The Empire had begun life as a fast-freight forwarder, just one of the many companies that Scott and Thomson had created to pick the meatier bones left on the Pennsylvania’s table. Its superb chief executive, Col. Joseph Potts, had built it into a major transportation business in its own right, with a particularly strong position in petroleum. Besides owning fleets of tank cars, it was one of the first creators of gathering pipelines in the oil region, assembling oil from producing wells into centralized tank farms at railroad connections. Potts’s ambitions were unbounded: he believed that fast-freight companies, by controlling transshipping points, loading facilities, and specialized carriers like tank cars, could emerge as the freight balancer and rate-setter for all railroad traffic. The cross-ownership with the Pennsylvania ensured that the Empire’s facilities were designed to optimize Pennsylvania traffic. Rockefeller, of course, fully appreciated the importance of gathering facilities. By the early 1870s, he had pieced together an even larger network oriented toward Cleveland and New York.
Rockefeller’s inexorable momentum was ominous for both Scott’s and Potts’s businesses, so they joined forces in early 1877 to construct a Pennsylvania-based petroleum refining and shipping cartel to squeeze out the Standard. Their strategy included both rate wars and competitive operations. The Empire reduced pipeage charges to almost nothing to lock up the few remaining independent refiners, while Scott made deep preferential rate cuts on Empire-sourced freight. Potts bought an independent refinery on Long Island, started building a new refinery in Philadelphia, and sent agents into the oil region to pay market-breaking prices to corner the crude supply.
It was delusional. The Pennsylvania was more oil-dependent than other roads, and the Standard, despite its bias toward New York ports, still provided two-thirds of its oil traffic. Standard-controlled gathering pipelines surrounded the Empire’s, and the region was flooded with surplus crude supply. Rockefeller paid a visit to the Pennsylvania’s headquarters in March, asking them to desist; when Scott refused, Rockefeller immediately launched total war. The Standard’s Pittsburgh refineries were shut down until a connecting line was built to the Baltimore & Ohio, so not a gallon of Standard product shipped on the Pennsylvania. A crash tanker construction program rushed six hundred new cars to the Erie and New York Central to pick up the slack. Both those roads matched Scott’s price cuts at every step, the Standard pipelines undercut Potts’s rates, and Standard agents easily outbid Potts for crude supplies. The dramatic shift of refinery and oil port business away from Philadelphia brought howls of pain from local oilmen, while plummeting Pennsylvania revenues alarmed Scott’s shareholders. With a huge war chest and no public security holders, Rockefeller could fight a no-quarter war for as long as Scott and Potts chose to bleed. Characteristically, he kept the war very focused. As A. J. Cassatt, a later Pennsylvania president, told a House committee, “They simply insisted that they could not make any arrangement with us for the transportation of their oil so long as that transportation was carried on by an organization which was their rival in the refining business. . . . That was the only point that they insisted upon.” The consequences for the Pennsylvania were dire beyond the sheer loss of money. Drowning in red ink, Scott made the deep slashes in railroad manning schedules and pay that precipitated the lethal 1877 labor confrontations in Pittsburgh. With Pittsburgh in flames and his business a wreck, he had no choice but to capitulate.
John D. Rockefeller was in his mid-fifties when he sat for this portrait, and at the peak of his powers, although he would shortly retire from the company. It captures the aura of absolute self-assurance that allowed him to dominate a fractious global industry without, it seems, ever raising his voice.
Rockefeller could not resist mocking Scott in private: how the great man swept into a room of Standard executives to make his surrender, as if he had carried off the laurels. But he was happy to allow Scott his atmospherics. A deal was quickly struck to fold up the Empire; since the Pennsylvania controlled his company, Potts had no say in the matter. In Cassatt’s words, “We made up our minds that it was a mistake.” The Pennsylvania took all of Potts’s rolling stock, while the Standard took the pipelines and all of the petroleum and harbor facilities. As usual, Rockefeller did not haggle over the price of $3.4 million. He even let Scott demand that $2.5 million of it be paid in cash within twenty-four hours, necessitating flying visits by him and William to their New York and Cleveland bankers to gather up funds. When his other partners balked at including a fleet of antiquated lake barges in the deal, Rockefeller bought them himself. There were no hard feelings against Potts, and he eventually became an active director of the Standard’s pipeline subsidiary. After several more smaller acquisitions, all the gathering pipelines were in the Standard’s control.*
There was one more high-profile struggle to be won, and it arose because Rockefeller, for once, had missed a beat on new technology. A group of entrepreneurs from the oil regions, led by one Byron Benson, started work on a seaboard pipeline, the Tidewater. These were experienced men who had cut their teeth building a gathering pipeline to circumvent the Empire, before they had been crushed by Scott. A seaboard pipeline was a new order of challenge, involving much longer distances over difficult mountain terrain, using much larger pipes and unprecedented pressures. Even with very heavy-gauge pipe, the line actually writhed as pressure and temperature changes made the metal dance. Benson and his colleagues reached an arrangement with an independent railroad, the Philadelphia & Reading, in 1877, and the Reading president, Franklin Gowen, put up half their capital; they also raised additional money from New York investors, including George F. Baker, president of the powerful First National Bank. The first phase was to pipe oil to a Reading terminus at Williamsport, in eastern Pennsylvania, with the road handling the second leg to the coastal refineries. Benson and his group also started building their own refinery near Philadelphia, to forestall a squeeze-out by the Standard.
The railroads had the most to lose, and they were determined not to give up without a fight. The Standard’s stake was not nearly so clear, but, apparently after some internal debate, they chose to stand shoulder to shoulder with the roads. In the ensuing battle only the Tidewater covered itself with glory. The Standard and the railroads fought back with rate cuts, preemptive land purchases on the Tidewater’s route, obstruction of tanking and tank car orders, and a large dollop of political bribery. The Tidewater overcame all obstacles. At one point, with a critical lease at risk if the land wasn’t crossed by a certain date, operations were mired in a five-foot blizzard. The men hauled pipe forty miles through the drifts and made their deadline with only seven hours to spare. The moment of triumph came in late spring of 1879 when the expectant crowd at Williamsport heard the hollow roar of air being pushed ahead of the oncoming oil.
It was a clear victory for the Tidewater. Ever the realist, Rockefeller conceded that the future of oil transport lay with long-distance pipelines and kicked off a massive construction program that quickly dwarfed the Tidewater’s. For his part, Benson and his shareholders had signaled almost from the start that they would be happy to be acquired. Interestingly, instead of an acquisition, the Standard and the Tidewater agreed on a market-sharing agreement that preserved the Tidewater’s then-current 11.5 percent of the long-distance pipeline business, and implicitly protected their coastal refineries. Rockefeller, as usual, held no grudges, and had nothing but respect for Benson. From that point, Tidewater Oil enjoyed a long success as a kind of pet independent, prospering within the protective shadow of the Standard. Ninety percent of the industry, Rockefeller had decided, was enough.
The Standard’s commitment to long-distance pipelines was the beginning of the end of the railroads’ dominant role in petroleum transport. Rockefeller began to negotiate what were effectively reverse-rebate arrangements, guaranteeing the roads minimum returns for maintaining their oil-shipping facilities whether or not he used them. The last step in achieving total industry dominance was to integrate backward into crude product
ion, which took place gradually through the 1880s.
In an industry like oil, structural factors of the kind Rockefeller exploited favor larger integrated firms; but in the usual case, one would expect three or four major winners to emerge, as happened in, say, steel, automobiles, electrical equipment, and other industries. But with Rockefeller at the helm of the Standard, it was not only the world’s number-one oil company but there was no one in second place.
Running the Machine
A word on Rockefeller as a manager, for he has a claim to be not only the first great corporate executive but one of the greatest ever. He had the rarest of talents for adjusting to each new stage of the Standard’s growth. He seized on the initial opportunity in oil in the 1860s with extraordinary entrepreneurial vision and energy; he always seemed to see the future plain, and drove relentlessly to put the Standard at the head of the pack, quickly adjusting tactics to each sudden turn in the road. After consolidating Cleveland, he demonstrated an equal capacity for running what was a very large enterprise for its time. He managed to delegate well, but also to remain in close touch with operations. Even as the Cleveland operations grew to employ several thousand workers, he reputedly knew almost all of them by name. And he did all that at the same time as he was aggressively expanding the range of his strategic conquests.
Then, as the Standard grew to become the largest and most far-flung enterprise in history to that time, he shifted his operations to New York, the company’s new center of gravity, and proved to be a superb big-company administrator, building a modern organization that was both highly decentralized and highly unified. A full century before Ralph Cordiner and Jack Welch built GE’s famous management tracking systems, Rockefeller was doing something very similar at the Standard. Here is Rockefeller’s most severe critic, Ida Tarbell, on the subject:
In the investigation of 1879, when the producers were trying to find out the real nature of the Standard alliance, they were much puzzled by the sworn testimony of certain Standard men that the factories they controlled were competing, and competing hard, with the Standard Oil Co. of Cleveland. How could this be? Being bitter of heart and reckless of tongue, the oil men denounced the statements as perjury, but they were the literal truth. Each refinery in the alliance was required to make each month a detailed statement of its operations. These statements were compared and the results made known. If the Acme at Titusville had refined cheaper that month than any other member of the alliance, the fact was made known. If this cheapness continued to show, the others were sent to study the Acme methods. Whenever the improvement showed, that improvement received credit, and the others were sent to find the secret. The keenest rivalry resulted—each factory was on its mettle.
If anyone personified William Dean Howell’s image of the engineer at the center of the Corliss engine—now and then laying down his paper to touch “some irritated spot on the giant’s body with a drop of oil”—it would have been Rockefeller. Carnegie’s drive to the top of the steel industry feels almost hormonal—boundless energy, aggression, and ambition fortunately channeled into something constructive. Rockefeller’s seems much more a matter of sheer intelligence in pursuit of an ever-larger scale of elegance and order. Carnegie pushed and badgered, shamelessly playing executives against each other, and too frequently crushed his best men, like Henry Frick. Rockefeller’s management style, by contrast, was quiet and reasonable, even though, unlike Carnegie, he never held a majority stake in the Standard. If he had the final word, it was because his very talented executives believed in their hearts that he was smarter than everyone else.* He always reached out for the ablest executives he could find, gave them plenty of running room and support, and kept most of them bound to him for the rest of their careers. For such an aggressive and acquisitive company, the relative lack of vendetta in takeover battles, and the willingness to bring former enemies into the fold, are further evidence of the consistently high order of intelligence at the company’s center. Rockefeller’s style was not to destroy good men or good companies but to enlist them in the cause. When Rockefeller withdrew from an active management role, in about 1895, Arch-bold, from the oil region, succeeded him as president, while Rogers, from the Pratt refineries, became vice president.*
Altogether it was an extraordinary performance. Rockefeller’s record, and his later years, were both marred by the eventual violent public revulsion against his company, which he never understood. His failure to comprehend, or even engage with, the broader public may have been the flip side of his uncanny abilities within a business context, where success and failure were relatively unambiguous, and objectives quantifiable and easy to agree. To paraphrase Henry Adams on the nation’s founders, Rockefeller’s range may have been narrow, but within it he was supreme.
*The Union Iron Mills was famous for its “Lucy” blast furnace; at seventy-five feet tall, it was the largest in America when it was built in 1872. “Lucy” was Tom Carnegie’s wife—blast furnaces were usually named after executives’ wives, perhaps a trace of Victorian misogyny. Another Pittsburgh group soon built a furnace on the same dimensions, the “Isabella.” The two were quickly locked in a production competition that set record after record well into the 1880s and was followed closely in the trade press and Pittsburgh papers.
*By the standards of the Erie, the Crédit Mobilier scandal was decidedly small beer. Robert Fogel’s careful reconstruction concludes that, given the risks assumed, the promoters, who put up a lot of their own money, did not earn unreasonable returns. Ames did lie about one critical point, however. When he was testifying on construction reimbursement rates in 1866 he said that the UP still had not found a practical path across the continental divide. In fact, not long before his testimony, a cavalry detachment had rescued a UP engineering crew under attack by a Crow war party. The intrepid chief engineer, Grenville Dodge, noticed how the Crow melted away when the cavalry appeared. Trailing the escaping Crow, he found the long-sought western passage. Ames’s correspondence leaves no doubt that he had been informed. Presumably, if Congress had known, they would have set a lower reimbursement rate, and to that extent UP investor returns were excessive. Dodge’s exploit gives a flavor of the heroism that was part of the UP routine. landscape. Gould was no longer just the stock-jobber of contemporary legend. He had been badly bitten by the railroad bug, and the UP was the perfect vehicle for rebuilding his reputation.
*When merger discussions with Pacific Mail broke down, Gould executed one of his classic bear raids, driving down the price of the stock, then stealthily snapping it up at bargain prices. Pacific Mail executives woke up one morning to find themselves working for the UP. The exercise was a warning to all but the most powerful companies that with Gould at the helm, the UP had sharp teeth.
*During the first period of intense railroad building in the 1840s and 1850s, most roads were apparently profitable from the outset. But they were built in thickly settled eastern states, or the eastern edges of the “west,” and usually lagged demand.
*Rockefeller’s personal annual statements are in a very similar format to Carnegie’s. I could find statements for one or the other for a number of years in this period, but only one, from 1889, for the same year. Compared to Carnegie’s $2.1 million in assets in 1873, for instance, Rockefeller’s 1875 statement shows $1.1 million. About 45 percent was in Standard stock and 40 percent in local real estate, with only small outside shareholdings. He had clearly surpassed Carnegie by the mid-1880s. By 1889, he listed assets of $37.4 million compared to Carnegie’s $13.6 million.
*The producers charged exploitation by the Standard when production soared following huge new strikes at Bradford, Pennsylvania, in the mid-1870s. The evidence is ambiguous. Because they were so fragmented, and because most drilling leases were structured to ensure rapid exploitation, drillers typically produced as much oil as they could without regard for demand. The gathering pipelines moved oil to railroad connections and stored it until it was loaded into tank cars. The pipeline charge
appears to have included the storage; in effect, the producer regarded it as free. When Bradford production kept rising, the Standard, which was the only pipeline/gatherer after 1877, either could not, or chose not to, add tank space fast enough to keep up with the surplus. Its solution was to refuse to store oil that had not been sold, forcing the producers, they claimed, to sell at firesale prices—to the Standard, of course, which was nearly the only buyer. In the Standard’s eyes, the excess production was none of its doing. It ultimately built a “prodigious amount of tankage” at Bradford, but, whether out of malice or not, dragged its feet for at least a year or so before committing to a crash program on the required scale. A plausible reading is that the Standard did resist the producers’ demands for a while (although still building a lot of new tankage), using its power to refuse to store unsold oil. But it finally decided that the din of bad publicity wasn’t worth it, and built the tankage to accommodate the runaway production. In truth, since that new tankage was likely to be surplus once the market caught up, it’s extremely unlikely that independent companies without the Standard’s resources would have responded as well. (The Empire’s Bradford facilities were quite inadequate before the Standard takeover.)
*This is yet another area of similarity between Rockefeller’s Standard and Bill Gates’s Microsoft. Even after Microsoft had become quite a large organization, its very talented corps of executives habitually deferred to Gates, not because he was the largest shareholder but because he was still the smartest kid on the block.
*The original team broke up in the 1890s, after a twenty-five- to thirty-year run. Rockefeller himself seems to have retired long before the rest of the world knew it. Flagler fell in love with Florida and, after about 1892, become Florida’s first railroad and land development tycoon. By the end of the decade, Rogers and William Rockefeller were running a deals operation that nearly rivaled the Morgan bank’s, although they kept their desks at the Standard. Archbold stayed devoted to the company, but there is a near-consensus that the Standard was not well served by his pugnacious instincts during the trust-busting years.
The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany Page 20
