by H. W. Brands
Regardless of their justification, Rockefeller’s rebates confirmed his advantage over his rivals. Business increased apace, so that when the Rockefeller partnership was dissolved in 1870 and the enterprise was reincorporated as the Standard Oil Company, it was the largest petroleum refiner in America. And it was poised to grow still more. One of Rockefeller’s business colleagues in Cleveland remembered him saying, “The Standard Oil Company will someday refine all the oil.”33
Whether or not he truly meant this, he acted as though he did. Like Morgan in railroads, Rockefeller had no use for competition in oil refining. Competition was wasteful; competition produced the kind of anarchy one saw in the oil fields, where a barrel might be lost to spillage, fire, or overproduction for every barrel captured and brought to market. The refining of oil benefited from economies of scale—the savings that result from larger facilities and longer production runs. The big companies themselves gained from these economies, in the form of higher profits, but so did their customers, in lower prices. Rockefeller didn’t consider himself a philanthropist—that would come later—but neither did he consider himself an exploiter of other people. Customers were free to purchase kerosene from Standard Oil or not; the choice was theirs. But if they did, they received a product they couldn’t have purchased at any price fifteen years earlier, and at a price that kept falling every year. If this didn’t constitute progress, Rockefeller didn’t know what did.
And those persons who stood in the way of progress deserved what they got. Capitalist theoreticians would talk about the “creative destruction” economic development entails; Rockefeller didn’t theorize but gladly took part in both the creation and the destruction. He—and Henry Flagler, who actually drafted the corporate charter—created Standard Oil, which proceeded to destroy most of the competition in the refining business.
But it didn’t do so alone. As powerful as Standard Oil was, it couldn’t prevent the entry of new refiners into the industry. The technology of refining remained so rudimentary that the barriers to entry—the costs of starting a business—were quite low. The result was a drastic oversupply of refining capacity. At one point in the 1870s capacity outstripped demand by as much as three to one.
To solve the problem, Rockefeller collaborated—“conspired” wasn’t too strong a word, as the collaboration was closely held—with several other large refiners and a number of railroads in what was called the South Improvement Company. This cartel embodied an effort by railroads and refiners to apportion the market in a way that preserved their profits—and, not incidentally, crowded out their competitors. To Rockefeller the cartel represented the triumph of reason over the law of the jungle.
But the triumph was short-lived, for word of the cartel leaked out, angering producers who guessed that it would lead to lower prices for their crude. The producers launched what came to be called the “Oil War,” pitting the thousands of producers—many of whom were full-time farmers or merchants and pumped oil part-time from a single well or two—against the handful of refiners and railroads of the South Improvement Company. The producers organized an oil embargo, hoping to starve the refiners and railroads into submission. The campaign assumed the air of a crusade, with the producers holding solidarity rallies praising their own devotion to democracy and equal opportunity and damning the refiners and railroads as plutocratic oppressors. Yet the very number of the producers was their Achilles’ heel, for it was far easier for the cartel to hold its few members in line than it was for the producer’s ad hoc organization to discipline its thousands.
The cartel tried to exploit this weakness, offering sweetheart deals to producers willing to break ranks. One small producer, Frank Tarbell, received an offer of $4.50 per barrel, twice the market price, for his entire year’s production. Tarbell, however, spurned the offer, valuing the respect of his fellow producers (and his young daughter Ida, who would grow up to become the scourge of Standard Oil) above the cartel’s cash. And in the end the producers won. Between the ill will the cartel generated and the oil it didn’t receive, the South Improvement Company collapsed.34
Rockefeller wasn’t surprised. He later claimed that the cartel wasn’t his idea, that he had gone along to please the other directors of Standard Oil. Though Rockefeller was the largest shareholder in Standard, he didn’t own a majority of the stock and so had to lead by persuasion rather than decree. “When it failed,” he said of his thinking on the cartel scheme, “we would be in a position to say, ‘Now try our plan.’ ”35
Rockefeller’s plan was something at once simpler and more ambitious than a cartel. Far from curing him of the idea of industrial cooperation, the South Improvement fiasco convinced him that cooperation was more necessary than ever. If cooperation couldn’t be sustained among the several big firms in the refining industry, it would have to be effected by a single firm. If Standard couldn’t organize the industry, it would have to own the industry.
During the next several years Standard swallowed one competitor after another, buying up refineries and the companies that operated them. Rockefeller was a reasonably honest man and, by his own lights, a compassionate man. He didn’t aim to ruin anyone. “He treated everybody fairly,” recalled a rival who accepted Rockefeller’s purchase offer. “When we sold out he gave us a fair price.” Rockefeller paid in cash or Standard stock. He preferred to pay in stock, and nearly all those who accepted stock were happy they did, especially after the stock made some of them millionaires. Rockefeller came to believe that many of those who criticized his takeover campaign were really angry at themselves for insisting on cash and thereby missing the chance to grow rich on Standard stock.
But though Rockefeller could be kindly, he was also implacable. Those rivals who refused his offers felt the full weight of Standard’s power. He cut prices to below theirs; if they answered with cuts of their own, he cut again. His lower production and transportation costs gave him an advantage over everyone else; when this advantage failed to elicit capitulation, he cut prices to below his own costs, knowing he could stand the attrition longer than they could. He and Flagler engineered shortages of railcars and bought up all the barrels in the neighborhoods of the recalcitrants.
Rockefeller was convinced he was doing the Lord’s work. “I believe the power to make money is a gift from God,” he told an interviewer, “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.” And Rockefeller’s conscience dictated the consolidation of the oil industry. He afterward derided allegations that Standard had engaged in predatory practices in acquiring its competitors. “How ridiculous all that talk is!” he said. “It’s twaddle, poisonous twaddle, put out for a purpose. As a matter of fact, we were all in a sinking ship, if existing cut-throat competition continued, and we were trying to build a lifeboat to carry us all to shore. You don’t have to threaten men to get them to leave a sinking ship in a lifeboat.” Warming to the memory, he described some of the companies he purchased as “old junk, fit only for the scrap heap,” and declared, “The Standard was an angel of mercy, reaching down from the sky, and saying ‘Get into the ark. Put in your old junk. We’ll take the risks!’ ”36
Standard did take risks. Rockefeller’s buying spree began during the depression that followed the Panic of 1873. He benefited from the depression prices, but he had no guarantee of when, or even if, the American economy would pull out of its slump. On occasion he had to reassure his wife—he had married in 1864—that he had made investments beyond oil and that they could survive even if Standard didn’t.
THE BIGGER GAMBLE was that new sources of oil could be found. During its entire brief history, the American oil industry had depended on a single source, the oil district of northwestern Pennsylvani
a. The older wells there were beginning to fail, and one had to think the newer wells would fail, too. The state geologist of Pennsylvania went so far as to describe “the amazing exhibition of oil” in the producing region as “a temporary and vanishing phenomenon, one which young men will live to see come to its natural end.” John Archbold, one of Rockefeller’s own men at Standard, said the chances of finding another field like that of the Oil Creek district were “at least one hundred to one against.” Standard might own the entire industry, but without more oil it wouldn’t be an industry worth owning. Already railroads were reluctant to reinvest in equipment to handle oil shipments.37
Rockefeller bet that new oil would be found. He couldn’t believe that God would have guided him into the oil industry only to snatch away the resource that made it all possible. Nor would God take oil away from the American people. “The whole process seems a miracle,” Rockefeller said. “What a blessing the oil has been to mankind!”38
He continued to pour money into the business. He purchased competitors till only a handful remained, and these he let survive as a testament to his patience. When railroads refused to invest in the new technology of tanker cars, Rockefeller built the cars himself and leased them to the railroads. Besides guaranteeing Standard the most efficient means of transporting oil, this strategy gave the company a veritable stranglehold over its remaining rivals, as it now owned the cars they needed to transport their product. Not long after the tanker cars became the transport of choice, producers and others began experimenting with pipelines, which promised to be even more efficient. Rockefeller invested heavily in pipelines, again with the dual purpose of improving Standard’s efficiency and placing competitors at his mercy.
Meanwhile he consolidated the Standard empire internally. Though Standard seemed solid enough to outsiders, Rockefeller knew it was an institutional hodgepodge. The companies he had acquired were purchased not by Standard itself but by its directors. This arrangement afforded camouflage; Rockefeller could deny the extent of Standard’s monopoly and be technically correct. And for the time being the directors were happy to follow Rockefeller’s lead. But they—or, more likely, their heirs—might not always be so complaisant, and, anyway, it was inefficient to have to persuade the multiple owners whenever Rockefeller thought the group ought to move in this direction or that. It would be far more efficient to centralize control.
To this end Rockefeller and his lawyers adapted the common-law concept of a trust—something held for someone else—to a novel purpose. The Standard Oil trust, established in 1882, held shares of the companies that formed the Standard empire, giving the nine trustees control of those companies. There was nothing especially nefarious about the arrangement; similar schemes occurred to other corporate lawyers about the same time. But neither was it something Rockefeller boasted about. In fact, he did just the opposite, covering his trail with dissimulation and denial for several years, until congressional antitrust investigators revealed the existence of the Standard trust.39
Though the trust arrangement increased Rockefeller’s control of the corporation, it still didn’t give him majority ownership. He still guided by persuasion, although now he had to persuade a smaller number of people. He avoided the first-person singular in talking about his business dealings. “Don’t say that I ought to do this or that,” he told his associates. “We ought to do it. Never forget that we are partners; whatever is done is for the general good of us all.” His hand rested lightly on the tiller. “I have seen Mr. Rockefeller often at a meeting of the heads of the different departments of the Company, listening carefully to each one and not saying a word,” one of his colleagues remembered. “Perhaps he would stretch out on a lounge and say: ‘I am a little tired, but go right on, gentlemen, for I know you want to reach a decision.’ He might close his eyes now and then, but he never missed a point. He would go away without saying a word but goodbye. But next day when he came down he had digested the whole proposition and worked out the answer—and he always worked out the right answer.”40
Under Rockefeller’s gentle guidance, the Standard trust extended its hold on the oil industry. Having routed the refiners—by the time the trust was created, Standard refined nine of every ten barrels processed in the United States—Rockefeller took on the producers. Standard’s dependence on firms it didn’t control for the oil that formed its lifeblood had always made him nervous. And as the South Improvement failure had demonstrated, he needed the producers as much as they needed him, and such dependence was something he couldn’t stand.
As matters developed, the decline in the Pennsylvania fields inspired oil prospectors to look elsewhere. Like the gold prospectors who traveled from California to Nevada and other parts of the mountain West in search of new mines, they knew nothing of the genesis of the deposits they sought; like the prospectors, they simply looked for topographical and geological features that resembled those that had paid off elsewhere. Along the Ohio–Indiana border were springs that, since time out of mind, had spontaneously burst into flame; these seemed a good bet for the drillers. In the mid-1880s these Lima-Indiana fields, as they were called, began producing copiously.
Rockefeller spied his chance to break into production. Though the Lima oil stank so badly consumers wouldn’t purchase the kerosene it made (drillers called the new oil “skunk juice”), Rockefeller determined to acquire as many production leases as possible. His fellow directors were skeptical; no one knew if the sulfur that caused the stink could be removed economically. “Our conservative brethren on the board held up their hands in holy terror and desperately fought a few of us,” Rockefeller remembered. But he assured the skeptics that Standard’s chemists could solve the sulfur problem, and they let themselves be persuaded. “Buy all we can get,” he cabled his agents. They bought a great amount, even as the chemistry division worked overtime. By the early 1890s both groups had succeeded, and Standard, while retaining its refining monopoly, was America’s largest producer as well.41
ANDREW CARNEGIE WAS less religious than Rockefeller but no less convinced he was doing good by doing well. Having put all his eggs in the basket of steel, Carnegie devoted himself to becoming the master steelmaker in America. He found a few deep-pocketed partners, including Tom Scott, his old mentor, and built a cutting-edge steel mill on the field south of Pittsburgh where British general William Braddock had died in the battle that started the French and Indian War a century earlier. Besides being close to Carnegie’s home, the Pittsburgh site combined access to coal and transport, the latter by three rivers and two railroads. (The competing railroads were crucial to Carnegie’s plan; having spent a dozen years on the Penn, he knew how they squeezed customers wherever they enjoyed local monopolies.) The Panic of 1873 threatened the project’s funding, but Carnegie refused to let anything bar the path. At one point Scott asked for help meeting current demands. Carnegie sympathized but reckoned that affording the assistance would hinder construction on the steel plant. After what he called “one of the most trying moments of my whole life,” he decided that profits came before friendship or loyalty.42
Carnegie’s immersion in the steel business convinced him that most of those in the industry didn’t know what they were doing. “I was greatly surprised to find that the cost of each of the various processes was unknown,” he said. “Inquiries made of the leading manufacturers of Pittsburgh proved this. It was a lump business, and until stock was taken and the books balanced at the end of the year, the manufacturers were in total ignorance of results. I heard of men who thought their business at the end of the year would show a loss and had found a profit, and vice versa.”43
Carnegie applied what he had learned on the Penn to track his own costs, and he employed this knowledge to his advantage. The steelmakers of Pittsburgh typically formed cartels, or pools, in bidding large contracts. Carnegie initially went along. But when one such pool allocated him the smallest share of the contract, he balked. Instead he demanded the largest share and warned that if he di
dn’t get it he would undercut them all, since he could roll steel rails at nine dollars a ton. They surrendered, thereby confirming his belief that they hadn’t the faintest idea what the cost per ton of steel production was, since his actual costs were fifty dollars a ton.44
They didn’t stay that high. Carnegie obsessed about costs, doing everything humanly possible to bring them down. He monitored inventories constantly. “There goes that damned bookkeeper,” one of his foremen groused as Carnegie walked past. “If I use a dozen more bricks than I did last month, he knows it and comes round to ask why.” To unravel the mysteries of steel manufacture he hired teams of chemists, who also had orders to find uses for the byproducts of the smelting and alloying process. His engineers streamlined the path of the metal from ore to alloy, pouring ingots, for instance, on moving flatcars, in anticipation of the assembly-line methods of Henry Ford. To cut the cost of fire insurance—a major expense in the hellish business of steelmaking—he tore down his wood buildings and replaced them with iron. Whenever he heard of an innovation that promised to save money, he ordered it implemented, almost regardless of capital cost. In one instance he ripped out a three-month-old rolling mill to replace it with a more efficient model. A British steelman Carnegie met declared proudly that his company was still using equipment introduced two decades before; Carnegie answered that that was what was wrong with British industry. “It is because you keep this used-up machinery that the United States is making you a back number.”45