”How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him.” (Adam Smith)
We live in an age of consolidation of corporate power. Huge companies and powerful men wield vast power in our society. This situation is not new. Corporate power has been a constant in American life since the middle of the 19th century.
This column is based in large part on the book Titan, by Ron Chernow. This author is in the news today because of his recent very well received best selling book on Alexander Hamilton. I’m going to look back in American history and see what we can learn about today’s economy by examining John D. Rockefeller’s Standard Oil. Created in 1870 when Rockefeller was 30, Standard Oil gained control of 90 percent of the world wide oil business by 1880. The Standard, as it was frequently called, still controlled 86 percent of the American refinery business in 1906, when it was in the last stages of its struggle against many years of antitrust legislation and legal setbacks.
It is not my intent in this article to draw direct parallels between Standard Oil and the software business. Has one company got control of the computer business the way Standard Oil had control of the oil business? Can a parallel be drawn between the way the Standard used railways to transport oil and the way modern companies use new computers to distributed pre-installed software? Just as Standard sold oil at a loss, does one company today force another company out of business by giving away products? Do politicians, sometimes bought and sold politicians, protect big computer companies in the same way that politicians protected Standard Oil?
There are no easy answers to these questions. But if we were going to wrestle with them, we might learn from first attempting to properly understand the past. Issues like those we face today have been faced before, and we can learn from reviewing those experiences.
In this column I will explain that the creator of Standard Oil, John D. Rockefeller, Sr., was a great man, a deeply religious man, a monopolist, and a public and vocal enemy of the free enterprise system. Standard oil was a highly innovative company that was embroiled in vicious legal battles from within two years of its inception. It engaged in extensive and highly successful attempts to influence the political system, and it secretly implemented a carefully thought out plan to create a vast, and ultimately highly successful, monopoly. This monopoly was never undone by market forces alone, but instead by legislation. When reading this article, you should understand that Standard Oil was but one of a series of vast trusts that emerged in an era when there were no laws to restrain monopolies.
Rockefeller the Man
In cases like this it is easy to settle for black and white interpretations of history. One is tempted to paint Rockefeller as either an angel or a devil, when in fact he was neither. Or perhaps it would be easier to say that he was both. Rockefeller was always extraordinary. When he was good, he was very good, and when he was bad, he was very bad.
From childhood, Rockefeller was a deeply religious Baptist, and a firm believer in charity, temperance, and abolitionist causes. It was not simply that he didn’t drink, but that he was a constant, and long term, supporter of temperance. He worked hard, for instance, to ban the sale of alcohol in the state of Ohio.
John D. Rockefeller made his fortune in Cleveland, Ohio, where he lived until Standard grew so large that he was forced to work out of New York City. He started in business in his late teens, and from his earliest years he gave a substantial portion of his income to charity. This was not just a whim of his later years, but something he did throughout his life, often at considerable cost to himself.
One of his most remarkable charitable causes was the creation of a respected school for black women in the deep south. To put it mildly, this was not a common charity in the second half of the 19th century.
Rockefeller married Laura Spelman, a woman whose family home was a stop on the Underground Railroad that helped slaves escape from the south before the Civil War. Her views on race relations encouraged him to work for the good of black people, though he was sometimes known to make racist comments about Jews.
Rockefeller was faithful to his wife, and a good and conscientious parent. In later years when he traveled, he almost always took a minister with him. He cared deeply about religion, attended his Baptist church at least once a week, and never wavered in his faith.
The founder of the University of Chicago, Rockefeller pioneered the idea of the charitable man of business. The tale of his often herculean efforts in charitable work would fill an interesting, and quite lengthy book. Primarily through home schooling, he groomed a son who with his father’s proud blessing went on to become one of the most influential philanthropists of his age.
In general, Rockefeller was a disciplined, hard working, even tempered, man. To most of those who knew him, he was unfailingly polite and considerate. Many found him to be a warm and thoughtful, though not always very close, friend.
Standard Oil and Monopolies
Even Rockefeller’s avid pursuit of a monopoly was driven, at least in part, by religion. Trying to fully understand the relationship between American protestant theology and money is no easy task. Certainly, there is now, and has always been, a class of Americans who believe that wealth is a sign of God’s grace, and there can be little doubt but that Rockefeller counted himself among that number.
Ron Chernow tells the tale of a Standard Oil employee, and a friend of Rockefeller’s, named Samuel Dodd, who told the following joke: “Well, as the ministers say when they get a call to higher salary, it seems to be the Lord’s will.” This saying could stand as an epigraph for Rockefeller’s life. He believed he had a God given talent for making money, and that the wealth he earned was proof of his virtue.
In Rockefeller’s eyes, the demonic force of evil that stood between him and his God given right to earn money was the free enterprise system. Today, we take it for granted that all Americans support the free enterprise system. But there is little evidence that the majority of the founding fathers supported it, and it is completely clear that Rockefeller, like many of the famous financial figures of his day, was opposed to it.
When Rockefeller was making his fortune in the 1860′s and 70′s, the oil business was plagued by boom and bust cycles that caused prices to fluctuate between lows of ten cents a barrel and highs of over $10 a barrel in a single year. Rockefeller rightly pointed out that it was impossible to conduct business in such a financial climate. His remedy, however, was to create a complete monopoly of the entire international oil business. Once in complete control, he could decree a reign of virtue that ensured that prices were set in such a way as to create a steady and reasonable market for his product. Ah! Order at last!
Rockefeller did not, of course, call what he was creating a monopoly. Instead, he tended to say things like, “The day of combination is here to stay. Individualism has gone, never to return.” (page 148 of Titan.) By this he meant to say that the free enterprise system was finished, and that he was going to bring order to the wild and disorderly rule of the free market. Rockefeller believed in the brotherhood of man, not in the rights of the individual. The question, of course, was who God had appointed to be the father of this brotherhood.
Rockefeller perhaps best expressed his philosophy in this statement “It was the battle of the new idea of cooperation against competition, and perhaps in no department of business was there a greater necessity for this cooperation than in the oil business.” (P. 149) Today, we know that by cooperation, Rockefeller meant trusts, or monopolies. But back then, it was all new. Rockefeller, a brilliant and highly original innovator, was at first able to define the terms of the discussion.
Standard Oil and the Railroads
By 1880, ten years after its founding, Standard Oil exercised a nearly complete monopoly of the oil refining business. It would, however, be a serious mistake to assume that Rockefeller’s sphere of influence was limited solely to refining oil.
The word Octopus has frequently been associated with Standard Oil, and for good reason. Rockefeller’s company was a vast trust with arms that reached out into the shipping business, the banking business, the barrel making business, the pipeline business, and most notoriously, the railroad business. Interestingly, he did not ever have a deep interest in the oil drilling business. He regarded that enterprise as too risky, since it depended on a boom and bust cycle dictated by the chance discoverey of new wells.
One of the many companies that came under Rockefeller’s sway was an institution called the South Improvement Company (SIC), which was to be formed in 1872, two years after the formation of Standard Oil. Members of the SIC were to receive a 50 percent rebate from the railroads. More importantly, they would also receive rebates for every barrel shipped by non-members. For instance, Standard Oil was to receive a 40 cent rebate “for every barrel shipped to Cleveland by competitors.” Think about that for a second. What incentive did the railroads have to use competitors if they had to pay Rockefeller 40 cents for each barrel shipped by the competitors? (Titan, Page 136)
An analogy might bring home the significance of this deal. Suppose that in todays market, one company were to get a monopoly on the Internet, and all carriers of Internet traffic. Suppose that company were in the information business, and used the Internet to conduct business at a rate 50 percent less than the rate that everyone else had to pay. Suppose further that the company was paid every time anyone else used the Internet. Finally, suppose the company were to monitor the traffic at certain company owned hubs in order to discover what other competitors were doing, and to block their traffic at certain strategic times. That would give you a sense of the power that Rockefeller attempted to wield under the SIC, and that he in fact did wield when he later completed his monopoly.
The South Improvement Company (SIC) was never fully formed, and after an approximately six month run, it was disbanded under enormous legal pressure of a type that would follow Rockefeller around for the rest of his life. Those six months, however, were one of the major turning points in the history of Standard Oil. Using the threat of the South Improvement Company to bludgeon his competition in Cleveland, Rockefeller crushed or bought all but a handful of his competitors during the winter and spring of 1872. In particular, Chernow states, between “February 17 and March 28, 1872 – between the first rumors of the SIC and the time it was scuttled – Rockefeller swallowed up twenty-two of his twenty-six Cleveland competitors. During one forty-eight hour period alone in early March, he bought six refineries.” (p143.) Cleveland was only 150 miles from the oil fields in Western Pennsylvania, so this purchase gave him a huge share of the entire oil refinery business.
The year 1872 was the turning point for Rockefeller, for Standard Oil, and certainly a critical date for American business. Nevertheless, questions about the SIC plagued Rockefeller all his life. He never wanted to admit what went on in 1872. Unfortunately, questions about the SIC followed him around for decades, and many claimed that the SIC was never truly defeated, but existed in shadow form into the next century. Certainly it was true that Standard Oil received huge rebates from the railways for many years after 1872.
But Rockefeller remained unrepentant. “It was right. I knew it as a matter of conscience. It was right before me and my God. If I had to do it tomorrow I would do it again the same way – do it a hundred times.”
Rockefeller and his Conscience
Rockefeller was in many areas of his life a good and decent man. But he was not always honest. Like all the rest of us, he found it impossible to live up to so high an ideal.
Sometimes he told forgivable untruths. For instance, once he was asked to testify about the Southern Improvement Company. Before replying, he consulted with his lawyer. Then he faced his questioners and said that he had never been part of it. Indeed, he never had been part of the Southern Improvement Company. But he had certainly had been a major investor in the South Improvement Company! Such wily cat and mouse games would become a Rockefeller trademark as the law began to close in on him.
At other times, Rockefeller was less clever. For instance, Chernow, (p. 147) relates how Rockefeller stated that few persons who were stockholders in Standard Oil were subscribers to SIC stock, when in fact fifty percent of SIC was held by Standard Oil employees. Rockefeller’s statement might have been construed to be literally true, but it was obviously highly deceptive. He went on to say that SIC chairman Watson owned no Standard Oil stock when he had in fact gotten 500 shares through a sub rosa deal. This later statement was clearly not just a clever evasion, but a frank lie, and one that Rockefeller might have hoped would never be uncovered.
Rockefeller also invested heavily in newspapers, and afterwards said that he had perhaps “given too little heed to influences of this kind. I decided best to do it.” (p 212). When an employee of Standard Oil explained the importance of making a member of the legislature “our man,” Rockefeller told him to do “all that is necessary.” (p. 213) He also engaged in money laundering schemes, paying members of the New York Senate in Government bonds, so as to hide the fact that money was changing hands. (p. 210) These practices continued for many years, and his willingness to buy books and articles favorable to Standard Oil increased when he came under attack by Teddy Roosevelt.
There is a very modern sound to many of the court cases involving Standard Oil. For instance, Chernow points out that “Whether by chance or design, Rockefeller’s 1872 business papers have vanished.” (Page 146) 1872 was, of course, the key year in Standard Oil history, as it was the time of the South Improvement Company. The distant sound of documents being shredded is something that all readers of modern newspapers hear with alarming frequency.
In 1898, there were reports of 16 boxes of books burned by Standard Oil employees when they feared they might be subpoenaed. A teenage boy who worked for Standard Oil told of his job to weekly burn the records of rebates funneled back to Standard from the railroads.
Rockefeller and other Standard Oil employees also had remarkably short memories when on the stand. This fuzzy thinking was in sharp contrast with Rockefeller’s well documented displays of keen memory for even the tiniest details when engaged in business. At one point, when asked on the stand if he had ever heard of Standard Oil, Rockefeller furrowed his brow as if unable to remember anything clearly. At last managed to say in distant voice, “I believe, your honor, they operate an oil refinery in New Jersey.” (p 541.)
The Turning of the Tide: Antitrust
In America, Standard Oil was a virtually unopposed monopoly well into the 1890′s. By 1879, when Rockefeller turned 40, Standard Oil controlled 90 percent of the world wide oil business. As late as 1906, it still controlled 86 percent of the US Oil refinery business. Overall, Standard Oil exercised a nearly complete monopoly for some 25 or 30 years, and continued to dominate the refinery business for nearly 40 years. That may not sound like a long time to us now, but to the other businessmen who were competing against Standard Oil, 25 years was the length of their entire career. In other words, at least one entire generation of businessmen lived in the shadow of this, and many other, monopolies.
Nevertheless, well before Teddy Roosevelt and Taft broke up Standard Oil in 1911, the power of the cooperative had been mitigated by a combination of legitimate competition, and antitrust legislation. Laws such as an 1887 ban on railroad rebates, the 1890 passage of the Sherman Antitrust Act, and the 1903 Elkins Act, all seriously crippled the Standard’s monopoly.
Though President McKinley generally left the trusts alone, in the early 1900s, President Teddy Roosevelt put new force behind the Sherman Antitrust act. Roosevelt oversaw the passage of the Elkins Act, and promoted the Department of Commerce and Labor.
Standard Oil was under frequent attack from the press, the judiciary and the government from the 1872 SIC debacle on. However, the first big success against it was the passage, in 1887, of the Interstate Commerce Act. This legislation made railroad rebates illegal, thus appearing to take away one of Standard Oils major tools. Previous to this moment, and for many years afterwards, the Standard combine received rebates from the railroads. This made their transportation rates significantly lower than the rates faced by their competition. Furthermore, as mentioned earlier, they often were paid by the railroads whenever the competition, such as it was, shipped anything. The Interstate Commerce Act passed despite the opposition of US Senators under Standard’s control such as Johnson Newton Camden and Henry B. Payne. (Of the two, Camden was a former Standard Oil board member, while Payne was the father of an important Standard Oil executive who, as a Democrat, had claim to some nominal independence. (p. 292)
Arguments as to whether or not Standard actually complied with the Interstate Commerce Act continue to this day. However, there are internal documents showing that Rockefeller was aware of how his company attempted to circumvent this law, and Standard was fined, temporarily, for violating it in 1907. Certainly the passage of this law represents an important landmark in US law. The law clearly benefits the free market and hence most businesses, but restricts a few big businesses. Laws of this kind are fiercely debated today, when libertarians argue that any such law is bad, even if it has the effect of benefiting the majority of American citizens by restraining a small minority.
One of the fundamental concepts at stake in the Standard railroad cases was the idea of a common carrier. Were the railroads a common carrier that treated all businesses equally, or should they be controlled by a single company for its own benefit? A contemporary version of that argument might include ideas of whether or not the US highway system or the Internet are common carriers, or whether it would be acceptable to allow a corporation to gain control over them and to use that control for its own benefit. Lessons learned in the struggles with Standard Oil are one of the major reasons why we take for granted the idea that highways are a common resources available to all, rather than the domain of some proprietary interest.
By 1888, Rockefeller was in flight from a government determined to break up his trust. The all powerful magnate, who still had many friends in government, and was fawned over by many in the press, nonetheless had to begin a game of evasion, slipping out of doors at the last moment to avoid subpoenas, and running back and forth between Cleveland and New York to avoid being served. On the stand, however, he proved to be a master of evasion, and frequently fought his interlocutors to a standstill. His skill was the result of a keen intelligence, a lifelong habit of secrecy, a remarkably calm and even disposition, and an unshakable faith in his own virtue.
Nevertheless, Standard was the center of a huge national movement to break up the trusts, which penetrated, at the height of the gilded age, in to many different businesses besides oil, including sugar, tobacco, copper and the railroads. When the US House of Representatives issued a report on the subject in 1888, 1000 of the 1500 pages in the report were dedicated to Standard Oil.
In a major setback for Rockefeller, antitrust legislation forced the Standard out of Texas in 1900. This was a severe blow to the company, since it was in 1901 that oil was discovered in Texas. As a result, Standard had to sit by and watch Pure Oil and Texaco emerge from the rich Texas oil fields. These companies also gained a foothold in California and other western states.
Ironically, it was the belated emergence of competition that helped sink Standard Oil. As long as the Standard was the only company in the business, it was hard to prove that it was suppressing its rivals through monopolistic practices. In 1905 Pure Oil, though less than 1/20th the size of Standard Oil, was emerging as Standard’s largest rival. It was, however, with Roosevelt’s help, powerful enough to go to court and effectively lay bare Standard Oil’s monopolistic practices.
The tide finally turned against Standard Oil in 1905, after Roosevelt was reelected. By then, both the US government and the individual states had begun a series of thousands of successful prosecutions, that ended up sending Rockefeller into hiding. As he had in the 1880s, Rockefeller exerted enormous energy to avoid having to testify. Ironically, he was once betrayed by his love for rare cheeses. An alert delivery man reported special cheeses being sent to the Rockefeller’s Pocantico Hills estate. “Rockefeller, in my opinion, is somewhere on that estate,” the hack driver said. (p. 521) Process servers still were unable to get past the gates of the vast, heavily guarded estate, but Rockefeller was forced to retreat to New Jersey, where he trained spot lights on his yard to avoid men with summonses.
The process of dismantling the Standard had deep roots going back beyond the formation of the Sherman Antitrust act in 1890, past the 1887 law that banned railroad rebates, and all the way to the 1872 SIC case. Still it was not until 1900′s that the job was finished. Chernow writes, “On November 18, 1906, the federal government filed suit in Missouri to dissolve Standard Oil under the Sherman Antitrust Act.” The defendants mentioned in the suit were Standard Oil and sixty-five companies that it had under its control. (p 538.) According to Chernow, they were “charged with monopolizing the oil industry and conspiring to restrain trade through a familiar litany of tactics: railroad rebates, the abuse of their pipeline monopoly, predatory pricing, industrial espionage, and the secret ownership of ostensible competitors.” (p 538) A key moment in the case against Standard was the discovery of proof that the combine was still receiving railroad rebates in 1907, though they had been outlawed years before.
Chernow reports that in 1906, Standard still refined “87 percent of all kerosene, [and] handled 87 percent of exported kerosene, marketed 89 percent of domestic kerosene, and was more than twenty times the size of its most serious competitor, Pure Oil.” Gas for cars was becoming very important by this time, but kerosene for lighting houses had been by far the most important product in Standard’s history. It was the commodity upon which the Standard Oil empire had been built.
In 1906, after weathering five years of Roosevelt’s Presidency, Standard still had 86 percent of the refinery market, but by its final breakup in 1911, the beleaguered company had only 70 percent of the market. Because the business was unpredictable and the margins low, Standard wisely never went into the oil well business in a big way, and instead focused on refining. Nevertheless, Chernow states that it had pumped “32 percent of American crude oil in 1899, [but] its share had slumped to 14 percent by 1911.” (p. 555)
The Effect of Antitrust Law
Of course, the 1911 antitrust campaign against Standard Oil was hardly the end of John D. Rockefeller. Rockefeller prospered after 1911 in part because of the rise of the automobile, but in greater part because of the break up of the Standard combine.
In 1910, sales of gasoline surpassed sales of kerosene. Rockefeller was ideally situated to take advantage of this situation. Instead of owning twenty-five percent of Standard Oil, he now owned twenty-five percent of the thirty-four companies which were created by the breakup of the trust. Among those thirty-four companies were the corporations which today are known as Exxon, Mobil, Amoco and Chevron. In two short years, Rockefeller’s worth soared from 300 million dollars before the breakup of the trust, to just under one billion dollars in 1913. This would be roughly the equivalent of 13 billion dollars in today’s money.
From studying Rockefeller’s history it is clear that we cannot have a free market in this country unless we have laws to restrain those who would undermine that free market. Rockefeller himself did not believe in the free market, but ironically, the presence of a truly free market in 1850 made it possible for him to establish a huge monopoly. There simply were no laws to prevent him from doing what he wished.
After the formation of the Standard combine, the country decided that the free market could not exist unless restraints were placed on trade. Laws restraining free trade come down to us in the form of antitrust legislation. Most of us, with the possible exception of some in the libertarian movement, accept those laws. Indeed, they are built into the structure of this country to such a degree that we take them for granted. What we need to ask ourselves is whether we take them so completely for granted that we no longer bother to enforce them with the proper spirit when modern monopolists emerge. As we watch one huge corporation gobble up another huge corporation, we have to ask ourselves if this is just a new form of an old problem that plagued this country 100 years ago. And if it is, will there be heroes such as Teddy Roosevelt who emerge to put a stop to it?