eBusiness Weekly
In 1793, Eli Whitney invented a basic machine that arguably changed the course of industrial development in the world.
The machine separated cotton lint from seeds. The timing was excellent. The US was adopting a new cotton variety, Gossypium hirsutum (or Petit Gulf).
Unlike other varieties, it thrived. More land was taken up by cotton. Demand for slaves which had slowed started rising. By 1860, the auction price of a prime slave hit dizzy heights of $1 800 from about $500 late 1790s.
England was hungry for cotton as Edmund Cartwright’s invention demanded much more than supplies from Egypt and India.
US cotton exports rose from 400 000 pounds in 1790 to 66 million pounds in 1860. By 1860, US accounted for 75 percent of global production. Although cotton mills were coming up in places like New England, the manufacturing sector was still tiny.
US imported almost all finished goods including clothes, just like Africa imports chocolate products while producing 85 percent of cocoa in the world.
It is an anomaly Alexander Hamilton, Secretary of Treasury in 1789, wanted to avoid. He envisaged an economy driven by manufacturers. Many saw the future in agriculture. It was hard to argue otherwise then because cotton was making money.
Even though cotton was the mainstay up to 1860, the wheels of transformation Hamilton had initiated gathered pace, especially from the presidency of Andrew Jackson in the 1830s.
By the 1840s “banks sprang up everywhere, canals crosshatched the countryside, steamboats plied rivers, railroads and telegraphs welded together the first national markets” writes Ron Chernow.
By late 1840s gold was discovered and new routes to the shores of the Pacific explored. Like cotton, most of the gold was exported to England. After 1865, industrial US as we know it today began its rise and John D. Rockefeller’s business career captures that rise.
We have heard of John but little George Bissell, ten years John’s senior. George had a hunch in the 1850s. The hills of Pennsylvania had leaks of a smelly black liquid, oil. Some claimed it cured liver ailments.
George thought there was more to it. He took samples and asked Professor Benjamin Silliman at Yale University to study. It was the mid-1850s. There was no electricity, no running water. Animal fat, especially mutton fat, provided light at night. The alternative, whale oil, was becoming expensive because whales were depleting.
The Professor confirmed George’s hunch. Oil could be used for light and other things. George was elated but faced immediate challenges. How was he going to extract it in large quantities? How was he going to transform it to usable products? He brought in Edwin Drag for the extraction. Many chemists had ideas on treating the oil to usable state so the worry fell away.
But Edwin struggled. The soil caved in. Then a thought hit him to adopt a method used to dig salt. On August 28, 1859, he struck oil. He was elated. But how was he going to harvest it? How was he going to move it for processing?
The railroads were far. So, horses pulled the barrels, (a new invention made of wood), down very slippery pathways littered with spilt crude and decomposing horses that often succumbed to whipping and exhaustion. It was a concoction of horrible smells.
Meanwhile, oil refineries mushroomed in urban centres such as Cleveland. One such belonged to John and his partners. With so many refineries emitting so much waste, the taste of beer from local breweries was affected as was milk. Entry barrier were too low. Picture a refinery then as a basic mill to crush ore from informal gold miners and oil wells as gold claims.
Most wanted a quick buck. Not John. He planned ahead negotiating discounts with railroads and eventually investing in them; he made own barrels and later oil tanks for the rail. He consolidated the infant industry by buying almost all competitors in Cleveland after which he expanded to New York to be close to the main port for exports. By the 1880s it was not only kerosene he sold but fertiliser, gas and so on. Unlike cotton, the US took charge of the entire oil value chain and thus dominated the world market — something Africa is working on through AfCFTA. He led the industrialisation movement.
At his firm, Standard Oil, detail mattered. Costs were captured to decimal points. Plumbers could be hired monthly with supplies provided to keep costs low. One time, he was inspecting a kerosene canning plant in New York. He asked how many drops of solder were used per can. It was 40. He suggested 38. The cans leaked. Then 39. The cans were fine.
“That one drop of solder saved $2 500 the first year; but export business kept on increasing and the saving has gone steadily along to many hundreds of thousands of dollars” he boasted years later.
The attention to detail undoubtedly contributed to his success but the major reason for the success (hence driver of industrialisation) was his embrace of scientific research from the very beginning of his oil venture in 1866. He never wavered. Twenty years later, he imported from Germany the chemist Herman Frasch to eliminate a very foul smell in the oil from new prolific wells. In the subsequent 15 years, “Frasch’s patents furnished dazzling profits for Rockefeller and Standard Oil and boosted the status of research scientists throughout the industry.
The original oilmen were self-made roughnecks, biased against science and prone to operate by intuition, whereas Rockefeller brought a rational spirit to business”.
Thanks to innovation and cost management, his products were affordable. In the five years to 1885, refining cost fell from 2,5 to 1,5 cents per gallon. By 1890 the retail price for kerosene at 7,5 cents per gallon was down from 23,5 cents in the 1860s. Of course, innovators such as Thomas Edison with his electric bulb didn’t like kerosene and mounted counter attacks. It was dog eat dog but consumers were winning, so were shareholders, bankers and the public purse. In 1878 for instance Standard Oil declared a dividend of $60 on every $100 share. Even in the 1871 recession, Standard Oil declared a 40 percent dividend.
He had so much cash the man was practically a very liquid bank unto himself, rescuing the entire financial system several times in his career though credit usually went to bankers like J. Piermont Morgan.
The world was very different then but some tenets are still the same. Industrial development is an unending search for solutions to social problems. It works well if the solutions are simple and delivered efficiently such that whosoever comes up with them earns a healthy return.
Several in his times got healthy returns among them Cyrus McCormick of International Harvester who invested and kept perfecting the combine harvester to boost efficiencies in farms. As a result, people migrated to towns to work in new industries.
Some new sub-sectors emerged from oil even across the Atlantic. In Germany for instance, Gottlieb Daimler’s experiments resulted in him tapping out gasoline from oil which he initially used to power bicycles and tricycles.
His experiments eventually dovetailed Karl Benz’s work and the motor industry came alive. In the US, the experiments saw the rise of Henry Ford and others.
The motor industry became Standard Oil’s main customer as kerosene was replaced by the electric bulb. Once in motion, the wheels of industry keep turning until the oil runs out.
The oil is human ingenuity which manifests as scientific research. It is underrated in Africa just as it was by early oilmen who operated by intuition and fell by the wayside. We must not.
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