The Monopoly That Went Too Far
As the merger wave of the 1990s transforms the American economy, it has spawned corporate giants of a stupefying new scale in sectors ranging from financial services to pharmaceuticals, communications, and defense. This trend has awakened fears of corporate concentration reminiscent of the early 1900s, when J.P. Morgan cobbled together U.S. Steel, International Harvester, and other such formidable behemoths, arousing the trustbusting fervor of President Theodore Roosevelt. Once again a swelling tide of consolidation has provoked a militant mood in Washington.
Some of America's most revered business names have now been stigmatized with the tag of monopolist. Microsoft Corp. chieftain Bill Gates has come under especially searching scrutiny from the Justice Dept. His travails have summoned up memories of an ancient drama that riveted the nation in the early 1900s: the Justice Dept.'s bitter and protracted antitrust suit against Standard Oil and its presiding deity, John D. Rockefeller. The oil trust refined, distributed, and marketed nearly 90% of all the oil produced in America. As its founder, visionary, and chief strategist, Rockefeller was synonymous with Standard Oil, much as Gates is with Microsoft. Rockefeller's brilliant, piratical stewardship raised baffling questions about the necessary degree of government intervention in the economy.
Rockefeller always waded hip-deep into controversy. From the time he started Standard Oil in Cleveland in 1870--11 years after Colonel Edwin Drake struck oil in Titusville, Pa.--he steered his company with an icy efficiency and tactical daring that were both terrible and wondrous to behold. During one electrifying two-month period in 1872, he acquired almost all of the rival refineries in Cleveland--22 to be exact--then successively reenacted this feat in the other major refining centers: Pittsburgh, Philadelphia, New York, Baltimore, and western Pennsylvania. Standard Oil was more than a mere company. It was a giant, amorphous cartel with both wholly and partly owned subsidiaries. With a penchant for secrecy frequently tinged with paranoia, the trust hid its ownership of many companies and resorted to espionage to track competitors' shipments.
At a time when it cost scarcely more to build a small refinery than to open a store, many fortune-hunters swarmed into the business, creating surplus capacity and plunging profits. Rockefeller--a precise, methodical Baptist--scorned these get-rich-quick rivals and resolved to establish the industry on a stable, long-term basis. With a meticulous attention to detail, he introduced huge economies of scale that rapidly reduced his production costs far below those of competitors. He also exploited the value of byproducts, selling kerosene--the principal oil business prior to the Auto Age--as well as lubricants, varnishes, fuel oil, petroleum jelly, natural gas, and scores of other petroleum products.
Rockefeller wasn't content to vanquish rivals through lower prices and superior products alone. In the rowdy era of laissez-faire capitalism that preceded the 1890 Sherman Antitrust Act, he figured out ways to manipulate markets and starve out smaller competitors by engineering artificial shortages of barrels, chemicals, or tank cars. To shrink refining capacity and bolster prices, he would purchase rivals, shutter their obsolete plants, and then make them sign agreements to stay out of the business. From an early stage in his march to supremacy, he colluded with the railroads to secure preferential freight rates for Standard Oil and punitive rates for rivals. After parlaying his railroad influence into an unassailable position in refining, he extended his sway to long-distance pipelines. In this way, Standard Oil formed the very infrastructure of the industry.
In the 1880s, the trust began to market oil directly, sweeping away an antiquated system of middlemen and delivering kerosene straight to the nation's grocers and hardware stores. Standard Oil divided the country into 11 exclusive marketing territories and resorted to strong-arm tactics, if needed, to ward off outsiders. Grocers who stocked kerosene from independent refiners might suddenly find a new grocery store opening across the street; this rival would not only sell Standard Oil kerosene but suspiciously cheap groceries. The trust's most potent weapon was always predatory pricing--i.e., the prolonged underselling of rivals until they were driven out of business.
With the intricate mind of a chess master, Rockefeller devised a complete arsenal of anticompetitive weapons. In writing antitrust legislation, reformers had simply to study his career. By the time Rockefeller retired from Standard Oil in the late 1890s, the Ohio Attorney General had lodged the first in an extended string of state and federal antitrust actions against the trust. Rockefeller's wary colleagues made him retain the president's title. As his partner Henry H. Rogers said: "We told him he had to keep it. These cases against us were pending in the courts; and we told him that if any of us had to go to jail, he would have to go with us!" As a result, the government, press, and general public assumed that Rockefeller's retirement was a transparent fraud and that he still quietly pulled the strings at Standard Oil--which wasn't the case.
How did Rockefeller elude the law during his active business career? Why didn't public outrage against Standard Oil crystallize sooner? After all, the trusts (the term used to describe the monopolies) were seen as menacing creatures by small businesspeople bred on the gospel of individual enterprise. Progressives fretted about the corrupting influence of Big Business, which seldom had scruples about suborning state legislatures, tampering with courts, and buying politicians. Populist farmers denounced the unholy alliance of big shippers and powerful railroads that relegated them to marginal status. And workers found themselves in an unequal contest with employers who steadily grew in size and organization.
Yet this stereotypical view of the Gilded Age as one of a deepening tension between the "masses" and the "classes" doesn't entirely capture the public ambivalence toward the leviathans. However notorious many of their practices, men such as Rockefeller and Andrew Carnegie were superb businessmen and destined to attain heroic status in a society that worshipped money. Many Americans took pride in the power and prosperity that these hard-bitten industrialists conferred on a largely agrarian society.
The late 19th century was also a splendid time for consumers, who were dazzled by new products from light bulbs to telephones. In some respects, the Gilded Age was a period much like our own, distinguished by perpetual innovation and an explosion of new industries. The trusts, despite their sins, patented advanced production methods and slashed the prices of many products. Prices might well have been lowered by perfect competition, but the average consumer enjoyed a steady cheapening of the necessities of life. During its first twenty years, Standard Oil trimmed the average price of refined oil from 23 cents to 7 cents a gallon, so that Rockefeller could boast of having bestowed cheap oil on the masses. Partly through economies of scale introduced by the trusts, the general price level fell steadily from the end of the Civil War to the turn of the century.
After William McKinley was assassinated in 1901 and Theodore Roosevelt rose to the Presidency, public tolerance for the trusts eroded. This stemmed partly from the tremendous merger boom that started in 1897 and engulfed many industries. As small businesses disappeared into the maws of massive combines, the public stared aghast at the magnitude of these new entities. That they were forged by Wall Street financiers such as J. Pierpont Morgan only heightened fears of a new economic absolutism. By no coincidence, the first great wave of trustbusting got under way in the early 1900s, just as the late 19th century deflation bottomed out and prices began a slow but inexorable climb. When John D. Archbold, Rockefeller's sucessor at Standard Oil, decreed steep price hikes in domestic kerosene, the public finally rebelled. It would tolerate harsh business methods and the lopsided distribution of wealth as long as it could share, to some extent, in the gains. But once irate consumers teamed up with Rockefeller's disgruntled business opponents to tame the trust, Standard Oil's days were numbered.