The legality of the convertible issuances was precisely the kind of shadow land where Gould was at his best. The Erie’s capital structure under its legislative charter arguably did permit issuance of convertibles, and there was some precedent for it. (See Julius Grodinsky, Jay Gould, p. 41.) The journal of “legal” expenses is from Assembly of the State of New York, Report of the Select Committee Appointed by the Assembly, March 11, 1873, to Investigate the Alleged Mismanagement on the Part of the Erie Railway Company, Together with the Testimony Taken Before Said Committee (vol. 6, no. 98) (Albany, N.Y.: Argus, 1873), pp. 336–37. The Report may be the richest source of details on the Erie wars.
Railroad Privateer
“Airplane-seat pricing” is just a special case of industries, including railroads, with heavy fixed and low variable costs, where competitive pressures lead to “marginal cost pricing,” charging at or slightly above the variable cost. Memory chip factories, another example, cost $1 billion or more to build, but the labor and materials cost of each chip is only about twenty-five cents or so. The desperate hunt for revenues to recover the factory investment inevitably triggers savage chip price wars. The Japanese solution was a government sponsored chip cartel in the 1970s and 1980s, eventually broken by the Koreans. Recent OPEC history also exemplifies the challenges of keeping cartels intact. Gould’s acquisition drive was born of his perception that it was foolish to expect independent companies to subordinate their competitive instincts to a cartel agreement; J. P. Morgan proved the soundness of that instinct over some thirty years of futile cartel construction.
Julius Grodinsky, Jay Gould, pp. 57–69; 73–74 has a clear description of Gould’s acquisition strategy. For the Pennsylvania reaction, Maury Klein, Life and Legend, pp. 93–95; “state mercantilism” is in James E. Vance, Jr., The North American Railroad (Baltimore, Md.: The Johns Hopkins University Press, 1995), p. 89. The most detailed account of the Albany & Susquehanna–Erie struggle is in Charles and Henry Adams, Chapters, pp. 137–90, written by Charles, which omits any mention of Morgan (who was not a significant figure when Adams wrote it). For Morgan’s role, see Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, Mass.: Harvard University Press, 1987), pp. 121–23.
The Gold Corner
The best short accounts of the Gold Corner are Maury Klein, Life and Legend, pp. 100–15; and Charles and Henry Adams, Chapters, pp. 101–36. (The Gold Corner story was written by Henry, and is the best of the three sections of Chapters.) The best overall source is U.S. House of Representatives, Committee on Banking and Currency, Report no. 31, Gold Panic Investigation, 1870 (reprinted: New York: Arno Press, 1974). The hearings open with extensive ground-laying testimony that fully explains the operations of the Gold Exchange, hedging practices, and other essential background. For general background on the postwar currency system, see Irwin Unger, The Greenback Era: A Social and Political History of American Finance, 1865–1879 (Princeton, N.J.: Princeton University Press, 1964).
Modern trading markets differ only in detail from Gould’s day. The kind of hedging operation described here is now normally accomplished in the futures markets—selling an uncovered futures contract is functionally equivalent to taking a short position, and futures cash margin requirements work in essentially the same way. Although markets are now much deeper and more liquid, and there are much tighter controls over trading positions, trading fiascos still occur like clockwork, especially after the introduction of some new product or trading efficiency. In addition, we tend to look more benignly on “speculation” as an essential part of the price-discovery process.
Quotes: Gould’s “fictitiousness” is from Gold Panic Investigation, pp. 153–54; Adams’s “worthy” from Charles and Henry Adams, Chapters, p. 119; Corbin’s “only for the sake of,” Gold Panic Investigation, p. 253; Gould on purpose of gifts, and “I did not,” ibid., pp. 163, 135; “Delivered” versions, ibid., p.174 and Klein, Life and Legend, p. 106; Gould’s “What put gold,” and “undone,” Gold Panic Investigation, pp. 135, 256. Fisk to Speyers, ibid., p. 64; “crazy,” Klein, Life and Legend, p. 112. Fisk on Butterfield tip, Gold Panic Investigation, p. 181; Fisk on the Corbins, ibid., p. 176.
Ouster
The most thorough account of Gould’s unseating is Assembly of the State of New York, Report, which I use for the summary here. The English shareholders’ complaint against Gould was summarized in a 101-count pleading that, although obviously partisan, is an excellent—and it appears mostly accurate—time line of the Gould-Fisk reign. It is reproduced in full at Heath et al. v Erie Railway Co. et al. 11 Federal Cases, 976 (April 27, 1871). The Stevens quote is in Assembly of the State of New York, Report, p. 310; the Bischoffheimer deal, the Gould settlement, and “raise the cry” are from ibid., pp. 35–38, 314–15, and 746. Gould’s settlement was later reopened and he was forced to disgorge some additional money; but by that time he was once again very rich. On the valuations of the Gould package, the English shareholders’ complaint (Count 57) listed the Opera House at a value of $700,000 (to argue the enormity of the Fisk-Gould embezzlements), but the settlement accounting valued it at $1.5 million. Peter Watson was an investor in, and later president of, the westernmost of the “lake shore” routes, the Michigan & Southern, and had held other positions within that network. His appointment to the Erie board signaled Vanderbilt’s temporary preeminence, since the lake shore routes were now firmly within the Commodore’s control. In the New York Assembly hearings referred to above, Watson patiently explained basic concepts like expenses, capitalized expenditures, depreciation, net earnings, and the priorities between interest and dividends. See, for example, his testimony, pp. 188ff.; the committee’s own summary demonstrates considerable confusion on all these issues. The “gigantic offspring” quote is in Chester McArthur Destler, “The Standard Oil, Child of the Erie Ring, 1868–1872: Six Contracts and a Letter,” Mississippi Valley Historical Review (June 1946) 89–114, at p. 100.
The First Oil Baron
The basic story triangulates the accounts in Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (New York: Random House, 1998), pp. 129–55; Allan Nevins, John D. Rockefeller: The Heroic Age of American Enterprise (New York: Charles Scribner’s Sons, 2 vols.), I:217–346; Ida M. Tarbell, The History of the Standard Oil Company (New York: Macmillan, 1925, 2 vols.), I:38–103; and Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry: Vol. I, The Age of Illumination, 1859–1899 (Evanston, Ill.: Northwestern University Press, 1959). Williamson, pp. 170–201, 297–308, has a crisp, accurate account of the early evolution of the competition between the trunk lines; comparative mileage data are from p. 300. Refining technology is from ibid., pp. 202–51. Rockefeller’s “running scared” is based on Allan Nevins, op. cit., I:279–81, who relied on interview data, long after the fact, but it fits everything else we know. The details of the 1868 deal between the Erie lines, the three refineries, and the pipeline are from the original documents reprinted in Chester McArthur Destler, “The Standard Oil,” pp. 103–14. Destler finds the contract reprehensible.
Crisis and Consolidation
Oil price data is from the table in Harold F. Williamson, The American Petroleum Industry, p. 360. The annual reports of Andrew Carnegie’s Columbia Oil Co. list ten years of monthly average sale prices per barrel. The variations within each year are quite wide, and the price collapse in 1873 is apparent. Columbia generally suspended operations when prices fell to a dollar. (HSWP, Box 20, folder 1)
High
Low
1864
13.00
4.00
1865
9.25
4.00
1866
5.00
1.65
1867
4.00
1.50
1868
5.00
1.80
1869
7.00
4.25
1870
4.00
2.75
1871
5.15
3.40
1872
4.60
3.00
1873
1.05
1.00
1874
1.90
0.65
For Standard’s capitalization, see the table on page 344. A comment: Nevins (Allan Nevins, John D. Rockefeller, I:292) seems to imply that the initial $1 million represented new cash— “each incorporator taking his own allotment and paying for it”—but the partnership of Rockefeller, Andrews, and Flagler would have been dissolved at the same time; instead of distributing the assets, they would have been converted into shares of the new entity. The reorganization was much more about flexibility than about raising money, although there was one new investor. Nevins, ibid., then assumes that the Cleveland bankers invested just before the capitalization increase of January 1872. Nevins makes polemical use of that assumption, see infra, but absent more evidence, his inferences seem unwarranted. The table on page 344 summarizes the capitalization changes over this period. Altogether, they seem quite normal for a two-year period, comprising merely the sale of the original 1,000 treasury shares, some reallocations of Rockefeller’s shares, and a sale of part of Jennings’s stake. BP America, a successor to part of the Exxon archives, was the custodian of the 1870s minute books, the capitalization source for Nevins and Chernow, but the files were transferred a few years ago, and are now missing, so I could not determine the precise dates of the transfers (if, indeed, the minute books show them). I do appreciate the assiduous search by Sarah Howell, at BP’s public relations firm, and Tom Pardo, of the BP staff, to track them down. Shortly before I commenced the research for this book, Exxon transferred its early-period files to the University of Texas. Whether they would shed further light on this period I don’t know, but they will be closed until 2006 or so until the cataloging is complete.
Nevins argues (Allan Nevins, John D. Rockefeller, I:306–37) that Rockefeller was poised to commence his Cleveland consolidation before he heard of the SIC, and only went into it as a second-best option. His primary evidence is that Rockefeller had expanded the company’s capitalization before he heard of the SIC and that the merger with Payne was independent of the SIC. Neither argument is convincing. He did not increase, but only rejiggered, the Standard’s capitalization in the two years after 1870, and it strains credulity that the Payne merger and Payne’s taking shares in the Standard and SIC on successive days, all within about two weeks, were unrelated transactions. The stock table is reconstructed from Nevins’s narrative, I:290–337.
Standard Oil Stock Tables, 1870–1872
Jan. 10,
1870
Dec. 31,
1871
Change
Jan.1,
1872
Dist. to
Shlders
(13)
Jan.1,
1872
New
Issue
(14)
Jan. 2,
1872
New
Issue
Total
%
Owned
John D. Rockefeller
2,667
2,016
–651
806
3,000
5,822
16.6%
William Rockefeller
1,333
1,459
126
584
2,043
5.8%
Henry Flagler
1,333
1,459
126
584
1,400
3,443
9.8%
Samuel Andrews
1,333
1,458
125
583
2,041
5.8%
Stephen Harkness (1)
1,334
1,458
124
583
2,041
5.8%
O. B. Jennings (2)
1,000
500
–500
200
700
2.0%
Rockefeller, Andrews, & Flagler (3)
1,000
0
–1,000
0
0
0.0%
Amasa Stone (4)
500
500
200
700
2.0%
Stillman Witt (5)
500
500
200
700
2.0%
T. P. Handy (6)
400
400
160
560
1.6%
Benjamin Brewster (7)
250
250
100
350
1.0%
Clark, Payne (8)
4,000
4,000
11.4%
Jabez Bostwick (9)
700
700
2.0%
Joseph Stanley (10)
200
200
0.6%
Peter Watson (11)
500
500
1.4%
J. D. Rockefeller as
agent (12)
1,200
10,000
11,200
32.0%
Total
10,000
10,000
0
4,000
11,000
10,000
35,000
100.0%
1. An in-law of Flagler
2. William Rockefeller’s father-in-law
3. Former partnership name; shares held for future distribution
4,5,6. Cleveland bankers and businessmen
7. Entrepreneur/investor
8. Acquisition of refinery
9. Acquisition of refinery/marketing/distribution business
10. Acquisition of refinery
11. President, South Improvement Company
12. Treasury shares, held for future acquisitions
13. Shares awarded pro rata, presumably in lieu of cash dividend
14. New Rockefeller/Flagler shares purchased; remainder for acquisitions and Watson grant, in addition to new treasury shares
Quote “alias” from Ida M. Tarbell, History, I:99. Industry margin changes calculated from the table in Harold F. Williamson, The American Petroleum Industry, p. 360.
The Muckrakers’ Case against Rockefeller
Ron Chernow, Titan, pp. 435–61, has a fine background essay on Tarbell, supported by work in her personal papers and notes. Quotes “unjust and illegal” and “swift and ruddy” from Ida M. Tarbell, History, I:101, 36–37. Harold F. Williamson, The American Petroleum Industry, pp. 170–89, has a lucid discussion of the positioning of the railroads, and on pp. 287–301, of the respective advantages and disadvantages of the different refining centers; and on pp. 344–46, the secondary, albeit important, character of petroleum freight compared to the grain trade. Export data are from United States Bureau of the Census, Historical Statistics, vol. 2, Series U, pp. 274–94.
For a recent neo-Tarbellian argument, see Elizabeth Granitz and Benjamin Klein, “Monopolization by ‘Raising Rivals’ Costs’: The Standard Oil Case,” Journal of Law and Economics, 39:1 (April 1996), 1–47. They argue that the real monopoly belonged to the three railroads—the Erie, the Central, and the PRR—and that they built up the Standard to act as the policeman and the freight evener over their cartel. While the argument is ingenious, it suffers from many of the same flaws as Tarbell’s. An essential premise, as it was for Tarbell, is that there were no efficiencies of scale in refining, so they assume all refineries were making about the same returns, which is patently wrong. Only by that assumption can they conclude that, absent railroad collusion with the Standard, it would make no sense for other refiners to sell out, instead of holding on and enjoying a “free
rider” price increase when Rockefeller achieved his near monopoly. Returns to scale, in fact, seem to have been quite high during this period, as evidenced by the rapid move to scale on the part of all the best refiners—besides the usual processing and capital efficiencies, scale allowed better exploitation of the nonkerosene fractions. And in Rockefeller’s case, he moved much faster than the rest of the industry to exploit both tiny scale efficiencies in refinery management—like his own barrel shop—and the very large ones to be gained from moving into distribution. Granitz and Klein are correct that in the decade before the long-distance pipeline, the Standard emerged as the evener of railroad freights, but that seems the natural consequence of its market power. Granitz and Klein would have it the other way, that the railroads bestowed that power on the Standard, but fail to explain why the roads would have picked Rockefeller as their savior before he had market power—a problem they also share with Tarbell. The authors also have considerable difficulty fitting the very nasty 1877 Standard/PRR war (see chapter 5) into their framework. One of their primary pieces of evidence for a conspiracy, finally, is that the Standard did not fully exploit its market power in exacting lower freight rates from the railroads. But that is perfectly consistent with Rockefeller’s normal behavior; he was almost always happy to allow modest extra premiums to keep important vendors contented and loyal.
The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany Page 43