One day in 1942, my father came home and cried.  I had never seen Dad cry. But he cried that day because he was so grateful—he had gotten a job in the accounting department of the Bethlehem Steel Corporation. He had lost his small business in the Depression and had struggled to support our family of five, and now he was joining the nation's seventh largest industrial company—America's top military contractor in World War II. This company had built the Golden Gate Bridge, most of the Manhattan skyscrapers, the George Washington Bridge, the Chicago Merchandise Mart and the United States Supreme Court. Dad's future seemed bright.

    By the time I left Bethlehem in 1975, however, the corporation was awash in red ink. The worst year in its 73-year history was just ahead—1979, when on September 30, "Black Friday," 2,500 shocked white-collar workers were handed their dismissal notices.  Many successful men and women in the company's headquarters cried then. "A glorious era was coming to a traumatic end," wrote John Strohmeyer, editor of the Bethlehem Globe Times for 28 years. That awful year revealed a net loss of $488 million.

    The crisis worsened. Bethlehem Steel filed for bankruptcy protection on October 17, 2001. The United States Pension Benefit Guaranty Corporation took over Steel's pensions on December 18, and by May 7, 2003, the International Steel Group purchased all of Bethlehem Steel's assets.  This once-mighty industrial empire was no more.

    What happened? What went wrong?
 
    In 1837, a Welshman named David Thomas tried burning hard anthracite coal instead of soft coke to produce iron. His successful attempt would soon drive a revolution 3,000 miles away in Pennsylvania.

    Northeastern Pennsylvania was rich in anthracite coal, iron ore and limestone. Entrepreneurs Josiah White and Erskine Hazard saw the potential in Thomas' success and lured the Welshman to the Lehigh Valley of Pennsylvania in 1839. Thomas supervised the building of Furnace No. 1, and by 1850 the Lehigh Valley was the iron-making capital of the nation. In the 1860s, the Lehigh Valley Railroad Company built an ironworks in South Bethlehem along the Lehigh River to make iron rails for tracks.  Asa Packer, the millionaire owner, Robert Sayre, a civil engineer, and the gifted ironmaster John Fritz spearheaded this venture, creating the framework for Bethlehem Steel. Bethlehem Iron, as it was then called, contributed to the Union victory in the Civil War. After the war, the company committed themselves to making steel, and a technological gem of a steel mill was erected in South Bethlehem.  There 700 employees, mainly of German and Irish descent, labored "in noise and heat" to roll its first steel rails. Packer and Sayre headed an elite management team who treated their employees as peasants in a medieval feudal system. The workers resented this paternalism, so from the beginning relationships between management and labor were a problem.

    By 1873, the Bethlehem plant had become an efficient Bessemer steelworks. Large military contracts led to open-hearth steel making—an improvement over the Bessemer technology—and Bethlehem Iron continued to prosper. In 1899, the principal shareholders of Bethlehem Iron organized the new Bethlehem Steel Company; in 1901, the company was sold to Charles M. Schwab, president of the U. S. Steel Corporation, the nation's largest steel maker. Schwab boasted, "I intend to make Bethlehem the prize steel works of its class in the entire world" (Hilliard and Venditta 39).


    Forging America, Ardith Hilliard and David Venditta's history of Bethlehem Steel, calls Schwab "the king of steel." Early in 1901, Schwab arranged a merger between Carnegie's steel interests and those of J. P. Morgan, creating the U. S. Steel Corporation and becoming its first president at age 39. However, he was not given a free hand to make the progress he wanted, so in May of the same year he bought the fledgling Bethlehem Steel Company for himself. He secured the patent rights to Henry Grey's revolutionary process for rolling wide-flange beams and columns in a single section directly from an ingot, which enabled Bethlehem to erect buildings "that seemed to kiss the clouds." Labor problems confronted Schwab, but he solved them in management's favor. During World War I, with fat military contracts from Britain and France, Bethlehem became one of the largest, most profitable companies in the world, second only to U. S. Steel.

    In the 1920s, Schwab and his protégé Eugene Grace used the money earned during the war to purchase a number of competitors. Schwab turned over daily management of Bethlehem Steel to his "boy," Grace, but his strategies continued to shape the company: the use of pay incentives for managers and workers to produce more, the application of steel for new consumer products such as autos, promotion from within, and a central Board of Directors composed of handsomely paid loyal top executives of the company. He countered the labor union movement threat by creating his own cooperative version called the "Bethlehem Employee Representation Plan," giving labor representatives an advisory capacity but retaining real decision making as the prerogative of management.

    Schwab avoided the appearance of anti-unionism but was no friend to labor. One laborer at Sparrows Point described work in the 1920s: "You had to work till you dropped dead…Retirement—hell, there was no such thing." In the 1930s, President Roosevelt's Secretary of Labor, Frances Perkins, fought for the welfare of the steel workers and tried to bring management and labor together, but Eugene Grace and other steel executives strongly opposed these attempts. In 1936, John L. Lewis began to organize a union in the steel industry and made slow but real progress, with U.S. Steel signing a union contract in1937, but Grace and Bethlehem Steel continued to resist unionization, declaring it was "not necessary."


    John Strohmeyer assessed Eugene Grace in a 1986 book, Crisis In Bethlehem. "When Schwab died in 1939, the company became a one-man show. Grace's administrative style meant keeping a finger on everything that went on. […] his word was gospel in all matters" (83-84).  Grace "charted the course of Bethlehem's growth and prosperity with the solitary and supreme status of a ship captain," and shipbuilding was a crucial component of Bethlehem's success. World War II was another huge profit opportunity. When Grace learned of Hitler's invasion of Poland and Britain and France's declaration of war upon Germany, he told his golf partners at the Country Club where he played regularly, "Gentlemen, we are going to make some money!" (Hilliard and Venditta 92). Bethlehem soon got $300 million worth of orders from Britain, and when Pearl Harbor exploded, so did Bethlehem Steel. Employment at the main plant more than doubled, from 13,000 in 1939 to 31,500 in 1943. Bethlehem produced one-third of the steel needed by the Navy in the war, with gross sales of $1.33 billion. Grace cooperated with the Administration and found common ground with union leaders, who pledged not to strike. By the end of the war, Bethlehem was American's number one military contractor. Grace boasted he would provide the steel the world needed to rebuild, and his company grew fat in the post-war era. Grace was the highest paid corporate executive in the nation for many years. But trouble was on the horizon.

    A lone farseeing leader, William H. Johnstone, chair of the finance committee in Bethlehem Steel's bonanza years, saw change coming: new forces in the economy, revolutionary new technology in steel making, and traditional markets invaded by international competition. He warned his colleagues, but Bethlehem did not heed—things were going too well. John F. Heinz, a speechwriter for the top executives, saw fresh ideas and independent thought stifled. "The definition of intelligence was to do things the Bethlehem way…the way we always did it in the past" (quoted in Strohmeyer 85).

    Grace also ignored the growing power of the union, refusing to bargain with labor despite President Harry Truman's intervention. A nationwide strike against the steel industry ensued in 1946, and labor won. Labor leaders proposed new approaches for the industry, and one man, John G. Roberts, Sr., General Manager of the Sparrows Point plant, promoted management-labor teamwork; however, his wisdom did not prevail.  Management, led by Grace, resisted progressive moves.

    The 1950s began with Grace, approaching eighty, still at the helm. The Board of Directors and company officers were still an "inside" group. The autocratic Chairman perpetuated a monolithic structure that produced profits for decades.  Fortune magazine wrote, "Bethlehem has geared every unit of its empire to a functional efficiency that Adolf Hitler would envy'" (qtd in Hilliard and Venditta 60).

    In 1956 Bethlehem Steel enlarged the Sparrows Point plant, and as a result, 1957 was a very profitable year, yielding the biggest bonuses since 1929. But the world was on the threshold of the space age. Demand for steel was down, as manufacturers utilized aluminum and plastic instead, but Grace dismissed the idea of moving to new high-tech products. It was not until the 1960s, under CEO Arthur B. Homer, that a modern Research Center was established, yet even then the company remained skeptical about change. In a 1962 interview with Fortune, Homer said the company was rich enough not to innovate. "We have a nice business as it is."  
 
    Eugene Grace died in July 1960 at age 83. Flags flew at half-mast all over Bethlehem. A. B. Homer succeeded him. A retirement policy was instituted to make retirement mandatory at age 65. But Homer did not change the old pattern of raising steel prices to pay for union wage settlements, contributing to the famous confrontation of President Kennedy with the steel industry in 1962.

    Slowly but surely the laborers in the steel mills were gaining economic justice, long overdue. When in 1965 a strike threat aroused President Lyndon Johnson in the midst of the expanding war in Vietnam, steelworkers won a three-year contract with a wage increase twice the size management wanted to offer. This added cost was multiplied by Bethlehem's commitment to extend the benefits labor won to its white-collar workers, by anachronistic work rules that the union defended religiously, by the thirteen-week vacations granted to many employees, and by rising health and pension benefits. Unlike U.S. Steel, Bethlehem deferred underwriting its pensions to the future while using its cash to modernize and expand plants.

    Edmund F. Martin, who became Chief Executive Officer in 1964, made more changes. He wanted outside Directors on the Board and lowered executive salaries, and he oversaw the opening of the new integrated Burns harbor plant on the banks of Lake Michigan. But times and technologies were changing while Bethlehem was clinging to the past, following Andrew Carnegie's dictum that "Pioneering doesn't pay." Faced with competition from foreign steel makers, Bethlehem lobbied the federal government to set quotas on foreign steel rather than develop the new technologies that would enable it to offer quality products at lower prices. In 1970, when Martin handed the company over to Stewart S. Cort, profits dipped below $100 million for the first time in eight years.

    Cort also faced a serious discrimination suit filed by the federal government against Bethlehem because of the ways it dealt with minorities. In 1973 it was the largest industrial company ever to be ordered by the Labor Department to correct its discriminatory practices, primarily at Sparrows Point. Bethlehem agreed to pay millions in back pay to 40,000 minority workers.

    Lewis W. Foy became the new chairman in 1974, a year in which Bethlehem earned a record $342 million, with 115,720 employees at work. But in 1975 Japanese steel makers surpassed Americans in productivity. From now on American mills were losing market share to foreign imports in a dwindling market. The year 1977 ended with a net loss of $488 million. Yet, as late as 1979, Foy was claiming that "the market for steel is growing" and was pushing for expansion when what was needed was retrenchment and modernization. He retired in 1980, and by 1985 admitted to Strohmeyer that "a helluva lot of mistakes" were made. "We didn't keep ourselves lean enough […]. We tried to be all things to all people" (Strohmeyer 103-04). He laid blame on the government for its antitrust actions against Bethlehem, its tough stance on steel pricing, and its expensive environmental mandates. Yet when Strohmeyer asked him directly, "What took you so long to recognize that American steel was in trouble?" Foy replied, "I don't know how to answer that" (107).

    To cope with their declining fortunes, the company hired an outsider—Donald H. Trautlein, a successful accountant who knew little about steel making but much about Bethlehem Steel's fiscal condition, having for many years handled its account for Price Waterhouse. In his first report to employees, he told them just how sick the company was and called for drastic measures, including pay cuts for executives and reduction of excess salaried workers. There were mass dismissals, changing many lives overnight. Sparrows Point became a graveyard. Employment at the Bethlehem plant plummeted to 5,661 in 1985. When the research laboratory was sold, the future looked grim indeed. Trautlein got out while the getting was good; in 1986 he was given a generous salary increase and a "golden parachute."

    From that time until 2003, under four successive new CEOs, Bethlehem struggled, managing some profitable quarters when conditions allowed, but clearly fighting a losing battle to survive. In the 1990s pensioners outnumbered workers three to one, and mini-mills such as Nucor were winning contracts Bethlehem normally won. 1992 ended with $550 million in losses. On November 18, 1995, the company ended steel making in Bethlehem. Tom Jones, a former union president for the local in Bethlehem, mourned, "The steel that built half of New York City was rolled in those mills, and they just let it all die" (Hilliard and Venditta 136).

    In 2001 the company posted a record $1.1 billion loss, and with a combined debt of $4.5 billion filed for Chapter 11 bankruptcy protection. In 2002 its once blue-chip stock was removed from the New York Stock Exchange for trading below $1.00 per share. In December the U.S. Pension Benefit Guaranty Corporation took over Bethlehem's pensions, and in 2003 International Steel Group bought its assets for $1.5 billion. Fortune magazine published an "autopsy" by Carol J. Loomis in its April 2004 issue, concluding with the question, "Could a really great businessman like Jack Welch [who led General Electric successfully for many years] have come into the company 40 years ago and saved it?" The experts who were asked thought the question unanswerable, so the magazine posed the question directly to Welch. He puzzled over it for a while, and then finally said, "I don't think Christ could have done it" (Loomis).


    For this paper, I interviewed several Bethlehem Steel employees who knew the situation from the inside. Michael Zito started as a laborer in 1940 and worked his way up to become General Manager of the Blast Furnace Division. He supervised 500 people, and was responsible for blast furnaces that could produce multi-million tons of iron in an eight-hour shift. What went wrong? He cited not only "the greed of the labor unions" and "much office labor waste, many people hired with little to do," but also management mistakes, "the profits that should have been channeled into making a better steel product, more efficiently and less costly," and the "complacency of top management, who did not see the competition from foreign steel, or chose to ignore it." Looking back in retirement and worried about the future of his pension, Mike wrote, "that such a large prestigious company that was such a leader in its industry, that meant so much to the economy, could collapse in front of our faces so quickly seems inconceivable."

    I also listened to Kenneth Niewoehner, a metallurgical engineer in the home office. Ken was a "legacy employee," his father having long managed the St. Louis sales office. (By age 10, Ken had seen the movie "Building the Golden Gate Bridge by Bethlehem" many times.) Ken sees the company's demise as a complex story. Management kept unprofitable steel plants open too long, he believes; in 1965 U.S. Steel shut down all products requiring more than four man-hours per ton, but Bethlehem tried to save the products, the plants and the men's jobs, taking terrible losses. New mini-mills that had no past work rules or high labor costs grew profitable at Bethlehem's expense. The union would not make concessions needed in wages and benefits. "In hindsight," Ken concludes, "the demise might have been prevented by management taking a ruthless position, shutting down facilities immediately when they showed a loss."


    1.  What made the Bethlehem Steel Corporation such a large, successful industry for so long? Charles Schwab utilized new steel technology, found an efficient and ruthless (in regard to labor) operations man, Eugene Grace, and gave generous financial rewards to the men at the top. The economics of two world wars with post war expansion were important factors. The laborers in the steel mills and the white collar workers who directed or supported them worked diligently as a team for many years, proud to be number one or two in America and grateful for the compensation that enabled them to live well.

    2.  Why did this empire decline and fall?  Top management failed to meet the challenge of changing technology, changing markets, and world competition. Greed, foremost that of management but also that of the labor union, won out over rationality. Add in failure to do long range thinking; obesity instead of leanness; smart competition from abroad, sometimes supported by governments; smart new competition at home; and finally, the vagaries of economic times and a corporate culture not open to change.

    3. Why does this sad story matter? Because this could happen again. Our leaders will always face new challenges that demand new responses.  They ignore such challenges at their peril. As George Santayana, the famous Spanish-American philosopher observed, "Those who cannot remember the past are condemned to repeat it."

Hilliard, Ardith and Venditta, David. Forging America: The Story of Bethlehem Steel. Allentown, PA: The Morning Call Press, 2003.

Loomis, Carol J.  "The Sinking of Bethlehem Steel." Fortune 149:7 (April 5, 2004). Also available at http://money.cnn.com/magazines/
fortune/fortune_archive/2004/04/05/366339/

Reutter, Mark. Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might. Urbana and Chicago: University of Illinois Press, 2004.

Strohmeyer, John. Crisis in Bethlehem. Bethesda, MD: Adler & Adler, Publishers, 1986.

Young, Donald and Bartholomew, Ann. Bethlehem Steel: A Photographic History. Easton, PA: National Canal Museum and National Museum of Industrial History, 2010.