Alfred M. Mthimkhulu
Come, let us reason together. What shall we say about these monopolies and cartels we hear of? Should we loathe them, love them or should we even care?
Consider the life of John Rockefeller Snr, a foremost industrialist in frontier America and one of the richest man ever. He, like his mother Eliza, was a devout Christian. He was Eliza’s fervent aid thanks to the wandering husband who every so often would abandon them for months. John’s father indulged in a double life and masqueraded as a medical doctor across frontier America. So, John was some kind of surrogate father to his siblings, a responsibility he took as seriously as his Christian faith.
On September 26, 1855, sixteen-year-old John got his first job at Hewitt and Tuttle, a merchant trading firm in Cleveland. For the rest of his life (he died at 98), he would celebrate this day with profound gratitude referring to it as “the Job Day”.
He got his first salary 3 months later: a whopping $50 being told by his boss that it would thereafter be $25 dollars per month.
“I felt like a criminal” he said.
It seemed excessive and way too much for a young man cautious about money and earthly pleasures. As early as 1859, he was giving away more than 10 percent of his income to charity, a tradition he maintained all his life and beyond.
Some three years later, he quit his job to start a merchant trading partnership with Maurice Clarke on $4 000 capital. They netted $4 400 in their first year.
Through Maurice, John met a self-made chemist, Samuel Andrews. Samuel had found a way of refining oil to kerosene using sulphuric acid. He was in dire need of working capital. In 1863, the partnership invested $4 000 in his venture. It was their little side thing. It would be the hallmark of their lives, especially after John bought-out Maurice in 1865.
Oil was in relative abundance then and wanderers like John’s father professed its medicinal properties. As with all formative industries, it was volatile. New oil wells depressed prices as did rumours of new finds. What made it worse was that a refining business did not require much capital to set up such that output always outstripped demand. In 1864, a barrel of oil was $12 but $2,40 two years later.
“The spoiled refiners” recollected John, “were disappointed if they did not make 100 percent profit in a year — sometimes in 6 months”. By 1870 the refining capacity was three times the oil from wells. This hurt producers and refiners alike. It depressed prices by some further 25 to 30 percent in the early 1870s, a serious existential threat to the industry.
Relatedly, railroads which had expanded markedly since the 1850s also had excess capacity particularly after the Civil War had ended in 1865. Transporting oil was thus a welcome business and railroads fiercely jostled for it just as oil merchants were gasping to stay afloat.
John saw all this chaos as his God-given responsibility to fix. In January 1870, he incorporated the Standard Oil Company with himself as President and William his younger brother as Vice.
He wanted to raise external capital through the company which was not possible in a partnership structure. Once raised, he would implement a “systemic solution” to the chaos in the nascent industry.
Towards the end of 1871, he bought an oil trading outfit in New York, Bostwick and Tilford. This was a strategic investment given that formalised exchanges were becoming the way forward in commodities markets. It also had a refining subsidiary that would operate as if it were unrelated to Standard Oil, a cartel-like arrangement.
In early 1872 John brought in new investors to Standard Oil boosting the firm’s capital from $1 million to $2,5 million. The war chest was in place and with it, he would wreak havoc in what has come to be known as the “Cleveland Massacre” and so effect his systemic solution.
In preparation of the Massacre he facilitated the formation of the South Improvement Company (SIC) with some railroad companies, oil producers and refiners in November 1872. SIC immediately increased freight charges for non-members while giving members rebates of up to 50 percent of freight costs. This worsened the precarious state of oil producers and refiners while improving that of SIC members. Competitors cried foul but at that point, all was set for the Cleveland Massacre.
In the six weeks to March 28, 1872, John bought 22 of the 26 refineries in Cleveland folding them into Standard Oil or just leaving them to wear and tear. He had cornered the market.
With almost all refineries under his belt and key traders such Bostwick and Tilford in the cartel along with conspiring railroad companies, he had consolidated the industry into Standard Oil. For decades, Standard Oil would earn great returns to shareholders but be loathed by competitors for unfair trading practices.
Litigation against it run like a soap opera until Chief Justice White’s ruling in May 1911 to split it into independent subsidiaries and prohibit its officers from re-establishing the monopoly.
Today many of us are aware of brands such as Exxon, Mobil, Amoco, Chevron and so on, all spin-offs from Standard Oil. At its peak, Standard Oil may have accounted for 86 percent of refined oil globally.
It is useful to note that it was mergers and consolidations of competitors elsewhere (e.g. Royal Dutch and Shell in 1907) that reduced Standard Oil’s dominance, not so much the dictates of the courts.
Whatever our thoughts are on cartels and monopolies, reflections on the work of industrialists such as John Rockefeller, Aliko Dangote, Bill Gates, Strive Masiyiwa and others can enrich our debates and guard against emotional tirades.
As Ron Chernow writes of John Rockefeller Snr in a book (from which most of this discussion drew), “during his career he cut the unit cost of refined oil by almost half and never diverted from his gospel of industrial efficiency.”
What else can a consumer ask for other than a good product at a fair price. Of the philanthropic work of these monopolists and cartel barons we did not discuss. We should.
◆ Alfred M. Mthimkhulu is a Senior Lecturer at the Graduate School of Business, NUST. He can be contacted on [email protected], Twitter: @mthimz