The Myth of the Robber Barons

by Burt Folsom

  Schwab led the effort to defeat the bill. He spoke out against it in public and ran ads in over 3,000 newspapers challenging the need for a government plant. He stressed the fairness angle. He said that years ago the government had asked Bethlehem to make armor; they had done so only when the government agreed to buy from them.

  Now, with $7 million invested in equipment, the government was planning to build its own plant and make Bethlehem's useless.41

  Most Congressmen, however, bought the arguments of Tillman and Daniels. The bill passed the Senate and the House by about two to one margins, and Wilson signed it. As Senator Albert Cummins of Iowa said, "It is [one of] my profoundest convictions that the manufacture of armor-plate for battleships is a government function. I hope the private enterprises will be entirely eliminated."42

  Dozens of cities lobbied to be the site for the new plant. From Rome, Georgia, to Kalamazoo, Michigan, city after city was put forth as being uniquely situated to produce armor plate. The winner of this competition was South Charleston, West Virginia. Congress soon raised the appropriation to $17.5 million and authorized the South Charleston plant to make guns and projectiles, as well as armor. Construction began in 1917 on the new factory and on hundreds of houses for the workers. The war delayed the building, but it was continued later. Higher construction costs after the war meant an overrun of several million dollars. By 1921, the new plant was making guns, projectiles, and armor—all at prices apparently much higher than that of Bethlehem Steel. Within a year the whole plant was shut down, put on "inoperative status," and never run again.43

  Schwab turned sixty in 1921 and was beginning to look backward more than forward. There was much to see: whether he had made rails, beams, or armor plate, he was successful. Even Carnegie, near death, had recently written Schwab, "I have never doubted your ability to triumph in anything you undertook. I cannot help feeling proud of you for having far outstripped any of my 'boys'."44

  In the 1920s and 1930s, however, Schwab seemed to lose his entrepreneurial spirit. Producing a better product at a lower price no longer seemed to dominate his thinking. Let's "live and let live," Schwab told the steelmakers at the American Iron and Steel Institute in 1927. Next year, he urged them to fix prices and avoid cutting them. The year after this, Schwab, the father of the Bethlehem beam, urged the steel men not to expand but to use their existing plant capacity.45

  When the Great Depression took hold in the 1930s, Schwab's public addresses were full of anecdotes and preaching that "the good. . .lies ahead." One of Schwab's remedies for the ailing economy was a high protective tariff. He had always favored a tariff on imported steel but usually settled for low duties. The Smoot-Hawley Tariff of 1930 created the highest duties in American history on many items. Some writers have argued that the Smoot-Hawley Tariff triggered the Great Depression; others say it merely made the depression worse. One thing is certain: many nations retaliated against high American tariffs by dosing off their borders to American-made goods. The demand for American goods, therefore, declined and this put more people out of work. When Cordell Hull, Roosevelf s Secretary of State, tried to lower American tariffs in 1934, Schwab opposed it. He was afraid of foreign competition.46

  During the 1930s, Schwab enjoyed his role as elder statesman of the steel industry. He was full of stories and ever ready to do interviews with reporters. He never got senile; his ability to memorize speeches and his knack for remembering names and faces was still amazing. He just preferred to let Eugene Grace and others run Bethlehem Steel, while he worked the crowd.47

  When Schwab retired as an entrepreneur, his fortune became jeopardized. He had earlier shown the traits of a dissipater and had the potential to run through his $25 million fortune. Liberated from work, Schwab traveled, gambled, and flirted more than ever. He joined the New York Whist Club and played there for high stakes. He frequented the roulette tables in Monte Carlo with his favorite mistress. The art of speculation, an anathema to Carnegie, appealed to Schwab: he installed a ticker tape in his mansion to keep tabs on Wall Street; he also invested in a variety of companies and knew almost nothing about some of them. Gambling wasn't the only drain on Schwab's wealth: he co-signed one million dollars worth of notes— usually worthless—for "friends" and also gave monthly allowances to twenty-seven people.48

  Schwab refused to cut back on expenses, even during the Great Depression. He still hired the most famous musicians of the era to give private recitals for him at Riverside. The mansion itself—complete with swimming pool, wine cellar, gymnasium, bowling alley, six elevators, and ninety bedrooms—needed twenty servants to keep it functioning. He also hired 300 men to care for his 1000-acre estate at Loretto. So Schwab desperately needed his $250,000 annual salary at Bethlehem, given for past services, just to pay his expenses. From 1935 to 1938, a small group of rebel stockholders attended the company's annual meetings; they challenged Schwab's salary and told him he had "outlived his usefulness." He finally stopped them by privately telling one of the critics that he desperately needed the money to live on. Actually he needed more. He couldn't pay the annual taxes on Riverside and couldn't sell it either, even at a $6 million loss. He couldn't even give it away, when he offered it as the residence for the mayor.49

  Schwab's last years were also marked by poor health and the death of his wife, who had borne him no children. After her funeral, Riverside was taken by creditors; Schwab moved into a small apartment. Schwab, who had shown the world a vision of entrepreneur-ship, now had only a vision of death. "A man knows when he doesn't want to be alive," he said, "when the will to continue living has gone from him." Schwab died nine months after he said this, at age seventy-seven with debts exceeding assets by over 300,000.50

  CHAPTER FIVE

  John D. Rockefeller and the Oil Industry

  In 1885 John D. Rockefeller wrote one of his partners, "Let the good work go on. We must ever remember we are refining oil for the poor man and he must have it cheap and good." Or as he put it to another partner: "Hope we can continue to hold out with the best illuminator in the world at the lowest price." Even after twenty years in the oil business, "the best. . .at the lowest price" was still Rockefeller's goal; his Standard Oil Company had already captured 90 percent of America's oil refining and had pushed the price down from 58 cents to eight cents a gallon. His well-groomed horses delivered blue barrels of oil throughout America's cities and were already symbols of excellence and efficiency. Consumers were not only choosing Standard Oil over that of his competitors; they were also preferring it to coal oil, whale oil, and electricity. Millions of Americans illuminated their homes with Standard Oil for one cent per hour; and in doing so, they made Rockefeller the wealthiest man in American history.1

  Rockefeller's early life hardly seemed the making of a near billionaire. His father was a peddler who often struggled to make ends meet. His mother stayed at home to raise their six children. They moved around upstate New York—from Richford to Moravia to Owego—and eventually settled in Cleveland, Ohio. John D. was the oldest son. Although he didn't have new suits or a fashionable home, his family life was stable. From his father he learned how to earn money and hold on to it; from his mother he learned to put God first in his life, to be honest, and help others.2

  "From the beginning," Rockefeller said, "I was trained to work, to save, and to give." He did all three of these things shortly after he graduated from the Cleveland public high school. He always remembered the "momentous day" in 1855, when he began work at age sixteen as an assistant bookkeeper for 50 cents per day.3

  On the job Rockefeller had a fixation for honest business. He later said, "I had learned the underlying principles of business as well as many men acquire them by the time they are forty." His first partner, Maurice Clark, said that Rockefeller "was methodical to an extreme, careful as to details and exacting to a fraction. If there was a cent due us he wanted it. If there was a cent due a customer he wanted the customer to have it." Such precision irritated some debtors, but it won
him the confidence of many Cleveland businessmen; at age nineteen Rockefeller went into the grain shipping business on Lake Erie and soon began dealing in thousands of dollars.4

  Rockefeller so enjoyed business that he dreamed about it at night. Where he really felt at ease, though, was with his family and at church. His wife Laura was also a strong Christian and they spent many hours a week attending church services, picnics, or socials at the Erie Street Baptist Church. Rockefeller saw a strong spiritual life as crucial to an effective business life. He tithed from his first paycheck and gave to his church, a foreign mission, and the poor. He sought Christians as business partners and later as employees. One of his fellow churchmen, Samuel Andrews, was investing in oil refining; and this new frontier appealed to young John. He joined forces with Andrews in 1865 and would apply his same precision and honesty to the booming oil industry.5

  The discovery of large quantities of crude oil in northwest Pennsylvania soon changed the lives of millions of Americans. For centuries, people had known of the existence of crude oil scattered about America and the world. They just didn't know what to do with it. Farmers thought it a nuisance and tried to plow around it; others bottled it and sold it as medicine.6

  In 1855, Benjamin Silliman, Jr., a professor of chemistry at Yale, analyzed a batch of crude oil; after distilling and purifying it, he found that it yielded kerosene—a better illuminant than the popular whale oil. Other by-products of distilling included lubricating oil, gasoline, and paraffin, which made excellent candles. The only problem was cost: it was too expensive to haul the small deposits of crude from northwest Pennsylvania to markets elsewhere. Silliman and others, however, formed an oil company and sent "Colonel" Edwin L. Drake, a jovial railroad conductor, to Titusville to drill for oil. "Nonsense," said local skeptics. "You can't pump oil out of the ground as you pump water." Drake had faith that he could; in 1859, when he built a thirty-foot derrick and drilled seventy feet into the ground, all the locals scoffed. When he hit oil, however, they quickly converted and preached oil drilling as the salvation of the region. There were few barriers to entering the oil business: drilling equipment cost less than $1,000, and oil land seemed abundant. By the early 1860s, speculators were swarming northwest Pennsylvania, cluttering it with derricks, pipes, tanks, and barrels. "A good time coming for whales," concluded one newspaper. America had become hooked on kerosene.

  Cleveland was a mere hundred miles from the oil region, and Rockefeller was fascinated with the prospects of refining oil into kerosene. He may have visited the region as early as 1862. By 1863 he was talking oil with Samuel Andrews and two years later they built a refinery together. Two things about the oil industry, however, bothered Rockefeller right from the start: the appalling waste and the fluctuating prices.

  The overproducing of oil and the developing of new markets caused the price of oil to fluctuate wildly. In 1862 a barrel (42 gallons) of oil dropped in value from $4.00 to $.35. Later, when President Lincoln bought oil to fight the Civil War, the price jumped back to $4.00, then to $13.75. A blacksmith took $200 worth of drilling equipment and drilled a well worth $100,000. Others, with better drills and richer holes, dug four wells worth $200,000. Alongside the new millionaires of the moment were the thousands of fortune hunters who came from all over to lease land and kick down shafts into it with cheap foot drills. Most failed. Even Colonel Drake died in poverty. As J. W. Trowbridge wrote, "Almost everybody you meet has been suddenly enriched or suddenly ruined (perhaps both within a short space of time), or knows plenty of people who have."7

  Those few who struck oil often wasted more than they earned. Thousands of barrels of oil poured into Oil Creek, not into tanks. Local creek bottoms were often flooded with runaway oil; the Allegheny River smelled of oil and glistened with it for many miles toward Pittsburgh. Gushers of wasted oil were bad enough; sometimes a careless smoker would turn a spouting well into a killing inferno. Other wasters would torpedo holes with nitroglycerine, sometimes losing the oil and their lives.8

  Rockefeller was intrigued with the future of the oil industry, but was repelled by its past. He shunned the drills and derricks and chose the refining end instead. Refining eventually became very costly, but in the 1860s the main supplies were only barrels, a trough, a tank, and a still in which to boil the oil. The yield would usually be about 60 percent kerosene, 10 percent gasoline, 5 to 10 percent benzol or naphtha, with the rest being tar and wastes. High prices and dreams of quick riches brought many into refining; and this attracted Rockefeller, too. But right from the start, he believed that the path to success was to cut waste and produce the best product at the lowest price. Sam Andrews, his partner, worked on getting more kerosene per barrel of crude. Both men searched for uses for the byproducts: they used the gasoline for fuel, some of the tars for paving, and shipped the naphtha to gas plants. They also sold lubricating oil, vaseline, and paraffin for making candles. Other Cleveland refiners, by contrast, were wasteful: they dumped their gasoline into the Cuyahoga River, they threw out other by-products, and they spilled oil throughout the city.9

  Rockefeller was constantly looking for ways to save. For example, he built his refineries well and bought no insurance. He also employed his own plumber and almost halved the cost on labor, pipes, and plumbing materials. Coopers charged $2.50 per barrel; Rockefeller cut this to $.96 when he bought his own tracts of white oak timber, his own kilns to dry the wood, and his own wagons and horses to haul it to Cleveland, There with machines he made the barrels, then hooped them, glued them, and painted them blue. Rockefeller and Andrews soon became the largest refiners in Cleveland. In 1870, they reorganized with Rockefeller's brother William, and Henry Flagler, the son of a Presbyterian minister. They renamed their enterprise Standard Oil.10

  Under Rockefeller's leadership they plowed the profits into bigger and better equipment; and, as their volume increased, they hired chemists and developed three hundred by-products from each barrel of oil. They ranged from paint and varnish to dozens of lubricating oils to anesthetics. As for the main product, kerosene, Rockefeller made it so cheaply that whale oil, coal oil, and, for a while, electricity lost out in the race to light American homes, factories, and streets. "We had vision," Rockefeller later said. "We saw the vast possibilities of the oil industry, stood at the center of it, and brought our knowledge and imagination and business experience to bear in a dozen, in twenty, in thirty directions."11

  Another area of savings came from rebates from railroads. The major eastern railroads—the New York Central, the Erie, and Pennsylvania—all wanted to ship oil and were willing to give discounts, or rebates, to large shippers. These rebates were customary and dated back to the first shipments of oil. As the largest oil refiner in America, Rockefeller was in a good position to save money for himself and for the railroad as well. He promised to ship 60 carloads of oil daily and provide all the loading and unloading services. All the railroads had to do was to ship it east. Commodore Vanderbilt of the New York Central was delighted to give Rockefeller the largest rebate he gave any shipper for the chance to have the most regular, quick and efficient deliveries. When smaller oil men screamed about rate discrimination, Vanderbilt's spokesmen gladly promised the same rebate to anyone else who would give him the same volume of business. Since no other refiner was as efficient as Rockefeller, no one else got Standard Oil's discount.12

  Many of Rockefeller's competitors condemned him for receiving such large rebates. But Rockefeller would never have gotten them had he not been the largest shipper of oil. These rebates, on top of his remarkable efficiency, meant that most refiners could not compete. From 1865 to 1870, the price of kerosene dropped from 58 to 26 cents per gallon. Rockefeller made profits during every one of these years, but most of Cleveland's refiners disappeared. Naturally, there were hard feelings. Henry Demarest Lloyd, whose cousin was an unhappy oil man, wrote Wealth Against Commonwealth in 1894 to denounce Rockefeller. Ida Tarbell, whose father was a Pennsylvania oil producer, attacked Rockefeller in a series
of articles for McClure's magazine.13

  Some of the oil producers were unhappy, but American consumers were pleased that Rockefeller was selling cheap oil. Before 1870, only the rich could afford whale oil and candles. The rest had to go to bed early to save money. By the 1870s, with the drop in the price of kerosene, middle and working class people all over the nation could afford the one cent an hour that it cost to light their homes at night. Working and reading became after-dark activities new to most Americans in the 1870s.14

  Rockefeller quickly learned that he couldn't please everyone by making cheap oil. He pleased no one, though, when he briefly turned to political entrepreneurship in 1872. He joined a pool called the South Improvement Company and it turned out to be one of the biggest mistakes in his life. This scheme was hatched by Tom Scott of the Pennsylvania Railroad. Scott was nervous about low oil prices and falling railroad rates. He thought that if the large refiners and railroads got together they could artificially fix high prices for themselves. Rockefeller decided to join because he would get not only large rebates, but also drawbacks, which were discounts on that oil which his competitors, not he, shipped. The small producers and refiners bitterly attacked Rockefeller and forced the Pennsylvania Legislature to revoke the charter of the South Improvement Company. No oil was ever shipped under this pool, but Rockefeller got bad publicity from it and later admitted that he had been wrong.15

  At first, the idea of a pool appealed to Rockefeller because it might stop the glut, the waste, the inefficiency, and the fluctuating prices of oil. The South Improvement Company showed him that this would not work, so he turned to market entrepreneurship instead. He decided to become the biggest and best refiner in the world. First, he put his chemists to work trying to extract even more from each barrel of crude. More important, he tried to integrate Standard Oil vertically and horizontally by getting dozens of other refiners to join him. Rockefeller bought their plants and talent; he gave the owners cash or stock in Standard Oil.16