The Standard Oil and John D Rockefeller Saga Pt 2 - The Fall of Standard Oil

In the early 1880s, Standard Oil had grown so mighty that many thought it was greater than the U.S. government. John D. Rockefeller's ruthless drive for efficiency turned a small commodities trading firm into a gigantic oil empire.

No cooperation, no business; no man could stand shoulder to shoulder with Standard Oil, but...maybe a woman can.

Here's a link to part 1 if you missed it.

Let's get into the story, shall we?

The Antitrust Act of 1890

The year is 1888 in the U.S., and after hefty campaign donations from John D. Rockefeller and Standard Oil, Senator John Sherman of Ohio emerged victorious in his third senatorial bid. Everyone shook hands with wide smiles that could cure a depressed soul.

With an influential figure like Sherman preserving their interests in the national assembly, Standard Oil could hold the fort in the American market while unleashing the force of its monopoly into other parts of the world.

Rockefeller and his cronies began cooking up a plan for world dominance. After all, they've been running several medium-scale operations abroad.

America was conquered; let's take over the world.

With the amazing success of the Standard Oil Trust, many other companies in the U.S. began replicating the model, combining several businesses that resulted in huge monopolies.

As the number of monopolies multiplied, the several smaller competitors that were forced out of business began mounting pressure on the government to intervene.

Imagine competing against a monopoly of not just Standard Oil but also that of Andrew Carnegie, JP. Morgan himself, Railway trusts, Sugar trusts, Whiskey trusts, Tobacco trusts, etc. That's not a fair fight, is it? Well, let's make it even.

The government joined forces with the competitors, and they began mapping out ways to crumble the big boys. But Standard Oil was unfazed. With their man, Senator Sherman, in the government, this is no big deal.

Even for the government, coming up with a strategy to defeat Standard Oil and other trusts was no small task. They needed someone with the right experience, one skilled in trade and commerce regulations, one who must have had history with the men who controlled the monopolies.

Guess who they called? Senator John Sherman. Yeah, this was the man who was supposed to protect the interests of Standard Oil.

Would he turn against his benefactor?

In 1890, Sherman did the unthinkable. He proposed an anti-trust bill that would outlaw any trust and business combinations that were in restraint of trade. This was a direct arrow aimed at the Standard camp.

Immediately after the house rounds, U.S. President Benjamin Harrison signs the bill into law.

But the guys at Standard Oil viewed it as a win regardless. I mean, what does "in restraint of trade mean?" The law didn't define that. As long as no one could define that, Standard felt they should keep the ball rolling.

But 40-year-old David K. Watson, the attorney general of Ohio, doesn't think so.

Attack I - Ohio vs Standard Oil

In the same year, David Watson brought a case against Standard Oil, accusing the company of violating Ohio interstate trade laws through its shady trust. Who was this riffraff to fight against the mighty Standard Oil?

Standard denied the accusations. After all, the companies under the trust didn't bear Standard in their names, and most were still managed by the original owners even though Standard Oil secretly bought them over.

But the resilience of David Watson pulled through, and in 1892, after several accusations and defenses, the Court ruled against Standard Oil and ordered the liquidation of the Standard Oil Trust. Finally, the law caught them.

But for a company so large with a wealth of experienced lawyers working for them, a state Supreme Court ruling wouldn't be enough to take them down.

Standard's lawyers devised a strategy to delay implementing the court's decision by asking the court to give them time due to the complexity and largeness of their business.

They became a "trust in the process of liquidation" for almost five years while running business as usual. When a government official in Ohio noticed that Standard tricked the court with this practice, he charged them again.

They can't get away this time.

The court summoned the boss himself, Rockefeller, to testify on the witness stand. But he outsmarted them by feigning loss of memory due to old age.

While the case lagged in court, the state of New Jersey adjusted its laws to allow interstate commerce. This meant anyone, including Standard Oil, could own stocks in companies in other states while still operating within New Jersey.

Who needs a trust anyway?

They separated Standard Oil of Ohio as a single entity and reorganised in New Jersey under a new structure as a holding company, the Standard Oil Co. of New Jersey. The company was the largest stockholder in 41 companies, which owned several other companies, which in turn controlled many other companies.

How about that? The court can't get them anymore.

This angered competitors even more. They began fueling negative narratives about Standard Oil and Rockefeller in popular newspaper outlets. Bit by bit, people gradually became aware of the power Standard Oil held over the oil industry.

Cracks in the Fortress

As the pressure mounted, Rockefeller decided it was time to leave the scene. At this point, he was 57 years old; the smell of oil no longer aroused him like it did in the 1870's and 80's.

But the guys at Standard would have none of it. The man who began it all, the godfather of the oil industry, leave the scene at a time when the public is mounting pressure on them? If they ever needed him, it's now.

In the end, Rockefeller decided to remain as President of the board - mainly by title - and handed over the reins of CEO to John Archbold in 1896. By this time, he had found a new passion in philanthropy. (We'll get into that later).

When Archbold took over, he increased the company's dividend payout from 11% to 31% in 1897. However, Rockefeller was against this development, even though he was the largest shareholder in the company. His philosophy was to reinvest a larger percentage of profits to fuel expansion.

Archbold, on the other hand, felt Rockefeller had already perfected the Standard machinery, and all they could do at this point was reap the benefits.

Between 1893 and 1901, they paid out over $250 million in dividends to shareholders, with 25% going to Rockefeller. Standard's share price increased from $176 to $458 between 1896 and 1899.

But this was nothing. Around the same time, in 1898, automobiles were becoming popular around the world. Standard was set to expand their oil business beyond kerosene.

On top of this, William McKinley, the preferred candidate of Standard Oil and many other large trusts, became President of the United States. Before Standard could celebrate the victory, trouble was brewing again. This time in New York, the headquarters of the Standard Oil corporation.

The new governor of New York, a young man in his late 30s, wants to gun down all business trusts in the state, starting with the progenitor, Standard Oil. Who the heck is this governor anyway? Theodore Roosevelt! Yeah, the popular Theodore Roosevelt.

Standard Oil and the guys that control these other business trusts knew this was bad news.

And they were right! Roosevelt immediately ordered an investigation into all trusts in the United States, starting with you know who - Rockefeller's Standard Oil. If something isn't done, this young man is going to end them.

Standard Oil and the other trust leaders came up with a brilliant plan to eliminate the threat. They leveraged their influence on the Republican party to nominate Roosevelt as Vice President for the re-election campaign of President William McKinley.

This would lead him to the White House - occupying a serene vice presidential role - and out of New York, where he was a nuisance. McKinley wins again in a landslide victory, taking Roosevelt along with him away from New York.

Job done! Another flawless victory.

Woah... Not so fast.

Unfortunately, on September 14th, 1901, President McKinley suffered a gunshot injury in an assassination attempt that claimed his life. And according to United States laws, the vice president takes over in the case of such occurrences.

As a result, Theodore Roosevelt, Standard Oil's ultimate villain, assumed office as the new President of the United States. The same man Standard Oil wanted out of only one state, they've promoted to the most powerful office in the entire United States. What a mistake!

While the executives at Standard Oil thought the worst had happened, something or someone more dangerous with Titusville roots—where it all began—was cooking.

Attack II - The Woman Has Arrived

In the same month that Theodore Roosevelt was inaugurated as President, a small journalist at McClure's National Magazine, Ida Minerva Tarbell, began working on a new book series, The History of Standard Oil.

Most Standard Oil executives contributed largely to the work of Ida through several interviews and documents to ensure it was successful. But what they didn't realise is that Ida Tarbell wasn't writing about a nice oil empire.

Ironically, I believe Standard executives where like, "You want to document the history of our great empire? Welcome! Let's give you a tour of our in-house operations.”

And while she may look like a small writer with no power, she believes her stories can become the stone that kills the giant. The launch of each volume in McClure's magazine drilled holes into the Standard Oil forte.

Ida spared no punches in her attack against Rockefeller and his company. By this time, Standard Oil controlled 91% of oil refining in the U.S. and 85% of final sales.

Although Ida's stories contained several half-truths that Rockefeller and Standard could have leveraged to send a powerful response, they did nothing. Rockefeller had always maintained a no-talking-to-the-press rule, and he felt responding to the accusations of Ida would give credence and popularity to her work.

However, Ida's work doesn't need his response to sell.

Unlike many other press stories on Standard Oil, Ida Tarbell made bare the secret tactics of Rockefeller and Standard Oil; from their deal with railroads to the Cleveland massacre, their secret ownership of competitors, the magnitude of their influence over the U.S. oil industry, etc.

The book spread like wildfire all through the U.S., as everyone was eager to know how Standard and Rockefeller became the gods of the oil industry. As a result, the circulation of McClure's magazine grew by hundreds of thousands during this period.

Several newspapers and magazines reviewed the book, portraying Rockefeller and Standard Oil as a giant octopus that controlled several industries in the U.S.

Through her story on Standard Oil, Ida pioneered what we know today as investigative journalism.

Fueled by Ida's work, Standard Oil met a severe backlash from the public, as everyone was beginning to see them as bullies who needed to go down. For Roosevelt, Ida couldn't have come at a better time. He began mapping out how to leverage all the facts released in her work to challenge Standard Oil and Rockefeller.

But before he could launch his main attack, it was time for elections.

Standard Oil could finally breathe an air of relief after years of probing from Roosevelt. It was time to leverage their influence to bring a new president to the White House.

Attack III - The New President

But after calculating their odds, Standard Oil and many other large trusts in the U.S. decided to employ the old playbook by trying to buy over Roosevelt. They donated heavily to his re-election campaign in hopes that he would return the favour by winding down his antitrust pressure.

With such huge donations, Teddy Roosevelt defeated the opposition in a landslide victory. Standard Oil expected Teddy to stay on their side after their supports. Heck, I expected Teddy to show them all the love he had.

But immediately after his inauguration as President, he threw Standard under the bus.

Chernow wrote of Henry Frick of US Steel: "We bought the son of a bitch, but he wouldn't stay bought."

Armed with the evidence in Ida's work, Roosevelt influenced the U.S. Congress to pass a resolution instructing all individual states in the country to launch an anti-trust investigation into Standard Oil.

In less than a month, 10 states filed over 33 separate cases against Standard Oil and affiliated companies. And Ohio, which Standard had earlier screwed in court, went to the extreme by issuing an arrest warrant for Rockefeller.

For the first time in his life as an oil man, Rockefeller panicked and fled into hiding without revealing his location to anyone—not even his family members or Standard Oil executives knew his whereabouts.

While in hiding, he kept sending letters with no return address to Archbold stating that he wants to resign from the company. But if you were part of the board at Standard, would you let him? I mean, he began this whole thing, and now he wants to run away.

The discovery of oil in several regions, both internationally and in the US, and a growing list of over 147 competing refineries crashed Standard's U.S. market share from 91% to 70%.

With all of these forces choking them, Roosevelt decided it was time to pull out all the stops. He instructed the U.S. attorney general to file a federal lawsuit against Standard Oil on the grounds of breaching the Sherman Antitrust Act. Yeah, the same Sherman that Rockefeller earlier supported his Senate re-election campaign with huge donations.

If Standard Oil loses this case, Rockefeller and most of the board members could serve a good number of years in jail.

To get Rockefeller out of hiding, a judge in Chicago promised to grant him criminal immunity if he testified in court. Knowing this would prevent him from serving jail time, Rockefeller appeared before the court and testified about how Standard Oil's efficiency helped it produce quality products.

But when the judge questioned him about railroad discounts, monopolies, and the like, 71-year-old Rockefeller played the loss of memory card again.The angry judge, realising that Rockefeller tricked him, slammed Standard Oil with a fine of $29 million—the highest any company had received at the time.

Standard Oil is Dead, Long Live Standard Oil

After extensive deliberation and argument in various courtrooms, the federal and appeals courts concluded that Standard Oil violated the Sherman Antitrust Act by restraining trade through unfair competitive tactics like rebates, fixing prices, and destroying competition. As a result, they ordered that Standard Oil be split into several independent companies based on state boundaries.

But Standard wouldn't go down without a fight. They played their final card by appealing to the U.S. Supreme Court. Just maybe a miracle can happen. Just maybe they can escape this like they've always done.

However, on May 15, 1911, the U.S. Supreme Court upheld the decision of the lower courts, ruling that Standard Oil was a monopoly that illegally restrained trade. Standard Oil was to dissolve into 34 separate companies within six months.

According to the ruling, shareholders would receive an equivalent fraction of their shares in all 34 companies. For example, if you own 10% of the original Standard stock, you will get 10% of the stock in each of the 34 different companies.

As the news got out, Standard Oil stocks began crashing at a rapid pace. All hell was about to break loose for stockholders, especially Rockefeller, who owned 25% of all Standard Oil stocks.

Rockefeller was busy enjoying a nice time playing golf with a Catholic priest when the news reached him.

Immediately, he asks the priest if he's got some cash to spare. The mighty Rockefeller, begging for money?

I know you're thinking Rockefeller is about to lose everything. The normal from rags to riches back to square one story... But let's hear what he has to say:

“Father Lennon, have you some money? Buy Standard Oil stocks right now.”

But Standard Oil was on the verge of destruction. Why would he say that to the priest?

Standard Oil was eventually divided into 34 companies based on state boundaries.

And when these companies became publicly traded on the stock exchange, everyone for the first time saw the true picture of Rockefeller's creation, including the several assets they owned: Vaseline, forests for making barrels, railroad cars, pipelines, etc.

With the new sight before investors, they hurriedly invested in the child businesses of Standard Oil, sending their stock prices through the roof.

Standard Oil of New Jersey goes from an initial share price of $360 a share to $595 in year 1, SO of New York goes from $260 to $580, SO of Indiana goes from $3500 to $9500, and so on.

With his 25% ownership in each of these different companies, Rockefeller made more money after Standard Oil was broken up than he did while he was working.

As of 1934, he owned 1.5% of the entire U.S. GDP—no billionaire in today's world compares in terms of wealth. What a man!

Standard Oil may have been broken up, but its descendants are still heavy players in the oil industry. From ExxonMobil to Chevron, Marathon, and ConocoPhillips, the creation of Rockefeller lives among us to this day. The end!

Rockefeller's Charity Efforts - The Science of Philanthropy

Rockefeller was a devout Christian with a Baptist background. And one of the foremost Christian doctrines that reflected in his life, right from a young age until his death was the practice of giving. A few quotes on his philanthropic efforts:

My Two Cents

• Does it get to the point where a business has to slow down on growth? Although Standard Oil had its fair share of unfair business practices, I feel the government took them down because they were growing too big.

• Long term investing requires having a clear understanding of the future. Rockefeller knew Standard was never going down, hence he never sold shares - not even in the face of the company's fiercest battle.

• What do you do with all the wealth in the world after accumulating it?

Some Interesting Finds I Came Across

Fences - An interesting movie about family by Denzel Washington and Viola Davis

Breath of Life - Another interesting movie on grief and finding purpose again

Charlie Munger - (Founders Podcast)

Nick Huber on Boring Entrepreneurs

The Secret to Stephen King's Fast Writing

Sources

The History of Standard Oil by Ida Tarbell

Standard Oil (Wikipedia)

John D. Rockefeller

Standard Oil I (Acquired Podcast)

Standard Oil II (Acquired Podcast)

Titan: The Life of John D. Rockefeller, Sr

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