Edited by Gerald Boerner
Commentary:
At the end of the 19th century our country saw the rise of industrial tycoons such as John D. Rockefeller. He founded the Standard Oil Company refine and distribute petroleum products. However, he created a monopoly in this industry to control prices, distribution, and transport of these products. Why? To prevent competition from independent producers. At this he was successful to a fault.
When Teddy Roosevelt became president, he launched a campaign of trust-busting. He began strict enforcement of the Sherman Antitrust Act that had been enacted in 1890. Rockefeller was his first target an the monopolistic Standard Oil Company of New Jersey controlled by Rockefeller. This company was found by the Supreme Court upheld the guilty verdict and the company was broken up into many companies whose names were household words until the recent rash of mergers.
We are better off today with competition rather than the control of consumable resources by a few. Perhaps the monopoly was good in the initial development of an industry, but competition helps to refine the industry. Such is our exploration today.
So, let’s get our exploration started… GLB
These Introductory Comments are copyrighted:
Copyright©2010 — Gerald Boerner — All Rights Reserved[ 4100 Words ]
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Industrial Tycoons — John D. Rockefeller & Standard Oil
John Davison Rockefeller (1839 – 1937) was an American oil magnate. Rockefeller revolutionized the petroleum industry and defined the structure of modern philanthropy. In 1870, he founded the Standard Oil Company and aggressively ran it until he officially retired in 1897. Standard Oil began as an Ohio partnership formed by John D. Rockefeller, his brother William Rockefeller, Henry Flagler, Jabez Bostwick, chemist Samuel Andrews, and a silent partner, Stephen V. Harkness. As kerosene and gasoline grew in importance, Rockefeller’s wealth soared, and he became the world’s richest man and first American worth more than a billion dollars. Adjusting for inflation, he is often regarded as the richest person in history.
Rockefeller spent the last 40 years of his life in retirement. His fortune was mainly used to create the modern systematic approach of targeted philanthropy with foundations that had a major effect on medicine, education, and scientific research.
His foundations pioneered the development of medical research, and were instrumental in the eradication of hookworm and yellow fever. He is also the founder of both the University of Chicago and Rockefeller University. He was a devoted Northern Baptist and supported many church-based institutions throughout his life. Rockefeller adhered to total abstinence from alcohol and tobacco throughout his life.
He had four daughters and one son; John D. Rockefeller, Jr. "Junior" was largely entrusted with the supervision of the foundations.
Beliefs
Rockefeller became a lifelong member of the then-new Republican Party, and a strong supporter of Abraham Lincoln and the party’s abolitionist wing. He was a faithful congregant of the Erie Street Baptist Mission Church, where he taught Sunday school, and served as a trustee, clerk, and occasional janitor. Religion was a guiding force throughout his life, and Rockefeller believed it to be the source of his success. As he said, "God gave me money", and he did not apologize for it. He felt at ease and righteous following John Wesley’s dictum, "gain all you can, save all you can, and give all you can."
Oil
In 1866, his brother William Rockefeller built another refinery in Cleveland and brought John into the partnership. In 1867, Henry M. Flagler became a partner, and the firm of Rockefeller, Andrews & Flagler was established. By 1868, with Rockefeller continuing practices of borrowing and reinvesting profits, controlling cost and using refineries’ waste, the company owned two Cleveland refineries and a marketing subsidiary in New York; it was the largest oil refinery in the world. Rockefeller, Andrews & Flagler was the predecessor of the Standard Oil Company.
Standard Oil
Standard Oil Refinery No. 1 in Cleveland, Ohio, 1899
By the end of the American Civil War, Cleveland was one of the five main refining centers in the U.S. (besides Pittsburgh, Philadelphia, New York, and the region in northwestern Pennsylvania where most of the oil originated). In June 1870, Rockefeller formed Standard Oil of Ohio, which rapidly became the most profitable refiner in Ohio. Standard Oil grew to become one of the largest shippers of oil and kerosene in the country. The railroads were fighting fiercely for traffic and, in an attempt to create a cartel to control freight rates, formed the South Improvement Company, in collusion with Standard and other oil men outside the main oil centers. The cartel received preferential treatment as a high-volume shipper, which included not just steep rebates of up to 50% for their product, but also rebates for the shipment of competing products. Part of this scheme was the announcement of sharply increased freight charges. This touched off a firestorm of protest from independent oil well owners, including boycotts and vandalism, which eventually led to the discovery of Standard Oil’s part in the deal. A major New York refiner, Charles Pratt and Company, headed by Charles Pratt and Henry H. Rogers, led the opposition to this plan, and railroads soon backed off. Pennsylvania revoked the cartel’s charter and equal rates were restored for the time being.
John D. Rockefeller ca. 1875
Undeterred, though vilified for the first time by the press, Rockefeller continued with his self-reinforcing cycle of buying competing refiners, improving the efficiency of his operations, pressing for discounts on oil shipments, undercutting his competition, making secret deals, raising investment pools, and buying rivals out. In less than four months in 1872, in what was later known as the "Cleveland Conquest" or "Cleveland Massacre", Standard Oil had absorbed 22 of its 26 Cleveland competitors. Eventually, even his former antagonists, Pratt and Rogers, saw the futility of continuing to compete against Standard Oil: in 1874, they made a secret agreement with their old nemesis to be acquired. Pratt and Rogers became Rockefeller’s partners. Rogers, in particular, became one of Rockefeller’s key men in the formation of the Standard Oil Trust. Pratt’s son, Charles Millard Pratt became Secretary of Standard Oil. For many of his competitors, Rockefeller had merely to show them his books so they could see what they were up against, then make them a decent offer. If they refused his offer, he told them he would run them into bankruptcy, then cheaply buy up their assets at auction. He saw himself as the industry’s savior, "an angel of mercy", absorbing the weak and making the industry as a whole stronger, more efficient, and more competitive. Standard was growing horizontally and vertically. It added its own pipelines, tank cars, and home delivery network. It kept oil prices low to stave off competitors, made its products affordable to the average household, and to increase market penetration, sometimes sold below cost if necessary. It developed over 300 oil-based products from tar to paint to Vaseline to chewing gum. By the end of the 1870s, Standard was refining over 90% of the oil in the U.S. Rockefeller had already become a millionaire.
Standard Oil Trust Certificate 1896
In 1877, Standard clashed with the Pennsylvania Railroad, its chief hauler. Rockefeller had envisioned the use of pipelines as an alternative transport system for oil and began a campaign to build and acquire them. The railroad, seeing Standard’s incursion into the transportation and pipeline fields, struck back and formed a subsidiary to buy and build oil refineries and pipelines. Standard countered and held back its shipments, and with the help of other railroads, started a price war that dramatically reduced freight payments and caused labor unrest as well. Rockefeller eventually prevailed and the railroad sold all its oil interests to Standard. But in the aftermath of that battle, in 1879 the Commonwealth of Pennsylvania indicted Rockefeller on charges of monopolizing the oil trade, starting an avalanche of similar court proceedings in other states and making a national issue of Standard Oil’s business practices.
Monopoly
Standard Oil gradually gained almost complete control of oil refining and marketing in the United States through horizontal integration. In the kerosene industry, Standard Oil replaced the old distribution system with its own vertical system. It supplied kerosene by tank cars that brought the fuel to local markets and tank wagons then delivered to retail customers, thus bypassing the existing network of wholesale jobbers. Despite improving the quality and availability of kerosene products while greatly reducing their cost to the public (the price of kerosene dropped by nearly 80% over the life of the company), Standard Oil’s business practices created intense controversy. Standard’s most potent weapons against competitors were underselling, differential pricing, and secret transportation rebates. The firm was attacked by journalists and politicians throughout its existence, in part for these monopolistic methods, giving momentum to the anti-trust movement. By 1880, according to the New York World, Standard Oil was "the most cruel, impudent, pitiless, and grasping monopoly that ever fastened upon a country." To the critics Rockefeller replied, "In a business so large as ours…some things are likely to be done which we cannot approve. We correct them as soon as they come to our knowledge.”
At that time, many legislatures had made it difficult to incorporate in one state and operate in another. As a result, Rockefeller and his associates owned separate corporations across dozens of states, making their management of the whole enterprise rather unwieldy. In 1882, Rockefeller’s lawyers created an innovative form of corporation to centralize their holdings, giving birth to the Standard Oil Trust. The "trust" was a corporation of corporations, and the entity’s size and wealth drew much attention. Nine trustees, including Rockefeller, ran the 41 companies in the trust. The public and the press were immediately suspicious of this new legal entity, but other businesses seized upon the idea and emulated it, further inflaming public sentiment. Standard Oil had gained an aura of invincibility, always prevailing against competitors, critics, and political enemies. It had become the richest, biggest, most feared business in the world, seemingly immune to the boom and bust of the business cycle, consistently racking up profits year after year.
Its vast American empire included 20,000 domestic wells, 4,000 miles of pipeline, 5,000 tank cars, and over 100,000 employees. Its share of world oil refining topped out above 90% but slowly dropped to about 80% for the rest of the century. In spite of the formation of the trust and its perceived immunity from all competition, by the 1880s Standard Oil had passed its peak of power over the world oil market. Rockefeller finally gave up his dream of controlling all the world’s oil refining, he admitted later, “We realized that public sentiment would be against us if we actually refined all the oil.” Over time foreign competition and new finds abroad eroded his dominance. In the early 1880s, Rockefeller created one of his most important innovations. Rather than try to influence the price of crude oil directly, Standard Oil had been exercising indirect control by altering oil storage charges to suit market conditions. Rockefeller then decided to order the issuance of certificates against oil stored in its pipelines. These certificates became traded by speculators, thus creating the first oil-futures market which effectively set spot market prices from then on. The National Petroleum Exchange opened in Manhattan in late 1882 to facilitate the oil futures trading.
Even though 85% of world crude production was still coming from Pennsylvania wells in the 1880s, overseas drilling in Russia and Asia began to reach the world market. Robert Nobel had established his own refining enterprise in the abundant and cheaper Russian oil fields, including the region’s first pipeline and the world’s first oil tanker. The Paris Rothschilds jumped into the fray providing financing. Additional fields were discovered in Burma and Java. Even more critical, the invention of the light bulb gradually began to erode the dominance of kerosene for illumination. But Standard Oil adapted, developing its own European presence, expanding into natural gas production in the U.S. then into gasoline for automobiles, which until then had been considered a waste product.
Standard Oil moved its headquarters to New York City at 26 Broadway and Rockefeller became a central figure in the city’s business community. He bought a personal residence in 1884 on 54th street near the mansions of other magnates such as William Vanderbilt. Despite personal threats and constant pleas for charity, Rockefeller took the new elevated train to his downtown office daily. In 1877, Congress created the Interstate Commerce Commission which was tasked with enforcing equal rates for all railroad freight, but by then Standard was depending more on pipeline transport. More threatening to Standard’s power was the Sherman Antitrust Act of 1890, originally used to control unions, but later central to the breakup of the Standard Oil trust. Ohio was especially vigorous in applying its state anti-trust laws, and finally forced a separation of Standard Oil of Ohio from the rest of the company in 1892, the first step in the dissolution of the trust.
In the 1890s, Rockefeller expanded into iron ore and ore transportation, forcing a collision with steel magnate Andrew Carnegie, and their competition became a major subject of the newspapers and the cartoonists. Rockefeller also went on a massive buying spree acquiring land for crude oil production in Ohio, Indiana, and West Virginia, as the original Pennsylvania oil fields began to play out. Amidst the frenetic expansion, Rockefeller began to think of retirement. The daily management of the trust was turned over to John Dustin Archbold and Rockefeller bought a new estate, Pocantico Hills, north of New York City, turning more time to leisure activities including the new sports of bicycling and golf.
Upon his ascent to the presidency, Theodore Roosevelt initiated dozens of suits under the Sherman Antitrust Act and coaxed reforms out of Congress. In 1901, U.S. Steel, now controlled by J. Pierpont Morgan, having bought Andrew Carnegie’s steel assets, offered to buy Standard’s iron interests as well. A deal brokered by Henry Clay Frick exchanged Standard’s iron interests for U.S. Steel stock and gave Rockefeller and his son membership on the company’s board of directors. In full retirement at age 63, Rockefeller earned over $58 million in investments in 1902.
One of the most effective attacks on Rockefeller and his firm was the 1904 publication of The History of the Standard Oil Company, by Ida Tarbell, a leading muckraker. She documented the company’s espionage, price wars, heavy-handed marketing tactics, and courtroom evasions. Although her work prompted a huge backlash against the company, Tarbell claims to have been surprised at its magnitude. “I never had an animus against their size and wealth, never objected to their corporate form. I was willing that they should combine and grow as big and wealthy as they could, but only by legitimate means. But they had never played fair, and that ruined their greatness for me.” (Tarbell’s father had been driven out of the oil business during the South Improvement Company affair.)
Rockefeller responded by calling her “Miss Tarbarrel” in private but held back in public saying only, “not a word about that misguided woman.” Instead Rockefeller began a publicity campaign to put his company and himself in a better light. Though he had long maintained a policy of active silence with the press, he decided to make himself more accessible and responded with conciliatory comments such as, “capital and labor are both wild forces which require intelligent legislation to hold them in restriction.” He wrote and published his memoirs beginning in 1908.
Rockefeller as an industrial emperor,
1901 cartoon from Puck magazine
Critics found his writing to be sanitized and disingenuous and thought that statements such as “the underlying, essential element of success in business is to follow the established laws of high-class dealing” seemed to be at odds with his true business methods.
Rockefeller and his son continued to consolidate their oil interests as best as they could until New Jersey, in 1909, changed its incorporation laws to effectively allow a re-creation of the trust in the form of a single holding company. Rockefeller retained his nominal title as president until 1911 and he kept his stock. At last in 1911, the Supreme Court of the United States found Standard Oil Company of New Jersey in violation of the Sherman Antitrust Act. By then the trust still had a 70% market share of the refined oil market but only 14% of the U.S. crude oil supply. The court ruled that the trust originated in illegal monopoly practices and ordered it to be broken up into 34 new companies. These included, among many others, Continental Oil, which became Conoco, now part of ConocoPhillips; Standard of Indiana, which became Amoco, now part of BP; Standard of California, which became Chevron; Standard of New Jersey, which became Esso (and later, Exxon), now part of ExxonMobil; Standard of New York, which became Mobil, now part of ExxonMobil; and Standard of Ohio, which became Sohio, now part of BP. Pennzoil and Chevron have remained independent.
Rockefeller, who had rarely sold shares, held over 25% of Standard’s stock at the time of the breakup. He, as well as all stockholders, received proportionate shares in each of the 34 companies. In the aftermath, Rockefeller’s control over the oil industry was somewhat reduced but over the next ten years, the breakup also proved immensely profitable for him. The companies’ combined net worth rose fivefold and Rockefeller’s personal wealth jumped to $900,000,000.
Philanthropy
From his very first paycheck, Rockefeller tithed ten percent of his earnings to his church. His church was later affiliated with the Northern Baptist Convention, which formed from American Baptists in the North with ties to their historic missions to establish schools and colleges for freedmen in the South after the American Civil War. As Rockefeller’s wealth grew, so did his giving, primarily to educational and public health causes, but also for basic science and the arts. He was advised primarily by Frederick Taylor Gates after 1891, and, after 1897, also by his son.
Rockefeller believed in the Efficiency Movement, arguing that: "To help an inefficient, ill-located, unnecessary school is a waste…it is highly probable that enough money has been squandered on unwise educational projects to have built up a national system of higher education adequate to our needs, if the money had been properly directed to that end."
He and his advisers invented the conditional grant, which required the recipient to "root the institution in the affections of as many people as possible who, as contributors, become personally concerned, and thereafter may be counted on to give to the institution their watchful interest and cooperation."
Rockefeller and his son
John D. Rockefeller, Jr. in 1915
In 1884, Rockefeller provided major funding for a college in Atlanta for African-American women, which became Spelman College (named for Rockefeller’s in-laws who were ardent abolitionists before the Civil War). The oldest existing building on Spelman’s campus, Rockefeller Hall, is named after him. Rockefeller also gave considerable donations to Denison University and other Baptist colleges.
Rockefeller gave $80 million to the University of Chicago under William Rainey Harper, turning a small Baptist college into a world-class institution by 1900.
His General Education Board, founded in 1902, was established to promote education at all levels everywhere in the country. In keeping with the historic missions of the Baptists, it was especially active in supporting black schools in the South.
His General Education Board made a dramatic impact by funding the recommendations of the Flexner Report of 1910. The study had been undertaken by the Carnegie Foundation for the Advancement of Teaching; it revolutionized the study of medicine in the United States. Rockefeller also provided financial support to such "Ivy League" institutions as Yale, Harvard, Columbia, Brown, Bryn Mawr, Wellesley and Vassar.
Despite his personal preference for homeopathy, Rockefeller, on Gates’s advice, became one of the first great benefactors of medical science. In 1901, he founded the Rockefeller Institute for Medical Research in New York City. It changed its name to Rockefeller University in 1965, after expanding its mission to include graduate education. It claims a connection to 23 Nobel laureates. He founded the Rockefeller Sanitary Commission in 1909, an organization that eventually eradicated the hookworm disease, which had long plagued rural areas of the American South.
John D. Rockefeller’s painting
by John Singer Sargent in 1917
He created the Rockefeller Foundation in 1913 to continue and expand the scope of the work of the Sanitary Commission, which was closed in 1915. He gave nearly $250 million to the foundation, which focused on public health, medical training, and the arts. It endowed Johns Hopkins School of Hygiene and Public Health, the first of its kind. It also built the Peking Union Medical College in China into a great institution. The foundation helped in World War I war relief, and it employed William Lyon Mackenzie King of Canada to study industrial relations.
Rockefeller’s fourth main philanthropy, the Laura Spelman Rockefeller Memorial Foundation, was created in 1918. Through this, he supported work in the social studies; this was later absorbed into the Rockefeller Foundation. In total Rockefeller donated about $550 million.
Rockefeller became well known in his later life for the practice of giving dimes to adults and nickels to children wherever he went. He even gave dimes as a playful gesture to wealthy men, such as tire mogul Harvey Firestone.
As a youth, Rockefeller reportedly said that his two great ambitions were to make $100,000 and to live 100 years.
Please take time to further explore more about JOHN D. ROCKEFELLER, STANDARD OIL, MONOPOLY, PHILANTHROPY, and ANTITRUST by accessing the Wikipedia articles referenced below…
References
Other Events on this Day:
In 1777…
George Washington’s army fights the Second Battle of Trenton, New Jersey.In 1788…
Georgia becomes the fourth state to ratify the U. S. Constitution.In 1863…
President Abraham Lincoln signs the Emancipation Proclamation, declaring slavery illegal in all states still in rebellion against the Union and sabotaging the Confederacy’s attempts to gain wartime support from Great Britain and France.In 1882…
John D. Rockefeller forms the Standard Oil Trust, a giant oil monopoly. He revolutionized the petroleum industry and defined the structure of modern philanthropy.In 1892…
Fifteen-year-old Irish immigrant Annie Moore is the first person to pass through the Ellis Island immigration station, which will process more than 12 million new arrivals to the United States over the next 62 years.In 1942…
During World War II, Japanese forces capture Manila, the capital of the Philippines.In 1974…
President Richard Nixon signs legislation limiting highway speeds to 55 miles per hour to conserve gas.In 1977…
Jacqueline Means becomes the first woman in the United States to be formally ordained as an Episcopalian priest, following a 1976 decision by the General Convention of the Episcopal Church.
Dates and events based on:
William J. Bennett and John Cribb, (2008) The American Patriot’s Almanac Daily Readings on America. (Kindle Edition)
Background information is from Wikipedia articles on:
Wikipedia: John D. Rockefeller…
http://en.wikipedia.org/wiki/John_D._Rockefeller
Wikipedia: Standard Oil…
http://en.wikipedia.org/wiki/Standard_Oil
Wikipedia: Monopoly…
http://en.wikipedia.org/wiki/Monopoly
Wikipedia: Philanthropy…
http://en.wikipedia.org/wiki/Philanthropy
Brainy Quote: FINANCIAL Quotes…
http://www.brainyquote.com/quotes/keywords/financial.html
Other Posts on this Topic:
Prof. Boerner’s Exploration: Theodore Roosevelt and the Global Village…
http://www.boerner.net/jboerner/?p=10992
Prof. Boerner’s Exploration: McKinley Dies and Teddy Roosevelt Becomes President…
http://www.boerner.net/jboerner/?p=14367
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