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4. Circular letter of March 2, 1901, addressed by J. P. Morgan & Co. to stock-

holders of various constituent concerns of the United States Steel Corpo-
ration 396

5. Syndicate agreement of March 12, 1902, between J. P. Morgan & Co. and

syndicate subscribers, relative to conversion of a portion of the preferred
stock of the United States Steel Corporation into bonds 400

6. Pro forma consolidated general balance sheet, United States Steel Corpo-

ration and subsidiary companies, April 1, 1901, in comparison with similar
balance sheet at December 31, 1910 405

7 . Issued capital stock of the constituent companies of the United States Steel

Corporation, amount owned by the said Corporation, the issued capital
stock of the subsidiaries of said constituent companies and percentage

thereof owned by the latter, July 1, 1911 407



Depaetment of Commerce and Labor,

Office of the Secretary,

Washington, July 1, 1911.
Sir: I have the honor to transmit herewith Part I of the Report
of the Commissioner of Corporations on the Steel Industry, the said
part deaUng with the organization, investment, profits, and position
of the United States Steel Corporation.

Respectfully, Charles Nagel,

The President.

Department of Commerce and Labor,

BxiREAU OF Corporations,

Washington, July 1, 1911.
Sir: I have the honor to transmit herewith Part I of a Report on
the Steel Industry, made to the President under your direction and
in accordance with the law creating the Bureau of Corporations.
The said part deals with the organization, investment, profits, and
position of the United States Steel Corporation.

I desire to mention as especially contributing, under my direction,
to the preparation of this report the names of Mr. Luther Conant, jr..
Deputy Commissioner, and Mr. Francis Walker, one of my assistants.
Very respectfully,

Herbert Knox Smith,

To Hon. Charles Nagel,

Secretary of Com/merce and Labor.


Department of Commeece and Labor,

Bureau of Corporations,

WasMngton, July 1, 1911.

Sir : I have the honor to submit herewith Part I of a Report on the
Steel Industry. This part deals with the organization, investment,
profits, and position m the industry of the United States Steel Corpo-
ration. Additional parts will be submitted later dealing with costs
and with prices.

The basic industry of steel making affects the whole people of the
United States. Its organization is a naatter of public concern (not
merely of private interest), and a great national resource, iron ore,
lies at the foundation of the business.

The dominant concern is the United States Steel Corporation.
There is here set forth (a) the causes of the formation of the Corpo-
ration; (6) its actual investment contrasted with its capitalization;
(c) its rate of profits; and {d) its degree of control in the industry.

The Steel Corporation was the culmination and the result of a
remarkable and even dramatic period in the steel industry. UntU
about 1898 the bulk of the business was distributed among a very
considerable number of concerns. There was sharp competition,
modified by frequent pools and price agreements of greater or less
duration and effectiveness.

In 1898 began an era of great consolidations, with capitalizations
ranging from $30,000,000 to $100,000,000, usually mergers of many
smaller companies. In most of these, as in the earlier price agree-
ments, the ruling motive was the removal of competition.

They did not, however, finally eliminate competition. -On the con-
trary, a broad movement at once became apparent which threatened
competition on a larger scale and probably more severe than any in
steel history. This was the process known as "integration."

The situation in 1899-1900 was as follows: There were three great
companies — the Carnegie Company, the Federal Steel, and the National
Steel — dominating the production of crude and semifinished steel.
This may be called the "primary" group. Six other large concerns —
the American Steel and Wire, American Tin Plate, American Steel
Hoop, American Sheet Steel, National Tube, and American Bridge —
severally controlled these fighter finished products. These formed
the "secondary" group.

4525°— 11 2 xvn


But, large as these concerns were, no one of them was entirely self-
sufficient. The ' ' secondary " group was dependent on the ' ' primary "
for its crude steel; the "primary" largely dependent on the "sec-
ondary" for a market for its products. Few were completely
"integrated;" that is, few carried through under one control, with
the accompanying advantages, the entire industrial process from the
ore to the finished product, Unking up ore and coal mines, transpor-
tation, blast furnaces, steel works, roUing mills, and finished manu-

Immediately, however, came the next step. These great concerns
almost simultaneously began the final linking up of the chain of pro-
duction. Once begun by one concern, others followed in self-
defense. The "secondary" companies began to reach back, acquir-
ing ore reserves and crude steel plants. For example, in 1900 the
Steel and Wire Company, whose supply of materials had previously
been purchased mainly from the Carnegie or the Federal company,
planned to make its own steel; likewise the National Tube Company.
The "primary" concerns, finding these their chief customers turning
into rivals, retahated by reaching forward to the manufacture of
finished products.

Paramount in importance was the ore. The recognition of that
importance came strangely late, but, once recognized, it became an
axiom that no large concern could stay in the business unless fortified
by its own ore reserves. By 1900 the bulk of the Lake ores was in the
hands of less than a dozen companies, with a similar concentration
in coking coal.

Such efforts on the part of these great concerns, in striving each
to "integrate," to make itseK wholly independent, threatened to
result in a great and sudden increase and duphcation of the steel
producing and finishing capacity of the country, and to involve them
also in an invasion of each other's business.

Thus there was suddenly revealed to the industry what the trade
press at the time called "the impending struggle of the giants," a con-
test between great concerns who under such circumstances might be
forced to work out, in rigorous competition, the survival of the fittest.

Such were the conditions in the steel industrj' in 1900. The spark
that hghted the train was the threat of the Carnegie Comjiany to
erect a great tube plant near Cleveland, thus invading the field of
finished manufacture.

Steel men and the various associated financial mterests regarded
this situation with much alarm. In such competition they^saw a
great danger to their businesses, especially to the profitable quasi
monopolies in certain branches of the trade. In avertino- it tliev
also saw a great opportunity. The extraordinary era of industrial
expansion was still on; the public were stUl eagerly absorbing laro-o



issues of securities. By merging these, conflicting interests into a
great corporation, the threatened "steel war" would be averted, and
great profits realized from the flotation of securities.

With amazing swiftness, in a few weeks, the United States Steel
Corporation was thus organized, and began business on April 1, 1901.
Its total capitalization was a little over $1,402,000,000 (including
bonds). It is strictly a "holding" company — that is, it does not
mine, manufacture, transport, or sell; it simply owns the stock (as a
rule all the stock) of its constituent concerns. The concerns acquired
were as follows:

Acquired 1901 :

Carnegie Company (of New

Federal Steel Company.

National Steel Company.

American Steel and Wire

American Sheet Steel Com-

American Tin Plate Com-




Acquired subsequently :

Union Steel Company (1902) .
Clairton Steel Company

Tennessee Coal, Iron and
Railroad Company (1907).


American Bridge Company.

National Tube Company.

Bessemer Steamship Com-

Shelby Steel Tube Company.

Lake Superior Consolidated
Iron Mines.

Thus competition between these concerns was eliminated, while
enormous profits were made from the fiotation of securities, with,
also, an unparalleled stock commission to the underwriting syndicate,
which netted a clear profit of about $62,500,000 in cash.

At its formation the United States Steel Corporation (referred to
herein as the "Corporation") controlled about two-thirds of the
country's production of crude steel, and from one-half to four-fifths
of the principal rolled steel products. It comprised ore, coal, lime-
stone, natural gas, railway and steamship companies, blast furnaces,
steel works, rolling mills, finishing plants, and various other proper-
ties. It was thus a thoroughly integrated concern, from ore to fin-
ished products.

There remained outside the merger a number of great companies of
the primary sort, such as Jones & Laughlin, the Pennsylvania, Cam-
bria, Lackawanna, Republic and Colorado Fuel and Iron companies,
and numerous concerns of the secondary type. While overshadowed
by the Steel Corporation, these included strong, efficient, and growing
businesses, furnishing a basis for vigorous competition.



The Steel Corporation is the greatest industrial concern in the
United States, with the largest properties, and of international impor-
tance. It is the most conspicuous example of the modern corporate
organization of great businesses. As such, the relation of its invest-
ment to its capitaUzation and to its earning power are matters of
public concern. The Corporation itself has recognized this fact m
its public reports, and has also furnished very extensive information
to the Bureau.

The Corporation was organized with (in round numbers) 510 mil-
lions of preferred stock; 508 millions of common stock; 303 millions
of Corporation bonds, and about 81 millions of underlying and mis-
cellaneous obligations; a total of over 1,402 million dollars.

Speaking broadly, such capitalization amounted to the claim, the
representation, that there was a value in this concern which would
justify a fair business return on this capitalization. The Bureau finds,
on the contrary, that in 1901 the fair market value of its tangible
property was about 700 million dollars, slightly less than one-haK its
capitalization. The other half, the excess of about 700 million
dollars, is thus separated and stands out, embodying the essential
public questions raised by the Bureau's analysis of its investment.
In so far as that excess represented value in 1901, it was value due
either to increased earning power from elimination of competition;
concentrated ownership of the basic natural resources, iron ore and
coal; or, in some degree, integration efficiency.

When such values are capitalized into dividend or interest bearing
securities, they involve important public problems. They are merely
another name for price policy, and the whole pubhc is ultimately
concerned in steel prices. For that sufficient reason the bulk of this
part of the report is devoted to an analysis of the Corporation's

Three separate methods have been used in valuing its assets in 1901 :

(a) By historical study of the formation of constituent concerns;

(b) by market values of the securities of constituent concerns; (c) by
detailed estimates of physical properties, classified by departments of
business. By the first method the valuation is $676 000 000- by the
second, $793,000,000; and by the third, $682,000,000. None' of these
figures mcludes any merger, integration, or monopolistic factors
ansmg from the combination of 1901. It is precisely the obiect of
the Bureau to distinguish such values from ordinary property value

The first valuation rests chiefly on evidence that the tano-ible nroD-
erty of most of the constituent concerns did not exceed the preforr d
stock. A cash option price was usually fixed by their promoters'^ " ^d


the original owners could take this, or an equal amount of preferred
stock, with a bonus in common stock, in the new combinations.

This was the case with the National Steel, American Tin Plate,
American Sheet Steel, American Steel Hoop, American Steel and Wire,
National Tube, and American Bridge companies. The Federal Steel
Company's property somewhat exceeded its preferred stock. In the
Carnegie Company, reliable book values indicate that its tangible
assets did not exceed its bond issue. The property of the Lake
Superior Consolidated Iron Mines was taken as equal to the par value
of its stock.

This gives the valuations at the dates of organization. Adding now
the surplus earnings of these concerns up to April, 1901, plus the new
cash provided for the Corporation, and sundry miscellaneous obliga-
tions representing property, gives the total stated above, $676,000,000.

Valuation by market prices of the securities of constituent com-
panies (second method) gives about $793,000,000, or $117,000,000
more than the preceding valuation. Such excess is natural, as this
method necessarily covers all property, including intangible merger
values in these consolidations prior to the Steel Corporation.

The valuation by departments (third method), the most detailed
and conclusive, was as follows:

Manufacturing properties, including blast furnaces $250, 000, 000

Transportation properties 91, 500, 000

Coal and coke properties 80, 000, 000

Natural gas and limestone properties 24, 000, 000

Current assets 136, 500, 000

Ore properties 100, 000, 000

Total 682, 000, 000

In July, 1902, in defending its capitalization, the Corporation itself
made an estimate similarly classified. If we omit iron-ore properties
in each case, that estimate exceeded the third valuation by the Bureau
by about $175,000,000, or 30 per cent. But in ore the Bureau's
valuation was $100,000,000, wliile the Corporation's was $700,000,000,
seven times as great, a difference of $600,000,000. Thus the ore
reserves, the dominant factor in the steel industry, are, in this
valuation of its assets by the Steel Corporation, made to stand for
the excess of capitalization over value of tangible assets.

And it is true, as is thus tacitly assumed by the Corporation itself,
that in these ore holdings, under the present status of ownership and
control, there exists an earning power and a control of the industry
on which rest largely those ultimate intangible merger values which
must be invoked in any attempt to justify its great capitalization.

The determination of the ordinary market value of this ore in 1901
segregates such ordinary value from the pecuhar merger and combi-
nation values evidently attributed to it by its owner. The Bureau's


valuation of $100,000,000 for the ore was reached by a study of mar-
ket prices for similar properties about 1901; from the price paid by
the Corporation for a large part of its own holdings; and from a calcu-
lation of the "present worth" of the royalties paid on leased ore.
There was a marked agreement in the results by these various meth-
ods, and it is certain that $100,000,000 is a liberal figure.

To sum up: The actual market value of the Steel Corporation's
entire tangible properties at its formation, omitting all factors of
merger, integration, and concentration, was not over $700,000,000,
just about one-half its capitalization.

The Bureau does not assume to say that the capitahzation should
have been one-half what it was, or indorse at this time any particular
theory of capitalization. It has simply separated the market value
of physical property in tliis vast concern from value based on earning
power derived from intangible factors. It has defined these intangible
factors and pointed out their peculiar relationship to price policy and
the public interest, to wit, merger value, integration value, monopo-
listic value, and above all the incalculable industrial power that rests
on the control of the bulk of the available iron ore of the country.


Increases in propertt. — Since its formation, the Corporation,
from surplus earnings (allowing for depreciation and changes in
securities), has made good much of the original excess of its capitaHza- '
tion over tangible property. That excess in 1901 was about 700
million dollars, or 100 per cent, and in 1910 only about 280 million
dollars, or 24 per cent. The total tangible value in 1910 was 1,187
million dollars. As in 1901, there is omitted here all the merger values
heretofore referred to, and all appreciation of natural resources above
the actual cost thereof to the Corporation.

Profits. — ^The rate of profit has been calculated, not on the Corpora-
tion's capital stock, but on the total investment as computed by the
Bureau. Operating, administrative, and general expenses, as well as
taxes, have been deducted from earnings; also true depreciation, a
matter of some intricacy. The Corporation's allowance for depre-
ciation, including mineral exhaustion and obsolescence, has exceeded
a necessary allowance. The Bureau has c aref uUy determined from the
records of the Corporation the proper depreciation, and has restored
the excess to profits.

Thus arrived at, the average rate of profit on actual investment from
April 1, 1901, to December 31, 1910, was 12 per cent. It was liighest
in 1902, 15.9 per cent, and lowest in 1904, 7.6 per cent. The yearly
rates do not indicate any pronounced tendency, but have on the whole
sUghtly decreased.


It must be remembered, however, that 12 per cent profit for one
small concern out of many is one thing. Other concerns may make
much less. It is a very different thing when, as in this case, one-half
of the whole industry has been maintained on the level of a 12 per cent

It must be made entirely clear that this 1 2 per cent is the rate of
profit on the whole investment. Were that part of the investment
deducted which may be said to be borrowed money, chargeable only
with a low "fixed rate of return, the rate on the remainder, on that
part which may be considered as put in by the stockholders, would
be considerably higher.

Position in the industry. — While in production the Steel Cor-
poration from the beginning has overshadowed its principal rivals,
and even exceeded all of its competitors combined, its proportion of
the total has materially diminished in the ten years of its operation.

In pig iron production, the Corporation has just about maintained
its original position; in 1901, 43.2 per cent; in 1910, 43.4 per cent.
But in steel, both crude and finished, it has lost ground; in 1901,
66 per cent of the steel ingots and castings; in 1910, only 54 per cent,
notwithstanding great additions to its capacity. RoUed steel prod-
ucts generally show an almost steady loss, especially structural
shapes and tin plate. Even in rails there has been no gain.

In short, speaking broadly, as against 60 per cent of all crude and
finished steel production in 1901, the Corporation now has not much
over 50 per cent, indicating conclusively the continuous presence of
strong and increasing independent production. The competition of
these independents with the Steel Corporation so far as prices are
concerned has been modified by the policy of " cooperation." This
will be discussed in a later part of the report.

In efiiciency, location of plant, and equipment — in capacity rather
than actual production — the Corporation is materially stronger than
the foregoing figures indicate, and in case of continued trade depres-
sion this strength would probably show itself in increased control.
In ownership of railroads for handling its materials it stands in a
class by itself. It has a strong but not exceptional position in water
transportation. Its control of the best qualities of coking coal is
very strong, though modified of late by new processes which make
other coal more or less available for coking purposes.

Its position in ore reserves, on the other hand, is much stronger than
in any other factor in the business. It is almost impossible, and would
be unwise, to attempt any quantitative statement of its proportion
of the total ore of the country; but of the Lake ores, on which the
present steel industry is based, it has about 75 per cent, and this
advantage is materially enhanced by its extensive control of the rail


transportation of the ore from the mines to the Lakes. The so-called
HUl lease made by the Corporation in 1907, with an unprecedentedly
high rate of royalty and other onerous conditions, is a striking
instance of the pohcy of the Corporation to maintain a high degree of
control of ore. This lease covered enormous ore holdings.

There is much significance, also, in the prevailing custom of leasing
ore mines under royalty instead of purchasing outright. This sys-
tem as applied in the Lake ore region, without, any effective restric-
tions as to size of holdings, plainly facilitates concentration of ore
property, as it greatly reduces the investment required to control
large bodies of ore. It has unquestionably had a large influence in
producing the high concentration of control now existing in Lake
ores, as well as elsewhere.

Thus, the industry itself rests physically on the ore; the Corpora-
tion based one-half its capitaUzation on the ore; its profits on ore,
as will later be shown, are large; and in the ore is its highest degree
of concentration and control. The ore, therefore, is of primary sig-
nificance in the Corporation's dominance, and in that resource chiefly
are involved the industry's problems of ultimate pubhc interest.
Very respectfully,

Herbert Knox Smith,

Commissioner of Corporations.

The President.




The principal features of this part of the Bureau's report upon the
steel industry are :

1. The marked development of consolidation, culminating in the
organization of the United States Steel Corporation.

2. Capitalization by the United States Steel Corporation far in
excess of property values. The Bureau's valuation of the tangible
assets in 1901 is $682,000,000, as against $1,400,000,000 of issued

3. An analysis of the cost of the subsequent additions to the prop-
erty of the Corporation, showing a total investment in tangible
property on December 31, 1910, of $1,187,000,000, as against
$1,468,000,000 outstanding securities.

4. An average rate of profit from 1901 to 1910 on the Corporation's
actual investment, as computed by the Bureau, of 12 per cent.

5. An almost continuous decrease in the Corporation's proportion
of the 0U+ ut of principal steel products, but a marked increase in its
ownership or control of iron-ore deposits.


Prior to 1898 the iron and steel business of the United States was
distributed among a very large number of interests. There was
active and general competition. It is true that in the production of
crude steel (ingots), semifinished steel (billets, slabs, sheet bars, etc.),
and heavy finished steel products, such as rails, plates, and structural
material, substantial prominence had been attained by a few com-
panies. Furthermore, there were occasional instances of consolida-
tion, notably the organization of the Illinois Steel Company in 1889



as a merger of several important steel concerns in Chicago and vicinity.
The Carnegie Steel Company (I Ad.), moreover, while not generally
considered a consolidation, had in its expansion taken on many
features of a consohdation. Despite price agreements of more or
less significance and duration these large steel-making companies
were, as a rule, in active competition. With respect to such finished
products as merchant bars, tubes, sheets, tin plate, wire, and wire
nails, the number of manufacturers was large and rivalry between
them was keen. In short, the distinguishing characteristic of the
industry at this period was competition.

Another feature of the industry at this period was that most of

Online LibraryUnited States. Bureau of CorporationsReport of the commissioner of corporations on the steel industry ... → online text (page 2 of 70)