BEFORE 1898, the steel industry was the scene of active and, at times, destructive competition. In this early period, various gentlemen's agreements and pools were organized in an effort to control the production of steel rails, billets, wire, nails and other products, but the outstanding characteristic of these agreements was the "frequency with which they collapsed."1 Their weakness was that inherent in any pool or gentlemen's agreement, namely that "60 per cent of the agreers are gentlemen, 30 per cent just act like gentlemen, and 10 per cent neither are nor act like gentlemen." If production and prices were to be controlled, these loose-knit agreements had to be superseded by more stable forms of organization. The latter came upon the industry with a suddenness and intensity seldom paralleled in American industrial history.
From 1898 to 1900, a vast concentration movement took place in the steel industry. Large companies such as Federal Steel, National Steel, National Tube, American Bridge, and American Sheet Steel were organized. Dominated by three financial interest groups-Carnegie, Morgan, and Moore-these consolidations did not succeed in bringing "stability" to the industry. In fact, a fight between the newly formed giants seemed unavoidable.
Since each of the major interest groups was peculiarly vulnerable in case a "battle between the giants" materialized, and since cooperation promised to be more profitable than competition, stubbornness yielded to reason. In 1901, with the initiative of Charles Schwab, J. P. Morgan, and a corporation lawyer named James B. Dill, the interested parties agreed to form the "combination of combinations"-the U.S. Steel Corporation which at the time of its formation controlled approximately 65 per cent of the nation's steel capacity. The size of the $62,500,000 promotion fee which accrued to the Morgan banking syndicate immediately aroused "the suspicion that here, as in earlier combinations, the security issue was greatly inflated."2 Later investigation by the Commissioner of Corporations has justified this suspicion, for it was found that of the corporation's total capitalization of $1,402,846,817 only about half, $676,000,000, represented investment in tangible property. The rest, i.e., $726,846,817 minus reasonable allowance for good will, indicates, of course, the amount of excess capitalization or stock watering3 which, over a period of years, was eventually squeezed out of the capital structure and replaced with tangible assets in the form of mills and mines.
Considerable disagreement has attended discussions of the motives behind____________________
Reprinted with permission of the publisher from The Structure of American Industry by Walter Adams , editor. Third Edition, pp. 144-147. Copyright 1961 by The Macmillan Company.
In his testimony before the Stanley Committee in 1911, Judge Moore defended such stock watering as not at all unusual. Said the Judge: "Everybody knows what they [sic!] are getting when they get common stock. . . . They know they are not getting anything that represents assets."