Forging America: The History of Bethlehem Steel - Chapter 3

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Cleveland agreed with a Navy board of inquiry that the armor plate should have been of better quality. He endorsed a fine against Carnegie Steel, but the amount was less than the Navy wanted. His decision, in effect, was a compromise.

Critics weren't satisfied. In Congress, a House subcommittee was formed to investigate whether Schwab authorized or allowed fraudulent practices. The most serious charges were that he failed to follow the Navy's specifications for armor plate, that he falsified test results and covered up defects, and that he had secretly re-treated plates that were chosen for a ballistics test.

Schwab, in his testimony, said that because the Navy wasn't knowledgeable about steelmaking, it shouldn't be prescribing the armor-making process, but should only be concerned with results.

He admitted tampering with preliminary test results and hiding surface defects, but said that was to please Navy inspectors, who didn't know enough to see that the steel was actually of high quality. He said the plates for the ballistics test were re-treated as an experiment, and Navy officials weren't told because they ''were not practical men and they would not have understood this thing.''

The subcommittee found Schwab's arguments fell short and concluded that the results of his actions ''would be the sacrifice of the lives of our seamen in time of war, and with them, perhaps, the dearest interests of our nation.'' It upheld the Navy's original findings and the reduced fine set by the president.

Carnegie, who was lashed in the press, stood by Schwab and in 1897 made him president of the Carnegie Steel Co., which had four plants in the Pittsburgh area. He chose Schwab mainly because the two shared a belief in the importance of producing a high volume of steel at the lowest cost. Schwab swung the ax and drove up Carnegie Steel's profits.

Early in 1901, Schwab arranged a merger between Carnegie's interests and the steel interests of investment banker J. Pierpont Morgan to create U.S. Steel Corp., which combined 190 companies into the largest steelmaker in America and the world's first billion-dollar corporation.

Schwab had become rich working for Carnegie, who retired after selling out to Morgan, but the U.S. Steel deal made him even richer. Having owned 6 percent of Carnegie Steel, he got $25 million in the new corporation's bonds.

In April 1901, the 39-year-old Schwab became the company's first president and moved to the corporate headquarters in New York, which became his playground. He dived into the social scene and began building a block-long mansion modeled after a French chateau.

He called his new home Riverside. Situated on Riverside Drive between 74th and 75th streets in Manhattan, it was the biggest private residence in the city — four stories high, made of steel and granite, with 90 bedrooms, a swimming pool, a bowling alley, a gymnasium, a wine cellar, an art gallery stocked with masterpieces, and its own power plant. It would take four years and $8 million to build, furnish and decorate.

Among the contents was a $100,000 organ on which Schwab had his personal organist, Archer Gibson, play classics. As a finishing touch, Schwab had 100 Flemish women brought to America to weave tapestries to cover the pipes.

Schwab kept three French chefs on call 24 hours a day, and masseurs were available at any time as well. He hired Metropolitan Opera players to come and perform highlights from arias he liked, because he didn't have the patience to sit through an entire opera.

''I suppose I am too much of a realist,'' he said, ''to appreciate a man or a woman taking 20 minutes to die, warbling all the time.''

Among the entertainers was famed tenor Enrico Caruso, who performed for Schwab and his guests for $10,000 a night.

For other pleasures, Schwab bedded Broadway showgirls. He had a long affair with Boston businesswoman Myrtle Hayes that ended when he learned she had forged his name to $24,000 in promissory notes. In 1924, she admitted her guilt in court.

Unfortunately for Schwab, his days at the U.S. Steel office weren't as lighthearted as his night life. Hoping to run the company the way he saw fit, he instead had to butt heads with a Morgan associate who was above him in the chain of command — Elbert Gary, the chairman of U.S. Steel's Executive Committee.

Opposites in manner and business philosophy, Schwab and Gary scraped against each other like tectonic plates. Schwab was a boisterous libertine who gambled, craved publicity and had mistresses. Gary was a preachy, teetotaling Methodist, reserved and respectable.

Schwab, who had worked in steel plants since he was a boy, slashed costs and prices, offered bonuses to workers and managers for jobs well done, and liberally spent money for expansion.

Gary had been a lawyer and a judge with a reputation for honesty. As a businessman, he was a consolidator who wanted to make U.S. Steel's holdings more efficient, not add to them. He sought stable prices and harmony among competitors, and didn't believe in bonuses for individual performance.

As Schwab had demonstrated with the Navy in the armor-plate scandal, he hated having to deal with people he believed didn't know the practical side of steelmaking. He tried to sidestep Gary's authority, and Gary responded by reining him in.

''Judge Gary, who had no real knowledge of the steel business, forever opposed me on some of the methods and principles that I had seen worked out with Carnegie — methods that had made the Carnegie company the most successful in the world,'' Schwab said later.

In May 1901, about eight weeks after joining U.S. Steel, Schwab bought the Bethlehem Steel Co. for himself. Bethlehem was a small, specialized company that made heavy steel forgings for guns and marine engines, and was the only company other than U.S. Steel that produced armor plate. It had 4,000 workers, a plant that stretched for a mile and a half along the Lehigh River, and substantial earnings that would total $1.4 million in 1901.


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