HST 112 — Survey of American History

Textbook treatments of J. D. Rockefeller Textbook excerpt one1 In the days before the automobile and gasoline, crude oil was refined into lubricating oil for machinery and kerosene for lamps, the major source of lighting in the nineteenth century. The amount of capital needed to buy or build an oil refinery in the 1860s and 1870s remained relatively low — roughly what it cost to lay one mile of railroad track. As a result, the new petroleum industry experienced riotous competition. Ultimately, John D. Rockefeller and his Standard Oil Company succeeded in controlling nine-tenths of the oil-refining business. Rockefeller grew up the son of a shrewd Yankee who peddled quack cures for cancer. Under his father's rough tutelage, Rockefeller learned how to drive a hard bargain. In 1865, at the age of twenty-five, he controlled the largest oil refinery in Cleveland. Like a growing number of business owners, Rockefeller abandoned partnership or single proprietorship to embrace the corporation as the business structure best suited to maximize profit and minimize personal liability. In 1870, he incorporated his oil business, founding the Standard Oil Company. As the largest refiner in Cleveland, Rockefeller demanded illegal rebates from the railroads in exchange for his steady business. The secret rebates enabled Rockefeller to drive out his competitors through predatory pricing. The railroads needed Rockefeller's business so badly that they gave him a share of the rates that his competitors paid. A Pennsylvania Railroad official later confessed that Rockefeller extracted such huge rebates that the railroad, which could not risk losing his business, sometimes ended up paying him to transport Standard’s oil. Rebates enabled Rockefeller to undercut his competitors and pressure competing refiners to sell out or face ruin. To gain legal standing for Standard Oil’s secret deals, Rockefeller in 1882 pioneered a new form of corporate structure — the trust. The trust differed markedly from Carnegie’s vertical approach in steel. Rockefeller used horizontal integration to control not the entire process, but only an aspect of oil production — refining. Several trustees held stock in various refinery companies “in trust” for Standard’s stockholders. This elaborate stock swap allowed the trustees to coordinate policy among the refineries by gobbling up all the small, competing refineries. Often buyers did not know they were actually selling out to Standard. By the end of

1 James Roark, et al. The American Promise

page 1 HST 112 — Survey of American History the century, Rockefeller enjoyed a virtual monopoly of the oil-refining business. The Standard Oil trust, valued at more than $70 million, paved the way for trusts in sugar, whiskey, matches, and many other products. When the federal government responded to public pressure to outlaw the trust in 1890, Standard Oil changed tactics and reorganized as a holding company. Instead of stockholders in competing companies acting through trustees to set prices and determine territories, the holding company simply brought competing companies under one central administration. Now one business, not an assortment of individual refineries, Standard Oil controlled competition without violating antitrust laws that forbade competing companies from forming “combinations in restraint of trade.” By the 1890s, Standard Oil ruled more than 90 percent of the oil business, employed 100,000 people, and was the biggest, richest, most feared, and most admired business organization in the world.

Textbook excerpt two2 The most celebrated corporate empire of the late nineteenth century was John D. Rockefeller’s Standard Oil. Shortly after the Civil War, Rockefeller launched a refining company in Cleveland and immediately began trying to eliminate his competition. Allying himself with other wealthy capitalists, he formed the Standard Oil Company of Ohio in 1870, which in a few years had acquired twenty of the twenty-five refineries in Cleveland, as well as plants in Pittsburgh, Philadelphia, New York, and Baltimore. So far, Rockefeller had expanded only horizontally— buying many refineries. But soon he began expanding vertically as well. He built his own barrel factories, terminal warehouses, and pipelines. Standard Oil owned its own freight cars and developed its own marketing organization. By the 1880s, Rockefeller had established such dominance within the petroleum industry that to much of the nation he served as a leading symbol of monopoly. Rockefeller and other industrialists saw consolidation as a way to cope with what they believed was the greatest curse of the modern economy: “cutthroat competition.” Most businessmen claimed to believe in free enterprise and a competitive marketplace, but in fact they feared that substantial competition could spell instability and ruin for all.

2 Alan Brinkley. The Unfinished Nation

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As the movement toward consolidation accelerated, new vehicles emerged to facilitate it. The railroads began with so-called pool arrangements —informal agreements among various companies to stabilize rates and divide markets (arrangements that would, in later years, be known as cartels). But the pool arrangements were too weak and could not ensure cost stability. The failure of the pools led to new techniques of consolidation. The next effort to stabilize prices was the creation of the "trust"— pioneered by Standard Oil in the early 1880s and the banker J. P. Morgan. Under a trust agreement, stockholders in individual corporations transferred their stocks to a small group of trustees in exchange for shares in the trust itself. Owners of trust certificates often had no direct control over the decisions of the trustees; they simply received a share of the profits of the combination. The trustees themselves, on the other hand, might literally own only a few companies but could exercise effective control over many. In 1889, the state of New Jersey helped produce a third form of consolidation by changing its laws of incorporation to permit companies to buy up rivals. Other states soon followed. Once actual corporate mergers were permitted, the original "trusts" became unnecessary. Rockefeller, for example, quickly relocated Standard Oil to New Jersey and created what became known as a "holding company''-a central corporate body that would buy up the stock of various members of the Standard Oil trust and establish direct, formal ownership of them By the end of the nineteenth century, 1 percent of the corporations in America were able to control more than 33 percent of the manufacturing. A system of economic organization was emerging that lodged enormous power in the hands of very few men — the great bankers of New York such as Morgan, industrial titans such as Rockefeller (who himself gained control of a major bank), and others.

Textbook excerpt three3 Fierce competition characterized the new industrial order. Businesses failed at an alarming rate in the late 19th century; some observers estimated that 95 percent of businesses failed in the 1870s and 1880s. Cheap production, businessmen soon learned, depended on a company’s ability to control every aspect of manufacturing as well as the distribution of goods,

3 from Michael Schaller, et al., American Horizons: U.S. History in Global Context

page 3 HST 112 — Survey of American History and they crafted new organizational structures that would be hallmarks of “big business.” Vertical integration cut costs and guaranteed a regular flow of raw materials for production. Carnegie Steel, for example, owned, in addition to its massive steel mills, the mines that produced the raw materials needed for steel production-coal, coke, and iron ore-as well as the railroads and steamships to transport raw materials to steel mills. Carnegie also set up sales offices to distribute steel efficiently and thus controlled both the production and distribution processes. Horizontal integration aimed to tame the destructive elements of vigorous competition. The early oil industry, for example, was especially competitive and unstable. John D. Rockefeller and Standard Oil were notorious for eliminating competitors through secret deals with railroads that penalized rival oil companies and outright intimidation. To guarantee profits, oilmen first created cartels in which they agreed informally to fix prices, set quotas for production, and share enormous profits. But these informal agreements often broke down, and the American public vigorously protested price-fixing. Seeking a way to centralize control through consolidation, Rockefeller devised the trust. Stockholders in individual oil corporations turned their stock over to a small group of trustees, including Rockefeller himself, who ran the various parts of Standard Oil as one company. In return, the stockholders received profits from the combination but had no direct control over the decisions of the trustees. Standard Oil soon had a monopoly of the oil industry and controlled more than 90 percent of oil refining in the United States by the 1880s. By 1904, its profits reached a whopping $57 million. The first and most notorious trust, Standard Oil, served as a model as trusts in beef, tobacco, and sugar soon followed.

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