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capital of the Oliver Mining Compa
ny was then $1,200,000, so that the
investment in this additional third in
terest could not have been colossal.
The Rockefellers also owned some
good Lake Superior iron mines. Their
view of the value of ore properties
is revealed by what followed. In
1896 they leased their mines to Oliver
and Frick, on behalf of the Carnegie
concern. Under the lease they receiv
ed a royalty of twenty-five cents a ton;
but it was provided that there must
be an output of 600,000 tons a year to
be shipped over the Rockefeller trans
portation lines, rail and boat, and that
these lines should get another 600,000
tons a year from the Oliver mine. The
Rockefellers evidently thought that
iron ore was good mostly to make
freight.
Now, this combination assured the
Carnegie mills about all the ore that
they needd. The combination, more
over, was in command of the best
rail and lake transportation and dock
facilities. The independent mine own
ers immediately saw where they got
off. This was a year, it will be remem
bered, of severe industrial and finan
cial depression. Acute demoraliza
tion, to quote a trade report, followed
among the independents. Acute de
moralizations are commonly very prof
itable to those fortunate persons who
are in a position to remain unaf
fected. Oliver set to work to gather
in the demoralized properties. By ar
ranging for options of stock here and
leases there, he was presently ready
to take over the best independent
mines. In his statement of the ar
rangement he says:
“The only cash obligation that we
will have, if my plan is carried out,
is in the purchase of the Norrie stock.
The Mesaba leases we can throw up
on six months’ notice, and the Tilden
and Pioneer leases on three months’
notice. The amount that we would in
vest in the Norrie is a very small item,
considering the immense stake we
have in this business.” And further
along, “I propose, at a risk of using
our credit to the extent of $500,000
of possibly $1,000,000, to effect a sav
ing, in which our competitors will not
share, of $4,000,000 to $6,000,000 per
annum.”
And again Mr. Carnegie vetoed the
plan. So poorly did he think of the
ownership of iron ore; so improbable
did he deem a monopoly in it. But
as Frick and Oliver persisted, he
withdrew his veto, and the deal was
closed. In this manner, with the in
vestment of hardly a dollar —for even
a million or two may be so spoken of
when contrasted with Mr. Schwab’s
valuation of the Company at half a
billion —did the Carnegie Company
come into possession of its iron ore
properties.
Iron Ore Monopolized.
The chief Lak© Superior iron mines
then outside the Carnegie-Rockefel
ler combination were owned by the
Minnesota Iron Company. This com
pany was capitalized at $16,500,000;
but its stock was not worth par in the
market. Presently it was absorbed by
the Federal Steel Company, which in
turn was taken into the United States
Steel Corporation. So the Steel Trust
had eighty per cent of the Lake Su
perior output, and all the best trans
portation and dock facilities. Iron
ore was practically monopolized.
The Carnegie Company owned, as
said above, five-sixths of the capital
of the Oliver Iron Mining Company.
To buy the remaining one-sixth and
make its ownership complete, the
Steel Trust issued $18,500,000 of its
own stock —half common and half pre
ferred. On this basis six-sixths would
come to $111,000,000. Compare this
with a gift to Carnegie of a half
interest a few years before and you
will get a view of what monopoly
means.
Shackling Our Children’s Children.
The Rockefellers had capitalized
their iron mines at $29,887,449. They
kindly turned them over to the Trust
in exchange for slightly more than
$80,000,000 of its stock. Forty-four
millions of the Trust’s stock stand
for its ownership of the Minnesota Iron
Company’s properties. Mr. Schwab
and others have declared that the
Trust’s ore deposits are worth more
than this vast capitalization that was
issued for them. Very likely so. And
this is the core of the whole matter.
If you can monopolize a staple com
modity it instantly becomes worth al
most any price you have a mind to
put upon it. There are limitations, of
course. No monopoly could keep iron
ore at the price of diamonds. But for
all practical purposes the rule holds
good.
And when you capitalize your com
modity on the basis of its earning
power as a monopoly—which is the
modern and prevalent idea —then you
necessarily bond and mortgage your
self to perpetuate the monopoly. Ob
serve how the capitalization of mo
nopolistic earning power works:
James J. Hill’s Grea North
ern Railway had come into
possession of great bodies of northern
ore lands with but a small investment
of capital. Until recently nobody ever
thought of those far-off ore lands as
constituting an asset of great and im
mediate value. But the capitalization
of the Steel Trust’s ore lands fixed
the value of the Hill ore lands.
Suppose you are engaged in running
a corner in corn at Chicago. You buy
up the visible supply, or eighty per
cent of it. That supply then becomes
worth, for all practical purposes, what
ever price you fix nuon it —the ob
vious limitations spoken of before, of
course, applying. But only so long
as you maintain your corner. If you
fix the price at eighty cents, all other
supplies of corn within reach of Chi
cago become worth eighty cents, less
the freight. You must take them at
that or down goes your monopoly.
Now, these far-off Hill ore lands may
be likened to so many million bushels
of No. 2 September corn. So the
Steel Trust leased the Hill ore lands.
The lease runs until all the ore shall
be exhausted, which according to con
servative estimates will not be for at
least a hundred years. There is, how
ever, a cancellation clause operative
after about ten years, but the lease
works so to the advantage of both
parties that this clause may be safely
ignored. It fixes the price of every
ton of ore during the life of the lease,
and the freight rate to be paid the Hill
road for moving it. A hundred years
is a long time. Many changes may
come in the manufacture of steel and
the mining of ore. But there stands
the lease, fixing the price of the ore
during our lives and our children’s
children, except, of course, in the un
lives and the lives of our children’s
likely event of cancellation. The roy
alty to be paid under this lease is
$1.65 a ton the first year, with an in
crease of 3.4 cents a ton in each suc
ceeding year. If human ingenuity could
devise a stronger pledge to our grand
children that they will not get steel
cheaper than we do I am at a loss to
imagine what it might be. And I
maintain that the basic purpose of this
lease Is to support the inflated capi
talization that the Steel Trust issued
on account of its own ore lands. When
Oliver and Frick leased the Rockefel
ler mines in 1896, it will be remem
bered, they paid a royalty of twenty
five cents a ton, against a royalty to
Hill of $1.65 a ton with a yearly in
crease. Not that the Rockefellers are
easy marks. But ore bad not then
WATSON’S WEEKLY JEFFERSONIAN.
been monopolized and capitalized on
its earning power.
Having made the lease, the Great
Northern Railway distributed pro rata
among its stockholders certificates rep
resenting the beneficial interest to
arise from it. There were 1,500,000 of
these shares, or certificates, which
were traded in on the curb at about
SBO a share, giving a valuation of
$120,000,000 for the whole. This $120,-
000,000 has no relationship in any way,
shape, or manner to any actual in
vestment. It represents the benefi
cial interest that may arise through
participating in a monopoly.
Frick’s Grip on Coke.
A hundred million dollars of the
Steel Trust’s capitalization is based
on its ownership of the H. C. Frick
Coke Company, by far the largest con
cern in the Connellsville region. In
defending the Trust’s capitalization,
Mr. Schwab pointed out that it owned
over sixty thousand acres of Connells
ville coal land—the best there is for
making coke. And he added: “There
is no more Connellsville coal. You
couldn’t get it for $60,000 an acre. It
simply isn’t there.” Obviously, there
fore, this staple commodity, being mo
nopolized, is worth, practically speak
ing, whatever the owner says it is
worth. Investment of capital has noth
ing to do with it. When Mr. Frick
began developing the coke industry,
he invested no capital to speak of, for
the excellent reason that he didn’t
have any.
From 80 to 500 Millions.
The Carnegie Company owned one
fourth of the Frick Company. To buy
the Carnegie Company and the re
maining three-fourths of the Frick
Company the Steel Trust issued capita]
to the amount of $492,558,100, of which
$304,000,000 is in bonds bearing five
per cent and $98,277,100 is preferred
stock bearing seven per cent, the re
mainder being in common stock \vhich
at present pays only two per cent. A
year before, the net book value of all
the assets of the Carnegie Company
(including its fourth of the Frick Com
pany) was a little over $80,000,000.
Actual values may have been great
er, but this was the “investment.” So
long as Mr. Carnegie and his associ
ates meant to keep all the stock them
selves they obviously had no motive
for inflating the capital. Which brings
us up against the disagreeable fact
that good business men never water
stocks for home consumption. Much
as they admire the beauties of the
process they do not apply it to them
selves. Stocks are watered only to be
sold. It was for the purpose of per
mitting the public to come in that this
eighty-odd millions of Carnegie capi
talization was increased by about $400,-
000,000.
In passing, I wish to mention that
this eighty-odd millions was not, strict
ly speaking, an investment of capital.
It was nearly all accumulated profits
that arose in good part from monopoly
and high tariff. As early as 1878, with
a duty of S2B a ton on rails, we find
the rail pool allotting the Carnegie
mill an output of 60,000 tons for the
year and fixing the price at $42.50 a
ton. Thus the Carnegie plant made
profits of 100 and even 140 per cent
a year.
Another Carnegie incident should be
glanced at here—the strike at Home
stead in 1892. Previous to the strike
an extraordinary and scandalous con
dition prevailed at Homestead. This
condition was not that the mills paid
their owners 100 per cent profits, but
that some of the workmen in them
earned sl2 and sls a day and rode in
carriages. The strike, with its incident
al riots, bloodshed, and starvation,
ended that, the unions being beaten.
Mr. Frick fought this battle for the
company, Mr. Carnegie having astute-
ly withdrawn to Scotland. James
Howard Bridge, in his excellent “Histo
ry of the Carnegie Steel Company,” to
which I am much indebted, is through
out a stanch admirer and champion of
Mr. Frick. Speaking of the profits of
the company, which rose from $4,000,-
000 the year of the strike to $21,-
000,000 in 1899, Mr. Bridge observes
(page 295):
It is believed by the Carnegie of
ficials, and with some show of reason,
that this magnificent record was to
a great extent made possible by the
company’s victory at Homestead. From
that time on the company profited
by the heavy investments it had made
in labor-saving machinery, and prices
got so low that one year when the
Carnegies made over $4,000,000, their
chief competitor, the Illinois Steel Co.
had upward of $1,000,000 loss. By
1897 the co?t of steel rails on the cars
at the Braddock mill was only sl2 a
gross ton!”
The admiring exclamation point is
Mr. Bridge’s. Whatever saving ac
crued to the company from its victo
ry at Homestead has now been capital
ized and is outstanding in the form
of stocks and bonds. So there is lit
tle fear that steel mill labor will re
lapse into the scandalous state of
earning sls a day. The necessity of
paying interest and dividends on this
capitalization stands in the way.
Morgan’s Fat Fee.
I have accounted above for the
bulk of the $1,500,000,000 capitaliza
tion of the Steel Trust —including
bonds of subsidiary companies which
it assumed, such bonds sometimes rep
resenting the total cost of the proper
ty. One further item remains to be
mentioned. The trust issued to Mr.
Morgan’s promoting syndicate $130,-
000,000 (in round numbers), par val
ue, of its capital in return for $28,000,-
000 in money. You will find the trans
action in detail on pages 16 and 17 of
the “Preliminary Report to Stockhold
ers of the United States Steel Cor
poration,” issued in February, 1902.
The Morgan syndicate furnished the
Trust with $25,000,000 in cash for
working capital, and paid the expens
es of organization and other incident
als to the amount of $3,000,000. For
this it. received 649,987 shares of pre
ferred stock and 649,988 shares of
common stock, the shares being of
SIOO par value.
Nearly $6,000,000 annually are ab
sorbed in paying dividends on the
stock thus given. Probably the able
employe can get the syndicate’s bless
ing. But he can’t possibly get a show
at those six millions. And the syndi
cate itself hasn’t that stock now. It
has been sold. You and I have it—
figuratively speaking, of course. We
paid real money for those 1,300,000
shares probably par for the preferred
and fifty for the common, or well to
ward $100,000,000 in all. We can’t get
any extraordinary return upon our
investment. We can get seven per
cent on the money invested in the
preferred and four per cent on the
money invested in the common. In
order to get this much we must keep
on paying the monopolistic price for
steel rails.
Such Is the effect of stock-watering.
A gentleman creates a monopoly in
a staple commodity, capitalizes it on
the basis of its monopolistic earning
powers, then sells it out, or sells a con
siderable interest in It after the inflat
ing process is complete. Then if the
public wishes to overthrow the monop
oly, thereby letting the water out of
the stock, it is the public itself—or
the outside investor—who gets
drenched. With a simple monopoly
you can tie up the public, but you
have the bother of holding the string.
With the stockwatering and floating
(Continued on page 13.)
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