The following is Methods of Prosperity newsletter number 11. It was originally deployed August 31, 2023. As of May 9, 2024, original subscribers have received up to issue number 47 (Sam Walton).
Last week on Methods of Prosperity, John D. Rockefeller was a deeply religious man who believed that it was his divine calling to make money. When the Pennsylvania oil rush began in 1859, he pursued the opportunity. Finding inefficiencies in the oil business, Rockefeller recognized that it would be systems and processes of refinery that other entrepreneurs failed to develop that would become the foundation of the Rockefeller empire. That, along with tactics such as price-fixing and predatory pricing.
Leveraging borrowed money, the young man started a small refinery in Cleveland, Ohio. He made a deal with Cornelius Vanderbilt to ship his oil, and then exploited inefficiencies in the market to buy out his competitors and create a monopoly. The biggest problem with inventing the first corporate American monopoly was that it indirectly sent the U.S. economy into a recession. He built a pipeline in 1878 as a cost-effective method of avoiding railroad transport, cutting off the railroads.
As Standard Oil conquered, the monopoly absorbed each and every competitor as they each went down. Rockefeller bought out bankrupt oil companies for next to nothing, expanding his monopoly. By the end of the depression, Rockefeller gained the largest corporate empire in America. Part of the collateral damage was the railroad company of Tom Scott.
Part 11. Andrew Carnegie.
TL;DR
Andrew Carnegie, born in Scotland in 1835, immigrated to the United States in 1848, escaping poverty. Starting work at a young age in a cotton factory, Carnegie eventually found employment as a telegraph messenger boy, which kicked off his career. His work ethic and ability to learn quickly led him from the Pennsylvania Railroad to investing in various enterprises, notably the steel industry, which he revolutionized in the late 19th century. Despite initial resistance, Carnegie’s steel became the backbone of America’s infrastructure, contributing to the construction of significant landmarks and the growth of the steel industry.
Carnegie was also known for his philanthropy, guided by the belief that the rich have a moral obligation to distribute their wealth to benefit society. He established 2,509 libraries worldwide, funded educational institutions, and supported peace initiatives. His business practices, however, especially during the Homestead Strike, attracted criticism for their ethics and impact on workers.
In 1901, Carnegie sold his steel company to J.P. Morgan for $492 million, leading to the creation of the United States Steel Corporation, the first billion-dollar corporation. Carnegie dedicated the rest of his life to philanthropy, donating vast sums to various causes until his death in 1919. He left a complex legacy as an industrial magnate who significantly impacted both the industrial landscape of America and the field of philanthropy.
Key lessons:
The purpose of wealth creation is to give it away.
Wealth is what you own, not what you do.
Something will inevitably go wrong.
Leverage debt in order to scale.
Be careful whom you trust.
Pay your employees well.
How do you get to Carnegie Hall? Practice.
Andrew Carnegie was born in Dunfermline, Scotland in 1835. Progress waits for no one. When technological forces make your job obsolete, it’s foolish to be prideful. His father refused to work in the textile factories after failing to compete with them on his own. It seems as if his father refused to acknowledge that weaving machines outproduced his individual endeavors and failed to provide for his family. His uncle, Tom Morrison, was a populist on the side of the poor who spoke out publicly against the rich. The cost of his uncle’s antagonizing opinions of the rich and powerful people was that his family was blacklisted from public events on the property of a nearby estate. Recompense came in 1903, when he purchased the estate and gifted it to the people of Dunfermline. The struggle between rich and poor would be foreshadowing upon the future challenges of the Scottish-born American industrialist and philanthropist who led the expansion of the American steel industry in the late 19th century.
Poverty in Scotland was unbearable. His mother decided to relocate their family to America. In 1848, they emigrated to the United States, where they settled in Allegheny City, Pennsylvania. At first, Carnegie worked as a bobbin boy in a cotton factory. Inspired by his tough beginnings, Carnegie became a vigorous champion of hard work and persistence. Without much of a formal education, Carnegie was an autodidact (self-learner). Motivated by intrinsic curiosity and a desire for self-improvement, he was an insatiable reader. As Carnegie’s primary education resource in adolescence, Colonel James Anderson, a significant mentor, opened his private library to local working boys.
At the age of 13, Carnegie got a job working in the isolated boiler room of the local thread factory for a wage of $1.20 per week. Fortunately, he would find a better job. As luck would have it, delivering telegrams led him to grow his professional network. In 1849, Carnegie became a telegraph messenger boy in the Pittsburgh Office of the Ohio Telegraph Company, at $2.50 per week ($88 by 2022 inflation), following the recommendation of his uncle. Andrew Carnegie commenced his career in telegraphy, which provided crucial communication services enabling the expansion of the railroads in the mid-19th century.
Working for the telegraph company expanded his prospects, but when he met Tom Scott in 1853, his career would follow a new track (pun intended). At that time, Scott was the superintendent of the Pennsylvania Railroad’s western division. Andrew Carnegie was 18 years old when Tom Scott offered him a job. Carnegie worked hard and impressed Scott with his work ethic and abilities. Scott referred to him as “my boy Andy” and hired him as his private secretary and personal telegrapher at $35 a month. Carnegie learned the ins and outs of the railroad industry and worked his way up the ladder at Pennsylvania Railroad, succeeding Scott as superintendent of the Pittsburgh Division in 1859.
The Adams Express Company was a leading express company in the United States in the mid-19th century. It provided a variety of services, including package delivery, freight transportation, and banking. Tom Scott taught 24 year old Andrew Carnegie the magic of making money without labor. He loaned Carnegie $500 to invest in ten shares of Adams Express Company stock at $60 a share. For collateral, Carnegie and his mother used their house as an asset to leverage the debt. When it paid a return of his first $10 dividend, Carnegie had a revelation. You don’t accumulate wealth by the sweat of your brow, but from the assets that you own. The Adams Express Company was eventually acquired by the American Express Company in 1918, increasing in value. From that point on, Carnegie became an investor.
His next big investment was a luxurious new innovation in railroad transportation. The Woodruff Sleeping Car Company, founded by Theodore Tuttle Woodruff in 1857, was the first to manufacture sleeping cars for passenger trains. The company’s cars were a success, and they helped to revolutionize train travel. Carnegie invested $217.50 in the company in 1862. Carnegie’s investment in the Woodruff Sleeping Car Company is also notable because it was another one of the first investments that he made with the help of Tom Scott. Carnegie made his first small fortune from these investments. In 1864, Carnegie was one of the early investors in the Columbia Oil Company in Venango County, Pennsylvania. In one year, the firm yielded over $1 million in cash dividends.
Then war broke out. Carnegie was appointed Superintendent of the Military Railways and the Union government’s telegraph lines in the East in 1861. A scar on his cheek he earned by freeing a trapped telegraph wire signified his efforts to defeat the Confederacy. He saw a large need for iron products during the Civil War and used this new knowledge to switch his business interests from railroads and telegraphs to the ironworks industry.
The Keystone Bridge Company was founded in 1863 by Piper, Linville, and Shiffler, three bridge engineers who had worked together on the construction of the Allegheny Portage Railroad. Carnegie invested in the company in 1865, and he quickly rose to become one of its leading shareholders. By this time, he no longer needed to work for money. Now his money was working for him. Carnegie resigned from the Pennsylvania Railroad. It was the last salaried position he would ever hold.
By 1868, after trading bonds (which he decided wasn’t a good idea), Carnegie was earning $50,000 in yearly passive income. He was 33 years old. At 35, he became dedicated to philanthropy. Remember, his upbringing had influenced him to believe that he had a moral and ethical obligation to give his money away. Ironically, giving it away to his family he believed to be unethical. In his mind, there was more virtue in helping strangers than helping his own flesh and blood. In his 1889 essay: “The Gospel of Wealth” Carnegie wrote, "The man who dies thus rich dies disgraced”. Carnegie believed that accumulating wealth was not an end in itself, but rather a means to an end, and that the wealthy had a moral obligation to use their wealth to benefit society. He argued that the accumulation of wealth was a sign of success, but that it was important to use that wealth to improve the lives of others.
Still, the thrill of advancing his empire was irresistible. Carnegie focused on vertical integration, where he controlled every aspect of the steel production process, from mining the raw materials to distributing the finished products. Steel was a new endeavor, the expansion of which had never been attempted at scale. Carnegie believed that steel was the future of construction materials. It was stronger, lighter, and more durable than iron, and it could be mass-produced more easily. However, no bridge was entirely made of steel. Furthermore, no bridge stretched across the Mississippi River. Carnegie’s first steel bridge was the Eads Bridge in St. Louis, Missouri. It was the first bridge to use steel as its primary structural material, and it was the longest bridge in the world at the time. The oldest bridge still standing on the Mississippi River, the Eads Bridge is a combined road and railway bridge over the Mississippi River connecting St. Louis, Missouri and East St. Louis, Illinois. The bridge was designed by James Buchanan Eads, a self-educated engineer who had previously designed a number of ironclad gunboats for the Union Navy during the Civil War. The Eads Bridge was a major engineering feat, and it was the first bridge to use steel as its primary structural material. It was also the longest bridge in the world at the time, which almost wasn’t completed.
A complex engineering feat, The Eads Bridge required a lot of steel. Steel was a relatively new material at the time, and it was still quite expensive. The complexity of the design also made it difficult to estimate the final cost of the bridge. Bad weather and labor strikes added to the overall cost of the bridge. As a result of these financial difficulties, Carnegie was forced to sell his interest in the Eads Bridge to the St. Louis Bridge Company. However, this was a significant proof-of-concept. The bridge was completed in 1874 and was a major engineering feat. Hesitant as the public was to trust the integrity of a steel bridge, Carnegie relied on cultural superstition to convince them. Utilizing the superstition that an elephant won’t walk over a structure unstable for its weight, that’s exactly how Carnegie proved to the public that steel was reliable. The unusual spectacle of an elephant marching across the bridge provided convincing evidence that steel was the future of infrastructure in America.
Andrew Carnegie said:
“Put all your eggs in one basket, then watch that basket.”
Founded in 1873, Carnegie Steel epitomized the emerging American steel industry. Despite initial resistance from traditional iron manufacturers, Carnegie’s steel production exponentially increased, outperforming competitors. Ultimately, the robust, cost-effective steel from Carnegie Steel became the backbone of America’s rising infrastructure. By the 1880’s Carnegie and Rockefeller were the two richest men in America. Tom Scott died of pneumonia in 1881. His business never recovered after the railroad industry bubble burst. He had an undeniable impact on Andrew Carnegie’s life. With his mentor gone, Carnegie was determined to become greater than Rockefeller.
The first skyscraper built with Carnegie steel was the Home Insurance Building in Chicago, Illinois. It was completed in 1885 and was 10 stories tall. The building was designed by William Le Baron Jenney, and it was a major breakthrough. A few other skyscrapers built with Carnegie steel that you may be aware of include The Flatiron Building in New York City (1902), The Woolworth Building in New York City (1913), The Empire State Building in New York City (1931), and The Chrysler Building in New York City (1930). Not to be out done, Rockefeller Center was built between 1931 and 1939. It was commissioned by John D. Rockefeller Jr. and designed by a team of architects led by Raymond Hood. Rockefeller Center was a major undertaking, and it required the coordination of thousands of workers. The complex was built during the Great Depression, and it helped to create jobs and boost the economy. Perhaps these rivals were trying to out-build each other? In 1885, Rockefeller was seven times richer than Carnegie.
Considering his opinion that wealth should be shared with the less fortunate, a logical error starts to surface with Carnegie. In order to maximize profits, Carnegie refused to pay generous wages to his workers. This presented a major problem. The workers of Homestead, Pennsylvania, belonged to the Amalgamated Association of Iron and Steel Workers. When the workers’ union refused to accept a new contract that cut their wages and increased their hours, violence erupted. Henry Clay Frick, the president of Carnegie Steel, responded by locking out the strikers and hiring Pinkerton agents to protect the plant. Pinkerton agents were private security guards who were hired by businesses and organizations to protect their property and interests. They were often used to break up labor strikes and other forms of protest. The Pinkertons were attacked by the strikers, and the violence escalated.
The Pennsylvania state militia was called in to restore order, and the strike was eventually broken. The union was defeated, and the company was able to impose its terms. The Homestead Strike was a major setback for the labor movement, and it helped to pave the way for the rise of the American Federation of Labor (AFL). Carnegie never trusted Frick again after this tragedy. The Homestead Strike occurred between June 30 to July 12, 1892. Three years prior, in 1889, Frick was involved in a cover up: the Johnstown flood disaster. Frick formed the exclusive South Fork Fishing and Hunting Club, located above Johnstown, Pennsylvania. Due to negligence, a dam on the property had been compromised, which resulted in twenty million tons of water sweeping down the valley. Frick and other members of the South Fork Fishing and Hunting Club gathered to form the Pittsburgh Relief Committee for assistance to the flood victims while averting lawsuits. Why did Carnegie partner with Frick in the first place? One could only guess, but Frick did help Carnegie increase profits by increasing production and lowering labor expenses.
Although Carnegie was in Scotland at the time of the conflict, his reputation suffered a blow for the handling of the strike. It put into question the ethics of his business practices and marked a major turning point in labor history.
In 1901, Carnegie established large pension funds for his former employees at Homestead.
Committed to giving back to his community, Andrew Carnegie allocated his resources to literature, music and performing arts, education, and promoting peace. Andrew Carnegie established 2,509 libraries worldwide between 1883 and 1929. He donated $60 million to build libraries in the United States and other countries. He believed that libraries were essential for education and self-improvement, and he wanted to make them available to everyone. The first Carnegie library was built in Dunfermline, Scotland, Carnegie’s hometown. The last one was built in 1929 in Sydney, Australia. The libraries were built in a variety of styles, but they all shared a common goal: to provide access to books and information for people of all backgrounds.
Carnegie Hall was built in 1891 to provide a home for the New York Symphony Society and the Oratorio Society of New York. Located at 881 Seventh Avenue in Midtown Manhattan, New York City, it was designed by William Burnet Tuthill and funded by Andrew Carnegie as a concert hall.
In 1901, JP Morgan & Co. organized the purchase of Carnegie Steel Company for $492 million. This created the United States Steel Corporation, which was the first billion-dollar corporation in the world.
Carnegie died on August 11, 1919, in Lenox, Massachusetts, at his Shadow Brook estate, of bronchial pneumonia. He had already given away $350,695,653 (approximately US$5.92 billion in 2022 dollars) of his wealth. After his death, his last $30 million was given to foundations, charities, and to pensioners. He was buried at Sleepy Hollow Cemetery in Sleepy Hollow, New York.
Stay tuned next week for the story of JP Morgan.
I like you,
–Sean Allen Fenn
