by Ron Chernow
Irate over the rebates enjoyed by Standard Oil, Hanna pleaded with executives of the Lake Shore Railroad to grant his refinery equal treatment. They defended Standard Oil’s freight rates as the privilege due to a big bulk shipper and promised to give Hanna the same rates if he delivered the same volume of oil— which he couldn’t. The railroads employed this as an all-purpose defensive tactic, since nobody could ever match Standard Oil’s voluminous shipments. In the end, Hanna accepted $45,000 for a refinery that he believed was worth $75,000.
It is interesting to note that Rockefeller perjured himself in an affidavit he submitted for the lawsuit brought jointly by William S. Scofield and Hanna, Baslington. Not only did he state that “but few persons who were stockholders in the Standard Oil Co. of Cleveland, Ohio were subscribers to stock in the South Improvement Company,” but he added that “P. H. Watson, Pres. of the South Improvement Co. . . . was not a stockholder in nor was he in any way connected with the Standard Oil Company.” 80 As mentioned, Standard Oil executives controlled almost 50 percent of the SIC shares and issued five hundred shares of Standard to Watson sub rosa in the January 1872 recapitalization. Although Rockefeller professed that he never lied under oath, the claim doesn’t bear up under close examination.
The oil wars of 1872 turned Cleveland society upside down. Many who had made easy fortunes in oil refining and built splendid mansions on Euclid Avenue found themselves bankrupt and forced to sell. Whether it was Rockefeller or the slumping oil market that forced them to sell their refineries at distress-sale prices, they chose to see Rockefeller as the author of their woes. It is likely that in many cases the marketplace would eventually have closed their unprofitable firms, but Rockefeller certainly speeded up the winnowing. Though several independent refiners held on for a few years, in most cases this merely postponed the day of reckoning. Ella Grant Wilson, a social chronicler of nineteenth-century Cleveland, recalled how her father, a partner in the refinery of Grant, Foote and Company, had befriended Rockefeller in various Baptist causes but refused to join Standard Oil, convinced it would fail. When it became impossible to compete with this leviathan, his refinery went bankrupt, and he surrendered his life savings. “Father went almost insane over this terrible upset to his business. He walked the house night and day. . . . [He] left his church and never entered a church afterward. His whole life was embittered by this experience.” 81 With so many losers in the struggle—and one shrewd, gigantic winner—it comes as no surprise to learn that John D. Rockefeller had made his first group of implacable enemies.
Nowadays, most people imagine that American businessmen have always favored free competition, at least in the abstract. But in the industrial boom after the Civil War, the most significant revolt against free-market capitalism came not from reformers or zealous ideologues but from businessmen who couldn’t control the maddening fluctuations in the marketplace. In an unregulated economy, they had to improvise the rules of the game as they went along. Pestered by overproduction in the early oil industry, Rockefeller tirelessly mocked those “academic enthusiasts” and “sentimentalists” who expected business to conform to their tidy competitive models. Like some of his contemporaries, he didn’t see how they could build vast, enduring industries in a volatile economy disrupted by recessions, deflation, and explosive boom-and-bust cycles, and he decided to subjugate markets instead of responding endlessly to their changing price signals. Thus, Rockefeller and other industrial captains conspired to kill competitive capitalism in favor of a new monopoly capitalism.
Economic historians often cite the exuberance of Gilded Age businessmen, their red-blooded faith in America’s future, without noting the constant uncertainty that lurked underneath. As Rockefeller’s story shows, many of the age’s most controversial business practices were forged in a desperate spirit of self-preservation. “It was forced upon us,” Rockefeller said of Standard Oil’s genesis. “We had to do it in self-defence. The oil business was in confusion and daily growing worse. Someone had to make a stand.” Though he foresaw the triumph of cooperation, its far-ranging ramifications weren’t yet clear to him. “This movement was the origin of the whole system of economic administration. It has revolutionized the way of doing business all over the world. The time was ripe for it. It had to come, though all we saw at the moment was the need to save ourselves from wasteful conditions.” Then he added, as if enunciating his economic credo: “The day of combination is here to stay. Individualism has gone, never to return”82
Of course, companies had colluded to restrain the open play of market forces before. In Europe, guilds and state monopolies were of ancient provenance, and even Adam Smith had noted the alacrity with which businessmen hatched conspiracies against consumers. In 1872, Standard Oil was just one of many companies whose leaders had daydreams of controlling prices and production throughout their industry. When the SIC scheme surfaced, one newspaper observed, “This great monopoly is one of many now forming to control the commercial products of this great nation,” and it referred to the western grain and livestock trades as analogous situations.83 As his own inspiration, Rockefeller cited Western Union, then busily buying up small telegraph lines, and the New York Central Railroad, which had consolidated its trunk line from the Atlantic seaboard to Chicago. During the 1870s, pools and rings flourished among salt, rope, and whiskey concerns.
It was only fitting that someone with Rockefeller’s personality and values should have questioned the canons of free-for-all capitalism. If the most creative and dynamic of economic systems, capitalism can also seem wasteful and inefficient to those who endure its rocky transitions and violent dislocations. By bringing forth superior methods, capitalism renders existing skills and equipment outmoded and thus fosters unceasing turmoil and change. Such a mutable system violated Rockefeller’s need for stability, order, and predictability. Indeed, the sober, thrifty Puritan identified by Max Weber as the prototypical capitalist was almost certain to feel distressed by this unstable economy, which forced him to steer his orderly business through a maelstrom of incessant change.
From the three-year interview he gave privately to William O. Inglis in the late 1910s, it is clear that Rockefeller brooded for many years on a theoretical defense of monopoly. His comments are fragmentary and do not cohere into a full-blown system, yet they show that he gave the subject a great deal of intelligent thought, much more than one might have expected. He knew that he had latched on to a mighty new principle, and arose as the prophet of a new dispensation in economic history. As he said, “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.”84
Rockefeller’s logic deserves some scrutiny. If, as he asserted, Standard Oil was the efficient, low-cost producer in Cleveland, why didn’t he just sit back and wait for competitors to go bankrupt? Why did he resort to the tremendous expense of taking over rivals and dismembering their refineries to slash capacity? According to the standard textbook models of competition, as oil prices fell below production costs, refiners should have retrenched and padlocked plants. But the oil market didn’t correct itself in this manner because refiners carried heavy bank debt and other fixed costs, and they discovered that, by operating at a loss, they could still service some debt. Obviously, they couldn’t lose money indefinitely, but as they soldiered on to postpone bankruptcy, their output dragged oil prices down to unprofitable levels for everybody.
Hence, a perverse effect of the invisible hand: Each refiner, pursuing his own self-interest, generated collective misery. As Rockefeller phrased it, “Every man assumed to struggle hard to get all of the business . . . even though in so doing he brought to himself and the competitors in the business nothing but disaster.”85 In a day of primitive accounting systems, many refiners had only the haziest notion of their profitability or lack thereof. As Rockefeller noted, “often-times the most difficult competition comes, not from the strong, the in
telligent, the conservative competitor, but from the man who is holding on by the eyelids and is ignorant of his costs, and anyway he’s got to keep running or bust!”86
What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he had borrowed heavily to build gigantic plants so that he could drastically slash his unit costs. Even his first partner, Maurice Clark, remembered that “the volume of trade was what he always regarded as of paramount importance.”87 Early on, Rockefeller realized that in the capital-intensive refining business, sheer size mattered greatly because it translated into economies of scale. Once, describing the “foundation principle” of Standard Oil, he said it was the “theory of the originators . . . that the larger the volume the better the opportunities for the economies, and consequently the better the opportunities for giving the public a cheaper product without . . . the dreadful competition of the late ’60’s ruining the business.”88 During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from this gospel of industrial efficiency.
To service the outsize debt that made this possible, Rockefeller needed to smooth out the inordinate price fluctuations that made the oil business so hazardous. Realizing that the higher the economic peaks the deeper the subsequent troughs, Rockefeller feared booms no less than busts. “Neither the depressions nor the advances were profitable. The depressions gave occasion to the advances; so that the conditions of the depressions had to be offset by the advances. I concede that so far as the oil industry was concerned we were successful in preventing to an extent these extremes so trying and unprofitable.”89 Rockefeller preferred moderate growth purely as a matter of self-interest. His goal was to forestall potential competitors through low prices and thus minimize risk and chance disruptions. By this approach, Rockefeller believed, he could beneficently spare Standard Oil employees the plight of other industrial workers who “find themselves in each period of ten or fifteen years in destitute circumstances, with bankrupt employers, owing to the foolish and universal competitive methods accompanying the excessive production of any and all products.”90
At times, when he railed against cutthroat competition and the vagaries of the business cycle, Rockefeller sounded more like Karl Marx than our classical image of the capitalist. Like the Marxists, he believed that the competitive free-for -all eventually gave way to monopoly and that large industrial-planning units were the most sensible way to manage an economy. But while Rockefeller had faith in such private monopolies, the Marxists saw them as merely halfway houses on the road to socialism.
The most tantalizing question in Rockefeller’s story—and one that allows no final answer—is whether Standard Oil stimulated or retarded the oil industry’s growth. Rockefeller’s foremost academic supporter, Allan Nevins, believed that after the Civil War it was so cheap and easy to enter oil refining that only a monopoly could have curbed surplus capacity and brought order to the industry. Without Standard Oil, he argued, the business would have fragmented into small, antiquated units, and oil gluts, with their accompanying low prices, would have persisted indefinitely. Rockefeller believed that only a firm with the strength of Standard Oil could have attained the necessary economies of scale at that stage of the industry’s development.
Long after Rockefeller had exited the industrial scene, various economists, while espousing the general superiority of competition, conceded the economic wisdom of trusts under certain conditions. The conservative, Austrian-born economist Joseph A. Schumpeter, for example, contended that monopolies might prove beneficial during depressions or in new, rapidly shifting industries. By replacing turmoil with stability, a monopoly “may make fortresses out of what otherwise might be centers of devastation” and “in the end produce not only steadier but also greater expansion of total output than could be secured by an entirely uncontrolled onward rush that cannot fail to be studded with catastrophes.”91 Schumpeter imagined that entrepreneurs wouldn’t commit large sums to risky ventures if the future seemed cloudy and new competitors could easily spoil their plans. “On the one hand, largest-scale plans could in many cases not materialize at all if it were not known from the outset that competition will be discouraged by heavy capital requirements or lack of experience, or that means are available to discourage or checkmate it so as to gain the time and space for further developments.”92 As we shall see, Rockefeller keenly felt a need to freeze the industry’s size, stymie new entrants, and create an island of stability in which expansion and innovation could then occur unimpeded.
When Rockefeller took over competing refiners, he retained plants with up-to-date facilities and shuttered obsolete ones. It would have been impossible to shrink the industry and steady prices, however, if those who sold their outmoded plants took the money only to open new refineries. Unencumbered by antitrust laws, Rockefeller forced these refiners to sign restrictive contracts that prohibited them from sneaking back into the oil business. Rockefeller regarded these agreements—which would today be outlawed as in restraint of trade—as sacred obligations. For the most part, they were faithfully honored, though on several occasions Rockefeller hauled violators into court.
For all the uproar about Rockefeller’s predatory tactics, many refiners continued to defy him, and dozens of small independents survived outside of Standard Oil. Rockefeller lured many of them into his tent with an intermediate step that he called “running arrangements,” in which Standard Oil guaranteed them a certain level of profits if they accepted a ceiling on their output. This allowed Standard Oil to restrict the output of rivals and made Rockefeller, a hundred years before the Organization of Petroleum Exporting Countries (OPEC), the chief administrator of a sweeping oil cartel. Much like OPEC leaders, Rockefeller had to arbitrate demands for increased quotas among restive members and cope with the immemorial problem of cartels: how to prevent cheaters. Whenever refiners with running arrangements exceeded their assigned allotment, Standard Oil, as the swing producer, curtailed its own output to maintain prices—exactly the dilemma faced by Saudi Arabia as the world’s largest oil exporter in the 1970s. This situation steeled Rockefeller in his determination to own his competitors instead of just presiding over a confederation of perennially warring members.
Where Rockefeller differed most from his fellow moguls was that he wanted to be both rich and virtuous and claim divine sanction for his actions. Perhaps no other businessman in American history has felt so firmly on the side of the angels. Critics were quick to spy an oily sanctimony in this servant of God and Mammon and wonder why his religious beliefs didn’t trammel his acquisitive nature. They converted him into a wily Machiavellian or a stock figure from a Balzac novel—the pious, cunning hypocrite who showily attends church on Sunday then spends the rest of the week trampling rivals underfoot. More generous critics argued that he simply led parallel lives, with a complete separation of his public and private selves. Rockefeller himself felt no such discontinuity and always insisted that his private and commercial activities should be judged by the same exacting standards. Many years later, William O. Inglis read to him John Milton’s stern denunciation of King Charles I: “For his private virtues they are beside the question. If he oppress and extort all day, shall he be held blameless because he prayeth night and morn?” In response, Rockefeller exclaimed, “That’s well put! And the oil men have got to stand the test of that.”93 Clearly, he felt that his business conduct could withstand the most rigorous scrutiny.
It is too glib to say that Rockefeller was a hypocrite who used his piety as a cloak for greed. The voice that reverberated in his ears was one of burning zeal, not low, devious cunning. He was a sincere if highly self-serving churchgoer and, however deluded, extremely devout. From an early age, he had learned both to use and to abuse religion, to interpret and to misinterpret Christian doctrine to suit his purposes. The church provided him with a stock of images and ideas that, instead of checking him, enabled him to proceed with a clear conscience. Religion validated his business mis
deeds no less than his charitable bequests, buttressing his strongest impulses. If religion made him great, it also armed him with theological justification for his actions and may have blinded him to their brutal consequences.
To reiterate an earlier point, John D. regarded God as an ally, a sort of honorary shareholder of Standard Oil who had richly blessed his fortunes. Consider this impassioned outburst he made to a reporter:
I believe the power to make money is a gift from God—just as are the instincts for art, music, literature, the doctor’s talent, the nurse’s, yours—to be developed and used to the best of our ability for the good of mankind. Having been endowed with the gift I possess, I believe it is my duty to make money and still more money, and to use the money I make for the good of my fellow man according to the dictates of my conscience. 94
For Rockefeller, there was a perfect fusion of Christianity and capitalism and, given his extensive church involvement, it would have been odd if his career hadn’t been saturated with his own version of evangelical Protestantism. Even the business of drilling and refining oil was wrapped for him in religious mystery. “The whole process seems a miracle,” he once said. “What a blessing the oil has been to mankind!” 95 In pleading for his oil monopoly, Rockefeller always exhibited many qualities of the Baptist missionary. He needed to endow his aggressive business tactics with transcendent purpose and elevate his material designs into holy crusades. When faced with the squalid disorder of the oil business in the early 1870s, he converted Standard Oil, in his own mind, into the moral equivalent of the Baptist Church. His career as a trust king would be for him a Christian saga, a pilgrim’s progress, where he was the exemplary man, rescuing sinful refiners from their errant ways.