January 2, 1882 – John D. Rockefeller Forms Standard Oil Trust, First Sanctioned Monopoly in America

John Davison Rockefeller Sr. was born in 1839 in New York State although the family moved to Ohio when he was a boy. His entrepreneurial nature showed up early; he went into a business partnership with Maurice Clark at age 20. They made good money, with the partners switching from the produce business to oil, building their first oil refinery in 1863. The new company was composed of Clark & Rockefeller, chemist Samuel Andrews, and Clark’s two brothers.

John D. Rockefeller in 1885

While other refineries would keep the 60% of oil product that became kerosene, but dump the other 40%, Rockefeller used the gasoline to fuel the refinery, and sold the rest as lubricating oil, petroleum jelly, and other by-products. Tar was used for paving, and naphtha was shipped to gas plants. Rockefeller also got into other aspects of the business, such as laying pipe and making barrels, thereby cutting costs and increasing profits even more.

In February 1865, Rockefeller bought out the Clark brothers for $72,500 (equivalent to $1 million in 2017 dollars) and established the firm of Rockefeller & Andrews. To take advantage of the post-Civil War boom, Rockefeller borrowed heavily, reinvested profits, and adapted rapidly to changing markets, which he followed by hiring observers to track them.

The company gradually gained dominance of oil refining and sales through horizontal integration, ending up with about 90% of the US market. It also continued the practice of vertical integration, by taking over other parts of the supply chain.

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Another young successful entrepreneur, Henry Flagler, who had, by his mid-20s, made a fortune distilling whisky, was tapped as a partner by Rockefeller to run the transportation side of the business.

Rockefeller and Flagler wanted to bring in more capital without jeopardizing control. To do this, on January 10, 1870, they turned their partnership into a joint stock company, Standard Oil Company, along with three other men. Eventually, they developed it into one of the world’s first and biggest multinational corporations.

In response to the judicial and political attacks on Standard Oil in the 1870s and 1880s, the legal concept of the “trust” was refined by SO and formalized in the Standard Oil Trust Agreement on this date in history, January 2, 1882. As a site on trusts at Penn State explains:

At that time, corporations themselves could not own stock in other corporations. The shares were therefore held in ‘trust’, not for the Standard Oil of Ohio, but for the shareholders of that corporation. The shares issued in trust were 700,000 with 191,700 to Rockefeller, and 60,000 to Flagler. The trustees held the shares in the individual companies on behalf of the 41 shareholders of the Standard Oil Trust and had ‘general supervision’ of the 14 wholly owned and 26 partly owned companies. . . . . The senior management included Rockefeller, his bother William, Henry Flagler, and two others who together controlled four-seventh of the stocks.”

Standard Oil’s business practices created intense controversy. Much of what people believed about the role of competition in general and the Standard Oil Trust in particular was epitomized in the expose by the famous “muckraker” (investigative journalist), Ida M. Tarbell. Her father and brother both had small oil companies that had not successfully competed with Standard Oil. In her 1904 book The History of the Standard Oil Company, Tarbell fueled negative sentiment toward John D. Rockefeller, Sr. and his company. Tarbell dug into public documents across the country that described instances of Standard Oil’s strong-arm tactics against rivals, railroad companies, and others that got in its way. She reviewed testimony in court and before Congressional committees, as well as copies of pleadings in lawsuits. She talked to people inside the company and those who had competed against Standard Oil. And she succeeded in gaining their trust – a step where others had failed. She excoriated Rockefeller’s “ruthless tactics” and “destructive effect” on smaller oil businesses.

Ida M. Tarbell

Ida M. Tarbell

In actual fact, a study by John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” 1 J. Law & Econ. 137 (1958) showed that the Standard Oil group seldom if ever charged prices below its own costs. McGee found that the record did not indicate that predatory price-cutting forced any refiner to sell out, nor that it was used to depress asset value of any of the more than one hundred and twenty refineries it purchased.

Research showed that Standard’s most effective method of growth was simply by merger with and acquisition of competitors. Rockefeller demonstrated to the small competitors that they could make more money by selling to him than by competing with him, so he gradually took over much of the competition. Further, Standard’s usual practice was to employ the managers and owners of the firms they absorbed.

Nevertheless, in November 1906 the government brought a bill of complaint under the Sherman Act against the Standard Oil Trust. The bill itemized an assortment of alleged grievances containing some enlightened and some misguided economic policy. The Complaint contained many allegations of ruthless tactics, rebates, and vertical integration. One of the key “ruthless tactics” consisted of charging low (but as McGee demonstrated, not predatory) prices.

The case reached the Supreme Court in 1910 and was decided in 1911.
In Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) the Supreme Court of the United States found Standard Oil guilty of entering into contracts in restraint of trade and monopolizing the petroleum industry through a long convoluted series of anticompetitive actions. The court’s remedy was to affirm a lower court decree effectively dividing Standard Oil into several competing firms.

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The real thrust of the opinion is that what we now call horizontal mergers and acquisitions are illegal if they entail substantially all the existing competition. Methods employed in the process were not considered relevant. Dirty pool tactics were later dealt with in 1914 when Congress passed the Federal Trade Commission Act, which proscribed “unfair methods of competition” and authorized the FTC to interpret and enforce the statute.

John D. Rockefeller, whose net worth would have been over $318.3 billion in current dollars according to Forbes Magazine, spent the last 40 years of his life in retirement. His fortune was mainly used for targeted philanthropy to foundations that had a major effect on medicine, education, and scientific research.

Henry Flagler became a key figure in the development of the Atlantic coast of Florida and founder of what became the Florida East Coast Railway. He is known as the Father of Miami and Palm Beach, Florida.

Henry Morrison Flagler

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