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Ida Tarbell and John D. Rockefeller, Part Two

10/17/2015

Source: Emily Arnold McCully. Ida M. Tarbell: The Woman Who
Challenged Big Business - And Won! (2014)

In November 1902, the first installment of "The History of the Standard Oil Company" (HSOC) appeared in McClure's Magazine, written by Ida Tarbell. Even though the HSOC series had started, Tarbell's research was very difficult and complicated in that Rockefeller insisted on anonymity and was mostly invisible in the relevant Standard Oil documents; Rockefeller ruled his empire with winks, nods, hints, and handshakes . . . all designed to derail any investigation.
Tarbell portrayed the independent oil producers as "Innocents" who risked everything in their ventures, and then a malevolent "Big Hand" (Rockefeller) came down and swatted them. Ida also wrote a separate article about the labor violence in the coal industry (Tarbell had little sympathy for labor union leaders), while Lincoln Steffens (pictured) wrote an article on the corruption in city governments for McClure's. All three articles were designed to show that the "American Contempt for the Law" negatively affected the public good.

In effect, these three articles were the real birth of "Muckraking", which used the following formula: first, quality investigation exposes a major problem, then citizens read the article, then the citizens mobilize, and demand change. One of Tarbell's leading researchers discovered proof that Standard Oil had started manipulating prices in 1876; he found a memo from Henry Flagler (Rockefeller's major partner) which stated that an increase of a quarter-cent per barrel would net Standard Oil millions of dollars. Tarbell's goal in exposing the document was to show that Standard Oil's goal was to always artificially increase prices for the consumer, for the benefit of Rockefeller and Standard Oil.

Tarbell contended that the independents welcomed competition (that basically wasn't true; Tarbell didn't have a great grasp on the mechanics and motivations within markets), and Rockefeller wanted to crush competition (that was absolutely true). Tarbell described a takeover by Standard Oil of an independent pipeline that used espionage, sabotage of a Buffalo refinery, and rigging an Ohio U.S. Senate election.
Even though Tarbell extolled the virtues of the independents, in private she became disillusioned about her heroes; her wrath with them was as great as with Rockefeller. Ida thought that the independents always seemed to make the wrong decisions and flunk-out at every critical juncture, but she kept her official written focus on the Standard Oil Trust (SOT) and Rockefeller . . . she kept going after "The Octopus".

Rockefeller's extreme elusiveness was in part due to the fact that he had lost all of his hair; that elusiveness cost him in that it worsened his reputation with the American public. Henry Demarest Lloyd, the first journalist to expose Rockefeller's decisions and practices with Standard Oil, finally agreed to meet with Tarbell. Lloyd documented that the railroad rebates were still occurring and benefiting Standard Oil, and the records of the rebates were continually destroyed. Ida borrowed documents from Lloyd's files, and used what she discovered in her HSOC series.
By 1904, Ida and her researchers still hadn't found a recent photograph of Rockefeller, and to Tarbell, the HSOC wasn't complete without one. Ida and her main assistant decided to attend Rockefeller's Baptist church incognito, using other parishioners as "cover". Also, a sketch artist would be with them in the church as well, and his sketch from the "secret mission" is pictured above.

Men like Rockefeller were accustomed to living and operating with no regard for public opinion. But privately, Rockefeller referred to Ida as "Miss Tarbarrel" during the run of the HSOC in McClure's Magazine (1902-1904). Rockefeller and his family fell ill with one ailment or another during the run of the HSOC; "Junior" suffered the most, suffering from a mental breakdown. After "The History of the Standard Oil Company" finished its run, Tarbell followed with a "Character Sketch" of Rockefeller, focusing on a key point in time: Rockefeller's decision to pursue the South Improvement Company (SIC) - to Tarbell, that was the point-in-time where Rockefeller chose evil instead of good (Ida used searing language in her "sketch").
Tarbell stated that a man of Rockefeller's power and influence should not be able to "Live in the Dark"; he was the victim of "Money Passion", which blinded him to the good in life (according to Mark Hanna, Rockefeller was "Money Mad . . . sane in every other way . . . but "Money Mad"). Tarbell's only praises for Rockefeller were that he was a good husband and father, and lived far more economically than other tycoons (tycoon is based on a Japanese word that meant "Great Lord").
In the second installment of her "Character Sketch" on Rockefeller, Ida found a formal photograph, and based the installment on her observations of Rockefeller's face, asking readers to do the same. To Ida, the photograph of Rockefeller (pictured on the cover of McClure's, above) combined with the "Church Sketch" showed concentration, cruelty, craftiness . . . a repulsive "Living Mummy", who was far too stealthy and secretive for the public good (Ida even proved that Rockefeller's father, a known scoundrel, had been indicted for horse theft and rape). After her "Character Sketch" on Rockefeller, Ida Tarbell became the most famous woman in America (in part that was also due to the decline in popularity of Jane Addams in the early-1900's).

All the while, Rockefeller never personally disputed Tarbell's findings or assertions in public. He probably believed such public responses were "beneath him", but he also didn't want to open any door to other investigations. Rockefeller could have ruined McClure's Magazine (and
S.S. McClure's publishing empire) by influencing and intimidating advertisers, but he was confident that his secret business methods would remain secret . . . he felt safe from further exposure.
Ida Tarbell (pictured at her desk at McClure's in 1905) condemned the practices of the Standard Oil Trust, but not the practice of Capitalism in general - Tarbell didn't have any problem with Combinations that used ethical means to earn profits. To Tarbell, Rockefeller's potential for greatness was ruined because he didn't played fair . . . in 1906, the Attorney General (Charles J. Bonaparte) agreed, in that he prosecuted Rockefeller and the Standard Oil Trust for unfair business practices under the Sherman Anti-Trust Act (1890).

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Ida Tarbell and John D. Rockefeller, Part One

10/17/2015

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Source: Emily Arnold McCully. Ida M. Tarbell - The Woman That
Challenged Big Business, And Won! (2014)

Ida Tarbell and her employer, S.S. McClure (McClure's Magazine) shared a longing for the bygone era of an "Uncorrupted America". Both wanted to do their part to restore that ideal, and in the process, assist working-class Americans as well as incoming immigrants. Exposing the ills of America would mean a huge investment in terms of money, time, and energy, and McClure's would be open to potential lawsuits as well. Therefore, Tarbell and McClure knew that the any articles that attacked big business would need to be exceptionally well-written and credible. Tarbell, McClure, and the staff at McClure's believed that reform-minded articles should be targeted to more than just the middle class and the "Upper-10's" (upper-10% of the population in terms of wealth).

After weeks of discussion and debate, the McClure's staff became convinced that Trusts (not a big business, but a board that supervised the operation of the big business) would be their focus for exposure and potential reform . . . but which Trust? Steel was considered, in that J.P. Morgan was in the process of creating the behemoth U.S. Steel, which would be the first "Billion Dollar Trust" . . . . but everything associated with that possible story line seemed too complicated. Tarbell told her colleagues about growing up in Northwest Pennsylvania around the emerging and expanding oil industry; given her skill-set and experience, it was a no-brainer that Ida Tarbell would write about John D. Rockefeller and Standard Oil (she reluctantly agreed to pursue the project). Tarbell wondered if readers would really enjoy a feature about interlocking corporations and their balance sheets; she didn't sense any potential for danger, just a desire to discover truth.

John D. Rockefeller had, in essence, created the first modern corporation by establishing the Standard Oil Trust (SOT) in 1882. Even before 1882, the Standard Oil Company controlled the production and distribution of oil, as well as determining its use by the consumer. The SOT was created in that Combinations (big consolidated businesses) couldn't do business across state lines; Rockefeller wanted to consolidate even more power and influence in the oil industry.
Rockefeller purchased tank cars, pipelines, banks, real estate, and even bribed politicians. He invested in newspapers so he could be portrayed in the most positive light; he never responded to criticisms and investigations of his methods or his Trust. New oil reserves were discovered in Ohio in 1885, and Rockefeller believed that this huge reservoir was a "Gift from God" given directly to him (even though the oil in Ohio had a strong sulfur content, but Rockefeller made it work as marketable fuel nonetheless). Ohio became the main source of petroleum for the SOT; not only had the SOT dominated refining, but by the mid-1890s the SOT became the dominant producer of oil in the industry.

Rockefeller continued to crush the independent oil producers by underselling them, and by using unsavory methods, such as industrial espionage. By the mid-1890s, the SOT was a financial colossus, no longer subject to the market fluctuations in the oil industry. As late as 1900, most Americans still burned kerosene in their homes instead of electricity, and the SOT produced 86% of that kerosene - it seemed that no independent producer could survive (one survivor was the Pure Oil Company, and its treasurer was Will Tarbell, Ida's brother).
Ida's father told her not to publish the first three parts of "The History of the Standard Oil Company", in that he feared that Rockefeller's retribution would be fierce (e.g. buying McClure's Magazine). Tarbell's search for documents was difficult, in that the SOT and the railroads (esp. NY Central, Erie, and PA) destroyed as many documents as possible relating to the South Improvement Company (SIC). But she persevered, and found that while most documents were destroyed, some remained in scattered locations. Tarbell proved that the SIC was Rockefeller's tool, using not only rebates, but "drawbacks" (a percentage of the freight rates that the independents paid the railroads went directly to the SIC). Rockefeller promised that he would ship all his refined oil with the NY Central, Erie, and Pennsylvania railroads in exchange for the rebates/drawbacks; it wasn't illegal, but it certainly wasn't ethical . . . and to Tarbell, it was grossly unfair, and more-than-worth investigating further.

Then, through a connection with Mark Twain (Ida had known him for quite a few years), Tarbell was able to meet with the Vice President of the Standard Oil Trust, Henry Rogers
(pictured below: Mark Twain with Henry Rogers, in front). Rogers admitted that the SIC was a mistake, and he even offered to arrange a meeting with Rockefeller. Ida visited Rogers at the SOT headquarters (26 Broadway in NYC) often for the next two years; she spent so much time there that some independents refused to talk with her, fearing that she was in league w/ Rockefeller. (Interesting fact: Tarbell earned $4000 per article, $107k today; by comparison, Rogers' secretary earned $10,000 per year at the SOT - $269,000 today). While Rogers cooperated most of the time, Tarbell still suspected that chicanery was afoot; she couldn't yet prove the espionage and criminal acts that she knew occurred due to the actions of the SOT.

The "breakthrough evidence" came from an unexpected source: a Standard Oil office boy. His job was to burn selected documents every night, and while doing so, saw the name of his Sunday School teacher on some documents. His Sunday School teacher was a refiner, and the documents showed that the railroads were warning the SOT well in advance of the oil shipments from the independent producers. As a result, the SOT could ship its product first, undercutting the competition.
The office boy took the documents to his Sunday School teacher, who had already read Tarbell's first three installments of "The History of the Standard Oil Company", and believed in Ida's integrity to the point where he gave her the documents. Those documents proved that the SOT was still engaged in unethical, and even illegal shenanigans, and in February 1904, McClure's published "Cutting to Kill" . . . Henry Rogers refused to meet with Ida Tarbell again.

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Thomas Jefferson: Idealistic or Practical President?

10/11/2015

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Source: Jon Meacham. Thomas Jefferson: The Art of Power (2012)

As President, Thomas Jefferson articulated ideals (theories), but largely acted pragmatically (practically) . . . especially helpful was his Secretary of State, James Madison. Jefferson used Hamiltonian methods to achieve his goals; the 3rd President embraced power very subtly. In terms of military strategy, Jefferson preferred to focus on defense (e.g. reducing the Navy), except when it came to the Barbary Pirates. A shakeup in Congress helped Jefferson immensely as President. From 1801 - 1803, there were 17 Republicans and 15 Federalists in the Senate; in 1807 - 1809, there were 28 Republicans and 6 Federalists. Jefferson told his Cabinet that he needed to see all the information they had from their departments; Jefferson wanted and needed to know everything . . . he believed in "The Art of Power".

Jefferson's favorite "political weapon" was hosting dinner parties, in that he used them as a tool for gathering political information and gossip. Many a Congressman's or Senator's vote was swayed by Jefferson during a dinner party. Jefferson's relationship with lawmakers kept information flowing between the Executive and Legislative branches. Jefferson was more a political chess player than a political warrior, hence the constant charges of "scheming" by his political opponents.
Jefferson believed that sociability was essential to Republicanism, in that citizens would become more virtuous and act for the public good on a regular basis. However, Jefferson never invited Republicans AND Federalists to his dinner parties . . . he absolutely abhorred conflict in his presence. So, Jefferson used his dinner parties to create more personal and political attachment to himself; very often, he let his guests sit where they chose, except for his usual seat, of course. Jefferson encouraged free-flowing conversation (with plenty of wine) instead of guests "toasting" each other non-stop, which he saw as false bonhomie. Jefferson had the gift of making everyone at his dinner parties feel comfortable and respected, which led to the kind of conversations that Jefferson could at least potentially use politically.

President Jefferson authorized the rules of engagement with the Barbary Pirates; he controlled events while appearing to defer to Congress. That style was typical of Jefferson, in that he could achieve his goal without causing confrontation or a crisis with Congress. By the time Jefferson had to directly deal with the Barbary Pirates early in his first term, he had become a broad interpreter of the Constitution, which was a very Hamiltonian thing to do.
On 31 October 1803, the U.S.S. Philadelphia was captured by Barbary Pirates based out of Tripoli. In February 1804, Stephen Decatur and a detachment of Marines torched the U.S.S. Philadelphia, which had been overrun and taken, denying the Barbary Pirates use of the frigate against the United States. After a successful "Black Ops" mission that was led by William Eaton (and authorized by Jefferson), a detachment of Marines, and a bevy of North Africans opposed to Tripoli, Jefferson announced to Congress that the enemy in the Mediterranean had, in essence, learned their lesson, and the U.S. would no longer have to pay "Tribute" . . . shortly thereafter, hostilities once again resumed.

In the Spring of 1801, Spain ceded half of their North American empire to Napoleon in the third Treaty of San Ildefonso. France now had the Louisiana Territory, and a new U.S. political course was required. In a way, Jefferson was the perfect President at the perfect time for the Louisiana Purchase; a less-courageous politician would have bungled, a too-idealistic politician would have been inflexible.
The Louisiana Purchase needed to be ratified by 30 October 1803; Jefferson called on Congress to meet on 17 October for "great and weighty matters". Jefferson's initial view on the purchase was that it required an amendment to the Constitution; his original intent was to formally ask both houses of Congress to propose the necessary amendment (Jefferson's initial thought was that purchasing the Louisiana Territory may have been in excess of his powers under the Constitution). In mid-August 1803, Jefferson received information that France was not as interested in the deal . . . that information changed the landscape dramatically, in that there was no time for an amendment, hence the "weighty matters" communication to Congress.

The idealistic Jefferson wanted an amendment to justify the Louisiana Purchase, but the practical Jefferson wanted the land. In his mind, Jefferson saw a link in territorial expansion with increased Republicanism (virtue) and wealth. A Federalist U.S. Senator from Massachusetts, John Quincy Adams (who had known Jefferson since his childhood), suggested that Jefferson use the Executive's power of negotiation in Article 2 of the Constitution in order to justify the purchase. With the ratification in the Senate of the Louisiana Territory (24-7), the political tables had turned, in that the Federalists believed that Jefferson would become a "President-for-Life", in other words, a Monarch.
After Vice-President Aaron Burr killed former Secretary of the Treasury Alexander Hamilton in a duel
on 11 July 1804, Jefferson kept silent, which was politically wise. Jefferson thought that Hamilton had possessed dangerous tendencies, yet he used Hamilton's institutions and methods to be the first President to drastically increase the power of the Executive branch. On 6 August 1804, Jefferson was informed that his Vice-President was interested in effecting a separation from the nation in Western states/territories. In the months that followed, Jefferson was re-elected in 1804 with an Electoral vote count of 162 to 14 for the Federalist candidate Thomas Cotesworth Pinckney.

Jefferson knew that the now former Vice-President, Aaron Burr, was no longer a political threat, but he was convinced that Burr was a threat to potential disunion. Therefore, Jefferson was willing to go to extraordinary methods in order to deal with Burr and his activities in the West. On 22 January 1807, Jefferson publicly announced that Burr was guilty of treason "beyond reason"; it was the same approach that he used in 1778 as Governor of Virginia against Josiah Philips.
On March 1807, Burr was arrested for treason; Jefferson was deeply involved with the prosecution, but from a distance. During the trial, Jefferson was subpoenaed to testify against Burr . . . Jefferson refused to submit himself and the office of the President to the control of others. Jefferson did agree to submit "relevant documents", which were mostly copies of documents that the presiding judge, Chief Justice John Marshall, refused to allow into evidence. Burr's acquittal enraged Jefferson; to him, it was yet another in a line of incorrect decisions made by Federalists in the Supreme Court. Added to Marbury v Madison, and the failed removal of Associate Justice Samuel Chase, Jefferson's distrust of the newly self-empowered Judicial branch increased.

On 22 June 1807, the H.M.S. Leopard attacked the U.S.S. Chesapeake off the coast of Virginia. The Leopard fired 22 times before the Chesapeake could respond; 3 Americans were killed, and 17 more were wounded. Not long afterwards, another U.S. ship was fired upon; aboard that ship was Vice-President George Clinton (former Governor of New York). Jefferson had guessed that Congress would choose an embargo over war in response to the British attacks.
Jefferson was willing to use force, but he knew in this situation he couldn't act unilaterally. Jefferson was also practical, in that the U.S. Navy was nowhere-near the strength of the Royal Navy. "War Fever" had subsided overall in America, and the only realistic alternative seemed to be the embargo . . . Jefferson reluctantly agreed that an embargo was the "least-bad" alternative.

Jefferson's big gamble with the embargo was that he thought that time was on his side. By keeping ships in their ports, he thought that might lead to a faster conclusion of the war between Britain and France, and then "Freedom of the Seas" would return. On 22 December 1807, Jefferson signed the embargo into law: it was now the Embargo Act of 1807. The scope of the act surpassed even that of the Federalist Alien & Sedition Acts in 1798. Jefferson was given broad executive authority to enforce the embargo; U.S. exports decreased by at least 75% (some historians argue that the percentage was even greater).
In the early stages, Great Britain felt some of the effects of the embargo, and actively encouraged U.S. ships to try and sail to Europe despite the rigid enforcement. What Jefferson didn't know was that embargoes are impractical over the long-term, and Great Britain, while inconvenienced, was able to procure most of what they imported from the U.S. elsewhere.
The Embargo of 1807 turned U.S. politics on its head; now even loyal long-time Republicans believed that Jefferson had become a de facto Monarch, since he was now negatively affecting the lives of regular citizens (the embargo led to a severe economic downturn). Federalists (who were concentrated in New England) focused more-and-more on state's rights, and discussions to explore the possibility of secession intensified. Yet, as time would determine, any other decision but the embargo would have been madness or cowardice.

In 1808, Jefferson was well-aware of his unpopularity with most Americans due to the Embargo of 1807, and as he had done before in the face of such political hostility and conflict (as Virginia's Governor during the Revolutionary War and as Secretary of State), he returned to his beloved Monticello. In effect, Jefferson was an "Absentee President" to close out his second term, and Secretary of State James Madison ran the Executive branch for the duration of Jefferson's second term, which was great training since he won the Election of 1808, and would serve two terms of his own as President.

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John D. Rockefeller and the Great Railroad Strike of 1877

10/3/2015

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Source: Ron Chernow. Titan: The Life of John D. Rockefeller, Sr. (1998)

In 1875, more oil fields were discovered near Oil Creek (NW Pennsylvania), and the market soon experienced another glut, from $4 a barrel in 1876 to .70 a barrel in 1878. Those that tried to deal directly with John D. Rockefeller (President of Standard Oil, pictured in 1872) during this crisis were frustrated, in that he only worked through trusted agents (one rival described trying to deal with Rockefeller as "boxing with a ghost").
A large controversy erupted during this glut in the oil market in 1878. The major causes were, first, that Standard Oil (SO) wanted to retain its monopoly on it share of pipelines (SO controlled nearly half of the pipeline network). In order to continue to do so, SO connected new oil wells to their pipelines free-of-charge. Standard Oil constructed as much as 5 miles of new pipeline a day, PLUS built huge tank farms for surplus oil, which increased the storage capacity from 1 million to 4.5 million barrels. However, the oil producers had no discipline (or memory of past gluts), and produced far more oil than the system's capacity could hold. These very same "Over-Drillers", when their oil spewed on the ground since there was no place to transport or store it, blamed Rockefeller for their travails.

   While Rockefeller didn't create the crisis, he saw something in the hullabaloo in which to take advantage. Rockefeller stated that he would only accept oil for immediate shipment to refineries (his refineries, of course). Standard Oil quoted a price for crude oil that was 20% below the market price, then stalled on payments to the desperate oil producers. This was a terribly high-handed and insensitive way to respond to the problems of the producers, even though the producers were the main reason for the crisis.

   (Pictured: A Standard Oil Company Stock Certificate)
The oil producers responded with a tsunami of rage; to them, the pipelines were behaving in the same conspiratorial manner as the railroads. To most Americans in the 1870s, the railroads were to be equally available for all to use, and the oil producers felt the same about the pipelines . . . interestingly, it's the same argument that Natives used in dealing with whites - no one truly owned the land, it should be available to all. Rockefeller saw the entire situation much differently, in that he was taming a wild and unpredictable industry. Soon, intimidating Ku Klux Klan-like protests by union hotheads occurred at night, threatening Standard Oil with all sorts of nasty and violent retribution.

In October 1878, the Pennsylvania state government officially exonerated Standard Oil of any wrongdoing in the crisis. To most involved, that decision proved that shenanigans were afoot (e.g. the investigator was bribed, etc.). Rockefeller saw the oil producers as malcontents and ingrates; he couldn't fathom how the producers failed to make the simple connection that their oil was worthless without his pipelines. To Rockefeller, these oil producers were behaving like five-year-old children that didn't understand how markets worked (e.g. "How dare you not take all that we produce"; and "Why don't you just pay us in 1876 prices?"); he was convinced that the oil producers were unreasonably hostile.

Rockefeller had the forward vision to position himself to profit from either surplus or scarcity in the oil market; but despite that foresight, he wasn't invulnerable. Tom Scott, the President of the Pennsylvania Railroad, entered the fray against Rockefeller again, this time using his refining and pipeline subsidiaries. Scott tried to win-over new refiners with bargain transportation rates, and he actually authorized construction of new pipelines from the new oil fields to seaboard refineries, which was a direct challenge to Standard Oil. Scott was trying to chop down Rockefeller despite the fact that 2/3's of all the oil the Pennsylvania Railroad carried was from Standard Oil.

Rockefeller interpreted Scott's actions as a declaration of war, and he decided to take on the most powerful corporation in America in the 1870s. Rockefeller threatened to ship his oil with other railroads (NY Central and Erie), but Scott didn't flinch, so he went on the attack. Rockefeller starved the Pennsylvania Railroad by idling the refineries he controlled in Pittsburgh while increasing production in those he controlled in Cleveland. Also, Standard Oil would undersell Scott's refineries in every market in which they competed.
Rockefeller had the New York Central and Erie Railroads trim their transportation rates to pressure the Pennsylvania Railroad to lower their freight charges. Also, Standard Oil purchased 600 oil tank cars from William Vanderbilt (pictured); Rockefeller had covered all his bases during his frontal assault against Tom Scott. Rockefeller had quickly humbled the world's largest freight carrier, which everyone assumed was invincible, including Tom Scott. In order to compete with Standard Oil, the Pennsylvania Railroad actually paid oil producers to let them ship their product.

Tom Scott responded by slashing rates and firing hundreds of workers, while reducing wages by 20%. He doubled the length of trains without expanding crews, which led to workers in the Pennsylvania Railroad walking off the job in protest. The Baltimore & Ohio Railroad cut their wages as well, which created the critical mass that precipitated the Great Railroad Strike of 1877, which featured an incredible amount of violence. In Pittsburgh alone, 500 tank cars, 120 locomotives, and 27 buildings were destroyed by union vandals. It became so costly that Tom Scott needed emergency loans from Wall Street financiers . . . and the cost & violence worsened.
(Pictured: the main Pennsylvania Railroad yard in Pittsburgh in flames)
President Rutherford B. Hayes sent federal troops to support state militias; American citizens watched in horror as the conflict intensified. After burning 2000+ freight cars, the strikers finally capitulated, but they had introduced America to a new era of labor strife.
Rockefeller had come VERY close to Standard Oil's property in the affected areas being taken or destroyed . . . in that respect, he was powerless, and very fortunate. Reeling, the Pennsylvania Railroad skipped paying out their scheduled dividend to investors, which sent the price of its stock plummeting. Finally, Tom Scott communicated (via intermediaries) that he was ready to negotiate a settlement with Rockefeller to end the nightmarish scenario.

The spoils of victory for Rockefeller were immense. Tom Scott was so desperate for cash that he offered to stop refining oil AND he offered the refining assets of the Pennsylvania Railroad at fire-sale prices (refineries, storage tanks, pipelines, steamships, tugboats, barges, loading docks) . . . even so, it was more than Standard Oil could pay. Scott refused to budge on two points, however: Standard Oil had to buy ALL the assets in which he offered, and he wanted $2.5 million of the $3.4 million purchase price to be paid by certified check in 24 hours.
That last demand taxed even Standard Oil's financial reserves, in that Rockefeller only had half of the $2.5m on hand. As a result, Rockefeller toured Cleveland's banks, telling each banker that he needed all the money they had, immediately. Yet, through all this, Rockefeller actually STRENGTHENED his alliance with Scott; his goal was always, if possible, to be conciliatory and to expand his influence.
Standard Oil agreed to ship at least 2 million barrels of oil per year via the Pennsylvania Railroad, while SO received an additional 10% rebate. Standard Oil (once again) became the "Oil Umpire" for the railroads, deciding on the percentage of oil shipments for each (PA 47%; NY Central and Erie, 21% each; Baltimore & Ohio 11%). And, to top it off, Standard Oil demanded that the Pennsylvania Railroad pay Standard Oil .20 per shipped barrel, like the NY Central and Erie Railroads. In the end, Rockefeller insured that the railroads could never again challenge his power and influence in the oil industry . . . Rockefeller's next big move to consolidate even more power and profit in the oil industry would come in 1882, with the creation of the Standard Oil Trust.

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John D. Rockefeller and the "Cleveland Massacre"

10/1/2015

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Source: Ron Chernow. Titan: The Life of John D. Rockefeller, Sr. (1998)

Why were there severe economic depressions in the decades after the Civil War? First, inflationary booms swamped the nation with goods. Next, big gluts (surpluses) developed from overproduction, and it became impossible for businesses to recoup their investment. The expanded supply led to lower prices, and a cruel deflationary bust, which led to unemployment . . . and a brutal economic depression. In the decades after the Civil War, economic advances were always followed by severe economic downturns, as seen in the depressions that started with the Panics of 1873, 1893, and 1907, and of course the Great Depression.
As a result, the incentive for many powerful men in business and industry was to try and crush competition by forming monopolies (aka Combinations). Oil was the most volatile of the major industries; being in the petroleum business was a nerve-wracking and unpredictable venture. Low kerosene prices were a boon to consumers, but they were a bane, especially to refiners, in terms of profit margin.

By 1870, refiners had a problem, in that total refining capacity was three-times the amount of oil that was pumped from the wells. Refiners and oil drillers were like farmers when the price went down, in that they produced too much crude / refined oil, trying to make money by sheer volume. In 1869, Rockefeller was in a panic; his fear was that his already immense wealth (he was only 29 years old) might disappear due to the volatile market, despite his under-the-table deal with rebates (discounts on shipping oil by rail) with the NY Central & Erie railroads.
(Pictured: A small part of Oil Creek in Northwest Pennsylvania in the 1860s)

Rockefeller studied the entire market, and figured that a "systematic" solution would rescue the industry . . . and protect and increase his wealth. He thought in terms of "Cooperation" (his word for monopoly); to him that meant strategic alliances and long-term planning. Basically, Rockefeller wanted to reduce the number of refineries to better match oil production. He envisioned a giant oil cartel that would reduce overcapacity and stabilize prices, and of course he would be the one to accomplish that feat, as well as being the primary beneficiary. Ironically, the independent oil companies at Oil Creek (NW Pennsylvania, where the first oil well was erected in 1857), tried to enact the same strategy in terms of limiting the amount of oil that was extracted from the reserves . . . but that coalition fell apart due to a lack of leadership.

In order to accomplish his goal, Rockefeller needed oceans of money . . . but how to supplement the company's existing capital and also keep control? His partner, Henry Flagler (pictured), found the solution via incorporation, which allowed them to sell shares to select outside investors. There was a problem with incorporation, however, in that a corporation couldn't own property outside of its state of incorporation ("Trusts" were created by Big Business to bypass this inconvenient law).
On 10 January 1870, Standard Oil was created, with Rockefeller as President, and Henry Flagler as Secretary and Treasurer (a third partner, Samuel Andrews, was Vice-President). The name of the company referred to their "standard" uniform quality of kerosene which had no impurities of note compared to the competition. Standard Oil already controlled 10% of America's refining capacity, and also had a barrel-making factory, warehouses, shipping facilities, and a fleet of railroad tank cars. Rockefeller's goal was to simply refine ALL of America's oil.
Rockefeller and Flagler refused a salary; their profit was to be solely from the appreciation of Standard Oil's shares and dividends (Rockefeller made sure that he was the largest single shareholder, holding about twice the shares of stock to Flagler and Andrews). Rich investors did not bang on Standard Oil's door, in that it was a very unstable time for new ventures, and the oil industry was too unpredictable for most that were looking to invest. In order to prove the naysayers wrong, Rockefeller paid out 105% on the company's dividends, which was absolutely unheard of in those days in an uncertain economic landscape.

Rockefeller's first targets for "Cooperation" were the 26 refineries in-and-around Cleveland, Ohio. His strategy was to become the "Oil Blob" by taking over these refineries, one-by-one. This move would be his first, and most controversial, during his multi-decade career in the petroleum business. To Rockefeller's supporters in 1872, Standard Oil was the birth of a benevolent giant; to his detractors, the company was a monster (soon to be portrayed as an octopus). His rivals saw a brutal power grab; to Rockefeller, he believed that what he was doing would lead to the salvation of the oil industry.
To "save" the industry from itself, Rockefeller covertly acquired New York's premier oil purchasing company in 1871 (it also had a refinery). This acquisition gave Rockefeller a sophisticated purchasing agency at the perfect time. Publicly, the firm looked like it stood in opposition to Standard Oil, but in reality, it was Rockefeller's pawn. On 1 January 1872, Standard Oil expanded it capital from $1m to $3.5m in just a couple of days. Among the new shareholders were the luminaries of Cleveland banking, with prominent railroad men as well. Also, on 1 January, Standard Oil's Executive Committee decided to purchase "certain refining properties" in Cleveland and elsewhere. It was the start of what historians call the “Cleveland Massacre”.

The excluded refiners were from New York and Oil Creek (NW PA). Standard Oil was the driving force behind the SIC; Rockefeller held 900 of the 2000 total shares, and 100+ shares were owned by "Rockefeller Men", which meant that Rockefeller had the controlling interest. As a result, Cleveland refineries were more powerful within the SIC, as well as in the overall marketplace.
One might ask - how did the railroads benefit from the from this agreement with Rockefeller and the SIC? Rockefeller helped the railroads arbitrate their vicious rate disputes; Standard Oil also guaranteed that the three railroads had specific percentages of the SIC oil shipments (PA 45%; NY Central and Erie 27.5% each) . . . Rockefeller had become the railroads "Oil Umpire". The railroads were able to run lines of cars at full capacity while making far-fewer stops, which significantly increased their profit margins. Also, the railroads were fully aware that Rockefeller had accumulated MANY oil tank cars; in short, the three railroads badly needed John D. Rockefeller.
Both refiners and railroads were struggling with excess capacity and suicidal price wars. Rockefeller figured out that he could fix the refiners' problems and those of the railroads in one fell swoop. Rockefeller knew exactly what he wanted, and he had a knack of knowing what the OTHER party wanted as well. Rockefeller saw the whole picture, and figured out how to save the railroads from themselves, and create greater wealth and power for himself.

The mayhem began when Rockefeller entered a secret compact with the head of the Pennsylvania Railroad, Tom Scott (pictured). Rockefeller wanted to drive a wedge between the Pittsburgh and Philadelphia refiners and Scott. The result of their agreement was the creation of the South Improvement Company (SIC); the Pennsylvania, New York Central, and Erie Railroads and the refiners that joined the SIC agreed to keep their deal secret.
The three railroads (that controlled the rails from NYC to Cleveland) raised the freight rates by 50% for all refiners that weren't part of the SIC (to Rockefeller and the railroads, "Fair Warning" had been given to all refiners). Those in the SIC would receive 50% rebates off crude/refined oil shipments. Also, those in the SIC would receive "Drawbacks", which were further rebates given SIC members for every barrel shipped by non-member refiners (Rockefeller felt totally justified in receiving drawbacks, in that Standard Oil was the de facto warehouse for the oil that was to be shipped . . . he believed he should receive payment for services rendered).
The railroads also gave members of the SIC inside information on oil shipments from the independent (non-member) refiners, which meant that the SIC could under-sell the independents. The drawbacks (and the other features of the SIC) were an instrument of competitive cruelty, which was unparalleled in US History up to that point; to many Americans, it was the grandest scheme of collusion and knavery they had ever seen.

Not long after the SIC was created, the secret was out among the independent refineries in Oil Creek. On 26 February 1872, Pennsylvania newspapers reported the rate hikes for those that weren't in the SIC; it was the death warrant of the independent refiners, and the protests were large, intense, and sometimes ugly. The Petroleum Producer's Union (PPU) was created, and the group of independents only sold crude oil to Oil Creek refiners (the embargo didn't last long, in that their pockets weren't as deep as Rockefeller's; he was awash in cash reserves). The Oil City Derrick listed the names of those in the SIC on its front page, and Rockefeller's name was clearly visible. It was the first time that most Americans heard of John D. Rockefeller, and it was a negative debut.
Ida Tarbell was 14 years old during this scurrilous hoo-haw, and the controversy was a negative frozen moment in her life (her father was one of the independent refiners). Eventually, she would write The History of the Standard Oil Company, which appeared in installments in McClure's Magazine from 1902 - 1904 (to Ida, Rockefeller didn't "play fair").
Rockefeller always believed that his enemies were axiomatically wrong, and he was right; not just right, but Righteous. To Rockefeller, the furor over the SIC confirmed his view that the oil industry needed to be brought under control . . . his control. Rockefeller's silence during the uproar confirmed, to the public, that he was not only arrogant, but guilty. Rockefeller told the few that were close to him (e.g. Henry Flagler), "You can abuse me, you can strike me, so long as you let me have my way".

As always, the greater the tumult, the more calm Rockefeller became, and the more firm he held his ground. The PPU was, in the short-run at least, well-organized and well-run; the PPU had 16 districts that blocked all oil sales to the SIC (there were even night patrols in each district to make sure there wasn't any clandestine night-time drilling). The PPU embargo / boycott took a toll on Standard Oil, in that Rockefeller temporarily laid-off 90% of his workforce.
The fatal mistake that Rockefeller and the SIC made was omitting refiners in the state of New York; almost immediately the NY refiners joined their Oil Creek brethren in opposition to the SIC. On 25 March 1872, the three railroads, under severe pressure from the PPU and the general public, agreed to cancel their contract with the South Improvement Company. The SIC didn't violate any laws of the day, but it did violate a collective sense of what was considered "Fair Play".
On 8 April 1872, Rockefeller surrendered to the obvious, instructing those in the SIC that all contracts with the three railroads were null and void. Rockefeller tried to explain (through intermediaries, since he refused direct contact w/ most anyone) that there was no conspiracy against the refiners . . . the conspiracy was against the consumers. Rockefeller claimed that he wanted a "United Front of Refiners" in order to keep the consumer from negatively affecting the oil market . . . few believed the President of Standard Oil. However, Rockefeller owned 20 of the 26 Cleveland refineries, and already had enough control of at least the regional market to continue to negotiate secret rebate deals with railroads on his own . . .

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