by Ron Chernow
Besides access to the Erie Canal and Lake Erie, Cleveland was serviced by three main railroad lines that gave its inland refineries direct access to eastern ports: the New York Central, which ran north from New York City to Albany and then west to Buffalo, where its Lake Shore line ran along Lake Erie to Cleveland; the Erie Railroad, which also sped across New York State to a point south of Buffalo, where its Atlantic and Great Western subsidiary headed down into Cleveland and the Oil Regions; and the august Pennsylvania Railroad, which went from New York and Philadelphia to Harrisburg and Pittsburgh. With virtuosic brilliance, Rockefeller and Flagler played these three railroads against each other in seemingly endless permutations. They even managed to manipulate such redoubtable figures as the notorious Jay Gould, who had wrested the Erie Railroad from Commodore Vanderbilt in 1868. Flagler singled out Gould as the fairest and squarest of the railroad chieftains in his dealings, and Rockefeller, when asked to name the greatest businessman he had ever met, instantly cited Gould.51 Gould himself later asserted that John D. Rockefeller had possessed “the highest genius for constructive organization” in American economic history.52
Before long, the various oil-refining centers were rushing to form tactical alliances with these railroad networks. As a natural outgrowth of their route structure, the New York Central and the Erie wanted to promote Cleveland as a refining center and regarded Rockefeller as a critical ally in efforts to boost their oil-freight business. With easy access to the oil fields via the Allegheny River, Pittsburgh might have seemed the optimal location, but its refiners were always held hostage to the freight monopoly of the Pennsylvania Railroad. Following a myopic and ultimately destructive policy toward Pittsburgh, the Pennsylvania Railroad decided it was more profitable to carry crude oil from Oil Creek all the way to Philadelphia or New York refineries rather than to have it refined in Pittsburgh. By penalizing Pittsburgh refiners with crushing rates, the railroad fattened its short-term profits but sacrificed the city’s future as a refining center and paved the way for the hegemony of the city the Pennsylvania wanted most to eradicate: Cleveland. As Rockefeller later said, the Pennsylvania Railroad’s attitude made it easy for him to find common cause with its archrivals, and he forged a cabal with the New York Central and the Erie that the Pennsylvania was hard-pressed to stop.
By the late 1860s, the press was rife with reports that the Pennsylvania Railroad had decreed that Cleveland would be “wiped out as a refining center as with a sponge”—a statement forever engraved on Rockefeller’s unforgiving memory. Taking this as a declaration of war, he was emboldened to respond with the most robust countermeasures at his command. He was a man who always acted on Flagler’s business motto of favoring “sharp, vigorous and decisive measures.”53 The Pennsylvania statement set off a panic-stricken reaction in Cleveland as local refiners prepared to transfer their operations to Oil Creek. Coolheaded in the face of such hysteria, Rockefeller saw that he could convert this chaos to advantage. By threatening to strip the others of their oil traffic, the Pennsylvania had placed the Erie and New York Central in a vulnerable position, and Rockefeller and Flagler decided to use this leverage to wring extreme concessions from them.
In the spring of 1868, Jay Gould hatched a secret deal with Rockefeller and Flagler that gave them shares in a subsidiary company called the Allegheny Transportation Company, which was the first major pipeline network serving Oil Creek. Through this deal, the Cleveland refiners received a staggering 75 percent rebate on oil shipped through the Erie system. As part of this extraordinary bonanza, Flagler also cut a deal with the Atlantic and Great Western, an Erie subsidiary, that gave Rockefeller, Andrews and Flagler highly advantageous rates on rail shipments between Cleveland and the Oil Regions.
In this season of bountiful concessions, Flagler also approached General J. H. Devereux, the newly installed vice president of the Lake Shore Railroad, which formed part of the New York Central system. Trained as a civil engineer, Devereux had revamped the railroad system in northern Virginia to assist the Union army and was commended by Lincoln for his work. In negotiating a new framework with him, Rockefeller and Flagler argued for preferential rates that would more than match discounts extended by the Pennsylvania Railroad to its customers in the Oil Regions. In other words, the young Cleveland refiners cannily converted their geographic disadvantage into a powerful bargaining tool and secured covert rates that allowed them to ship crude oil to Cleveland and then refined oil to New York for only $1.65 per barrel compared to an officially listed rate of $2.40.
In exchange for this extraordinary concession, Rockefeller and Flagler didn’t simply try to squeeze the railroads—they were much too shrewd and subtle for that—but offered compelling incentives. For instance, they agreed to assume legal liability for fire or other accidents and stop using water transport during the summer months. The biggest plum they dangled before Devereux was a promise to supply the Lake Shore with an astonishing sixty carloads of refined oil daily. Since Rockefeller lacked the refining capacity to fulfill this ambitious pledge, he was evidently prepared to coordinate shipments with other Cleveland refiners. For any railroad, the prospect of steady shipments was irresistible, for they could dispatch trains composed solely of oil-tank cars instead of a motley assortment of freight cars picking up different products at different places. By consolidating many small shippers into one big shipper making regular, uniform shipments in massive quantities, the railroads could reduce the average round-trip time of their trains to New York from thirty days to ten and operate a fleet of 600 cars instead of 1,800.
Never shy about his accomplishments, Rockefeller knew that he had broached a revolutionary deal: “It was a large, regular volume of business, such as had not hitherto been given to the roads in question.” 54 From that moment, the railroads acquired a vested interest in the creation of a gigantic oil monopoly that would lower their costs, boost their profits, and generally simplify their lives. As in other industries, the railroads developed a stake in the growth of big businesses whose economies of scale permitted them to operate more efficiently—an ominous fact for small, struggling refiners who were gradually weeded out in the savage competitive strife.
Without doubt, the Lake Shore deal marked a turning point for Rockefeller, the oil industry, and the entire American economy. Decades later, Ida Tarbell condemned it as Rockefeller’s original sin from which all others sprang. “Mr. Rockefeller certainly saw by 1868 that he had no legitimate superiority over those competing with him in Cleveland which would ever enable him to be anything more than one of the big men in his line.”55 Only Rockefeller’s willingness to cheat and cut corners, Tarbell contended, had enabled him to outdistance the pack. This claim, echoed by Rockefeller’s most virulent critics, overstates the case, for even before Rockefeller accepted his first rebate, he was the world’s largest refiner, equal in size to the next three largest Cleveland refineries combined. In fact, it was the unparalleled scope of his operation that had enabled him to cut this exceptional deal in the first place. Tarbell perceived correctly, however, that the principal advantage of Rockefeller’s commanding position was that it meant special power to compel railroad-freight concessions.
In closing their historic deal, Rockefeller and Flagler suffered no twinges of conscience and were frankly elated by their triumph. “I remember when the Standard received its first rebate,” said Flagler. “I went home in great delight. I had won a great victory, I thought.” 56 But they knew they had dabbled in a dark and controversial practice, for the rebates were predicated on great secrecy. Many years later, Rockefeller explained to one railroad negotiator that their dealings with the Lake Shore rested on oral agreements that were never committed to paper. “Our people do not think it would be best for the Lake Shore Road, or us, to have a contract, but with the good faith between us and desire to promote each other’s interest, we can serve each other better by being able to say we have no contracts.”57 Because many railroad deals ended with a handshake, not a signature, Rock
efeller could breezily deny their existence without fear of embarrassing refutations later on.
As the chief transportation deal maker, Flagler had overseen the landmark pact, and Rockefeller always credited him for it. Some of this derived from Rockefeller’s humility, but it also betrayed a lifelong habit of covering his tracks and pretending to be elsewhere when critical decisions were made. Although Rockefeller didn’t lead the Lake Shore negotiations, he was smack in the thick of them. On August 19, 1868, he sent a fascinating letter to Cettie from New York that shows his toughness vis-à-vis the Vanderbilts, who controlled the New York Central, the Lake Shore’s parent. “We were sent for by Mr. Vanderbilt yesterday, at twelve o’c & did not go, he is anxious to get our business and said that he could meet us on the terms. We sent our card by the messenger, that Vanderbilt might know where to find our office later.”58 The point is worth underscoring: Twenty-nine-year-old John D. Rockefeller demanded that seventy-four-year-old Commodore Vanderbilt, the emperor of the railroad world, come to him. This refusal to truckle, bend, or bow to others, this insistence on dealing with other people on his own terms, time, and turf, distinguished Rockefeller throughout his career.
Bolstered by the Lake Shore deal, Cleveland soon surpassed Pittsburgh as the leading refining center, and for the first time journalists began to track Rockefeller’s ascendancy. In 1869, one writer marveled at the power that this laconic young man, in his understated manner, had already attained in Cleveland. “He occupies a position in our business circles second to but few. Close application to one kind of business, an avoidance of all positions of honorary character that cost time, keeping everything pertaining to his business in so methodical a manner that he knows every night how he stands with the world.”59
Today an arcane, forgotten subject, the issue of railroad rebates generated heated debate in post–Civil War America since they directly affected the shape of the economy and the distribution of wealth. Railroads had obtained the power to produce either a concentrated economy, with progressively larger business units, or to perpetuate the small-scale economy of antebellum America. The proliferation of rebates hastened the shift toward an integrated national economy, top-heavy with giant companies enjoying preferential freight rates.
Rockefeller justly argued that he hadn’t invented the rebate and that the Pennsylvania Railroad had granted thousands of them in the six years before his seminal Lake Shore deal. “It was a common practice in all descriptions of freighting, not peculiar to oil; in merchandise, grain, everything.” 60 Rebates had inevitably accompanied railroad expansion. As the total railroad trackage doubled to 70,000 miles within eight years after the Civil War, the roads were saddled with high fixed costs and heavy bonded debt. This forced them to maintain a high, steady freight volume to stay alive and waylaid them into vicious rate wars. Rebates weren’t just solicited by shippers but were sedulously pushed by railway freight agents eager to win over new business. Rebates enabled them to maintain the fiction of listed rates while secretly giving discounts to favored shippers. Over time, relations grew ever closer and more incestuous between the railroads and large shippers. For decades, Rockefeller and his colleagues enjoyed free passes on all major railroads, which they regarded not as payoffs but as natural perquisites of their business.
Rockefeller never saw rebates as criminal or illegitimate or as favors secured only by bullying monopolies. He was correct in stating that listed rates were always a farce, a starting point for haggling. Many refiners received rebates, not just the leading firms, and some tiny rivals actually got superior discounts, especially from the Pennsylvania Railroad. Rockefeller’s business papers display much internal grumbling about this presumed inequity, for which he and his colleagues regularly chastised railroad officials at critical moments in negotiations. But in spite of numerous scattered cases of rival refiners getting comparable rebates, no other firm received so many rebates so consistently over so many years or on such a colossal scale as Rockefeller’s. It was therefore disingenuous of him to suggest that rebates played only an incidental role in his success.
So were Ida Tarbell and other detractors justified in tarring Rockefeller’s whole career based on railroad rebates? Unfortunately, the controversy was played out in a gray area of ethics and the law that makes a definitive answer impossible. From a strictly economic standpoint, Rockefeller rested on solid ground when he insisted that bulk shippers deserved a discount. “Who can buy beef the cheapest—the housewife for her family, the steward for a club or hotel, or the commissary for an army? Who is entitled to better rebates from a railroad, those who give it 5000 barrels a day, or those who give 500 barrels—or 50 barrels?”61 Besides providing a steady flow of oil shipments, Rockefeller’s firm invested heavily in warehouses, terminals, loading platforms, and other railroad facilities so that the roads probably derived more profit from his shipments than from those of rivals who paid higher rates. Small, irregular shippers were the bane of railroads for the simple, mechanical reason that they forced the trains to stop repeatedly to pick up single carloads of oil. To meet the terms of his deal with the Lake Shore, Rockefeller had to run his refineries at full capacity even when kerosene demand slackened. He therefore paid a price for his rebates and felt that equal rates for all shippers would have unfairly penalized his firm.
Perhaps because Ida Tarbell trained a glaring spotlight on the rebate issue, Rockefeller insisted vehemently in later interviews that the real profitability of his firm lay elsewhere. In an intriguing aside in later years, he even hinted that the clamor over rebates conveniently deflected public attention away from other, more profitable aspects of his operation: “Along this line much was said about rebates and drawbacks for long years, and the Standard Oil Company knew full well that the public were not on the right scent. They knew where their profits came from, but they did not deem it wise to inform the public, and especially their competitors, of the real secret sources of their strength.”62 Indeed, one can argue that the obsession among reformers with the rebate issue might have blinded them to a multitude of other sins.
Not until the Interstate Commerce Act in 1887 did it become an illegal, punishable offense for railroads to give rebates, and the practice didn’t cease entirely until the 1903 Elkins Act. Nevertheless, by the end of the Civil War, a widespread belief had begun to take hold that railroads were common carriers and should shun favoritism. Ida Tarbell cited provisions in the Pennsylvania state constitution that, as she interpreted them, compelled railroads to serve as common carriers and avoid discrimination. Yet in the last analysis, she based her withering critique of Rockefeller less on specific laws than on her belief that he had violated a sense of fair play. “That is,” she wrote in McClure’s Magazine in July 1905, “rebate giving then as now, was regarded as one of those lower business practices which characterizes commerce at all periods, and against which men of honor struggle, and of which men of greed take advantage.” 63 In the privacy of his study in 1917, an unrepentant Rockefeller disputed her view of the prevailing business ethics. “I deny that it was regarded as a dishonorable practice for a merchant or manufacturer to obtain the best rates possible for his goods.”64 As to Tarbell’s charge that the secrecy of rebates proved their immorality, Rockefeller countered that railroads didn’t wish to advertise discounts that might then be demanded by other shippers. “For these arrangements were not except by the academic expected to be published, any more than the general of an army’s plans are published to enable the enemy to defeat him.”65
The most compelling argument against rebates was that railroads received state charters and therefore had the right of eminent domain—that is, the right to claim private property in order to lay down tracks—investing their activities with a public character. In 1867, a committee of the Ohio senate declared that railroads, as common carriers, should charge equal rates, but a bill incorporating these ideas was defeated. The following year, just as Rockefeller implemented his Lake Shore deal, a Pennsylvania senate committee rep
orted that railroads were common carriers and had “no right to show partiality among their customers”; but, again, no regulatory changes ensued.66 Almost twenty years passed before reformers succeeded in introducing public regulation that forced an end to the railroad favoritism that so incensed farmers and other small shippers across America. In the meantime, Rockefeller profited enormously from the failure of public authorities to rectify the inequities of the transportation system, and his firm understandably kept up vigorous lobbying efforts to perpetuate the status quo.
John D. Rockefeller, Jr., forced to wear his sisters’ hand-me-downs. (Courtesy of the Rockefeller Archive Center)
CHAPTER 7
Millionaires’ Row
Rockefeller had speedily acquired a level of respectability that would have seemed unthinkable fifteen years before when he and his demoralized family were crowded into the Humiston house in Strongsville. In August 1868, after his rebate deal with the Lake Shore Railroad, he certified his enhanced status in Cleveland when he and Cettie moved from Cheshire Street to a solid brick home at 424 Euclid Avenue. This move dramatized the immense distance he had traveled after a few years in the oil business. Local boosters had already tagged Euclid Avenue “the most beautiful street in the world,” with homes that lavishly mirrored the local fortunes in oil, iron, banking, timber, railroads, and real estate. All of the town’s new opulence was reflected in this street of massive houses. The residential address for such local luminaries as Henry B. Payne, Amasa Stone, and John Hay, Euclid Avenue claimed so many mansions that it had richly earned its sobriquet of “millionaires’ row.”
With the spacious grandeur of a fine Victorian street, always busy with fashionable horses and carriages, the wide avenue had a double row of elms that created a tall, shady canopy overhead. The imposing homes were deeply recessed from the street, their trimmed lawns and shapely shrubbery providing buffer zones between the houses and their distant front gates. Since few houses were separated from adjoining houses by fences, the street sometimes gave the impression of being a single, flowing park, with elegant homes standing in an unbroken expanse of greenery.