School of business introduction to microeconomic standard oil – monopoly

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CHAPTER 1

1 Rockefeller’s Youth

John D Rockefeller was born on July 8, 1839, in Richford, New York His father, William

Avery Rockefeller, was a doctor who claimed he could cure cancer and charged people money for treatments His mother, Eliza Davison Rockefeller, was very religious and very strict She taught John how to work and to save money, and also how to give to charities

By age 12, he had saved more than $50 working for neighbors and raising turkeys for his mother At his mother's urging, he borrowed $50 from a local farmer at 7 percent annual interest Rockefeller was impressed when the farmer returned him with interest the following year, and spoke of it in 1904: Money ”

Rockefeller attended an elite school in New York in the early 1850s He was very good at mental arithmetic and was able to solve difficult problems quickly This skill would be very useful to him in his business career In other subjects, Rockefeller was average, but the quality of the education was very high

John Rockefeller attended high school in Cleveland from 1853 to 1855 He was very good

at math and was on the debating team His school encouraged public speaking, and although Rockefeller was only average, it was a skill that would prove to be useful to him

Hewitt & Tuttle He worked long hours and delighted, as he later recalled, in "all the

methods and systems of the office." He was particularly adept at calculating transportation

costs, which served him well later in his career Much of Rockefeller's duties involved

negotiating with barge canal owners, ship captains, and freight agents In these negotiations, he learned that posted transportation rates that were believed to be fixed could be altered depending on conditions and timing of freight and through the use of rebates to preferred shippers Rockefeller was also given the duty of collecting debts when Hewitt instructed him to do so Instead of using his father's method of presentation to collect debts, Rockefeller relied on a persistent pestering approach Rockefeller received

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$16 a month for his three-month apprenticeship During his first year, he received $31 a month, which was increased to $50 a month His final year provided him with $58 a month

As a youth, Rockefeller reportedly said that his two great ambitions were to make

$100,000 (equivalent to $2.91 million in 2021 dollars) and to live 100 years

2.2 Business partnership and Civil War service

In 1859, Rockefeller went into the produce commission business with a partner, Maurice

B Clark, and they raised $4,000 ($120,637 in 2021 dollars) in the capital Clark initiated

the idea of the partnership and offered $2,000 towards the goal Rockefeller had only $800

saved up at the time and so borrowed $1,000 from his father, "Big Bill" Rockefeller, at 10

percent interest Rockefeller went steadily ahead in business from there, making money each year of his career In their first and second years of business, Clark & Rockefeller

netted $4,400 (on nearly half a million dollars in business) and $17,000 worth of profit,

respectively, and their profits soared with the outbreak of the American Civil War when the Union Army called for massive amounts of food and supplies When the Civil War was nearing a close and with the prospect of those war-time profits ending, Clark & Rockefeller looked toward the refining of crude oil While his brother Frank fought in the Civil War, Rockefeller tended to his business and hired substitute soldiers He gave money

to the Union cause, as did many rich Northerners who avoided combat "I wanted to go in the army and do my part," Rockefeller said "But it was simply out of the question There was no one to take my place We were in a new business, and if I had not stayed it must have stopped—and with so many dependent on it."

Rockefeller was an abolitionist who voted for President Abraham Lincoln and supported the then-new Republican Party As he said, "God gave me money", and he did not apologize for it He felt at ease and righteous following Methodist preacher John Wesley's dictum, "gain all you can, save all you can, and give all you can." At that time, the Federal government was subsidizing oil prices, driving the price up from $.35 a barrel in 1862 to

as high as $13.75 This created an oil-drilling glut, with thousands of speculators attempting to make their fortunes Most failed, but those who struck oil did not even need

to be efficient They would blow holes in the ground and gather up the oil as they could, often leading to creeks and rivers flowing with wasted oil in the place of water

A market existed for refined oil in the form of kerosene Coal had previously been used to extract kerosene, but its tedious extraction process and high price prevented broad use Even with the high costs of freight transportation and a government levy during the Civil War (the government levied a tax of twenty cents a gallon on refined oil), profits on the refined product were large The price of refined oil in 1863 was around $13 a barrel, with a profit margin of around $5 to $8 a barrel The capital expenditures for a refinery at that time were small — around $1,000 to $1,500 and requiring only a few men to operate In

this environment of a wasteful boom, the partners switched from foodstuffs to oil, building

an oil refinery in 1863 in "The Flats", then Cleveland's burgeoning industrial area The refinery was directly owned by Andrews, Clark & Company, which was composed of

Clark & Rockefeller, chemist Samuel Andrews, and M B Clark's two brothers The

commercial oil business was then in its infancy Whale oil had become too expensive for the masses, and a cheaper, general-purpose lighting fuel was needed

While other refineries would keep the 60% of oil product that became kerosene but dump the other 40% in rivers and massive sludge piles, Rockefeller used the gasoline to fuel the refinery, and sold the rest as lubricating oil, petroleum jelly and paraffin wax, and other by-products Tar was used for paving, naphtha shipped to gas plants Likewise, Rockefeller's refineries hired their own plumbers, cutting the cost of pipe-laying in half Barrels that cost $2.50 each ended up only $0.96 when Rockefeller bought the wood and had them built for himself In February 1865, in what was later described by oil industry historian Daniel Yergin as a "critical" action, Rockefeller bought out the Clark brothers for

$72,500 (equivalent to $1 million in 2021 dollars) at auction and established the firm of

Rockefeller & Andrews Rockefeller said, "It was the day that determined my career." He was well-positioned to take advantage of postwar prosperity and the great expansion westward fostered by the growth of railroads and an oil-fueled economy He borrowed heavily, reinvested profits, adapted rapidly to changing markets, and fielded observers to track the quickly expanding industry

2.3 Beginning in the oil business

In 1866, William Rockefeller Jr., John's brother, built another refinery in Cleveland and

brought John into the partnership In 1867, Henry Morrison 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 costs, and using refineries’ waste, the company owned two Cleveland refineries and a marketing subsidiary

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in New York; it was the largest oil refinery in the world Rockefeller, Andrews & Flagler was the predecessor of the Standard Oil Company

CHAPTER 2

1 Standard Oil founding and early growth

Rockefeller c 1872, shortly after founding Standard Oil

By the end of the American Civil War, Cleveland was one of the five main refining centers

in the U.S (besides Pittsburgh, Pennsylvania,New York, and the region in

northwestern Pennsylvania where most of the oil originated) By 1869 there was triple the kerosene refining capacity than needed to supply the market, and the capacity remained in excess for many years

On January 10, 1870, Rockefeller abolished the partnership of Rockefeller, Andrews &

Flagler, forming Standard Oil of Ohio Continuing to apply his work ethic and efficiency, Rockefeller quickly expanded the company to be the most profitable refiner in Ohio Likewise, it became one of the largest shippers of oil and kerosene in the country The railroads competed fiercely for traffic and, in an attempt to create a cartel to control freight rates, formed the South Improvement Company offering special deals to bulk customers

like Standard Oil, outside the main oil centers The cartel offered preferential treatment as

a high-volume shipper, which included not just steep discounts/rebates of up to 50% for their product but rebates for the shipment of competing products

Share of the Standard Oil Company, issued May 1, 1878

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 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 non-preferential rates were restored for the time being While competitors may have been unhappy, Rockefeller's efforts did bring American consumers cheaper kerosene and other oil by-products Before 1870, oil light was only for the wealthy, provided by expensive whale oil During the next decade, kerosene became commonly available to the working and middle classes

Undeterred, though vilified for the first time by the press, Rockefeller continued with his self-reinforcing cycle of buying the least efficient 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 "The Cleveland Massacre," Standard Oil 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 Rockefeller to be acquired

3 Standard Oil Trust Certificate 1896

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 and then

make them a decent offer If they refused his offer, he told them he would run them into

bankruptcy and then cheaply buy up their assets at auction However, he did not intend to eliminate competition entirely In fact, his partner Pratt said of that accusation

"Competitors we must have If we absorb them, it surely will bring up another."

Instead of wanting to eliminate them, Rockefeller 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 It developed over 300 oil-based products from tar to paint to petroleum jelly 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 ($1 million is equivalent to $28 million in 2021 dollars)

He instinctively realized that orderliness would only proceed from centralized control of large aggregations of plant and capital, with the one aim of an orderly flow of products

from the producer to the consumer That orderly, economic, efficient flow is what we now,

many years later, call ‘vertical integration’ I do not know whether Mr Rockefeller ever used the word ‘integration’ I only know he conceived the idea

In 1877, Standard clashed with Thomas A Scott, the president of the Pennsylvania

Railroad, Standard's chief hauler Rockefeller envisioned 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, held back its shipments, and, with the help of other railroads, started a

price war that dramatically reduced freight payments and caused labor unrest Rockefeller

prevailed and the railroad sold its oil interests to Standard In the aftermath of that battle,

the Commonwealth of Pennsylvania indicted Rockefeller in 1879 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 Rockefeller was under great strain during the 1870s and 1880s when he was carrying out his plan of consolidation and integration and being attacked by the press He complained that he could not stay asleep most nights Rockefeller later commented:

“All the fortune that I have made has not served to compensate me for the anxiety of that period.”

One of the key strategies Rockefeller used was to buy up smaller oil companies and refineries, which allowed Standard Oil to control a significant portion of the market The company also invested heavily in new technology and infrastructure, such as pipelines and tank cars, which helped it to further reduce costs and increase profits

Rockefeller's business practices were controversial, and he was often criticized for his

ruthless tactics In 1911, the U.S Supreme Court ruled that Standard Oil was a monopoly and ordered it to be broken up into several smaller companies

Despite this setback, Rockefeller remained one of the wealthiest men in the world, and he

continued to be involved in philanthropy throughout his life He donated large sums of

money to various causes, including education, medical research, and the arts Today, he is

remembered as one of the most successful and influential businessmen in history

5 How Standard Oil became a monopoly

Shortly before the Civil War, Rockefeller and a partner established a shipping company in

Cleveland, Ohio The company made much money during the war In 1863, he and his

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partner invested in another business that refined crude oil from Pennsylvania into kerosene

for illuminating lamps

By 1870, Rockefeller and new partners were operating two oil refineries in Cleveland,

then the major oil refining center of the country The partners incorporated (under a charter

issued by the state of Ohio) and called their business the Standard Oil Company

To give Standard Oil an edge over its competitors, Rockefeller secretly arranged for

discounted shipping rates from railroads The railroads carried crude oil to Standard's

refineries in Cleveland and kerosene to the big city markets Many argued that as

"common carriers" railroads should not discriminate in their shipping charges But small

businesses and farmers were often forced to pay higher rates than big shippers like

Standard Oil

The oil industry in the late 1800s often experienced sudden booms and busts, which led to

wildly fluctuating prices and price wars among the refiners More than anything else,

Rockefeller wanted to control the unpredictable oil market to make his profits more

dependable

In 1871, Rockefeller helped form a secret alliance of railroads and refiners They planned

to control freight rates and oil prices by cooperating with one another The deal collapsed

when the railroads backed out But before this happened, Rockefeller used the threat of

this deal to intimidate more than 20 Cleveland refiners to sell out to Standard Oil at

bargain prices When the so-called "Cleveland Massacre" ended in March 1872, Standard controlled 25 percent of the U.S oil industry

Rockefeller saw Standard Oil's takeover of the Cleveland refiners as inevitable He said it

illustrated "the battle of the new idea of cooperation against competition." In his mind,

large industrial combinations, more commonly known as monopolies, would replace

individualism and competition in business

Rockefeller planned to buy out as many other oil refineries as he could To do this, he

often used hardball tactics In 1874, Standard started acquiring new oil pipeline networks

This enabled the company to cut off the flow of crude oil to refineries Rockefeller wanted

to buy When a rival company attempted to build a competing pipeline across

Pennsylvania, Standard Oil bought up land along the way to block it Rockefeller also

resorted to outright bribery of Pennsylvania legislators In the end, Rockefeller made a deal with the other company, which gave Standard Oil ownership of nearly all the oil

pipelines in the nation

By 1880, Standard Oil owned or controlled 90 percent of the U.S oil refining business,

making it the first great industrial monopoly in the world But in achieving this position,

Standard violated its Ohio charter, which prohibited the company from doing business outside the state Rockefeller and his associates decided to move Standard Oil from

Cleveland to New York City and to form a new type of business organization called a

"trust."

Under the new arrangement (done in secret), nine men, including Rockefeller, held "in

trust" stock in Standard Oil of Ohio and 40 other companies that it wholly or partly owned The trustees directed the management of the entire enterprise and distributed dividends

(profits) to all stockholders

When the Standard Oil Trust was formed in 1882, it produced most of the world's lamp

kerosene, owned 4,000 miles of pipelines, and employed 100,000 workers Rockefeller

often paid above-average wages to his employees, but he strongly opposed any attempt by

worth about $20 million

During the 1880s, Standard Oil divided the United States into 11 districts for selling

kerosene and other oil products To stimulate demand, the company sold or even gave

away cheap lamps and stoves It also created phony companies that appeared to compete with Standard Oil, their real owner When independent companies tried to compete,

Standard Oil quickly cut prices sometimes below cost to drive them out of business

Then Standard raised prices to recoup its losses

Much of the trust's effort went into killing off competition But Standard Oil while

Rockefeller was in command also usually provided good quality products at fairly reasonable prices Rockefeller often declared that the whole purpose of Standard Oil was

to supply "the poor man's light."

6 The antitrust movement

By 1900, the Standard Oil Trust had expanded from its original base in the East to new oil regions further west At the same time, a wave of anti-monopoly sentiment swept the United States Farmer organizations, labor unions, muckraking journalists, and many politicians attacked such combinations as the sugar and tobacco trusts But they especially

targeted the "mother trust," Standard Oil

By this time, nearly 30 states and the federal government had passed antitrust laws that attacked monopoly abuses These laws usually rested on a set of legal and economic assumptions:

1 The common law, inherited from England, condemned the restraint of trade

2 Monopolies tended to restrain trade by keeping prices high, suppressing product improvements, and making excessive profits