the parties to New York next morning in their
special car for the purpose of consultation. This I was only too glad
to do. Anthony Drexel was also called in to accompany us. During the
journey Mr. McCullough remarked that he had been looking around the
car and had made up his mind that there was only one sensible man in
it; the rest had all been "fools." Here was "Andy" who had paid for
his shares and did not owe a dollar or have any responsibility in the
matter, and that was the position they all ought to have been in.
Mr. Drexel said he would like me to explain how I had been able to
steer clear of these unfortunate troubles. I answered: by strict
adherence to what I believed to be my duty never to put my name to
anything which I knew I could not pay at maturity; or, to recall the
familiar saying of a Western friend, never to go in where you couldn't
wade. This water was altogether too deep for me.
Regard for this rule has kept not only myself but my partners out of
trouble. Indeed, we had gone so far in our partnership agreement as to
prevent ourselves from endorsing or committing ourselves in any way
beyond trifling sums, except for the firm. This I also gave as a
reason why I could not endorse.
During the period which these events cover I had made repeated
journeys to Europe to negotiate various securities, and in all I sold
some thirty millions of dollars worth. This was at a time when the
Atlantic cable had not yet made New York a part of London financially
considered, and when London bankers would lend their balances to
Paris, Vienna, or Berlin for a shadow of difference in the rate of
interest rather than to the United States at a higher rate. The
Republic was considered less safe than the Continent by these good
people. My brother and Mr. Phipps conducted the iron business so
successfully that I could leave for weeks at a time without anxiety.
There was danger lest I should drift away from the manufacturing to
the financial and banking business. My successes abroad brought me
tempting opportunities, but my preference was always for
manufacturing. I wished to make something tangible and sell it and I
continued to invest my profits in extending the works at Pittsburgh.
The small shops put up originally for the Keystone Bridge Company had
been leased for other purposes and ten acres of ground had been
secured in Lawrenceville on which new and extensive shops were
erected. Repeated additions to the Union Iron Mills had made them the
leading mills in the United States for all sorts of structural shapes.
Business was promising and all the surplus earnings I was making in
other fields were required to expand the iron business. I had become
interested, with my friends of the Pennsylvania Railroad Company, in
building some railways in the Western States, but gradually withdrew
from all such enterprises and made up my mind to go entirely contrary
to the adage not to put all one's eggs in one basket. I determined
that the proper policy was "to put all good eggs in one basket and
then watch that basket."
I believe the true road to preëminent success in any line is to make
yourself master in that line. I have no faith in the policy of
scattering one's resources, and in my experience I have rarely if ever
met a man who achieved preëminence in money-making--certainly never
one in manufacturing--who was interested in many concerns. The men who
have succeeded are men who have chosen one line and stuck to it. It is
surprising how few men appreciate the enormous dividends derivable
from investment in their own business. There is scarcely a
manufacturer in the world who has not in his works some machinery that
should be thrown out and replaced by improved appliances; or who does
not for the want of additional machinery or new methods lose more than
sufficient to pay the largest dividend obtainable by investment beyond
his own domain. And yet most business men whom I have known invest in
bank shares and in far-away enterprises, while the true gold mine lies
right in their own factories.
I have tried always to hold fast to this important fact. It has been
with me a cardinal doctrine that I could manage my own capital better
than any other person, much better than any board of directors. The
losses men encounter during a business life which seriously embarrass
them are rarely in their own business, but in enterprises of which the
investor is not master. My advice to young men would be not only to
concentrate their whole time and attention on the one business in life
in which they engage, but to put every dollar of their capital into
it. If there be any business that will not bear extension, the true
policy is to invest the surplus in first-class securities which will
yield a moderate but certain revenue if some other growing business
cannot be found. As for myself my decision was taken early. I would
concentrate upon the manufacture of iron and steel and be master in
that.
My visits to Britain gave me excellent opportunities to renew and make
acquaintance with those prominent in the iron and steel
business--Bessemer in the front, Sir Lothian Bell, Sir Bernard
Samuelson, Sir Windsor Richards, Edward Martin, Bingley, Evans, and
the whole host of captains in that industry. My election to the
council, and finally to the presidency of the British Iron and Steel
Institute soon followed, I being the first president who was not a
British subject. That honor was highly appreciated, although at first
declined, because I feared that I could not give sufficient time to
its duties, owing to my residence in America.
As we had been compelled to engage in the manufacture of wrought-iron
in order to make bridges and other structures, so now we thought it
desirable to manufacture our own pig iron. And this led to the
erection of the Lucy Furnace in the year 1870--a venture which would
have been postponed had we fully appreciated its magnitude. We heard
from time to time the ominous predictions made by our older brethren
in the manufacturing business with regard to the rapid growth and
extension of our young concern, but we were not deterred. We thought
we had sufficient capital and credit to justify the building of one
blast furnace.
The estimates made of its cost, however, did not cover more than half
the expenditure. It was an experiment with us. Mr. Kloman knew nothing
about blast-furnace operations. But even without exact knowledge no
serious blunder was made. The yield of the Lucy Furnace (named after
my bright sister-in-law) exceeded our most sanguine expectations and
the then unprecedented output of a hundred tons per day was made from
one blast furnace, for one week--an output that the world had never
heard of before. We held the record and many visitors came to marvel
at the marvel.
It was not, however, all smooth sailing with our iron business. Years
of panic came at intervals. We had passed safely through the fall in
values following the war, when iron from nine cents per pound dropped
to three. Many failures occurred and our financial manager had his
time fully occupied in providing funds to meet emergencies. Among many
wrecks our firm stood with credit unimpaired. But the manufacture of
pig iron gave us more anxiety than any other department of our
business so far. The greatest service rendered us in this branch of
manufacturing was by Mr. Whitwell, of the celebrated Whitwell Brothers
of England, whose blast-furnace stoves were so generally used. Mr.
Whitwell was one of the best-known of the visitors who came to marvel
at the Lucy Furnace, and I laid the difficulty we then were
experiencing before him. He said immediately:
"That comes from the angle of the bell being wrong."
He explained how it should be changed. Our Mr. Kloman was slow to
believe this, but I urged that a small glass-model furnace and two
bells be made, one as the Lucy was and the other as Mr. Whitwell
advised it should be. This was done, and upon my next visit
experiments were made with each, the result being just as Mr. Whitwell
had foretold. Our bell distributed the large pieces to the sides of
the furnace, leaving the center a dense mass through which the blast
could only partially penetrate. The Whitwell bell threw the pieces to
the center leaving the circumference dense. This made all the
difference in the world. The Lucy's troubles were over.
What a kind, big, broad man was Mr. Whitwell, with no narrow jealousy,
no withholding his knowledge! We had in some departments learned new
things and were able to be of service to his firm in return. At all
events, after that everything we had was open to the Whitwells.
[To-day, as I write, I rejoice that one of the two still is with us
and that our friendship is still warm. He was my predecessor in the
presidency of the British Iron and Steel Institute.]