Introduction
| The saga of Standard Oil ranks as one of the most dramatic episodes in the history of the U.S. economy. It occurred at a time when the country was undergoing its rapid transformation from a mainly agricultural society to the greatest industrial powerhouse the world has ever known. The effects of Standard Oil on the U.S., as well as on much of the rest of the world, were immense, and the lessons that can be learned from this amazing story are possibly as relevant today as they were a century ago. Standard Oil Company was founded by John D. Rockefeller in Cleveland, Ohio in 1870, and, in just a little over a decade, it had attained control of nearly all the oil refineries in the U.S. This dominance of oil, together with its tentacles entwined deep into the railroads, other industries and even various levels of government, persisted and intensified, despite a growing public outcry and repeated attempts to break it up, until the U.S. Supreme Court was finally able to act decisively in 1911. John D. Rockefeller John Davidson Rockefeller was born the second of six children into a working class family in Richford, (upstate) New York in 1839. In 1853, the family moved to a farm in Strongsville, Ohio, near Cleveland. Under pressure from his father, Rockefeller dropped out of high school shortly before commencement and entered a professional school, where he studied penmanship, bookkeeping, banking and commercial law. In 1859 Edwin Drake struck oil in Titusville, in western Pennsylvania. This triggered an oil rush to the region and marked the start of oil as a major industry in the U.S. Coincidentally, this was the same year that Charles Darwin's On the Origin of Species was published, a work that had a great influence not only on the sciences, but also on business and society in general. It was also in 1859 that Rockefeller started his first business. With $1,000 he had saved and another $1,000 borrowed from his father, and in partnership with another young man, Maurice B. Clark, he set up a commission business that dealt with a variety of products including hay, grain and meats. After the outbreak of the Civil War in 1861, Rockefeller hired a substitute to avoid conscription, as was not uncommon among Northerners in those days. Although the war initially disrupted the economy, it soon began to stimulate development in the North, and this appears to have been an important factor in Rockefeller's sudden and spectacular success. The Titusville discovery led to the swift ascent of a major new industry based largely on the use of kerosene for lighting. Oil refining became largely concentrated in Cleveland because of its proximity to the oil fields of Western Pennsylvania, its excellent (and competitive) railroad service, its availability of cheap water transportation (on adjacent Lake Erie) and its abundant supplies of low cost immigrant labor. Rockefeller was immediately attracted to the oil business, and in 1863, at the age of 24, he established a refinery in Cleveland with Clark and a new partner, Samuel Andrews, a chemist who already had several years of refining experience. Fueled by the soaring demand for oil and Rockefeller's ambition, this refinery became the largest in the region within a mere two years, and Rockefeller thereafter focused most of his attention on oil for the next three decades. Standard Oil Company In 1870, Rockefeller, together with his brother William, Henry M. Flagler and Samuel Andrews, established the Standard Oil Company of Ohio. This occurred while the petroleum refining industry was still highly decentralized, with more than 250 competitors in the U.S. The company almost immediately began using a variety of cutthroat techniques to acquire or destroy competitors and thereby "consolidate" the industry. They included: (1) Temporarily undercutting the prices of competitors until they either went out of business or sold out to Standard Oil. (2) Buying up the components needed to make oil barrels in order to prevent competitors from getting their oil to customers. (3) Using its large and growing volume of oil shipments to negotiate an alliance with the railroads that gave it secret rebates and thereby reduced its effective shipping costs to a level far below the rates charged to its competitors. (4) Secretly buying up competitors and then having officials from those companies spy on and give advance warning of deals being planned by other competitors. (5) Secretly buying up or creating new oil-related companies, such as pipeline and engineering firms, that appeared be independent operators but which gave Standard Oil hidden rebates. (6) Dispatching thugs who used threats and physical violence to break up the operations of competitors who could not otherwise be persuaded. By 1873 Standard Oil had acquired about 80 percent of the refining capacity in Cleveland, which constituted roughly one third of the U.S. total. The stock market crash in September of that year triggered a recession that lasted for six years, and Standard Oil quickly took advantage of the situation to absorb refineries in Pennsylvania's oil region, Pittsburgh, Philadelphia and New York. By 1878 Rockefeller had attained control of nearly 90 percent of the oil refined in the U.S., and shortly thereafter he had gained control of most of the oil marketing facilities in the U.S. Standard Oil initially focused on horizontal integration (i.e., at the same stage of production) by gaining control of other oil refineries. But gradually the integration also became vertical (i.e., extended to other stages of production and distribution), mainly by acquiring pipelines, railroad tank cars, terminal facilities and barrel manufacturing factories. Standard Oil Trust The company continued to prosper and expand its empire, and, in 1882, all of its properties and those of its affiliates were merged into the Standard Oil Trust, which was, in effect, one huge organization with tremendous power but a murky legal existence. It was the first of the great corporate trusts. A trust was an arrangement whereby the stockholders in a group of companies transferred their shares to a single set of trustees who controlled all of the companies. In exchange, the stockholders received certificates entitling them to a specified share of the consolidated earnings of the jointly managed companies. The concept of a trust was first proposed by Samuel Dodd, an attorney working for Standard Oil. In the case of Standard Oil, a board of nine trustees, controlled by Rockefeller, was set up and was given control of all the properties of Standard Oil and its numerous affiliates. Each stockholder received 20 trust certificates for each share of Standard Oil stock. The trustees elected the directors and officers of each of the component companies, and all of the profits of those companies were sent to the trustees, who decided the dividends. This arrangement allowed all of the companies to function in unison as a highly disciplined monopoly. Since its earliest days, the U.S. oil industry had been well aware of the power of monopoly and its huge profits potential. Although the seemingly erratic fluctuations of oil prices had convinced many refiners to try to restrict output in a joint effort, these attempts never lasted long because the incentives to cheat were so great. However, the unified organization of the trust finally made the disciplined regulation of production levels possible, thereby giving its owners complete control over prices. The massive and unprecedented profits of Standard Oil were made possible by (1) this control over prices (and the consequent ability to set prices at levels that would maximize profits), (2) the huge economies of scale attained from the control of almost all oil refined in the U.S. and (3) the ability to pressure railroads and other suppliers of goods and services into giving them bargain rates. However, even this unprecedented wealth and power was not enough. Rockefeller and Standard Oil needed ever more. The company thus expanded into the overseas markets, particularly Western Europe and Asia, and after a while it was selling even more oil abroad than in the U.S. Moreover, Rockefeller, in addition to his role as the head of Standard Oil, also invested in numerous companies in manufacturing, transportation and other industries and owned major iron mines and extensive tracts of timberland. The astonishing success of Standard Oil encouraged others to follow the Rockefeller business model, particularly in the booming final decades of the 19th century. Trusts were established in close to 200 industries, although most never came close to Standard Oil in size or profitability. Among the largest were railroads, coal, steel, sugar, tobacco and meatpacking. Public Disgust and Revulsion This trend went far from unnoticed by the general public. In fact, it led to widespread disgust and revulsion, not only among the many people who had their businesses or jobs wiped out by the ruthless predatory tactics of the trusts, but also by countless others who were affected by the increased costs and reduced levels of service that often resulted from the elimination of competition. The monopolization of the economy also became a major topic for the print media, which helped to create a widespread awareness not only of the effects of this consolidation but also of the techniques that were being used to attain it, including the extensive use of fraud, political corruption and physical violence. For example, in 1881 the Atlantic Monthly published Story of a Great Monopoly by the well-known reformer Henry Demarest Lloyd, and the widespread popularity of this article resulted in Lloyd's publication in 1894 of Wealth against Commonwealth, a book-length attack on monopolies based largely on his study of Standard Oil. The media attack on monopolies and corruption reached a peak from 1902 to 1912, which is often referred to as the muckraking decade. That period saw the publication of more than a thousand articles providing detailed accounts of the economic and political corruption caused by big business, especially the trusts. This surge was facilitated by advances in printing technology, including the development of the halftone process, which made possible the low cost production of profusely illustrated magazines that were affordable (and irresistible) to the masses. Particularly noteworthy among the muckrakers was Ida M. Tarbell, whose 1902 series of articles detailed the ruthless business tactics of Standard Oil and its abuse of natural resources. This series was subsequently published in book form as the classic The History of the Standard Oil Company. Another equally influential classic was Upton Sinclair's The Jungle, which was released in 1906 and exposed the corrupt and highly unsanitary practices of the meatpacking industry. Among the many other topics covered by the muckrakers were patent medicines, corruption in the U.S. Senate and racial discrimination. The muckrakers helped bring about an unprecedented era of reform which included pioneering legislation aimed at restoring free competition to the economy and at protecting the food supply along with other measures designed to stop the excesses and abuses of corporate greed. Governmental Impotence In spite of the outraged public sentiment, it took the government a long time to take effective measures to deal with the abusive tactics by Standard Oil and other monopolies. The strong desire on the part of the monopolies for preventing government intervention together with their pervasive influence undoubtedly played a major role in this delay. As an example of the difficulties which the government faced, Standard Oil executives and their friends were extremely uncooperative at judicial inquiries (such as the Hepburn Committee, which investigated railroad rate discrimination and whose 1880 final report helped bring about the adoption of the federal Interstate Commerce Act in 1887). In fact, they regularly contested the validity of such proceedings and frequently even refused to attend them. Their evasive and condescending responses to questions during the hearings confirmed their attitude of being above the rule of law, thereby further enraging the public. The vehement opposition to the trusts, especially among farmers who protested the high charges for transporting their products to the cities by railroad, finally resulted in the passage of the Sherman Antitrust Act in 1890. This was the first measure enacted by the U.S. Congress to prohibit trusts. Although several states had previously enacted similar laws, they were limited to intrastate commerce. The Sherman Antitrust Act, in contrast, was based on the constitutional power of Congress to regulate interstate commerce. It was passed by an overwhelming vote of 51-1 in the Senate and a unanimous vote of 242-0 in the House, and it was signed into law by President Benjamin Harrison. The Sherman Antitrust Act authorized the Federal Government to dissolve the trusts. It began with the statement: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." And it established penalties for persons convicted of establishing such combinations: ". . . shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court." However, the Act's effectiveness was at first limited because of loose wording together with intense political pressure from the trusts. Subsequently, in 1892 the Ohio Supreme Court declared the Standard Oil Trust to be an illegal monopoly and ordered its dissolution. Although the trustees superficially complied, this decree had little overall effect because they retained control through their positions on the boards of the component companies. Standard Oil was subsequently reorganized in 1899 as a holding company under the name of Standard Oil Company of New Jersey. That state had conveniently adopted a law that permitted a parent company to own the stock of other companies. Philanthropy As is often the case even with the most heinous of human activities, there was another, starkly contrasting side to the unabashed greed and callousness of some of the great monopolists. It was perhaps most notably espoused by Andrew Carnegie in his 1889 article The Gospel of Wealth, in which he asserted that the wealthy have a moral obligation to serve as stewards for society. Carnegie had likewise become one of the richest people in the world through the domination of a U.S. industry (steel), although he managed to do so in a less ruthless manner than Rockefeller. Carnegie stated that the accumulation of great wealth by a few in any capitalist society was not only inevitable, but also necessary to maintain prosperity and for the survival of democracy itself. However, he was also convinced that those who amassed such wealth have a moral duty to donate most of it during their lifetime for the benefit of society. In accordance with this philosophy, Carnegie dispensed hundreds of millions of dollars for various philanthropic activities, the best known of which was the construction of several thousand libraries throughout the English speaking world. Rockefeller became another of the great American philanthropists. To many this seemed to be a dramatic and puzzling contradiction for a ruthless monopolist who never hesitated to use any means, no matter how illegal or immoral, to crush his competitors. In fact, Rockefeller's belief in the importance of charitable activities actually started very early, with his regular donations of part of his income to his church and charities when he was earning money as a boy. He once wrote: "I believe it is every man's religious duty to get all he can honestly and to give all he can." Consistent with this conviction, Rockefeller began reducing his workload at Standard Oil in the 1890s in order to devote more of his time to philanthropy. Subsequently, in 1910 he announced his retirement so that he could devote full time to this activity, which he pursued with great passion for his remaining 26 years. Rockefeller gave away the bulk of his fortune in ways designed to do the most good as determined by careful study and with the assistance of expert advisers. For example, he established several major charitable organizations (including the Rockefeller Institute for Medical Research, the General Education Board, the Rockefeller Sanitary Commission and The Rockefeller Foundation) and played a pivotal role in the establishing and funding of the University of Chicago (which remains one of the leading U.S. universities). The sum of his donations to these and other causes were more than $500 million (of an estimated peak net worth of nearly one billion dollars) during his lifetime, and the total of his and his son's donations was in excess of $2.5 billion by 1955. Several explanations have been proposed for the massive public service and charitable activities of the great corporate robber barons. Many contemporaries of Rockefeller and Carnegie believed that they were really just egotists who craved the favorable attention that they received from donating money and delighted in having prestigious institutions and thousands of buildings named after them. Another explanation is that these activities were largely a public relations ploy and thus a good business investment. That is, they were techniques for deflecting attention from the harmful effects of the monopolies and for staving off the increasingly serious attempts to curtail their power or even break them up. Still another explanation is that such activities were a form of atonement for their feelings of guilt about their business activities. This is certainly consistent with the apparent religious convictions of Rockefeller and others and with their possible consequent fear of eternal punishment in an afterlife. Perhaps there is some truth to all of these explanations. The Roosevelt Administration's Trust-busting The Sherman Antitrust Act's effectiveness was at first limited because of loose wording and ferocious opposition from the big industrial combinations. However, the situation began to change starting in 1898 with President William McKinley's appointment of several senators to the U.S. Industrial Commission. The Commission's subsequent report to President Theodore Roosevelt laid the groundwork for Roosevelt's famous and feared trust busting campaign. Despite this reputation, Roosevelt, who became president in 1901, actually preferred regulation to dismantling, and he attempted to steer a middle course between the socialism favored by some reformers and the laissez faire approach advocated by the Republicans. His hand was strengthened by an increasingly outraged public, which, although leery of government intervention in the past, had become far more supportive of it because of the seemingly endless growth in the numbers and power of the monopolies. And the highly publicized philanthropic activities of some of the industrial barons did little to stop this momentum for reform. Several steps were taken by Roosevelt during his first term that proved highly successful despite intensive efforts by big business to block them. They included: (1) Convincing Congress to establish a Department of Commerce and Labor, the first new executive department since the Civil War, in order to increase the federal government's oversight of the interstate actions of big business and to monitor labor relations. (2) Setting up the Bureau of Corporations in the new department in order to find violations of existing antitrust legislation. The Bureau soon began investigations into the oil, steel, meatpacking and other industries. (3) Instructing his attorney general to launch a total of 44 lawsuits against what were determined to be harmful business combinations, among which was the Standard Oil Trust. In a seminal decision, the U.S. Supreme Court in 1904 upheld the government's suit under the Sherman Antitrust Act to dissolve the Northern Securities Company (a railroad holding company) in State of Minnesota v. Northern Securities Company. Then, in 1911, after years of litigation, the Court found Standard Oil Company of New Jersey in violation of the Sherman Antitrust Act because of its excessive restrictions on trade, particularly its practice of eliminating its competitors by buying them out directly or driving them out of business by temporarily slashing prices in a given region. Coincidentally, 1911 was also a pivotal year for the petroleum industry in another respect. It was the year in which the U.S. market for kerosene (until then the main product from oil refining) was surpassed by that for a formerly discarded byproduct of the refining process -- gasoline. In its historic decision, the Supreme Court established an important legal standard termed the rule of reason. It stated that large size and monopoly in themselves are not necessarily bad and that they do not violate the Sherman Antitrust Act. Rather, it is the use of certain tactics to attain or preserve such position that is illegal. The Court ordered the Standard Oil Trust to dismantle 33 of its most important affiliates and to distribute the stock to its own shareholders and not to a new trust. The result was the creation of a number of completely independent (although eight of them retained the phrase Standard Oil in their names) and vertically integrated oil companies, each of which ranked among the most powerful in the world. This decision also paved the way for new entrants into the industry, such as Gulf and Texaco, which discovered and exploited vast new petroleum deposits in Texas. The consequent vigorous competition gave a big impetus to innovation and expansion of the oil industry as a whole. Conclusion The trusts presented a superficially strong case for their activities. They claimed that their consolidation actually provided a net benefit to the public by reducing costs, and thus prices, through the elimination of duplicate and inefficient facilities and through economies of scale attained from larger volumes of output. They also contended that the greater volumes of output made it possible to finance larger and more efficient production facilities and to devote more funds to research and development. Although there was some truth to these arguments, at least initially, they failed to take into consideration the huge detrimental effects on the economy and society resulting from the long-term (four decades in the case of Standard Oil) absence of free market competition (i.e., the market mechanism). Monopolies often do reduce the prices and improve the quality of their products in their early stages when they are trying to eliminate the competition. But history has proven time and time again that they lose their incentive to do so after the competition gets exterminated; in fact, they then have a very powerful incentive to increase prices and reduce quality. Free competition, in contrast, serves to minimize prices and maximize quality over the long run, and it thus results, at least in many respects, in what economists term an efficient allocation of resources for the economy as a whole. Another major disadvantage of monopolies is their tendency to stifle innovation. Not only do they lose much of their motivation to develop and deploy new and improved technologies as a result of the loss of competition, but monopolies also often make vigorous efforts to prevent existing or potential competitors from bringing their innovations to market because of the threat that it poses to their dominance. Although it is easy for monopolists to create the illusion that they are major innovators, technological advance in monopolistic industries is often substantially less than what would occur in a more competitive environment. Innovation is generally regarded as one of the keys (if not the key) to economic growth, and thus its suppression will likely have a deleterious effect on the economy as a whole, even though such effect might not be readily apparent to the general public. The argument has also been made that the excessive prices and other harmful effects of monopolies are justified because of the great charitable activities of monopolists-turned-philanthropists such as Rockefeller. However, there is scant evidence to support this. Although the scale of Rockefeller's charitable activities was certainly impressive, it was likely small in comparison to the total costs imposed on the economy and society from the anti-competitive business practices of Standard Oil. These costs were not all obvious because they were widely scattered, often hidden and difficult to quantify, in sharp contrast to the highly conspicuous and well publicized philanthropic activities. Historians of the future will likely continue to view the dissolution of the Standard Oil Trust as an important milestone in the unending struggle to restore and preserve free competition in the U.S. economy. Yet, they might also be far more concerned than their predecessors about the failure of the market mechanism, and of society as a whole, to address an issue of at least equally great importance: namely, the inexorable rush to consume and deplete what increasingly appears to be a very finite resource virtually regardless of its consequences. |
