Yergin-The Prize-Chapter 2 PDF

C H A P T E R 2 "Our Plan": John D. Rockefeller and the Combination of American Oil A C U R I O U S A U C T I O N took place one February day in 1865 in Cleveland, Ohio, then a bustling city that had profited from both the Civil War and the oil boom and now stood to prosper from the great era of A...

C H A P T E R 2 "Our Plan": John D. Rockefeller and the Combination of American Oil A C U R I O U S A U C T I O N took place one February day in 1865 in Cleveland, Ohio, then a bustling city that had profited from both the Civil War and the oil boom and now stood to prosper from the great era of America's industrial expansion. The two senior partners in one of the city's most successful oil refineries had fallen into yet another of their chronic disputes over the speed of expansion. Maurice Clark, the more cautious partner, threatened dissolution. This time, the other partner, John D. Rockefeller, surprised him by accepting. The two men subsequently agreed that a private auction should be held between the two of them, the highest bidder to get the company; and they decided to hold the auction immediately, right there in the office. The bidding began at $500, but climbed quickly. Maurice Clark was soon at $72,000. Rockefeller calmly went to $72,500. Clark threw up his hands. "I'll go no higher, John," he said. "The business is yours." Rockefeller offered to write out a check on the spot; Clark told him, no, he could settle at his con­ venience. On a handshake they parted. "I ever point to that day," Rockefeller said a half century later, "as the beginning of the success I have made in my life." That handshake also signaled the beginning of the modern oil industry, which brought order out of the chaos of the wild Pennsylvania boom. The order would take the form of Standard Oil, which, as it sought total dominance and mastery over the world oil trade, grew into a complex global enterprise that carried cheap illumination, the "new light," to the farthest corners of the earth. The company operated according to the merciless methods and unbridled lust of late-nineteenth-century capitalism; yet it also opened a new era, for it de­ veloped into one of the world's first and biggest multinational corporations. 1 "Methodical to an Extreme" The mastermind of Standard Oil was the young man who won that auction in Cleveland in 1865. Even then, at the age of twenty-six, John D. Rockefeller already made a forbidding impression. Tall and thin, he struck others as solitary, taciturn, remote, and ascetic. His unbending quietness—combined with the cold, piercing blue eyes set in an angular face with a sharp chin—made people uneasy and fearful. Somehow, they felt, he could look right through them. Rockefeller was the single most important figure in shaping the oil industry. The same might arguably be said for his place in the history of America's industrial development and the rise of the modern corporation. Admired by some as a genius of management and organization, he also came to rank as the most hated and reviled American businessman—in part because he was so ruth­ less and in part because he was so successful. His lasting legacy would be strongly felt, in terms of his profound influence on the petroleum industry and on cap­ italism itself, as well as the continuing impact of his vast philanthropy—and in terms of the darker images and shadows he would cast permanently into the mind of the public. Rockefeller was born in 1839 in rural New York State, and lived almost a full century, until 1937. His father, William Rockefeller, traded in lumber and salt and then, moving the family to Ohio, turned himself into "Dr. William Rockefeller," who sold herbal remedies and patent medicines. The father was often away on long absences from the family; the reason, some have suggested, was that he maintained another wife and family in Canada. The son's character was already set at a young age—pious, single-minded, persistent, thorough, attentive to detail, with both a gift and a fascination for numbers, especially numbers that involved money. At the age of seven, he launched his first successful venture—selling turkeys. His father sought to teach him and his brothers mercantile skills early. "I trade with the boys," the father was reported to have boasted, "and skin 'em and I just beat 'em every time I can. I want to make 'em sharp." Mathematics was the young Rockefeller's best subject in high school. The school stressed mental arithmetic—the ability to do calculations quickly in one's head—and he excelled at it. Intent on achieving "something big," Rockefeller went to work at age sixteen in Cleveland for a produce-shipping firm. In 1859, he formed his own partnership with Maurice Clark to trade produce. The firm prospered from demand generated both by the Civil War and by the opening of the West. Maurice Clark would later testily recall that Rockefeller was "methodical to an extreme." As the firm grew, Rockefeller stuck to his habit of holding "intimate conversations" with himself, counseling himself, repeating homilies, warning himself to beware of pitfalls, moral as well as practical. The firm dealt in Ohio wheat, Michigan salt, and Illinois pork. Within a couple of years of Colonel Drake's discovery, Clark and Rockefeller were also dealing in, and making money from, Pennsylvania oil. Oil and the stories of instant wealth had already captured the imagination of entrepreneurial men in Cleveland, when, in 1863, a new railroad link placed Cleveland in a position to compete in the business. Refinery after refinery sprang 36 into existence along the railway tracks into Cleveland. Many of the refineries were desperately undercapitalized, but this was never true of the one owned by Rockefeller and Clark. At the beginning, Rockefeller thought that refining would merely be a sideline to the produce business, but within a year, as the refinery became quite profitable, he became convinced otherwise. Now, in 1865, with the auction and Clark out of the way, Rockefeller, already a moderately wealthy young man, was the master of his own business, which was the largest of Cleve­ land's thirty refineries. 2 The Great Game Rockefeller won this, his first victory in refining, at a perfect time. For the end of the Civil War in that same year, 1865, inaugurated in the United States an era of massive economic expansion and rapid development, of fiery speculation and fierce competition, and of combination and monopoly. Large-scale enter­ prises rose in conjunction with technological advances in industries as diverse as steel, meat packing, and communication. Heavy immigration and the opening of the West made for rapidly growing markets. Indeed, in the last three and a half decades of the nineteenth century, as at no other time in American history, the business of America was truly business, and it was to this magnet that the energies, ambitions, and brains of young men were irresistibly drawn. They were caught up in what Rockefeller called "the Great Game"—the struggle to ac­ complish and build, and the drive to make money, both for its own sake and as a register of achievement. That game, played with new inventions and new techniques of organization, turned an agrarian republic, so recently torn by a bloody civil war, into the world's greatest industrial power. As the oil boom progressed, Rockefeller, throwing himself wholeheartedly into the Great Game, continued to pour both profits and borrowed money into his refinery. He built a second one. He needed new markets for his growing capacity, and in 1866 organized another firm in New York to manage both the Atlantic Coast trade and the export of kerosene. He put his brother William in charge. In that year, his sales exceeded two million dollars. Yet, while the markets for kerosene and lubricants had grown, they were not growing fast enough to match the growth in refinery capacity. Too many companies were competing for the same customers. It didn't take much in terms of capital or skills to set oneself up as a refiner. As Rockefeller later recalled, "All sorts of people went into it: the butcher, the baker, and the candlestickmaker began to refine oil." In fact, Rockefeller and his associates became quite concerned when they learned that a German baker they liked had foolishly traded his bakery for a low-quality refinery. They bought him out in order to get him back to baking. Rockefeller devoted himself to strengthening his business—by expanding facilities and striving to maintain and improve quality, and yet always controlling costs. He took the first steps toward integration, the process of bringing supply and distribution functions inside the organization, in order both to insulate the overall operation from the volatility of the market and to improve its competitive position. Rockefeller's firm acquired its own tracts of land on which grew the 37 white oak timber to make its own barrels; it also bought its own tank cars, and its own warehouses in New York, and its own boats on the Hudson River. At the beginning, Rockefeller also established another principle, which he reli­ giously stuck to thereafter—to build up and maintain a strong cash position. Already, before the end of the 1860s, he had built up sufficient financial resources so that his company would not have to depend upon the bankers, financiers, and speculators on whom the railways and other major industries had come to rely. The cash not only insulated the company from the violent busts and depres­ sions that would drive competitors to the wall, but also enabled it to take advantage of such downturns. One of Rockefeller's great talents could already be discerned; he had a vision of where his company and the overall industry were going, and yet at the same time he persisted in commanding the critical daily details of its operations. "As I began my business life as a bookkeeper," he later said, "I learned to have great respect for figures and facts, no matter how small they were." Rockefeller immersed himself in all details and aspects of the business, even the unpleasant ones, and literally so. He kept an old suit that he would wear whenever he went out to the Oil Regions to tramp around in the muddy fields, buying oil. The result of his single-minded enterprise was that, by the latter part of the 1860s, Rockefeller owned what was probably the largest refinery in the world. In 1867, Rockefeller was joined by a young man, Henry Flagler, whose influence in the creation of Standard Oil was almost as great as Rockefeller's. Going to work at age fourteen as a clerk in a general store, Flagler had succeeded, by his mid-twenties, in making a small fortune distilling whiskey in Ohio. He had sold out in 1858 because of moral scruples about alcohol—if not his own, then at least those of his parson father. He then threw himself into salt manu­ facturing in Michigan. But, in circumstances of chaotic competition and oversupply, he went broke. It was a sobering experience for a man to whom making money had, initially, come so easily. Still, Flagler was an eternally buoyant man, determined to rebound, though now matured by his hard-won lessons. His bankruptcy left him with a deepseated belief in the value of "cooperation" among producers and a no less deepseated aversion to what he later called "unbridled competition." Cooperation and combination, he had concluded, were necessary to minimize the risks in the uncertain world of capitalism. He had also learned another lesson; as he later said, "Keep your head above water and bet on the growth of your country." Flagler was ready and eager to wager on post-Civil War America. Flagler was to become the closest colleague Rockefeller ever had, and one of his closest friends. His relationship with the remote Rockefeller was to lead Flagler to another adage: "A friendship founded on business is better than a business founded on friendship." Energetic and striving, Flagler was well matched to the dour, careful Rockefeller, who was delighted to acquire a partner so "full of vim and push." To a critic, however, Flagler looked somewhat dif­ ferent—"a bold, unscrupulous self-seeker [who] made no bones about con­ science. He did whatever was necessary to success." Many years later, after having made one great fortune with Rockefeller, Flagler set off on a second conquest, the development of the state of Florida. He would build the railways 3 38 down the east coast of Florida, all the way to the Keys, in order to open up what he called the "American Riviera," and was to found both Miami and West Palm Beach. But that was well into the future. Now, in these building years, Rockefeller and Flagler worked in close harness. They sat in the same office, with their desks back to back, passing drafts of letters to customers and suppliers back and forth to each other until the missives said exactly what they wanted to say. Their friendship was the business, which they were constantly and obsessively discussing—in the office, during lunch at the Union Club, or as they walked between the office and their nearby homes. "On those walks," Rockefeller said, "when we were away from the office interruptions, we did our thinking, talking, and planning together." Flagler devised and ran the transportation arrangements, which would prove central to the success of Standard Oil. For they gave the company a decisive power against all competitors, and it was on this base that the company's position and formidable prowess were built. Without Flagler's expertise and aggressive­ ness in this realm, there might well have been no Standard Oil as the world came to know it. The size, efficiency, and economies of scale of Rockefeller's organization enabled it to extract rebates—discounts—on railway freight rates, which lowered its transportation costs below what competitors paid, providing it with a potent advantage in terms of pricing and profit. These rebates would later be a source of great controversy. Many charged that Standard forced the rebates to enable it to undercut competitors unfairly. But so intense was the competition among railroads for freight that rebates and discounts of one kind or another became common practice across the nation, especially for anyone who could guarantee large, regular shipments. Flagler, with the strength of the Standard Oil orga­ nization behind him, was very good at driving the best deal possible. Standard, however, did not stop with rebates. It also used its prowess to win "drawbacks." A competing shipper might pay a dollar a barrel to send his oil by rail to New York. The railroad would turn around and pay twenty-five cents of that dollar back, not to the shipper, but to the shipper's rival, Standard Oil! That, of course, gave Standard, which was already paying a lower price on its own oil, an additional enormous financial advantage against its competitors. For what this practice really meant was that its competitors were, unknowingly, subsidizing Standard Oil. Few of its other business practices did as much to rouse public antipathy toward Standard Oil as these drawbacks—when even­ tually they became known. 4 "Now Try Our Plan" While the market for oil was growing at an extraordinary rate, the amount of oil seeking markets was growing even more rapidly, resulting in wild price fluctuations and frequent collapses. Toward the end of the 1860s, as overpro­ duction caused prices to plummet again, the new industry went into a depression. The reason was simple—too many wells and too much oil. The refiners were hit no less than the producers. Between 1865 and 1870, the retail price of 39 kerosene fell by more than half. It was estimated that refining capacity was three times greater than the market's needs. The costs of overcapacity were obvious to Rockefeller, and it was in these circumstances, with most refiners losing money, that he launched his effort to consolidate the industry in his own grasp. He and Flagler wanted to bring in more capital, but without jeopardizing control. The technique they used was to turn their partnership into a joint stock company. On January 10, 1870, five men, led by Rockefeller and Flagler, established the Standard Oil Company. The name was chosen to indicate a "standard quality of product" on which the consumer could depend. At the time, kerosene of widely varying quality was sold. If the kerosene contained too much flammable gasoline or naphtha, as sometimes happened, the purchaser's attempt to light it could be his last act on this earth. Rockefeller held a quarter of the stock in the new company, which, at that time, already controlled a tenth of the American refining industry. But that was only the beginning. Many years later, Rockefeller would look back on the early days and muse: "Who would ever have thought it would grow to such a size?" Newly constituted, armed with more capital, Standard used its strength to pursue even more vigorously the railroad rebates that gave it further advantage against its competition. But overall business conditions continued to deteriorate, and by 1871 the refining industry was in a complete panic. Profit margins were disappearing altogether, and most refiners were losing money. Even Rockefeller, though head of the strongest company, was worried. By this time, he was a leading business figure in Cleveland, and a pillar of the Euclid Avenue Baptist Church. He had married Laura Celestia Spelman in 1864. In her high school graduation essay, "I Can Paddle My Own Canoe," she had written, "The in­ dependence of woman in thought, deed, or will is one of the problems of the age." While giving up her dream of paddling her own canoe upon marrying Rockefeller, she became his closest confidante, even reviewing his important business letters. Once in their bedroom, he had earnestly promised her that if he ever had fears about business, he would tell her first. Now, in 1872, in the midst of the refinery depression, he was sufficiently concerned to feel that he had to reassure her. "You know," he said, "we are independently rich outside of investments in oil." It was at this anxious time that Rockefeller conceived his bold vision of consolidating nearly all oil refining into one giant combination. "It was desirable to do something to save the business," he later said. An actual combination would do what a mere pool or association could not: eliminate excess capacity, suppress wild fluctuations of price—and, indeed, save the business. That was what Rockefeller and his colleagues meant when they talked of "our plan." But the plan was Rockefeller's, and he guided its execution. "The idea was mine," he said much later. "The idea was persisted in, too, in spite of the opposition of some who became faint-hearted at the magnitude of the undertaking, as it constantly assumed larger proportions." Standard Oil geared up for the campaign; it increased its capitalization to facilitate takeovers. But events were moving in another direction as well. In February 1872, a local railway official in Pennsylvania became confused and 40 abruptly put up rates, suddenly doubling the cost of carrying crude from the Oil Regions to New York. Word leaked out that the increase was the doing of an unknown entity called the South Improvement Company. What was this mys­ terious company? Who was behind it? The independent producers and refiners in the Oil Regions were aroused and alarmed. The South Improvement Company was the embodiment of another scheme for stabilization of the oil industry and would become the symbol of the effort to achieve monopoly control. Rockefeller's name was to be ever more associated with it, but though he was one of the principal implementers of the scheme, the idea actually belonged to the railroads, which were trying to find a way out of bitter rate wars. Under the scheme, railroads and refiners would band together in cartels and divide markets. The refiners would not only get rebates on their shipments, but also receive those drawbacks—rebates from the full rates paid by nonmember refiners. "Of all the devices for the extinction of competition," one of Rockefeller's biographers has written, "this was the crudest and most deadly yet conceived by any group of American industrialists." Though still cloaked in mystery, the South Improvement Company enraged the Oil Regions. A Pittsburgh newspaper warned that it would create "but one buyer of oil in the whole oil region," while the Titusville paper said it was nothing less than a threat to "dry up Titusville." At the end of February, three thousand angry men trooped with banners into the Titusville Opera House to denounce the South Improvement Company. Thus was launched what became known as the Oil War. The railroads, Rockefeller, the other refiners—these were the enemy. Producers marched from town to town to denounce "the Monster" and "the Forty Thieves." And now, united against monopoly, they launched a boycott of the refiners and the railroads that was so effective that the Standard refineries in Cleveland, which normally employed up to twelve hundred men, had only enough crude to occupy seventy. But Rockefeller had absolutely no doubts about what he was doing. "It is easy to write newspaper articles but we have other business," he told his wife during the Oil War. "We will do right and not be nervous or troubled by what the papers say." At another point in the battle, in a letter to his wife he set down one of his lasting principles: "It is not the business of the public to change our private contracts." By April 1872, however, both the railroads and the refiners, including Rockefeller, had decided that it was time to disown and scuttle the South Im­ provement Company. The Oil War was over, apparently won by the producers. Later, Rockefeller would say that he had always expected the South Improve­ ment Company to fail, but went along for his own purposes. "When it failed, we would be in a position to say, 'Now try our plan.' " But Rockefeller had not even waited for the South Improvement Company to fail. By the spring of 1872, he had already won control over most of Cleveland's refining and some of the most important refiners in New York City—making him the master of the largest refinery group in the world. He was ready to take on the entire oil industry. The 1870s were to be marked by ever-rising production. Producers re­ peatedly tried to restrict production, but to no avail. Storage tanks overflowed, covering the land with black scum. The gluts became so large and prices fell so low that crude oil was run out into streams and onto farms because there was 5 4i nowhere else to put it. At one point, the price dropped to forty-eight cents a barrel—three cents less a barrel than housewives in the Oil Regions were paying for drinking water. The recurrent efforts to organize shutdown movements al­ ways failed. New territories were continually being opened by the drill, which undermined any stability in the industry. Moreover, there were far, far too many producers to organize any meaningful restraints. Estimates of producing firms in the Oil Regions in the last quarter of the nineteenth century ranged as high as sixteen thousand. Many of the producers were speculators, others were farm­ ers, and many of them, whatever their backgrounds, were highly individualistic and unlikely to take "a long view" and think of the common good, even if a workable plan had presented itself. Rockefeller, with his passion for order, looked with revulsion at the chaos and scramble among the producers. "The Oil Regions," he later said with acid disdain, "was a mining camp." His target was the refiners. 6 "War or Peace" The objective of Rockefeller's audacious and daring battle plan was, in his words, to end "that cut-throat policy of making no profits" and "make the oil business safe and profitable"—under his control. Rockefeller was both strategist and supreme commander, directing his lieutenants to move with stealth and speed and with expert execution. It was no surprise that his brother William categorized relations with other refiners in terms of "war or peace." Standard began, in each area, by attempting to buy out the leading refiners, the dominant firms. Rockefeller and his associates would approach their targets with deference, politeness, and flattery. They would demonstrate how profitable Standard Oil was compared with other refiners, many of which were struggling through hard times. Rockefeller himself would use all his own considerable talent for persuasion in the pursuit of a friendly acquisition. If all that failed, Standard would bring a tough competitor to heel by making him "feel sick" or, as Rocke­ feller put it, by giving him "a good sweating." Standard would cut prices in that particular market, forcing the competitor to operate at a loss. At one point, Standard orchestrated a "barrel famine" to put pressure on recalcitrant refiners. In another battle, seeking to bring an adversary to heel, Henry Flagler instructed: "If you think the perspiration don't roll off freely enough, pile the blankets on him. I would rather lose a great deal of money than to yield a pint to him at this time." The Standard men, moving in great secrecy, operated through firms that appeared to be independent to the outside world, but had in fact become part of the Standard Group. Many refiners never knew that their local competitors, which were cutting prices and putting other pressures on them, were actually part of Rockefeller's growing empire. Through all the phases of the campaign, the Standard men communicated in code—Standard Oil itself was "Morose." Rockefeller never wavered in his defense of the secrecy of his operations. "It is all too true!" he once said. "But I wonder what General of the Allies ever sends out a brass band in advance with orders to notify the enemy that on a certain day he will begin an attack?" 42 By 1879, the war was virtually over. Standard Oil was triumphant. It con­ trolled 90 percent of America's refining capacity. It also controlled the pipelines and gathering system of the Oil Regions and dominated transportation. Rocke­ feller was unemotional in victory. He bore no grudge. Indeed, some of the conquered were brought into the inner councils of Standard's management to become devoted allies in subsequent stages of the campaign. But even as Stan­ dard Oil reached its commanding position at the end of the 1870s, unexpected challenges appeared. 7 New Threats At the very end of the 1870s, just when Rockefeller thought he had everything virtually tied up, Pennsylvania producers made one last effort to break out of Standard's suffocating embrace with a daring experiment—the world's first at­ tempt at a long-distance pipeline. There was no precedent for the project, named the Tidewater Pipeline, and no guarantee at all that it was technically possible. The oil would travel eastward n o miles from the Oil Regions to a connection with the Pennsylvania and Reading Railroad. Its construction was carried out with both deception and dispatch. Fake surveys were even taken to throw Stan­ dard off as to its route. Many doubted right up to the last moment that the pipeline would work. Yet, by May of 1879, oil was flowing in the pipeline. It was a major technological achievement, comparable to the Brooklyn Bridge four years later. It also introduced a new stage in the history of oil. The pipeline would become a major competitor with the railroad for long-distance transpor­ tation. The clear success of Tidewater, and the revolution it implied in transpor­ tation, not only caught Standard by surprise, but also meant that its control of the industry was suddenly again in jeopardy. The producers had an alternative to Standard Oil. The company sprang into action, building in short order four long-distance pipelines from the Oil Regions to Cleveland, New York, Phila­ delphia, and Buffalo. Within two years, Standard was a minority stockholder in Tidewater itself and had an arrangement to pool shipments with the new pipeline company to manage competition, though Tidewater did retain some independence of operation. The refining consolidation completed, these pipeline developments marked the next major stage of Standard's integration of the oil industry. Very simply, with the partial exception of the Tidewater, Standard controlled almost every inch of pipeline into and out of the Oil Regions. 8 There remained only one way to hold this giant in check, and that was through the political system and the courts. At the end of the 1870s, producers from the Oil Regions launched a series of legal assaults in Pennsylvania against discrim­ inatory rates. They denounced "the overweening control of the oil business by the Standard Oil Company," castigated it as an "Autocrat" and as "this gang of thieves," and sought the indictment of its principal officers for criminal con­ spiracy. Meanwhile, legislative hearings in New York State on railroads focused on Standard Oil's rebate system. The investigations and legal proceedings in the two states together marked the first public revelation of the activities of Standard 43 Oil, its reach and extent, and its manipulation of rebates and drawbacks. A Pennsylvania grand jury indicted Rockefeller, Flagler, and several associates for conspiracy to create a monopoly and injure competitors. A vigorous effort was made to extradite Rockefeller to Pennsylvania. He was alarmed enough to exact a promise from the Governor of New York not to approve any extradition order, and the attempt eventually failed. Still, the cumulative effect on public opinion of the varying exposés was devastating for the company—and lasting. The veil had been lifted, and the public was outraged by what it saw. The charges against Standard were brought together for the first time by Henry Demarest Lloyd, in a series of editorials for the Chicago Tribune, and then in an article entitled "The Story of a Great Monopoly," which was published in the Atlantic Monthly in 1881. So great was the attention and interest that the issue went through seven printings. Lloyd declared that the Standard Oil Company had done everything to the Pennsyl­ vania State Legislature except refine it. Yet the article had little immediate impact on Standard's business. Lloyd's was the first major exposé of Standard Oil, but it was to be far from the last. The mysterious figure of John D. Rock­ efeller could no longer maintain his invisibility. In the Oil Regions, mothers would warn their children, "Rockefeller will get you if you don't mind." 9 The Trust While the courts and public opinion had to be kept at bay, an ingenious internal order and control was created in the vast empire that Rockefeller had conquered. To begin with, there was no clear legal basis for the association of these various refineries around the country. Thus, in an affidavit, Rockefeller could later say, with a straight face and without perjuring himself, that Standard Oil itself did 44 not own or control a host of companies that it manifestly did control. One executive from the group could explain to a committee of the New York State Legislature that relations among 90 percent or so of the refineries in the country were "pleasant" and that they just happened to work together "in harmony." And another could assure the same committee that his own firm had no con­ nection to Standard Oil and that his only personal relationship was as "a clamorer for dividends." That was the real clue to the organization. It was the stockholders of Standard Oil, not Standard Oil itself, who owned shares in the other firms. At that time, corporations themselves could not own stock in other corporations. The shares were held in "trust," not for the Standard Oil Company of Ohio, but on behalf of the stockholders of that corporation. The legal concept of the "trust" was refined and formalized in the Standard Oil Trust Agreement, which was signed on January 2, 1882. It was a response to the judicial and political attacks of the late 1870s and early 1880s. There was a more personal reason, as well. Rockefeller and his partners had begun to think about mortality and inheritance, and they had concluded that the death of one of them would likely lead, under the existing system, to confusion, controversy over values, litigation, and bitterness. A trust would get the ownership organized and clarified, with little left to future debate. In preparing the trust, "every foot of pipeline was measured, every particle of brickwork was estimated." A board of trustees was set up, and in the hands of those trustees was placed the stock of all the entities controlled by Standard Oil. Shares in turn were issued in the trust; out of the 700,000 total shares, Rockefeller held 191,700 and Flagler, next, had 60,000. The trustees held the shares in the individual companies on behalf of the forty-one shareowners of the Standard Oil Trust, and were charged with "general supervision" of the fourteen wholly owned and twenty-six partly owned companies. Their respon­ sibilities included the selection of directors and officers—among whom they might include themselves. It was the first great "trust," and it was perfectly legal. But this was also why the "trust," formerly a device for protecting widows and orphans, became a term of derogation and hatred. Meanwhile, separate Standard Oil organizations were set up in each state to control the entities in those states. The trust agreement made possible the establishment of a central office to coordinate and rationalize the activities of the various operating enti­ ties—a task made more urgent by the growing scale of the business. And the trust gave Rockefeller and his associates "the shield of legality and the admin­ istrative flexibility they needed to operate effectively what had become virtually global properties." That took care of the legal form. But what of the practical problem of managing the new entity? How to integrate into the new trust so many inde­ pendent entrepreneurs and so many enterprises producing so many productskerosene and fuel oil, plus some three hundred by-products? What evolved was a system of management and coordination by committee. There was a Domestic Trade Committee, an Export Trade Committee, a Manufacturing Committee, a Staves and Heading Committee, a Pipe Line Committee, a Case Committee, a Lubricating Committee, and later a Production Committee. Daily reports flowed into the committees from around the country. On top of it all was the 45 Executive Committee, composed of the top managers, which set the overall policies and directions. The Executive Committee did not issue orders so much as requests, suggestions and recommendations. But no one doubted its authority or control. The relationship between headquarters and the field was suggested by a comment Rockefeller made in a letter: "You gentlemen on the ground can judge better than we about the matter, but let us not drift into arrangements where we cannot control the policy." A basic strategy that had governed Standard in the 1870s became even more explicit in the 1880s—to be the low-cost producer. This required efficiency in operations, mastery of costs, a drive for scale and volume, constant attention to technology, and a ceaseless striving for ever-larger markets. Refining oper­ ations were consolidated in the quest for efficiency; by the middle 1880s, just three Standard refineries—in Cleveland, Philadelphia, and Bayonne, New Jer­ sey—produced upward of a quarter of the world's total supply of kerosene. The focus on costs, sometimes calculated to the third decimal place, never wavered. "It has always been my rule in business to make everything count," Rockefeller once said. Using its superior communications, the company took advantage of the arbitrage and played the spreads among prices in the Oil Regions, Cleveland, New York, and Philadelphia, as well as in Antwerp and elsewhere in Europe. The company also used an extraordinary system of corporate intelligence and espionage to keep track of market conditions and competitors. It maintained a card catalog of practically every buyer of oil in the country, showing where virtually every barrel shipped by independent dealers went—and where every grocer, from Maine to California, obtained his kerosene. A central theme underlay Rockefeller's management; he believed in oil, and his faith never wavered. Any drop in the price of crude was not a reason for anxiety, but an opportunity to buy. "Hope if crude oil goes down again . . . our Executive Committee will not allow any amount of statistics or information . . . to prevent their buying," he instructed in 1884. "We must try and not lose our nerve when the market gets to the bottom as some people almost always do." Shortly after, he added, "We will surely make a great mistake if we do not buy. " The senior management included Rockefeller, his brother William, Henry Flagler, and two others who altogether controlled four-sevenths of the stock. But it also extended to perhaps a dozen others as well, virtually all of them willful, assertive individuals who had been successful entrepreneurs—and, orig­ inally, competitors of Rockefeller. "It is not always the easiest of tasks to induce strong, forceful men to agree," Rockefeller later said. The only way such a grouping could work was by consensus. Choices and decisions were debated and argued, but action was taken only when, as Rockefeller insisted, the problems had been turned around and around, the various contingencies anticipated, and, finally, agreement formed about the right direction. "It is always, I presume, a question in every business just how fast it is wise to go, and we went pretty rapidly on those days, building and expanding in all directions," Rockefeller recalled. "We were being confronted with fresh emergencies con­ stantly. . . . How often we discussed those trying questions! Some of us wanted to jump at once into big expenditures, and others to keep to more moderate 10 46 ones. It was usually a compromise but one at a time we took these matters up and settled them, never going as fast as the most progressive ones wished, nor quite so carefully as the conservatives desired." He added that they "always made the vote unanimous in the end." The senior managers were frequently to be found shuttling back and forth on the day and night trains between Cleveland and New York and Pittsburgh and Buffalo and Baltimore and Philadelphia. In 1885, the trust itself moved into new headquarters, a nine-story office building at 26 Broadway, in lower Man­ hattan, which soon became a landmark of sorts. From there the entire enterprise was directed, starting with the Executive Committee, its membership being whoever was in town that day. The senior executives lunched together daily in a private dining room at the top of the building. Over the meal, vital information was exchanged, ideas examined, and consensus built. And under Rockefeller's leadership, these former competitors built a company whose activities and scale were unprecedented—a new type of organization, and one that had evolved with astonishing rapidity. The men around the lunch table at 26 Broadway were an unusually talented group. "These men are smarter than I am a great deal," William Vanderbilt of the New York Central Railroad told the New York State Legislature. "They are very enterprising and smart men. I never came into contact with any class of men so smart and able as they are in their business." 11 "The Wise Old Owl" But the smartest was certainly John D. Rockefeller. At the time the trust was formed, he was in his early forties, already one of the half-dozen richest men in America. He was the guiding force of the company, single-minded in his devotion to its growth and the cause of combination, scathing in his disdain for the "waste" of unbridled competition—and with no shortage of self-righteous­ ness about his purpose. He was also strangely, and deliberately, inaccessible. Later in life, he recited a little rhyme from memory: A wise old owl lived in an oak, The more he saw the less he spoke, The less he spoke, the more he heard, Why aren't we all like that old bird? He had resolved from the beginning of his business career to "expose as little surface as possible." He was analytical and suspicious, and he kept his distance from people. His remoteness and icy, penetrating stare were unnerving. On one occasion, Rockefeller met in Pittsburgh with a group of refiners. After the meeting, several of the refiners went off to dinner. The talk centered on the taciturn, ungregarious, menacing man from Cleveland. "I wonder how old he is," a refiner said. Various other refiners offered their guesses. "I've been watch­ ing him," one finally said. "He lets everybody else talk, while he sits back and says nothing. But he seems to remember everything, and when he does begin he puts everything in its proper place . . . I guess he's 140 years old—for he must have been 100 years old when he was born." 47 Many years later, one who worked for Rockefeller described him as "the most unemotional man I have ever known." Yet, of course, there was a man behind the mask. The 1870s and 1880s were years when "our plan" reached its fruition. But those years of consolidation and integration, of unexpected political and press attacks, were also years of great strain and tension. "All the fortune that I have made has not served to compensate me for the anxiety of that period," Rockefeller once said. His wife, too, would remember that time as "days of worry," and he himself would recall that he seldom got "an unbroken night's sleep." He sought relaxation and relief in different ways. Late in the day, during business meetings, he would lie down on a couch, tell his colleagues to continue, and participate in the discussions while stretched out on his back. He kept a primitive muscle extender in his office. He had a special love for horses, fast horses, and he would take them out for a carriage ride at the end of the day. An hour's fast driving—"trot, pace, gallop, everything"—followed by a rest and dinner would rejuvenate him. "I was able to take up the evening's mail and get ten letters off." In Cleveland, outside of business, his life centered on his Baptist church. He was superintendent of the Sunday school, where he left an indelible impres­ sion on one of the students, a friend of his children. Many years later, she recalled: "I can see Mr. Rockefeller yet as he led the exercises in Sunday School, his long sharp nose, and long sharp pointed chin pointed out over the childish audience, his pale blue eyes never changing in expression. He spoke with such deliberation always that he seemed to drawl, yet that he really enjoyed his position no one could doubt. Take away his piety and you remove his greatest avocation." Rockefeller loved his Forest Hill estate, outside Cleveland, and devoted himself to its details—the building of a fireplace, constructed of special redglazed bricks; the planting of trees; the cutting of new roads through the woods. He continued his hobby on a grander scale when he moved to his vast new estate in the Pocantico hills, north of New York City. There he directed the land­ scaping, constructed views, and worked at laying out new roads himself with stakes and flags, sometimes until he was exhausted. His passion for landscaping drew on the same talents for organization and conceptualization that had made him so formidable in business. Yet even while becoming the richest man in America, he maintained a curious frugality. He insisted, to the distress of his family, on wearing the same old suits until finally they became so shiny that they had to be replaced. One of his favorite dishes remained bread and milk. Once, in Cleveland, he invited a prominent local businessman and his wife to stay at his Forest Hill estate for the summer. The couple spent a pleasant six weeks. They were, however, sur­ prised afterward to receive a bill of six hundred dollars from Rockefeller for board. He was not without a sense of humor, even of playfulness, though he displayed it only in the most restricted circles. "Have been in the dentist's chair," he once reported to his colleague Henry Flagler. "Think would have preferred to write you, or even read your letters, but could not help myself!" He would 12 48 entertain his own family at dinner by singing, or by putting a cracker on his nose and then catching it in his mouth, or even by balancing a plate on his nose. He loved to sit with his children and their friends on the front porch and play a game called "Buzz." You began to count and every time you came to a number with a seven in it, you were supposed to say "Buzz" instead; otherwise, you were out. Somehow, Rockefeller, despite his gift for mathematics, just could never get beyond 7 1 . The children always found this hilarious. Rockefeller had begun making small donations to his church as soon as he started earning money. As time went on, the donations swelled, and he devoted increasing efforts to giving away a significant part of the wealth he had accu­ mulated. He applied to philanthropy the same kind of methodical investigation and careful consideration that he brought to business; eventually, his donations would extend through the sciences, medicine, and education. In the nineteenth century, however, much of his philanthropy was oriented to the Baptist church, whose most powerful layman he had become. At the end of the 1880s, he committed himself to the creation of a great Baptist university, and, in that cause, he provided the endowment, as well as the organizational focus, for the establishment of the University of Chicago. He continued to be by far its largest donor. Though he paid keen attention to its development, he did not interfere in its academic workings, save to insist that it stay within its budget. He refused to allow any buildings to be named after him so long as he was alive, and visited the university only twice in its first ten years. The initial visit was in 1896, on its fifth anniversary. "I believe in the work," he told a university convocation. "It is the best investment I ever made in my life. . . . The good Lord gave me the money, and how could I withhold it from Chicago?" He listened as a group of students serenaded him: John D. Rockefeller, wonderful man is he Gives all his spare change to the U. of C. By 1910, the "spare change" that Rockefeller had given to the university added up to $35 million, compared to $7 million from all other sources. And, altogether, to all his causes, he was to give away some $550 million. He carried over his habits of business to his private life. These were the decades of the Gilded Age, when the "robber barons" made immense fortunes and created extravagant and riotous lifestyles. His New York townhouse and his Pocantico estate were opulent indeed, but Rockefeller and his family some­ how stood apart from the garishness, ostentation, and vulgarity of the age. He and his wife sought to inculcate their own values of probity into their children and so avoid having them ruined by inherited riches. Thus, the children would have only one tricycle among them so that they might learn to share. In New York City, young John D. Rockefeller, Jr., would be made to walk to and from school even as other children of the rich were carried back and forth in rigs, accompanied by grooms, and he earned pocket money working on his father's estates for the same wages as the laborers. In 1888, Rockefeller packed himself off, with his family and two Baptist ministers, to Europe for three months. Though he did not know French, he 49 would scrutinize each item on every bill. "Poulets!" he would exclaim. "What are poulets?" he asked his son John Junior. Told that they were chickens, he would go on, reading the next item, asking what it was. "Father," John Junior would later recall, "was never willing to pay a bill which he did not know to be correct in all its items. Such care in small things might seem penurious to some people, yet to him it was the working out of a life principle." 13 A Marvel to the Eye The company Rockefeller founded and guided to unparalleled prosperity con­ tinued to expand during the 1880s and into the 1890s. Scientific research was incorporated into the business. Great attention was devoted both to the quality of the product and to the neatness and cleanliness of the operations, from refinery to the local distributor. The growth of the marketing system—down to the final consumer—was an imperative of the business. The company needed markets to match its huge capacity, which forced it to seek aggressively "the utmost market in all lands," as Rockefeller put it. "We needed volume." And it surely and steadily moved to ever-higher volumes. For the growth in the use of oil, largely in the form of kerosene, was stupendous. Oil and the kerosene lamp were changing American life—and the clock by which Americans lived. Whether living in the towns and cities of the East or the farms of the Midwest, consumers usually bought their kerosene either from their grocer or from their druggist, both of whom were supplied by a wholesaler, most of whom, in turn, were supplied by Standard Oil. As early as 1864, a New York chemist described the impact of this new illuminating oil. "Kerosene has, in one sense, increased the length of life among the agricultural population," he wrote. "Those who, on account of the dearness or inefficiency of whale oil, were accustomed to go to bed soon after the sunset and spend almost half their time in sleep, now occupy a portion of the night in reading and other amuse­ ments; and this is more particularly true of the winter seasons." Practical advice on the use of kerosene—showing its quick and widening acceptance—was provided in 1869 by the author of Uncle Tom's Cabin, Harriet Beecher Stowe, who assisted her sister with a book entitled American Woman's Home or Principles of Domestic Science. "Good kerosene gives a light which leaves little to be desired," they wrote, as they advised their readers what type of lamps to buy. But they warned against poor quality and impure oils, which were responsible for "those terrible explosions." In the mid-1870s, five to six thousand deaths a year were attributed to such accidents. Regulation was spotty and slow in coming, which is why Rockefeller insisted on consistency and quality control, and why he had chosen the name Standard. In larger urban areas, kerosene still faced competition from manufactured or "town" gas, now extracted from coal or naphtha, another fraction of crude oil. But kerosene still had a considerable cost advantage. According to one publication, in New York, in 1885, kerosene could supply a family's needs for about ten dollars a year, while "it was not uncommon for the gas bill of the more well-to-do householders to run that much per month." In rural life, there was no such competition. "A look at the stock of a good, lively country store 14 50 at the time of the Philadelphia Centennial in 1876 would have been enough to convert any citizen to a belief in progress," a student of the country store has written. "Lamps and lamp chimneys, and the whole class of merchandise known as 'kerosene goods' would seem to be a marvel to eyes that had strained to see at night by means of a lighted rag, soaked in beef tallow and draped over the edge of a dish." Kerosene was by far the most important product coming out of refineries, but not the only one. The other products included naphtha; gasoline, used as a solvent or turned into a gas for illuminating individual buildings; fuel oil; and lubricants for the moving parts in train engines and railway cars, agricultural implements, cotton spindles, and later bicycles. Other products were petroleum jelly, trademarked as "Vaseline" and made into a base for pharmaceutical prod­ ucts, and paraffin, which was used not only for candle making and food pres­ ervation, but also for "paraffin chewing gum," which was "highly recommended for constant use in ladies in sewing circles." In its effort to reach the consumer, Standard Oil moved to gain control over the marketing side of the business. By the mid-i88os, its control of mar­ keting must have been almost equivalent to its control of refining—in the 80 percent range. And its tactics in acquiring that huge market share were just as ruthless. Its salesmen would "make a fist" and seek to intimidate both rivals and errant retailers who dared to carry competing products. Standard pushed a series of innovations to make its marketing more efficient and lower costs. Much effort was made to do away with the bulky, leaky, awkward, and expensive barrel. One innovation was the railway tank car, which eliminated the need to pile barrels into boxcars. Standard also replaced barrels on the streets of America with horse-drawn tank cars, which could disburse to a retailer anything from a pint to five gallons of kerosene. Wooden barrels—though they were to continue to define the measurement of oil—were eventually reserved only for the hin­ terlands, from which it was assumed they would not return. 15 "Buy All We Can Get" But Standard had stayed out of one critical part of the business—the production of oil. It was too risky, too volatile, too speculative. Who knew when any particular well might go dry? Better to let the producers carry that risk and stick to what could be rationally organized and managed—refining, transportation, and marketing. As one of the members of the Executive Committee wrote Rockefeller in 1885, "Our business is that of manufacturers, and it is in my judgment, an unfortunate thing for any manufacturer or merchant to allow his mind to have the care and friction which attends speculative ventures." But a sense of precariousness underlay Standard's great globe-girdling sys­ tem. There was always the fear that the oil would run out. This gift that came from the earth might disappear with the suddenness with which it had appeared. Flush production quickly exhausted the capability of wells to produce. Insofar as American oil production was concerned, Pennsylvania was the entire game, the only game; and perhaps what had happened in different areas of the state might be the fate of the entire Oil Regions. The rise and fall of Pithole was a 5i stark warning of what could come. And who knew when? Could the industry survive even another decade? And, without crude, what value would there be to all the hardware and all the capital investment—the refineries, the pipelines, the tanks, the ships, the marketing systems? Various experts cautioned that the Oil Regions would soon be depleted. In 1885, the State Geologist of Pennsyl­ vania warned that "the amazing exhibition of oil" was only "a temporary and vanishing phenomenon—one which young men will live to see come to its natural end." That same year, John Archbold, a top executive of Standard, was told by one of the company's specialists that decline in American production was almost inevitable and that the chances of finding another large field "are at least one hundred to one against it." These warnings were sufficiently persuasive to Archbold that he sold some of his shares in Standard Oil at seventy-five to eighty cents on the dollar. Around the same time, Archbold was also told about signs of oil in Oklahoma. "Are you crazy?" he replied. "Why, I'll drink every gallon produced west of the Mississippi!" But, just at that moment, the industry was about to break out of Pennsyl­ vania—and with dramatic suddenness. The scene was northwestern Ohio, where flammable gas springs in the vicinity of Findlay had been known since the earliest settlements. In the mid-i88os, oil was discovered there, igniting a great boom in the region, which straddled the border with Indiana and became known as the Lima-Indiana fields. The newly discovered fields were so prolific that, by 1890, they accounted for a third of United States oil production! Rockefeller was poised to make his last great strategic decision—to go directly into oil production. No less than his colleagues, he had great antipathy for oil producers. Yes, they were speculators, they were unreliable, they behaved like greedy miners in a gold rush. Yet here, in Lima, was an opportunity for Standard to gain control of its raw materials on a very large scale, to apply its rational management to the production of oil, to balance supplies and inventories against its market needs. In short, Standard would be able to insulate itself to a considerable degree against the fluctuations and volatility of the oil market— and against the disorder of the "mining camp." And that was the direction in which Rockefeller very definitely wanted Standard to go. The signs of depletion in Pennsylvania were a warning that it was time to be bold, and Lima offered the indisputable evidence that the oil industry had a future beyond Pennsylvania. But there were two major obstacles. One was the quality of the petroleum. It had very different properties from that of Pennsyl­ vania, including a most unappealing sulfuric odor, like rotten eggs. Some called the Lima crude "skunk juice." There was no known way to remove the odor, and until such a way was found, the Ohio oil had only a very limited market. The second obstacle was located at 26 Broadway—the obstinacy of Rocke­ feller's more cautious colleagues. They thought the risk much too great. As a starting point, Rockefeller argued that the company should buy up all the oil it could and store it in tanks all over the region. The oil was flowing in such huge volumes out of the Ohio ground that the price dropped from forty cents a barrel in 1886 to fifteen cents a barrel in 1887. But many of Rockefeller's colleagues strongly opposed the policy of buying oil for which there was not yet any good 16 52 use. "Our conservative brethren on the Board," as Rockefeller called them, "held up their hands in holy terror and desperately fought a few of us." Even­ tually, however, Rockefeller prevailed, and Standard Oil put more than 40 million barrels of Lima oil in storage. Then, in 1888 and 1889, Herman Frasch, a German chemist employed by Standard, figured out that, if the crude oil were refined in the presence of copper oxide, the sulfur could be removed, eliminating the problem of the rotten-eggs smell and thus making Lima oil an acceptable source of kerosene. Rockefeller's Lima gamble proved to be well worth it; after Frasch's breakthrough, the price of Lima oil immediately doubled from the fifteen cents a barrel at which Standard had acquired it to thirty cents, and continued to climb. Rockefeller pushed the company toward the final step of buying up a large number of producing properties. The most rowdy, disorderly participants of the new industry were the producers—both in the way they managed their fields and in their business relationships. Here was a chance to impose a more orderly, more stable structure. His colleagues were, as before, reluctant, even opposed. Rockefeller was insistent. He carried the day. Of the leases available for purchase he simply ordered "Buy all we can get." By 1891, though virtually absent from production a few years earlier, Standard was itself responsible for a quarter of America's total output of crude oil. Standard committed itself to building the world's largest refinery at a place called Whiting, amidst desolate sand dunes on the shore of Lake Michigan in Indiana, to process the Lima crude. There, as everywhere, Standard's cult of secrecy—which would ultimately help undermine the entire organization—was at work. It was completely obvious that Standard was building a refinery. Still, a reporter from the Chicago Tribune found it impossible to get any information out of a Mr. Marshall, the close-mouthed manager