This week we resume the story of the Sherman Antitrust Act and
the way it has been applied in United States corporate history,
specifically the case of Standard Oil. And when you”re talking
Standard Oil, you”re talking John D. Rockefeller.
But while I”m not about to tell the full life story of Rockefeller
(which I”ll save for another time), it certainly is necessary to
disclose some bare facts in order to fully understand the issue.
And as we cover the Standard Oil case these next few weeks,
think about some of the comments that are made and the current
antitrust case against Microsoft. You”ll find a few interesting
parallels.
Rockefeller was born in 1839, the son of a bigamist and snake-oil
salesman. As a youth he moved to Cleveland, a strategically
positioned city considering the boom that was about to take
place.
In 1859, the first oil well was struck in Titusville, PA. The boom
was on. Granted, it started small, but by the next year, John D.
Rockefeller knew this was the field he wanted to be in. Only he
advised against sinking wells. Better, he thought, to control the
refining process which promised great profits with little risk.
At first, petroleum was fetching $20 a barrel (roughly the same
price as today). Then a rush of oil came and the price fell to 10
cents a barrel just 2 years later, only to rise to $7 in 1868, and
then back down to below $4 in 1870. In these early days,
petroleum was used ostensibly to produce kerosene.
As a location, Cleveland proved to be a key transit point with
connections to the fledgling railroad industry as well as shipping
connections. The oil fields of western Pennsylvania were close
by.
In 1867 Rockefeller put five big refineries into one firm,
Rockefeller, Andrew & Flagler. Then in 1870 he reorganized as
Standard Oil of Ohio (hereinafter, Standard). At the time the
company owned the refineries, a fleet of oil tank cars, warehouses
in Pennsylvania”s oil fields, warehouses in New York, a barrel-
making plant, and a forest to supply it with lumber.
Standard”s Clevandon Plant could refine the enormous total of 50
barrels a day. While this was only 4% of U.S. output at the time,
Rockefeller quickly controlled the key competition for transport
facilities. This enabled him to gain favorable shipping rates.
From this point on, Standard grew as John D. put the railroads,
legislatures, everyone, under pressure to give him breaks. By the
early 1880s, he controlled 90-95% of all the oil refined in
America.
Quickly, Rockefeller was able to dispose of his competition. By
controlling the distribution network, he cut prices, forcing out
the competition in the Cleveland area, driving his opponents into
bankruptcy and then buying them out. Controlling the refining
process enabled him to dictate prices to driller and retailer alike.
In his book, “Money, Greed, and Risk,” author Charles Morris
comments on John D.
“(Rockefeller) was an agent of what the economist Joseph
Schumpeter called ”creative destruction.” Although his methods
could be very rough, and he paid enormous bribes, he was the
first, and possibly the greatest, genius of large-scale enterprise.
An extraordinary combination of piratical entrepreneur and
steady-handed corporate administrator, he achieved dominance
primarily by being more farsighted, more technologically
advanced, more ruthlessly focused on costs and efficiency than
anyone else. When Rockefeller was consolidating the refining
industry in the 1870s, for example, he simply invited competitors
to his office and showed them his books. One refiner – who
quickly sold out on favorable terms – was ”astounded” that
Rockefeller could profitably sell kerosene at a price far below his
own cost of production. Rockefeller just razed the new
properties and incorporated their production into his own plants,
which were typically 10 to 50 times larger.”
The railroad barons were key to John D.”s success. By having
them under his influence, he could increase freight charges to
unreasonable levels as well, driving out competitors. Other times,
competitors would offer oil at a lower price but the buyer would
be scared to offend the trust.
But by 1880, Standard was constantly drawing the attention of
state legislatures (those John D. hadn”t reached) and the company
was being hauled before the courts.
During the period 1879-1882, Rockefeller created the “trust,” a
vehicle by which he could coordinate all of the production,
refining, transportation, and distribution activities with the main
Standard Oil. This allowed the various companies, in the case of
Standard 14 wholly owned ones (including Standard Oil of Ohio)
and 26 partially owned firms, to invest in each other, a new
format at the time which remained in place until 1892 when
Standard was booted out of Ohio due to antitrust investigations
(spearheaded by an aggressive attorney general, David Watson).
In 1891, New Jersey, looking for tax revenue so it could combat
its mosquito problem (well, why not?), became the first state to
allow corporations to own stock of other corporations in their
own right. So Standard Oil rushed to incorporate in New Jersey,
and the trust form of organization vanished from the American
economy.
This same era also witnessed the emergence of the “muckraker,”
journalists who thrived on exposing scandal. Or as Teddy
Roosevelt was to later say, “The muckrakers are often
indispensable to society, but only if they know when to stop
raking the muck.”
Henry Demarest Lloyd was one of the first of this new breed. In
1881, Atlantic Monthly ran an article written by the young
financial editor of the Chicago Tribune. Lloyd criticized Standard
Oil and the emerging trust format, making him instantly famous
and paving the way for the 1894 book “Wealth Against
Commonwealth,” in which he continued to expose the growth of
corporate giants responsible to none but themselves, able to
corrupt if not control governments. In the case of Standard, he
alleged that Rockefeller, in his efforts to influence the
Pennsylvania legal climate, did “everything to the legislators
except refine them.” Another Lloyd statement was that “when
Stephenson said of railroads that where combination was possible
competition was impossible, he was unconsciously declaring the
law of all industry.”
But perhaps the most famous muckraker was Ida M. Tarbell, or
as Rockefeller none too affectionately called her, Ida Tarbarrel.
Tarbell was raised in the heart of Pennsylvania oil country. Her
father had been an independent oil producer who was put out of
business by Rockefeller. By the time she started writing about
Standard, she was already well known for her articles on Lincoln
and Napoleon and was one of the highest-paid journalists of her
day.
Ida”s “History of the Standard Oil Company” (1904) provided a
more detailed treatment than Lloyd”s earlier book. Historian
Charles Geisst provides Tarbell”s conclusion:
“So long as railroads can be persuaded to interfere with
independent pipelines, to refuse oil freight, to refuse loading
facilities, lest they disturb their relations with the Standard Oil
Company, it is idle to talk about investigations, or antitrust
legislation or application of the Sherman law. So long as the
Standard Oil Company can control transportation as it does
today, it will remain master of the oil industry and the people of
the United States will pay for their indifference and folly.”
Standard”s counsel, S.C.T. Dodd replied:
“But men whose integrity is such as to permit them to be
entrusted with the management of large capital, whose intellectual
grasp of principles and details is such as to command with their
products the markets of the world, are those who will soonest
realize that the policy which succeeds is that which accords fair
treatment to all.” [Gates. Microsoft?]
Next week the story continues.
Sources:
“Monopolies in America,” Charles Geisst
“Money, Greed, and Risk,” Charles Morris
“The Pursuit of Wealth,” Robert Sobel
“The American Century,” Harold Evans
“A History of the American People,” Paul Johnson
“America,” George Brown Tindall and David Shi
Brian Trumbore
