EVERY SPOKEN WORD
140 min read · 27,656 words- 0:00 – 0:25
Intro
- BGBen Gilbert
So history and facts going up through-
- DRDavid Rosenthal
1890. [laughing]
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?
- 0:25 – 2:57
Why Standard Oil matters: kerosene (not gasoline) and the company’s living legacy
- BGBen Gilbert
Welcome to season nine, episode four of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.
- DRDavid Rosenthal
And I'm David Rosenthal, and I am an angel investor based in San Francisco.
- BGBen Gilbert
And we are your hosts. Today's episode is 150 years in the making. David, somehow we missed this IPO-
- DRDavid Rosenthal
[laughing]
- BGBen Gilbert
... if or when it happened. [chuckles]
- DRDavid Rosenthal
Can we get, uh, can we, can we still get, uh, get secondary shares?
- BGBen Gilbert
We'll see.
- DRDavid Rosenthal
Put together a little SPV, do, uh-
- BGBen Gilbert
I think it might be of a spin-off or something like that-
- DRDavid Rosenthal
Oh, okay. Okay
- BGBen Gilbert
... at, at, at this point. Uh, at least the Standard Oil that we will cover today never IPO'd. It was privately held the whole time. Its financials were kept very secret. That, that must be why we, we have missed it until now, David. Sure.
- DRDavid Rosenthal
Oh, yeah, must be. Must be.
- BGBen Gilbert
Well, this episode on Standard Oil is, of course, the oil monopoly founded in the 1870s by John D. Rockefeller, the wealthiest person in modern human history. Embarrassingly, until I had started to do the research, I didn't realize the oil in Standard Oil did not refer to gasoline, at least until much, much later in the life of the company. Standard Oil actually-
- DRDavid Rosenthal
Auto mobiles, uh, the Model T was, like, 1910 or so, like-
- BGBen Gilbert
Totally. Standard Oil predates the Ford Model T by, like, 40 years.
- DRDavid Rosenthal
Yeah. So wild. So yeah, John D. becomes the wealthiest person in, like, you know, modern human history before gasoline. [chuckles]
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
This is a different kind of oil.
- BGBen Gilbert
Gasoline helped later. Turns out compounding, uh, compounding can kind of show up, especially when the second business line gets layered on top, but we will get into it. Listeners, the other thing that is crazy that I want to point out, I didn't realize how much Standard Oil is very much with us today. Despite being famously broken up, the parts went on to become both Exxon and Mobil, Marathon, Amoco, which of course is now a part of BP, Chevron, and several other companies. When you look at a gas station, you are probably looking at some remnant of, uh, of Standard Oil.
- DRDavid Rosenthal
Just wild. Just wild. We will get much more into that next time.
- BGBen Gilbert
Yep. So this one will be at least a two-parter. It turns out the company responsible for creating the entire modern energy industry has a lot of wild stories. So, uh, we, uh, we will, uh, in part one here, just go through probably the Sherman Antitrust Act, but we'll see how far we get.
- 2:57 – 6:24
Sponsor break: Pilot + Rockefeller the bookkeeper origin story
- DRDavid Rosenthal
Yeah, we're gonna talk about Standard Oil today, and then next time will be legacy. All right, before we dive in, I would like to welcome our presenting sponsor for all of season nine, pilot.com. Pilot is the backbone of the modern financial stack for startups and is backed themselves by all-star investors like Sequoia, Index, Bezos Expeditions, and Stripe. They are truly the gold standard for startup bookkeeping. They are truly the gold standard for startup bookkeeping. Ben, do you know who else started their career as a bookkeeper?
- BGBen Gilbert
John D.
- DRDavid Rosenthal
John D. Rockefeller! That's right.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
Today, he would have started his career working for Pilot. [laughing] Uh, so great. Now, over to our conversation with Pilot co-founders, Waseem Daher and Jessica McKellar. So for nearly every technology startup, finance and accounting is not one of the things that matter and that you should do in-house. So this is not a new idea. Startups have been outsourcing their finance and accounting for decades. What changed that enabled you to actually build Pilot as a technology company around this?
- SPSpeaker
So I think there are really two trends that enable Pilot to exist now, sort of at this unique moment in time. The first is really the rise of fintech, the rise of SaaS, the rise of the cloud, and this back office stuff, meaning even 10 years ago, if you looked at the landscape, Stripe didn't really exist, Expensify didn't really exist, Gusto didn't exist. Your bank statement was literally a thing that arrived in an envelope at your home or your office. So the fact there are these best-of-breed electronic systems that you can use to help you run your back office, and that they all have APIs, is what enables a key portion of what we do, which is the ability to programmatically ingest and transform data from a variety of data sources. The second thing, though, I think, is really a shift in the consumer's behavior, which is that, again, you know, even 10 years ago, probably what the business owner wanted to do was to go downtown with a shoebox of receipts to visit their accountant in person and, you know, talk to them in a office with a lot of mahogany or whatever. And actually, what the business owner wants now is the convenience of it being done electronically, of being done well, of being able to take care of this stuff, you know, at Saturday at 11:00 PM in their pajamas.
- DRDavid Rosenthal
Amazing. Yeah, I don't know too many founders who are excited to go [chuckles] down to their accountant's office these days.
- SPSpeaker
Exactly.
- DRDavid Rosenthal
Wonderful. You can learn more about Pilot and whether they can help your company eliminate the pain of tax prep and bookkeeping by going to pilot.com/acquired. And thanks to Waseem and Jessica, all Acquired listeners, if you use that link, will get 20% off your first six months of service. Super excited to have y'all with us this season, and, uh, seriously, go check them out. They're the best.
- BGBen Gilbert
For sure. Love Pilot!... All right, well, listeners, before David takes us in, as always, this show is not investment advice. David and I may have investments in the companies we discuss. This is for-
- DRDavid Rosenthal
Unlikely investigation
- BGBen Gilbert
... information, entertainment. Uh, yeah, if, if you go look, uh, let us know if you find the Standard Oil stock ticker. You know, we- we'd, uh, we'd love to go check it out, evaluate. No. Um, yeah, without further ado, Standard Oil.
- DRDavid Rosenthal
[chuckles] Maybe PitchBook has some data on them.
- BGBen Gilbert
[laughing]
- 6:24 – 8:44
Primary source framing: Ron Chernow’s Titan and the ‘rules were unwritten’ era
- DRDavid Rosenthal
We'll see. [laughing] All right. Uh, well, before we dive in here, um, we owe, like, a thank you, like, a shout-out, love- we, we just owe love. I just wanna give a lot of love to Ron Chernow, who is one of, like, America's just, like, greatest historians, biographer of Hamilton, biographer and, uh, writes-
- BGBen Gilbert
He, he wrote the book that Hamilton's based on, the play, right?
- DRDavid Rosenthal
He wrote the book that Hamilton is based on, yep, and also wrote Titan, the biography, the definitive biography of John Davison Rockefeller, that is the main source for this episode. Like, seriously, I know we talk about a lot of books on this, this show, but, like, pause this podcast right now.
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
Go get this book in your preferred, you know, hardcover Kindle.
- BGBen Gilbert
This book is epic. It's so good.
- DRDavid Rosenthal
It's so good. So good.
- BGBen Gilbert
In fact, without Chernow's work, we probably would not have ended up doing an episode on this. Like, this... The, the book was good enough that it sort of, uh, [chuckles] emboldened David and I, two tech podcasters, to say, "You know what feels like it's within the scope of our show? Standard Oil."
- DRDavid Rosenthal
A two-part series on Standard Oil. [laughing]
- BGBen Gilbert
Yeah. [laughing]
- DRDavid Rosenthal
Uh, so thank you. And, and, uh, I, I gotta s- I think the perfect place to, to start is with, uh, with one of Chernow's, one of Ron's quotes at the very beginning in the introduction to Titan, where he says, "The story of John D. Rockefeller transports us back to a time when industrial capitalism was raw and new in America, and the rules of the game were unwritten as yet." Oh, boy. [chuckles] And this is just, like... I think more than anything we've covered on this show, like, Standard Oil wrote the rules. Like, all the rules that we assume- that we just assume are the rules-
- BGBen Gilbert
The way business is done.
- DRDavid Rosenthal
The way business is done, the unwritten rules, they wrote the unwritten rules. And then, you know, Congress wrote rules about them. [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
But we'll, we'll, we'll get to that. We'll get to that. [chuckles]
- BGBen Gilbert
Yeah, I mean, the, the, the, the era that you're thinking- that we should think of here, you know, this isn't the Wild Wild West, this is the Wild Wild East. Like, we're 30, 40 years after our nation was founded here in the early 1800s. The freaking Civil War hasn't even happened yet.
- DRDavid Rosenthal
Nope. No Texas, no California.
- BGBen Gilbert
Yeah, s- certainly early in corporate law, but we're early in, like, all forms of human organization in, uh, in the United States.
- DRDavid Rosenthal
[chuckles]
- 8:44 – 14:56
Family origins: ‘Devil Bill’ Rockefeller, Eliza Davison, and the strange household
- DRDavid Rosenthal
Law? What is law? Uh, speaking of... Okay, so we start in 1810 in New York, in Ancram, New York, which is actually, like, not that far from Manhattan. It's about two hours by car north of Manhattan, but back in those days was a different world. Uh, we start there with the birth of William Avery Rockefeller.
- BGBen Gilbert
Big Bill.
- DRDavid Rosenthal
Big, Big Bill. Uh, he would also go on to have a- another nickname. Big Bill was one-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... because he was a large man. Um, his other nickname was Devil Bill. [chuckles]
- BGBen Gilbert
Not as good.
- DRDavid Rosenthal
Which he got because of his profession that he would grow up to, um, participate... Of course, we're, we're talking about John Rockefeller's father here. Um, Devil Bill, Big Bill, was literally a snake oil salesman. [chuckles]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
You know, like, people use the term like, "Oh, like, uh, you know, oh, Ben, he's a snake oil salesman." Like, no, no, no, like, Bill sold-
- BGBen Gilbert
This is where the term comes from
- DRDavid Rosenthal
... He sold medicines [chuckles] out of his, like, pack that he rode into town on a horse, that, like, professed to be a doctor, but, you know, they didn't do it. And then he didn't do anything, and then he got out of town before anybody realized. [chuckles] Oh, wow, that was his profession. So one day, when he is 26 years old, in 1836, he rolls into a new unsuspecting community to offload his, uh, his, his, uh, goods on, shall we say. Richford, New York, which is in far, far, far away in central New York [chuckles] State. Uh, and, um, there, he encounters the Davison family, and, uh, the Davisons are, are quite, quite unlike Bill and the Rockefeller-
- BGBen Gilbert
They're upstanding
- DRDavid Rosenthal
... clan. They are upstanding. They are devout, religious, Christian followers. Extremely religious, very puritanical, uh, one might say, in their attitudes and mores, except for the fact that they are Baptists. We're gonna talk about that more in one sec, but they're... Like, for the moment, they are- they're quite different than Bill's, uh... They have a different moral compass than Bill, shall we say.
- BGBen Gilbert
Well, yeah, and they're wealthy.
- DRDavid Rosenthal
[chuckles] That is the other thing. They are quite wealthy. So Bill's, wild Bill's, young Bill's, Big Bill's eyes light up when he sees the Davison ranch. And he, uh, [chuckles] so the story goes... I think this is actually true. One of his, like, um, sort of tricks of the trade, uh, if you will, was he would profe- he would pretend to be deaf, uh, and he would carry, like, a, like, a chalk slate around his neck and write on it, and pretend to be deaf and couldn't speak. And he's at the Davison house, and he's sort of doing this little charade, and he hears the, uh, I think eldest, no, second eldest daughter of the Davisons, a woman named Eliza, pretty young girl, say, uh, uh, "I would marry that man if he weren't deaf and dumb." [chuckles] And miraculously-
- BGBen Gilbert
Pew!
- DRDavid Rosenthal
Oh, my God, the beauty of young Eliza cures Bill of his affliction, and he can speak, and he can hear. Amazing. So the, uh, patriarch of the Davison family, one John Davison, [chuckles] uh, remember that name-... uh, he's a little suspicious of what's going on here, but nonetheless, uh, Bill woos Eliza, and they are married shortly thereafter. They get married, they settle down. You know, Bill builds a house, shack- like, literally, people, like, built their houses back then, [chuckles] uh, a little, little ways down the road, uh, and they move in. A- and the house, you know, it's a, it's a nice house, so they need... You know, Bill's like: "Well, we need a housekeeper here. Uh, and I've, I've got this old, you know, friend, Nancy. Uh, why don't we, why don't we have Nancy move in with us and be our housekeeper?" Well, it turns out Nancy was his girlfriend. [chuckles]
- BGBen Gilbert
Yeah. Oh, this old friend, you know, she could help with the kids, hou- you know, the housekeeping. They didn't even have kids yet, but-
- DRDavid Rosenthal
[sighs] Well, not yet, but again, miraculously, I don't know how both Eliza and Nancy start having [chuckles] kids in this house.
- BGBen Gilbert
Well, you know.
- DRDavid Rosenthal
Ugh, you know, you know, what are the odds?
- BGBen Gilbert
All right, so we're, we're, we're painting the picture here, like, you've got this unbelievable swirling concoction of y- well-to-do, religious, by-the-book mom's side of the family-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... dad's side of the family, uh, not quite as, uh, upstanding of a, of a human being, uh, perhaps, uh, always seeing all the angles-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... that type of thing.
- DRDavid Rosenthal
But here they mix, and one July evening, all of these forces swirl together, and July 8th, 1839, Eliza gives birth to her second child in the house, in the house. They name him... It's the first son. They decide to name this child after Eliza's father, who was John Davison. They name the boy John Davison Rockefeller. [laughs] Uh, and oh, boy, does little J.D. have a lot of both John Davison and "Wild" Bill [chuckles] Rockefeller in him. So on the Rockefeller side, uh, little John is like-- he's, like, totally captivated by his dad. Uh, by, by the way, Bill doesn't stop, you know, going off to Tessa. He's gone for months at a time. [chuckles] Uh, when he comes back, John, like, totally dotes on him. He thinks he's the best. He, he would, he would even for, like, the rest of his life, Rockefeller would, like, intensely defend his father. Chernow would write that, "In no area did Bill impress his eldest son more, or did his eldest son prove more impressionable than in the magical realm of money. Big Bill had an almost sensual love of cash and enjoyed flashing plump rolls of bills," and indeed, one of Bill's companions at the time would say of him, quote, "The old man had a passion for money that amounted almost to a craze. I never met a man who had such a love of money."
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Except, of course, for his son in the future. [chuckles]
- BGBen Gilbert
[chuckles]
- 14:56 – 19:18
Rockefeller’s worldview: money as duty, thrift as virtue, and ‘gift from God’ capitalism
- BGBen Gilbert
And this is where we start to get into the ways in which his son would become like him but different, and the, the like him is, of course, in this love for making as much money as possible. The way in which it is different, you know, Bill would come back from these trips, and he would have a fat wad of cash, and he would take the $100 bill, and he would put it on the outside. He'd make sure that everybody knew that there was at least one, maybe lots of hundreds in this fat wad of cash, whereas John D. would grow up and detest shows of wealth. I mean, the smallest house on the nicest street in Cleveland, and never, ever even boarding a friend's yacht because, ugh, you know, that your ostentatiousness offends me and my sensibilities. And so i- it's just interesting to see, I'm gonna keep being that person on, on, on the show who's, like, interjecting ways in which he mixes his mother's side of the family into these lessons from his father.
- DRDavid Rosenthal
Oh, totally. Well, so speaking of, you know, his mother, uh, we said a minute ago that the Davisons were Baptists, and that was pretty, um... Well, not unique, but, um, pretty different than some of the original Protestant groups that had come to America, you know, a generation or two before. The Baptists, you know, like, uh, if, think about it, you know, if you're American or know anything about American history, you think Baptists, you think, like, church revivals. You think, like, big, showy, you know, theatrical. Uh, the whole point was to evangelize and to recruit. They didn't think that they were, like, the chosen people that were going off to the new land to be by themselves. They're like, "No, no, we're gonna take over the world here. We want everybody [chuckles] on our side."
- BGBen Gilbert
Right. It, it was an evangelical religion, which, uh, bodes really well for a religion growing and prospering and continuing when you can, you know, have a, an, uh, a, a mandate to keep bringing more people into the fold.
- DRDavid Rosenthal
Totally. So here's where [chuckles] these, these two sides of John's, you know, uh, maternal and, and p- and paternal sides here seem like oil and water. [chuckles] Oil and water. [chuckles] Uh-
- BGBen Gilbert
Ooh, David.
- DRDavid Rosenthal
They're not. The Baptists are all about the money. They think money is also great. They just think it's great for a different reason, which is that the more money, the more influence, the more, you know, followers we can recruit into the fold, and this also has a huge impact on, on J.D. He would say later, quote, "I believe the power to make money is a gift from God, just as are the instincts for art, music, and literature, to be developed and used to the best of our ability for the good of mankind. Having been endowed with the gift I possess," the gift to make money, "I believe it is my duty to make money and still more money, and to use the money I make for the good of my fellow man." [chuckles]
- BGBen Gilbert
Boom! I mean, duty. He heard the word "duty" in there about making money, that it is g- God has asked him to go forth and make as much money as humanly possible. It, it is this incredibly unique thing about John D. Rockefeller, where, uh, when you describe him as one of the wealthiest b-... businessmen of all time and a philanthropist. It's very different than the way that you would describe today's billionaires as wealthy people, and it's not one then the other. It's not career and then philanthropy. Like, John D. held these things to be intertwined, that he should go make as much money as possible, to give no penny away in any deal, in any business dealing, to always get as much as he could, and to be simultaneously incredibly philanthropic. A- a- and the, the, the purpose of making this money was to be philanthropic, as if he were a better charitable allocator than anybody, you know, walking away from any deal that, uh, that, uh, you know, he was a part of with any bit of edge.
- DRDavid Rosenthal
Totally. I mean, we're gonna [chuckles] we'll get much more into this as we go, but, like [chuckles] in every dimension, wealth, power, control, philanthropy, impact, [chuckles] John D. makes like, you know, d- uh, uh, Bill Gates or Mark Zuckerberg look like just children. [chuckles] Like, it's, uh, it's wild. Uh, so all this, you know, s- this upbringing, this sort of, you know, milieu that, uh, he's growing up in,
- 19:18 – 26:35
Ohio move and forced adulthood: dropout, bookkeeping crash course, and ‘Job Day’
- DRDavid Rosenthal
uh, in New York, in 1853, when John is 14 and sort of, you know, a teenager, sort of just on the cusp of manhood, uh, Bill swoops in, comes back from one of his trips, and decides, announces that he is gonna move the family away from New York to Ohio, [chuckles] specifically to Strongsville, which Ben, is, you know, is right next to Cleveland.
- BGBen Gilbert
For sure. Strongsville, Ohio, it's, uh, one of many wonderful suburbs of the Cleveland area.
- DRDavid Rosenthal
Yeah. Uh, Cleveland, boy, this is like, this is like your homecoming, this episode.
- BGBen Gilbert
It's true, like, a lot of this episode takes place in places that were within, like, a half-hour drive of where I grew up.
- DRDavid Rosenthal
Oh, so great. So the stated reason for, you know, the move is that Bill wants to, you know, go open new territories for, uh, for his business. But there's actually another reason, which is, uh, [chuckles] he's got another new girlfriend back in New York named Margaret, uh, and he wants to keep the families more separate. [chuckles] Oh, boy. Uh, so when they get to Ohio, when-
- BGBen Gilbert
Wait, so I'm sorry, he got another family in New York, and he's trying to create distance, so there's children with three different wives, and he's trying to-
- DRDavid Rosenthal
Yeah. Wow!
- BGBen Gilbert
He's not moving to Ohio to get closer to another family. He's moving to Ohio to get more distance-
- DRDavid Rosenthal
More distance-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... between his two. Well, he kind of has... I don't know exactly how this works out, but so Nancy, the girlfriend, he never married her. He had kids with her, he never married her. Uh, he only married Eliza, but he wants to marry [chuckles] this new girlfriend, and he's kind of, he's like... I mean, this is the world that America was back then. He's like, "Well, if I just get, you know, like, a state border between the two of them, great. I don't see why I can't have- [chuckles]
- BGBen Gilbert
That's true
- DRDavid Rosenthal
... two wives."
- BGBen Gilbert
There's no internet. State registries are probably pretty hard to, you know, go look something up in a different state.
- DRDavid Rosenthal
Wow. Uh, [chuckles] so they show- they move to Ohio, uh, and at first, before Bill marries his second wife, concurrently, Margaret, um, he sends, uh, he sends John and his little brother, William, to a boarding house in Cleveland to go to, like, a real high school in, in Cleveland. Um, and that, that goes on for about, uh, two years, and then when, when Bill actually marries, uh, Margaret, he sends a note to... He sends a letter to John and says, [sighs] "You know, this, uh, schooling thing and the... Well, well, well, plans have changed, and I, I can't really pay anymore for you and William to go to school, so you- I'm basically deputizing you now as head of household. Uh, and uh, you're gonna have to drop out and get a job and find a way to support the family. Best of luck, son." [chuckles]
- BGBen Gilbert
Talk about wild thing to just hear and totally hijack your life plans.
- DRDavid Rosenthal
Totally. Uh, and, and this, this really was not what John was planning, but, um, he does drop out of school, and he decides, remember, he's got this, this love of money. He's like, "Well, what, what can I do, um, to make money? Well, what if I sort of stay close to the money?" Uh, so he goes, he pays $40 and does a three-month crash course over the summer in bookkeeping [chuckles] and decides that he's gonna become a bookkeeper, and this is gonna be his, his path to supporting the family. Ever the sensible fellow, uh, when he finishes his, his training, and he, he's off to go get a job, he decides that the way he's gonna job search is he gets a directory of all the businesses in Cleveland, and he looks up what their credit ratings are and decides that he's only gonna target the ones with the best credit ratings. [chuckles] He, he's smart.
- BGBen Gilbert
I mean, to the extent that he thinks that the, the access to capital is the thing that, you know, he wants to be close to, you may as well only be a part of businesses with the best access to capital.
- DRDavid Rosenthal
Uh, strength leads to strength, right? [chuckles] So, uh, the story goes that he pounds the pavement for six weeks. He goes to every firm on his list. They all reject him, but he's undeterred. Uh, and he, he just starts back up at the top. So he goes to see all these companies, like at least two, some of them three times. Finally, one company, uh, the partnership of Hewitt and Tuttle, uh, two partners. Hewitt was the senior partner, and Tuttle was the junior partner. They probably just get so tired of this little kid, this 16-year-old kid, banging on their door that they're like, "All right, fine. [chuckles] You, you, you can start. You can, you can work here."
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
"You can be a junior bookkeeper." This happens on September 26th, 1855, and get this, for the rest of Rockefeller's, like, 80-plus year life, he celebrates September 26th as his job day. [chuckles]
- BGBen Gilbert
I love this. Like, more sacred than the birthday, job day was the day... It's like the day he was, you know, baptized into capitalism by being [chuckles] able to make money in the world.
- DRDavid Rosenthal
Absolutely. Uh, a- and literally, it's like, it's like this is the big deal every year in his life. Like, it's bigger than the birthday.... It's, it's job day. [laughs] Uh, except he's, you know, he's starting in labor, not in capital, but but he, he, he makes the transition pretty quick, don't worry. So he gets to work. Uh, he becomes basically [chuckles] like the best bookkeeper, uh, that history had seen before or since, uh, at least until Pilot. And, um, [chuckles] yeah, uh, Chernow writes about, about, about this, "John betrayed a special affinity for accounting and an almost mystic faith in numbers. For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible emotion." Uh, well, of course, they're sacred, like, the, the, the numbers in the books are money. [chuckles] And it's the divine, you know, God-given path to be close to the money and get as much of it as possible.
- BGBen Gilbert
Uh, yeah, I mean, a- absent the divinity, this is very Buffett-esque. I mean, at a young age, having this sort of respect and obsession with the numbers.
- DRDavid Rosenthal
It's, it's wild how, uh... I, I didn't talk about this earlier, but they're actually supposedly also, when John was a younger kid, he would also, like, go to the general store and, and buy, like, a, a big block of candy and cut it up into little pieces, and then sell the little pieces around the- [chuckles]
- BGBen Gilbert
Oh, no way
- DRDavid Rosenthal
... to other kids. Yeah, just like, uh, Buffett and, uh, gum, right?
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Sticks of gum.
- BGBen Gilbert
Yep.
- 26:35 – 31:40
From employee to partner: Clark & Rockefeller and the Civil War profit engine
- DRDavid Rosenthal
Totally. Totally. So, um, uh, John D is, you know, rising quickly through the ranks. Uh, pretty much immediately, they give him a 50% raise 'cause he's doing so well, even as a little kid. Uh, in 1850, the, uh, beginning of 1857, uh, so not quite two years after, uh, John joins the firm, Tuttle, the junior partner, leaves to, to go seek his own, you know, fortunes, uh, out from, uh, the, under the thumb of the senior partner, Hewitt. And Hewitt's like: All right, well, [chuckles] John, you're, you're, you're my new, uh, partner. Not partner, but, you know, you're, you're gonna take, uh, Tuttle's role [chuckles] here. Um, John is like: "Well, that's nice. Are you gonna pay me like a partner?" [chuckles] And, uh, uh, Hewitt's like: "Uh, dude, you're, like, 17 years old. Like, no." [chuckles] Um, John is undeterred, though, and, uh, this is pretty crazy. So, you know, he's, like, head of household, supporting his family. He's already making a lot of money. He's got this great role. Um, but the next year, in 1858, he's like: "I, I think I... You know, I'm doing the work of a partner in a merchant trading firm. I'm gonna go be a partner in a merchant trading firm." So he hooks up with a much older, uh, gentleman named Maurice, Maurice Clark, that he had met doing his accounting, uh, his bookkeeping training, and they go in 50/50 on a new merchant firm called Clark & Rockefeller.
- BGBen Gilbert
And, like, doing the same thing, still produce and meats and trading foodstuff?
- DRDavid Rosenthal
Exactly, foodstuffs, produce. Uh, things go, like, m- okay at first, for a couple of years. Like, uh, they actually-
- BGBen Gilbert
What is this, like, 1859, '60?
- DRDavid Rosenthal
Yeah, '59, '60. Uh, they actually... They managed between the two of them to put $4,000 in capital into the firm to start it, to start the trading operations, which, like, was a lot of money. Uh, and Rockefeller-
- BGBen Gilbert
And, and-
- DRDavid Rosenthal
... put in half of it.
- BGBen Gilbert
And wasn't Rockefeller, like, finding ways to borrow from Devil Bill at, like-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... kind of, like, I mean, it was like 10% interest rates and 15%. It was kind of like Devil Bill was kind of figuring out ways to take advantage of his son.
- DRDavid Rosenthal
Devil Bill definitely had his hands in, uh, had, had his sticky fingers in all this. Uh, that is for sure. Um, so things go, like, you know, okay, but they have some losses. They actually have to bring in a third partner, uh, I think in 1860, uh, to sort of shore up some losses and bring more capital into the firm. But then in the next year, in 1861-
- BGBen Gilbert
And, and just to put a point on that, the r- the reason the capital is so important is, like, they, they basically need to, uh, have enough on hand to basically make the purchases and then hold the inventory until they can go and sell it. 'Cause they're not... You know, the, the, the-- there's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle.
- DRDavid Rosenthal
Yep. So, you know, things are going okay, and then 1861, something big happens in America-
- BGBen Gilbert
Yeah, the-
- DRDavid Rosenthal
Something very big. [chuckles]
- BGBen Gilbert
The North goes to war with the South.
- DRDavid Rosenthal
Yeah. [chuckles] Fort Sumter, the Civil War. Uh, [chuckles] one, Rockefeller doesn't fight in the Civil War, despite being, what would he be? 21, 22 years old at that point in time, like, prime fighting age. He hires a substitute. Uh, there wa- there was technically a loophole. He was... As if you were head of family, you didn't have to fight. He was r- effectively head of his family.
- BGBen Gilbert
He even has a... You know, Rockefeller is very, um, careful in how he messages the strife going on in his family. He never throws his dad under the bus. He always holds everyone, at least outwardly, in the highest of esteem. Uh, and so the way that he sort of drops a hint here at some point is he says that, "You know, how could I, how could I go fight in the war when the business w- would die?" It was young, it was fledgling, uh, and, you know, so many relied on it.... and that's sort of his, him alluding to, like, "Look, like, my whole family kind of needs this business to stay alive."
- DRDavid Rosenthal
Yeah. So, um, so he doesn't go fight, uh, although he, he was a strict abolitionist, and, and that was a big part of the Baptist cause. Um, uh, he doesn't go fight, uh, [chuckles] but for his business that, you know, he needs to survive, the war is a pretty big boon for commodity prices, specifically foodstuff prices.
- BGBen Gilbert
I mean, you gotta supply an army with food somehow.
- DRDavid Rosenthal
Uh, yeah, there are a lot more orders and demand for, you know, pork belly and the like coming in, thanks to the war. So this drives up the price of foodstuffs, uh, through the roof. In 1862, the first, like, full year of the war, [chuckles] the firm Clark & Rockefeller, they make a profit, a trading profit of $17,000, which I believe was four times all the money that they had made in all the previous years of operations of the firm. So, like-
- BGBen Gilbert
Wow!
- 31:40 – 41:17
Oil discovery meets city demand: Titusville, refining kerosene, and the Cleveland opportunity
- DRDavid Rosenthal
... they are living large. Like, they're swimming in profits. They literally don't-... Like, they can't buy enough, uh, uh, enough goods to trade, enough, enough produce to, uh, foodstuffs to trade and make more money. They gotta put this money somewhere. [chuckles] So what do they do? Well, right around this time, people in Cleveland are starting to hear about an interesting development that's happening not too too far away in western Pennsylvania, in a tiny little hamlet called Titusville, in western Pennsylvania. And maybe, I bet some... Ben's obviously smiling here. Uh, some of you-
- BGBen Gilbert
Yeah, I just did-
- DRDavid Rosenthal
... are maybe smiling
- BGBen Gilbert
... a zillion hours of [laughing] reading.
- DRDavid Rosenthal
[chuckles] But probably most of you are like, "Uh, what are you talking about here? Like, Titusville, Pennsylvania? Like, I, I have no idea where you're going with this."
- BGBen Gilbert
E- E- Everyone knows, David, that the center of the oil world is not the Middle East or Russia or Alaska or Texas-
- DRDavid Rosenthal
Texas, yeah
- BGBen Gilbert
... but western Pennsylvania.
- DRDavid Rosenthal
Western Pennsylvania. That's right. So I had no freaking clue [chuckles] until reading Titan, doing the research for this episode. For, like, decades, the entire, like, the center of the oil industry in the world was this small little town.
- BGBen Gilbert
Yeah, for, like, 50 years.
- DRDavid Rosenthal
For, like, 50 years. Like, literally, there... I mean, there were some pr- producers, some oil, oil mines, uh, oil rigs, uh, elsewhere, but, like, very small. Like, most [chuckles] of the oil in the world came from Titusville, Pennsylvania.
- BGBen Gilbert
A- And we should... And not just Titusville, but other, you know, uh, uh, Oil Creek, and other-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... areas of western PA that had, had oil discovers.
- DRDavid Rosenthal
So this is all going on, it's not that far away from, from Cleveland. Uh, for the first couple years of this going on, up until the Civil War, the whole industry is just based there in Titusville. They, they drill for the oil, the oil comes out of the ground, they refine the oil, they make kerosene.
- BGBen Gilbert
Which is... When, when we say they were refining, like, it was a pretty, uh, rough process. I mean, they, they were- I think pretty early, they figured out you could use sulfuric acid to refine and separate the kerosene out, but, like, a crap ton of sulfuric acid, and, like, doing this in, like, large wooden boxes with cracks in it everywhere, and it's just sloshing around and spilling all over the ground. Like, it is a gnarly process of, quote, unquote, "refining."
- DRDavid Rosenthal
Yeah. [chuckles] Super, super gnarly. But right as, as Rockefeller and Clark have all this money that they need to have something to do with, people come up with the idea... Like, so the, with the oil, they were refining it into kerosene. Kerosene, the main use was to burn in lamps. Uh, and where, like, where do you need lamps and artificial light more than anywhere else? You need it in cities. Uh, people realize you don't actually have to refine the oil in the same place that you drill for the oil. [chuckles] So all of a sudden now, people are like: "Wait, wait, we can buy the oil that comes out of the ground, crude oil from Titusville, bring it into our cities, refine it in the cities, and then sell it, sell the kerosene in the city for..." And like, that's, like, a really good business. That's a good place to park some capital.
- BGBen Gilbert
Totally. And, like, at the same time, all these interesting tailwinds are happening where cities are blowing up. I mean, you have this sort of like, uh, industrial revolution that's happening, where people don't just live in, in the, uh, uh, rural areas and farm anymore. There's starting to be a lot more industry in cities. You have, for a while, only rich people could basically get oil to, to, you know, burn at night. Most people would just... The sun would go down, and then they'd have no light, and they'd go to bed. But, like, whale oil-
- DRDavid Rosenthal
And then they would use whale oil-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... yeah, from the whaling industry.
- BGBen Gilbert
Which I think if, if you... Isn't that f- uh, in the, where Hathaway of Berkshire Hathaway-
- DRDavid Rosenthal
Yes
- BGBen Gilbert
... started?
- DRDavid Rosenthal
That's where Hathaway of Berkshire Hathaway came from, from the originally from the whaling industry.
- BGBen Gilbert
The whaling industry.
- DRDavid Rosenthal
Well-
- BGBen Gilbert
But kerosene's, like, way cheaper than whale oil, which had a massive shortage, and it's obviously terrible that we kill-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... whales to harvest the whale oil. Like, way cheaper, way more plentiful. It's a pretty clean thing to burn relative to the other stuff that people were trying to burn. So-
- 41:17 – 45:53
Operational obsession: efficiency, vertical integration, and ‘use the whole buffalo’ byproducts
- DRDavid Rosenthal
Okay, so Rockefel- this is like... He is like a pig in mud here. I mean, like, he was a bookkeep- he's so meticulous. He loves money. He loves profit. And he was focused on trading before, but now he's got this operation, this refinery, and he becomes, like... Literally, he's like the Morris Chang of oil refineries. Like, [chuckles] he's experimenting with constantly tweaking the process. You know, Andrews, the, the chemist, is like, "Dude, I'm, like, the technical talent," but Rockefeller's like everything around it, the operations, how crude comes in, how they refi- like, where things are located in the factory. He's A/B testing. Like, he's doing-
- BGBen Gilbert
Oh, wow
- DRDavid Rosenthal
... all sorts of stuff. He's always looking, like, any efficiency, and it's all with a view to it. It's not just like, like, better is good, but it's all with a view to, like, profit, like, profitability. Like, "We wanna run this as lean as possible, make as much money-"
- BGBen Gilbert
God told me to make a profit, and I am here to make a profit. By the way, put a pin in that Morris Chang thing, 'cause there's an interesting way that they are very much like TSMC that I wanna talk about later.
- DRDavid Rosenthal
Ooh, ooh, let's come back. So, you know, he's focused... Like, this is so different. You know, there are other people that are setting up refineries in Cleveland and elsewhere, but they're just, like... They're just picking up $100 bills off the ground. Like, they don't care about optimization. They don't care about, like, uh, you know, efficiency. They're just like, "Look, hey, it's, it's a gold rush. Like, we're just, like, [chuckles] like, give me the gold, and I'll just take as much of it as possible, and if it goes away tomorrow, that's fine."
- BGBen Gilbert
Yep, I mean, just high-margin dollars just flying out of the ground.
- DRDavid Rosenthal
To Rockefeller, though, like, he's-... uh, you know, all, all of this, the behavior of the other folks, this causes huge gyrations in price. Like, it really is, it's like the early days of Bitcoin. I mean, or still today in crypto, like, things are flying around, like, all the time. Like, prices could be, you know, $12 a barrel, they could be 12 cents a barrel [chuckles] for oil. It-
- BGBen Gilbert
And it all depends on, I mean, two things: one is who found what, and two is what do people believe people have found recently? And so, like, prices would be impacted by word-of-mouth traveling and saying, "Hey, I heard there's a big gusher going on in this city right now." And people would be like: "Well, I guess I'm not gonna buy for a while, 'cause I heard there's a big gusher, and so prices are gonna go down."
- DRDavid Rosenthal
Yep. So Rockefeller, though, like, he's, he's just got this vision where he's like, "Oh, man, the more profit I make, the more money and more capital I can put into this, the more oil I can hold, the more I can produce, and when the price crashes, I'll just keep buying [chuckles] ". Like, I'll just keep... He's like, he buys the dip, like, over and over-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... and over again. Uh, and because his operations are so much more efficient and so much more profitable, he can, he can afford to pay, like, more than anybody else. He can afford to hold this stuff longer. He's, like, really thinking long-term in a way that none of his other competitors are.
- BGBen Gilbert
Oh, and we should say, like, wh- when we say he's tweaking stuff, he's so, so much more profitable, he is both horizontally and vertically integrating. So, like, l- let's talk about vertically integrating first. He's doing things like realizing, "Geez, we're hiring a lot of, like, plumbers to come in and, like-
- DRDavid Rosenthal
Oh, this is so good. I love this
- BGBen Gilbert
... lay this pipe every time we do a build-out." And so they do things like hire their own plumber and hire their own blacksmiths and decide, "Actually, we should do this ourselves, and that way, we can save all this money on piping instead of buying it from a third-party contractor." Later down the road, he even plants a forest, like, buys up a forest so that they can, uh, cut down the trees themselves to build the barrels out of.
- DRDavid Rosenthal
To make their own barrels. Yeah. Oh, my gosh-
- BGBen Gilbert
And they save all this money-
- DRDavid Rosenthal
This is so great
- BGBen Gilbert
... rather than buying barrels from somebody else. And then, of course, they can innovate on the barrel-making process. So he figures out, "Oh, if we treat the wood in the forest, then it's lighter and cheaper to ship back to the refinery, so we save all this money on transportation." So that's, like, the vertical integration side of things, which would be crazy enough, but he's also horizontally integrating. He's figuring out that, "Wait, we do this process, how else can we-- how can we sort of use the whole buffalo?"
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Like, what can we sell the gasoline for? What... I think they invent Vaseline.
- DRDavid Rosenthal
Yes. Yeah, uh, they, th- I think they buy the company that invents Vaseline, but yeah, they, like, like, petroleum jelly, which is one of the byproducts, they commercialize it.
- BGBen Gilbert
Right, they figure out how to use every little piece of everything that they're doing to go... You know, there's a new market invented for every little byproduct of the Standard Oil production process.
- 45:53 – 55:34
Breaking with partners and doubling down: the Clark buyout and naming ‘Standard’
- DRDavid Rosenthal
So great. So, uh, Rockefeller is like... I mean, he, he, he's, uh, he's, like, found his calling here. Like, this is, like, divine, like, [chuckles] uh, uh, passion here. [chuckles] There's just one problem, which is the partner, Clark. Clark is, like, not so into how much capital [chuckles] uh, Rockefeller is tying up in the business here. He's like: "Uh, hey, we're, like, merchant traders. The point is profits, and then we keep the profits." And Rockefeller's like: "No, like, reinvest in R&D, and, like [chuckles] CapEx, and, uh, and inventory." Um, [chuckles] so, uh, Rockefeller starts going around to all the banks and all the financers in Cleveland and lining up... He's just not e- not even using just the profits from their operations, he's getting more external financing to finance growth here.
- BGBen Gilbert
Oh, totally. Like, when I, when I say both vertically and horizontally integrating, like, in the horizontal sense, he is obsessed with trying to figure out how to be the sole supplier of oil to the world. Like, as soon as he figures out that there's economies of scale here, he's like: "Okay, cool, how do we, like, start the flywheel, get as much capital as possible, build out as much production as possible, start having agreements with whoever's got rights to the land as possible, so we can start vending to the world?"
- DRDavid Rosenthal
Yep, and own this super strategic choke point of refining in cities. So, uh, Clark is, like, spooked by all this. Uh, Chernow has this amazing quote that he finds from Rockefeller. I don't know where he found this. This, uh... I should look up in the, in the notes at the, at the end of Titan. This is so good. [chuckles] Rockefeller apparently, like, wrote or said this at some point: "Clark was an old grandmother and was scared to death because we owed money to the banks." [laughing] Oh, so great. So [chuckles] Rockefeller engineers a coup.
- BGBen Gilbert
This is so good.
- DRDavid Rosenthal
Like, and, and Clark's-- some of Clark's brothers are also partners in the business at this point in time. They get into all these arguments. So [chuckles] John baits them one day into threatening that, uh, that they should just dissolve the partnership. And John's like: "Okay, great. [chuckles] Let's dissolve the partnership."
- BGBen Gilbert
Well, 'cause he knows that if, if he goes to them and says, "Look, I don't think you guys... First of all, I don't think you are risk-tolerant enough. Second of all, I don't think you're upstanding. Like, I don't think you're men of God the way that I am, and therefore, I don't think you're worthy business partners because I think you're gonna be a risk to the business, uh, and so I want out." Like, he knows that he loses leverage by doing that, so that's why he baits them into, you know, doing their normal thing of getting all u- up in a fit and saying, "We're gonna back out!"
- DRDavid Rosenthal
Yep, totally. So he, [chuckles] Rockefeller immediately goes to the local paper, uh, and places a notice that the partnership is dissolving, and that there's gonna be an auction for, uh, the assets of the partnership, including the oil refineries. And it sets up this showdown where the Clark brothers [chuckles] and Rockefeller bid against each other for-... each other's 50%, uh, stake in the business.
- BGBen Gilbert
Which is, by the way, a great way to do it. Like, if you've got a partnership that's blowing up, like, all right, whoever wants to pay more to buy the other person out is the person that should get to own the whole thing. And so the, the idea of a bidding war between the two of them to figure out, to have to figure out how to val- value the business makes total sense.
- DRDavid Rosenthal
Between the two principals. Uh, so Rockefeller, though, remember, he's got- he's been going and getting the relationships with all the banks and financers. He lines up financing in advance [chuckles] of the auction. So he's got basically unlimited resources, although it's still, the price ends up stressing him out. He buys Clark's 50% of the oil business for $72,500, and in exchange, also gives Clark Rockefeller's... gives, gives Clark his 50% share of the produce trading.
- BGBen Gilbert
Which, by the way, that, that's something... He probably buys him out for, like, three to four million dollars, something like that, in 2021 dollars.
- DRDavid Rosenthal
Yeah, yeah. So, you know, a good, good chunk of change.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
But that 50%, that $72,500 or, you know, however you wanna think about it, [chuckles] that's 50% of Standard Oil right there. Wow! Uh, Rockefeller would say later, "It was the day that determined my career." Probably bigger than job day. [chuckles] "I felt the bigness of it, but I was as calm as I am talking to you now." This is... He's talking to his biographer later. He's just like... This is, like, what we're gonna see. Like, this man has ice. Not ice water, like, literally, like, solid ice running through his veins.
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
It's crazy. So th- so this was a big price. Uh, it was more than Rockefeller wanted to pay, but this happens in 1865, in the beginning of... in February of 1865. [chuckles] Back to what's going on in America, two months later, General Lee surrenders to Grant, and the Civil War is over, and with the Civil War over, what's less important? Commodity produce trading. [chuckles]
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
And what is all of a sudden a hell of a lot more important? Oil industry, urbanization, everything.
- BGBen Gilbert
Well, 'cause all these soldiers are coming back and getting jobs in factories. Like, you have sort of an industrial boom here, and it's interesting how Rockefeller is sort of obsessed with, "I'm not a speculator. You know, I'm not one of these people rushing to prospect, you know, various plots of land in Western Pennsylvania." We are... You know, it's funny that it's, uh, uh, I would say a picks and shovels play, but actually, this predates the Gold Rush by 50 years, [chuckles] so it's, it's pre-picks and shovels.
- DRDavid Rosenthal
Well, it depends which gold rush I think you're ta-
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
The California Gold Rush was even a little earlier, but, like, it would go on for a long time. I don't know when Levi's was started. That would be another good one to do someday.
- BGBen Gilbert
Totally. I guess the point to make here is he's doing the predictable, reliable, stable, very strategic part of the value chain. He's not out prospecting land.
- DRDavid Rosenthal
Yeah. Well, and then, you know, to just doubly underscore strategic, like, this... Uh, you know, I don't know, uh, did, did Rockefeller know the war was gonna end in two months? I mean, probably. I think Sherman's probably marching to the sea at, at this point. Um, uh, but, uh, but yeah, just being able to see after the war how important this is. So Chernow writes, quote, "The war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine, which had yielded a rival illuminant called camphene. The war had also disrupted the whaling industry and led to a doubling of whale oil prices. Moving into the vacuum, kerosene emerged as an economic staple and was primed for a furious post-war boom. This burning fluid extended the day in cities and removed much of the lonely darkness from rural life." Soon, John D. Rockefeller would reign as the undisputed king of that world. [laughs] Uh, so he's now got the oil operations, the refining business, all to himself. December of 1865, the war is over, all this is going on, he opens a second refinery in Cleveland next to the Excelsior Works, with a new name that he really... He, he chooses. He wants to, he wants to let everybody know that his oil, his kerosene, his business, his operations is gonna be bigger than anyone else. It's gonna be the best quality. There's not gonna be any low-quality kerosene coming out of this, and it is gonna reign from sea to sea. What does he call the new operation?
- BGBen Gilbert
Standard Oil.
- DRDavid Rosenthal
[chuckles] Well, the, uh, first, it's the factory is, is Standard Works, the Standard Works, and then it becomes-
- BGBen Gilbert
Oh, really?
- DRDavid Rosenthal
Yeah. Uh, so ex- the first one was- the first refinery was the Excelsior Works, and then-
- BGBen Gilbert
Ah
- DRDavid Rosenthal
... Standard Works is the name that he chooses, the Standard. He's setting the standard.
- BGBen Gilbert
And importantly, yeah, it's about setting industry standards. I mean, for him, he was observing... I know I'm hammering home on this, like, speculators and cowboys thing, but, like, especially after the war, you've got all these soldiers who are trying to figure out what to do with their lives, and they're going, and they're, you know, working and, and drilling. And so you have all these people that have... I think in the book, it refers to someone with a, a gun and a canteen and, and, uh, you know, their plot of land in Pennsylvania. And like, I think Rockefeller is basically observing that the kerosene that could power the world is, uh, volatile in price. People are scared that it's not safe because it's being refined in questionable ways, and so people's houses are burning down. You have, you know, like, there's not professionalization in the kerosene industry the way that he wants to bring it. So this, this notion of standard is almost like, kinda like the TSMC chip yield thing.
- 55:34 – 1:01:49
Going global early and building the bench: exports, financing savvy, and Flagler arrives
- DRDavid Rosenthal
Ah. So you said something a minute ago when you were talking about this. You said, "Selling this oil, this kerosene, to the world." So by the very next year, in 1866, [laughs] you know, America's a big market, and it's gonna grow hugely, especially after the Civil War. But do you know what's a bigger market? The rest of the world. [laughing]
- BGBen Gilbert
[laughs] Especially at this point in time. I mean, America is not America yet. It's... I, I don't know how many, hundreds, a few hundred million people, tops?
- DRDavid Rosenthal
Oh, no, no. Well, it's 300 million people now, so three, three-
- BGBen Gilbert
Oh, sorry, I meant the global population is a-
- DRDavid Rosenthal
Oh
- BGBen Gilbert
... is a few hundred million, so.
- DRDavid Rosenthal
Oh, that's a good question. I don't know what the global population is around then, but-
- BGBen Gilbert
Yeah, I mean, Amer- America is probably 30, 40 million people.
- DRDavid Rosenthal
Yeah, maybe, if that, um-
- BGBen Gilbert
All right, you, you keep talking. I'm gonna Google this.
- DRDavid Rosenthal
Okay, okay, great. Well, so by the very next year, in 1866, the fledgling Standard Oil Company is already selling two-thirds of their kerosene overseas, primarily to Europe. So, like, one-third domestic-
- BGBen Gilbert
Whoa
- DRDavid Rosenthal
... two-third, two-thirds international already.
- BGBen Gilbert
31 million people in 1865.
- DRDavid Rosenthal
Wow. God, that's so crazy to think about America having 31 million people. Uh, [laughs] so they're selling all this, um... They're selling most of their, their, you know, oil overseas. Uh, he sends, he, he dispatches, Rockefeller dispatches his little brother William, who's now working in the business, to New York City to go handle all of the export business for Standard Oil.
- BGBen Gilbert
Do you know the story about when he went to New York City and needed to raise, I think it was $50,000?
- DRDavid Rosenthal
Ooh, I don't know.
- BGBen Gilbert
Oh, yeah. Well, it's a great story. So, uh, this is in Chernow's book. Rockefeller has a bit of his father in him, a sort of a flair for showmanship, and, um, he really needs $15,000. Like, he needs a loan pretty quickly, and he's sort of looking around for financiers for it. And, um, you know, he, he dresses very nicely, and he presents himself nicely, and he walks in areas where he's sure to bump into people, and at some point, someone stops his carriage and looks over and says, "Oh, Mr. Rockefeller, could you, could you use a $50,000 loan?" [laughing]
- DRDavid Rosenthal
[laughs]
- BGBen Gilbert
And of course, Rockefeller is like, "Jackpot!"
- DRDavid Rosenthal
[laughs]
- BGBen Gilbert
And he sort of looks at him, like, without breaking, and he looks at him, he goes, "Hmm, could you give me 24 hours to think it over?"
- DRDavid Rosenthal
Yeah. [laughs]
- BGBen Gilbert
And of course, by doing that, he gets, like, the best terms on the loan.
- DRDavid Rosenthal
He's like, "I'm not sure-
- BGBen Gilbert
He's so-
- DRDavid Rosenthal
-I really need this."
- BGBen Gilbert
He's unbelievable at, like, getting his hands on way more capital at way better terms than other people-
- DRDavid Rosenthal
Oh
- BGBen Gilbert
... would be able to.
- 1:01:49 – 1:08:41
Railroad leverage and secret deals: the Lake Shore Agreement consolidates Cleveland
- DRDavid Rosenthal
And so Flagler joins, and literally, this is what I tweeted, [chuckles] he keeps a quote on his desk at Standard Oil for all the time he's working there. The quote says: "Do unto others as they would do unto you-
- BGBen Gilbert
[chuckles] Oh, yeah.
- DRDavid Rosenthal
- and do it first." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
Oh, my goodness. So Flagler takes over the negotiations for shipping of oil with the railroads. You can- if you know anything about Standard Oil, you can see where this is going. Uh, when Rockefeller was running negotiations with the railroads, uh, he always was able to get pretty good rates, uh, shipping rates, because he had a BATNA, being there in Cleveland on Lake Erie.
- BGBen Gilbert
Totally. It's, uh, uh, during the, during the summer months a- and the spring and fall, we can ship way cheaper by sending it, you know, out by water.
- DRDavid Rosenthal
By water, yep. So all the, the crude coming in from Titusville to be refined in, uh, in, in, in Cleveland at, at Standard, uh, could come in over the water or by rail, and then when it was going out to then go off to the rest of the country and the rest of the world, he, he had another option. [chuckles] Flagler is like: "Oh, this is nice. That's cute." [laughing] He gives-
- BGBen Gilbert
Let's exercise our power a different way.
- DRDavid Rosenthal
Yeah. What about if we go to the railroads, and we're like: "Hey, guys, it's really expensive to operate these railroads. Um-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... what would, what would you say if we were to guarantee a really, really, really large amount of minimum shipments of oil that we'll do with you? In exchange for us guaranteeing you guys, like, an unbelievable amount of volume that we'll do on your railroads, you give us an equally unbelievable rate, [chuckles] shipping rate, like, cost of, of doing this?" The railroads are like: "Uh, yeah, that sounds good."
- BGBen Gilbert
Except but the railroads are like: "Wait a minute, but you don't make that much oil."
- DRDavid Rosenthal
You don't make that much money, yeah. Well, and, and specifically-
- BGBen Gilbert
Where's all this oil gonna come from? [chuckles]
- DRDavid Rosenthal
Well, uh, specifically, the railroads think this sounds really good because with the amount of volume that they're talking about, this means they can run dedicated lines of just oil tank cars, so not mixed trains with, like, boxcars and oil cars, like, just oil tanks between Titusville and Cleveland with no stops. So if you think about operating a railroad, like, if you have different types of product that you're loading on to, onto the train, that takes more time and money.
- BGBen Gilbert
And they were gonna- they were, like, being forced to stop to pick up, like, one car and add it to the train.
- DRDavid Rosenthal
Exactly, and then all these stops, that just adds up. You know, it costs money, right? You know, time is money here. So they, they love this. [chuckles] But as you said, Ben, they're like: "Well, how, uh... you know, uh, Henry, like, this is a, this is a great idea, but how are you gonna do it? You don't have enough capacity."
- BGBen Gilbert
And two other things before we answer that question. One is, um, the- just to give, like, the magnitude of how much this helped them, it, it lets them own way less cars also. Like, the railroad, they get to go from something like needing to have 150 cars to being able to, like, make the same amount of money on, like, 40 or something just, like, dramatically smaller. And the other thing is Standard Oil has started to, like, really build up some credibility here because when people were putting oil on trains before, like, they were sloshing around in, like, open wooden-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... boxes, and, like, Standard Oil pioneered, you know, "Hey, we're gonna put them in, like, tanks," and then eventually metal tanks, and it, it really, like, professionalized the-
- DRDavid Rosenthal
And eventually we're gonna make railroad cars that are, like, the car itself is just a tank.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
And fast-forwarding a little bit like: "Oh, railroads, what if we made those tanks for you?" [chuckles] Uh, but we're getting ahead of ourselves. So Flagler was like: "Don't worry, guys, I got this." So he goes around to all the other refineries, like, everybody else in Cleveland, and he's like: "Hey, guys, I have negotiated a great-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
- rate for all of us. Do y'all wanna come on board together, and we'll all, like, pool our, you know, our, our, uh, shipments that we're all getting in from Titusville, and, uh, by doing this all together, we've got this great rate?" [chuckles] And he's, he's... This is an offer that they can't refuse. [chuckles]
- BGBen Gilbert
And not, not only can they sort of not refuse it because, uh-oh, what happens if we say no, but, like, this is their major cost driver. Like, they're in a commodity industry at this point, and so transportation is- uh, like, distribution of the oil is actually the big driver of the business.
- DRDavid Rosenthal
Yep, yep. So, okay, everybody said: "Well, this is fantastic." Flagler's like: "Okay, great, great. Let's do this. But, uh, you know, one thing, like, um, let's not write any of this down, okay?" [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
"Let's just keep this all as a little gentleman's agreement between all of us and the railroads. Nobody knew... We don't need any feds, you know, sniffing around here." [chuckles] Feds, quote, unquote, if there even were any then.
- BGBen Gilbert
Well, basically, if anybody ever asks us if we have an agreement, there's no agreement. That we- everybody can look at each other and go, "I haven't seen an agreement."
- 1:08:41 – 1:20:20
Inventing modern corporate structure: joint-stock company and the trust workaround
- DRDavid Rosenthal
you alluded to at the top of the show, there actually is no legal framework at this point in time for businesses to operate outside their own states.
- BGBen Gilbert
Yeah, they can't m-- importantly, uh, they cannot own property in other states.
- DRDavid Rosenthal
Yeah, they can't, they can't own property, they can't have operations. Um, you know, like, literally, this, you know, the United States was like... Th- this is all changing after the Civil War, but it was United States, like, the states were [chuckles] the sovereign, you know, or near sovereign entities here.
- BGBen Gilbert
Totally. And it's really only recently that you could just sort of incorporate your own business as you please at all, without getting express written consent from the government. I mean, in the days of England and, and early in the US, like, incorporating a company, a corporation, was like the government's granting you a special right to operate this business, and so already-
- DRDavid Rosenthal
You need a charter, literally
- BGBen Gilbert
... the doors are blown wide open that you can just start a company, but we're not yet to the era of like, "Oh, I can start a national corporation."
- DRDavid Rosenthal
Yep. So they think for a while, this, this whole little crew [chuckles] at Standard Oil in, in Cleveland, about how they're gonna do this. They know that if they wanna consolidate the whole industry and the whole country, they need, A, a lot of capital, and, B, uh, an ability to operate outside the borders of Ohio. So Flagler [chuckles] comes up with this idea, and he... This is amazing. He actually like-
- BGBen Gilbert
It's inno-- it's financial and corporate law innovation.
- DRDavid Rosenthal
Innovation. And d- did you find-- did you read about how, uh, he comes up with a new structure that they, that they, uh, use or, or, uh, I guess it was an old structure, but that they, uh, wasn't very popular, but they turned to the joint stock company. Did you read about how Flagler, who was not a lawyer, drew up the actual, like, [chuckles] incorporation-
- BGBen Gilbert
Oh, wasn't it on, like a, like a yellow legal pad or something?
- DRDavid Rosenthal
Yeah, like on, like, the equivalent of a yellow legal pad.
- BGBen Gilbert
No letterhead.
- DRDavid Rosenthal
Yeah, totally, which partially, I think, was, uh, just 'cause that's how... Like, this was still, you know, Wild West-type stuff. Uh, but also, I think they didn't want anybody to really know about this. They wanted this to be super secret. So Flagler comes up with the idea. It's like, ah, these joint stock companies, which, I mean, I think, like, wasn't the Dutch East India Company-
- BGBen Gilbert
I think so
- DRDavid Rosenthal
... a joint-stock company? So he takes this idea, uh, but not many other companies were doing it. "If we," he says, "if we were a joint stock company, then we could buy in-- we could buy shares in, in other joint stock companies. We could also sell shares in ourselves, you know, to raise money or, or to strategic partners who we might wanna have a vested interest in our success. This is, this is interesting. This might solve some of the, you know, capital requirements." Um, uh, okay, well, well, well, that's interesting.
- BGBen Gilbert
And also this, like, selling shares to raise equity capital thing, Rockefeller is like: "My God, that is brilliant! How did I not think of this before?"
- DRDavid Rosenthal
Totally. To- and the best, like, it's, and it's Flagler that comes up with this. It's amazing. So on January 10th, 1870, they abolish the old partnership, and they pour all of its assets into the new joint stock company, The Standard Oil Company of Ohio. Boom, uh, it's, it's born. Uh, but, uh, and, and by assets, they capitalize this new joint stock corporation with one million dollars [chuckles] of liquid assets. Like, that is how, uh, enormous this had become already. Uh, unheard of. I don't think that there was, uh, any other organized enterprise in America with that amount of capital, period.
- BGBen Gilbert
Wow!
- DRDavid Rosenthal
Any other industry, like, already, that's how big this is, and we're still just getting started. So this doesn't solve the interstate commerce issue, though. [chuckles] So they come up with another absolutely [chuckles] brilliant and diabolical [chuckles] plan to solve this, which is the trust. Uh, and, um, what they decide to do is they say, "Well, like, okay, technically, companies can't own shares in co-- other companies outside the state, but what if we create a trust, then this trust holds shares in companies all around the country?"
- BGBen Gilbert
The trust could have some trustees that sort of get to decide what happens with maybe all the companies that roll up to the trust.... we can sort of, uh, make sure that these corporations, each of which are n- ni- nicely situated inside their own state and don't own any property outside their own state, but, like, we, the trustees, sort of get to decide how those companies might work together.
- DRDavid Rosenthal
Yep, and there's no law that says that officers of, you know, a- any given company can't be trustees of [chuckles] of a trust that owns shares in other companies. So this is, this is the loophole around it. So they create this trust, [chuckles] and the trustees just, uh, A, dictate to the other companies that they purchase what to do, but also, B, this is important, all the dividends from all the other companies, the trustees designate the beneficiaries as the individual shareholders of Standard Oil of Ohio. So nothing ever touches the actual company, Standard Oil of Ohio. It all goes to the trustees-
- BGBen Gilbert
Oh
- DRDavid Rosenthal
... and then to the individual shareholders, and that's how they get around this.
- BGBen Gilbert
Interesting. So even the, so the, the Standard- the individuals who own the corporation-
- DRDavid Rosenthal
Yep, literally everybody on the cap table. [chuckles]
- BGBen Gilbert
Ha, end up being the sort of, you know, puppeteer or controller and beneficiaries of all these other entities.
- DRDavid Rosenthal
So Rockefeller comes up with the idea. He's like, "Oh, this is amazing." He comes up with the idea that none of them are gonna take a salary. They're gonna focus solely on these dividends that are coming in as, like, a, a source of a, a, a, of value and income, but also, even more importantly, focus on the appreciation of the value of, [chuckles] you know, this whole enterprise. Uh, this was like... This was new thinking. Like, now, people are listening to probably like, "Uh, yeah, duh!" Like, uh, equity-
- BGBen Gilbert
Like, why else would you join a startup? [chuckles]
- DRDavid Rosenthal
Why else would you do, you know, do- start a company or join a startup? Nobody had ever thought this way before. Like, the idea that equity, a- a- a dividend could, like, that that could be your primary, you know, source of income and, and wealth generation, and that you could use that to incentivize new people who you're bringing into the organization as employees or partners or companies you're buying, like-
- BGBen Gilbert
Yeah, the, the idea that, like, your competitors could become your friends by-
- 1:20:20 – 1:35:02
The South Improvement Company scandal and the ‘Cleveland Massacre’ roll-up
- DRDavid Rosenthal
... right now. Weather- It's juicy, yeah. Well, great, great is up for debate. Um, so, you know, the structure, the joint stock company, they can buy and hold stock in other, in other companies. The company, they can issue shares, hold it in them. What are they gonna do here? Remember we said the railroads are the most strategic, important, like, supplier and choke point for the industry. [laughs] Standard goes to the three biggest railroads, the Pennsylvania Railroad, the storied, huge, enormous Pennsylvania Railroad. The-
- BGBen Gilbert
I think that's on a Monopoly board.
- DRDavid Rosenthal
It is. It is literally on a Monopoly board. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
Like, that is how... [laughing] Uh, the Pennsylvania, the New York Central, and the Erie railroads, and they say, uh, "So we got this new thing. This new thing lets us do things with other [laughs] companies."
- BGBen Gilbert
"Do you wanna cooperate-
- DRDavid Rosenthal
Do you wanna cooperate?
- BGBen Gilbert
... as part of our new thing?"
- DRDavid Rosenthal
"How about we all do something together?" [laughs] Uh, and the railroads are like, "Oh, yeah, we like doing stuff. This sounds pretty good." So they get together, they set up a shell corporation called the South Improvement Company. Oh, this is so juicy. So here's the deal, which is South-
- BGBen Gilbert
Which is in- intentionally nebulously named.
- DRDavid Rosenthal
Yes, yes, and in fact, later in life, when, uh, Rockefeller would be getting grilled in, in federal depositions, uh, he would be asked-
- BGBen Gilbert
Oh, yeah
- DRDavid Rosenthal
... if he was ever a director or involved in the Southern Improvement Company, and Rockefeller would be like-
- BGBen Gilbert
Which, of course, is not a thing.
- DRDavid Rosenthal
Nope.
- BGBen Gilbert
I have no idea. [laughs]
- DRDavid Rosenthal
Standard Oil was never involved in the Southern Improvement Company. [laughs] Oh, my goodness, so great. Obviously, uh, he was not perjuring himself by saying that because the questioner got the name wrong.
- BGBen Gilbert
Though, though I think he did perjure himself in other SIC-related
- DRDavid Rosenthal
I think, yeah, I think he did. I think he did.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Um, [laughs] so here's the deal. Standard Oil is gonna set up and control most of the South Improvement Company through their, through their new, you know, trust and joint stock corporation structure. The railroads will own a, a token amount, but the railroads and the principal, you know, owners of the railroads, the individuals, they're gonna issue some, uh... Standard Oil is gonna issue them some stock so that, uh, you know, these guys now have a, have a little, uh, a little skin in the game with, uh, with Standard Oil. [laughs] Uh, all the interests are aligned here.
- BGBen Gilbert
Well, a- and the railroads had a problem that they need solved, which was that, like, because of the boom-bust nature of everything that's going on their cars, especially oil, uh, and the sort of... Remember that thing that I mentioned earlier, where people are, uh, deciding not to buy because they hear it's gonna be cheaper soon because they know there's a big gusher? Like, this whole thing is, like, totally screwing with the railroads, not to mention the fact that with intense competition among the railroads, just like there was intense competition among all of the non-sort of Standard Oil, uh, oil companies, like, a lot of the profits are just being arbitraged away, and so they've got, like, unpredictable demand. They've got, you know, booms and busts. They've got this situation, especially with oil, where, like, uh, uh, certain types of oil in certain areas were so insanely cheap that, like, everybody's going out of business 'cause no one can make any money. The same sort of thing is happening in, happening in the railroad industry, and so if there's, like, a cooperation opportunity for the railroads, and, you know, Rockefeller's offering them, "I can kind of solve your problem here, and we can sort of smooth out business"-
- DRDavid Rosenthal
Ben, it really comes down to, like, it's really hard to run a business when prices are, are fluctuating, and they're not fixed.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
So clearly the answer is to fix the prices. [laughing] Oh, my goodness. Okay, so-
- BGBen Gilbert
Uh, we, we ascribe no virtue to this. I think the, the, the, the, the, the jury on this whole thing, and then we'll get to this later in the episode and, and certainly in part two of, like, t- what parts of this were good and what parts of this were bad, like, it's both. There, there-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... there's lots of both that happened all through this story.
- DRDavid Rosenthal
Yep. Okay, [laughs] so the three, three biggest railroads and Standard, they get together in this South Improvement Company, and they say, "Eh, uh, here's what we're gonna do. All the railroads, we're gonna, we're gonna set a new fixed price." There is now a fixed, literally a fixed price for shipping oil on railroads. To everybody out there, all... Anybody who's shipping oil, there's one single fixed price, and it's really high. Like, whatever it was before, like, it's like a l- like, a multiple of that. It's, it's really high. Except for anybody who's a member with us of the South Improvement Company, y'all get a 50% discount [laughs] on that fixed price. And it goes even further. Uh, this is just like, oh, just twisting the knife here. Anybody else, a- anybody who's a member of, of our little, uh, our little company here-
- BGBen Gilbert
One might say, uh, a little cartel.
- 1:35:02 – 1:44:54
From monopoly to infrastructure control: tank cars, pipelines, and starving Tidewater
- DRDavid Rosenthal
like, the oil refiner, they let the other refiners stay in business. They just, you know, bought them [chuckles] and gave them Standard Oil shares. They're like, they're worried about the railroads, so, like, "We don't want them having strategic leverage over us. How can we co-opt them?" So I mentioned earlier, tank cars. [chuckles] Right?
- BGBen Gilbert
Yeah, what, what was the deal here?
- DRDavid Rosenthal
So right around this time, Standard starts going to all the big railroads, and they're like, "You know, we've saved you all this money on OpEx. Now you get to run trains directly, you know, no stops, no boxcars. This is great for you. Uh, but, you know, the- these tank cars, these modern tank cars, you know, made of steel, and the like, um, that's a lot of CapEx for you to keep building. And, and we just keep sucking up all this shipping volume with y'all. What if we just make these cars for you? [chuckles] And we lease them back to you. We'll take on the CapEx to make the cars. [chuckles] And, and we'll lease them to you at a really low rate."
- BGBen Gilbert
So what's the play here?
- DRDavid Rosenthal
So Chernow writes about this. He says: As the owner of almost all the Erie and New York Central tank cars, Standard position- Standard Oil's position grew unassailable. At a moment's notice, it could crush either railroad by threatening to withdraw-
- BGBen Gilbert
Ugh
- DRDavid Rosenthal
... its tank cars. No tank cars, no business. [chuckles] You can keep running this great business for y'all, but, you know, you mess with us, we can withdraw our tank cars. [chuckles]
- BGBen Gilbert
Wow! And so now they've got 90% market share of kerosene, and they've got this relationship [chuckles] with the railroad, where they basically are going to get the most favorable rates without the com- without a railroad going out of business. Like, they can squeeze every last bit of juice.
- DRDavid Rosenthal
And then they take it one step further again. [chuckles] So while all this is going on, there's a new-
- BGBen Gilbert
By the way, David, you laughing through this, like, maniacal plan, you're, like, the nicest... Like, it's so scary because I'm like, "Oh, I just have implicit trust in you." Like, you're so kind, and-
- DRDavid Rosenthal
[chuckles]
- BGBen Gilbert
... you're so warm, and you're so-
- DRDavid Rosenthal
Ah.
- BGBen Gilbert
And like, you're like, "And then they take it one step further. [chuckles] "
- DRDavid Rosenthal
And then they stab the knife in the back again, and it's so great. Ugh. [chuckles] I just like... It's just this is such a, like, good story. Ah, I love it. Not condoning this behavior by any stretch of the imagination, but, um-
- BGBen Gilbert
An important pillar of American history.
- DRDavid Rosenthal
Uh, a critical part of American history. So okay, uh, the, they, they take it one more step further, and this is really the, the coup de grâce here. So as they're doing all these deals and setting, you know, and, and Standard Oil is becoming this octopus, as it would be known, uh, uh, a derogatory term, derogatory term by its critics-... ah, octopus, you know, uh, like, you think the Goldman Sachs vampire squid sucking on America was bad?
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
Like, literally, the Standard Oil octopus is bigger than 10 vampire squids. Ah, so [chuckles] there's a new technology that people are thinking about with regard to oil. Not gasoline, not yet, that's coming later, but ah, all of the, you know, the oil's being moved around either by water or on railroads. People are thinking that, like, there might be a way to move oil much, much, much more efficiently. Ah, so the concept of pipelines already existed, but really short-distance pipelines, ah, from literally from the derricks, from the, from the wells to the railroad depots. So this, this would be like, you know, a mile at most. Ah, they would pump oil through pipes to the railroad depots or to the, you know, shipping depots or whatever, to then load it up in cars and get it out of there. Some people start thinking like, "Well, I wonder if we could pump oil a lot farther [chuckles] than just a mile or two?" Ah, and meanwhile, the remnants of the industry, ah, that haven't yet been consolidated by Standard, ah, they're looking for any kinda, you know, Hail Mary pass to get, get some leverage back in the industry. So they decide that they're all gonna go in together against Standard and try and, and ag- and the railroads, they know they can't get any concessions out of the railroads. They're gonna try and develop a pipeline, a long-distance pipeline. So in 1877, they do this. They band together, and they form the Tidewater Pipeline Company. This just sounds like a scandal right off the bat, [chuckles] like the name Tidewater Pipeline Company.
- BGBen Gilbert
Why would you name it that?
- DRDavid Rosenthal
Ah, f- I mean, it's 1870, like I... or 1877.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
I have no idea. [chuckles] Um, and ah, they're gonna... First, the goal is that they're gonna, ah, pipe oil from Titusville directly to Baltimore on the, on the, on the seafront. They then shorten it to Williamsport, Pennsylvania, which is still 110 miles. This would be like an amazing proof of concept that this would work.
- BGBen Gilbert
Isn't that where, like, the Little League World Series is?
- DRDavid Rosenthal
It is, it is.
- BGBen Gilbert
Yeah, I thought so.
- DRDavid Rosenthal
Yeah, I don't know why Williamsport was where they wanted to pipe this stuff to, but-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... they do end up piping it. So Standard, though, fights them tooth and nail on this. Like, they're- they'll like, ah, [chuckles] ah, a bunch of the execs wanna go hire thugs to go like smash the pipeline and do all this stuff, and like-
- BGBen Gilbert
And they do, right? Like, they've like, uh, the pipelines get smashed, and they light stuff on fire, and-
- 1:44:54 – 1:58:06
Retail power, HQ move, and politics: grocer threats, 26 Broadway, and the Sherman Act
- DRDavid Rosenthal
Uh, yeah. Okay, so after this, uh, it's done. I mean, this is, this is the story of how Standard Oil became Standard Oil. Like, Rockefeller, Standard, like, they have won. They have won on a scale that nobody has ever won before or since. Their competitors are obliterated, new upstart technologies are co-opted, all of the suppliers, [chuckles] you know, are reduced to total lackeys. Um, the customer- we didn't talk about the customers. Uh, this is great. So at least in America, most... [chuckles] Great. I'm now thinking about how you're... I'm saying, "Oh, this is great."
- BGBen Gilbert
This is a great story, is what I'm hearing.
- DRDavid Rosenthal
This is a great story. Most kerosene was sold at retail in America in grocery stores. So right around in the sort of early 1880s, Standard decides to run the same playbook that they've run with the railroads, with the grocery stores in America. [chuckles] Uh, they go to them and they say, "Hey, uh, you know, it's, it's expensive for you to, um, set up and give shelf space and everything to all of these cans that are all, you know, non-standardized of Standard Oil kerosene, uh, in your stores. From now on, all Standard kerosene needs to be sold in Standard canisters, that we set the terms on, and we fix the price, uh, and we tell you where you're gonna put it in your stores." [laughs]
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
And any, uh... So some stores, uh, you know, sort of bristle at this and say they're not gonna do it. [chuckles] Standard sends out a letter, uh, in Mississippi, they had a particular problem with this. They send out a letter to all the grocers in Mississippi. They say, "If you do not buy our oil, we will start a grocery store chain to compete with you and sell goods at cost and put you all out of business." [laughs]
- BGBen Gilbert
Oh, my God!
- DRDavid Rosenthal
This is in writing, sent to all of them. Uh, wow, so those are the customers, um-
- BGBen Gilbert
It's like y- you can just feel the American public and Washington getting stirred up about like, "Okay, monopolies are pretty bad. Like, s- we really need some legislation about this."
- DRDavid Rosenthal
Yeah, as, uh, [exhales] as, um, Chernow writes, "By this point in time, Rockefeller's creation could only be discussed in superlatives. It was the biggest and richest, the most feared and most admired business organization in the world." [laughs] Uh-
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
Wow. In 1883, uh, official Standard Oil headquarters moves to Manhattan, to New York City, and Rockefeller himself-
- BGBen Gilbert
26 Broadway
- DRDavid Rosenthal
... moves to Manhattan, to 26 Broadway. Uh, do you know which is the building that they have constructed, uh, for the Standard Oil headquarters, 26 Broadway, right on Wall Street? Do you know what is right outside of 26 Broadway today?
- BGBen Gilbert
No.
- DRDavid Rosenthal
The Bull, the Charging Bull on Wall Street-
- BGBen Gilbert
No way!
- DRDavid Rosenthal
... is literally right outside 26 Broadway.
- BGBen Gilbert
Ah.
- DRDavid Rosenthal
I also didn't know... You know, the Bull was only put there in, like, 1989, I think.
- BGBen Gilbert
Oh, no, I would have assumed it was there through the '80s.
- DRDavid Rosenthal
Uh, I totally would've thought. Yeah, it's actually hasn't been there... It was put there after the 1987, uh, stock market crash.
- BGBen Gilbert
Ah, interesting.
- DRDavid Rosenthal
But, uh, so Rockefeller, and, uh, you know, his brother, and all of his- their lieutenants, you know, they moved to New York also around this time. [chuckles] They just, like, buy up Midtown. Uh, so, uh, they- Rockefeller moves, uh, to right off Fifth Avenue, uh, in the '50s. Was it, it was at 54th Street, maybe? I actually don't have it written down. It was either, like, 53rd or 54th Street, right off Fif- Fifth Avenue. He buys a house, moves in there. Uh, you know, just, like, just really right there, you know, between the park and, and between Rockefeller Center. You know, like, [chuckles] no, there is no Rockefeller Center. They build freaking Rockefeller Center.
- BGBen Gilbert
Which he had nothing to do with.
- DRDavid Rosenthal
No.
- BGBen Gilbert
That was, uh-
- DRDavid Rosenthal
It was Junior
- BGBen Gilbert
... it ended up being endowed by his son, but yeah.
- DRDavid Rosenthal
Yeah, just why it... Actually, uh, we'll probably talk about this more next time. I didn't realize it was Columbia University's campus, um, there.
- BGBen Gilbert
Oh.
- 1:58:06 – 2:36:40
Wrap-up analysis: consumer welfare vs coercion, ‘Seven Powers,’ and grading the legacy so far
- BGBen Gilbert
I, I wanna talk a little bit about, like, the... We used to do these narrative sections when we do IPOs. I wanna talk about, like, the public sentiment versus Rockefeller's defense. So, like, the public sentiment here, and, and when we say public, it's less at this point in history, the actual public, and more about their competitors, who are sort of making a bigger deal out of this. 'Cause all the public knows is there's this really big company, uh, they provide things, kerosene, mostly, that I use in my life, and it gets to me in a consistent way, at a stable price. Like, it's- it, it is good for consumers. Like, if you think about the consumer welfare standard about, uh, of, of antitrust, like, this really isn't bad for consumers. It could get there if Standard Oil is the only company, and they sort of wield that pr- that power to raise prices and stuff like that. But at this point, it's, it's really like their competitors hate their guts, and especially anybody who's sort of been coerced to cooperate with them, the railroads, the pipelines, like anyone in their orbit, the, the retailers, like, it sucks for them, too. And so you've got this beginnings of, like, really stirred-up public sentiment against this company that's, like, by some views, you know, the most evil capitalist structure of all time. I mean, the, the, uh, Americans, ever since we got here from England, and here, [chuckles] I, I... You know, my family immigrated at some point, so I certainly didn't come from England. But, uh, ever since the original, uh, Anglo people came over from Europe and settled America, there's been this incredible hatred of monopolies, in particular because our country was founded on, like, equality and, and, uh, the, uh, people having the right to be free and the free market. Like, we don't want this government... Like, the government was a monopoly in, in England, and that's what we were running from.
- DRDavid Rosenthal
Well, and still to this day, there's, like, huge skepticism amongst Americans of any political party, uh, like, of centralized government power.
- BGBen Gilbert
Right. So even there's this interesting, like, very American stripe that runs through people that is, I can't quite put my finger on why, but I don't like big stuff, and I don't like concentration of power, and I didn't like it when it was concentrated in a government, and I don't like it now when it's concentrated in the rich people, and that shows up all the way through to today. I mean, that- that's a, the defining characteristic of the national conversation now. And, of course, Rockefeller's defense to all this is saying: Look, social Darwinism is bad. Like, without Standard Oil rolling everyone up, you just have all these people producing non-standard products that consumers can't tr- they're gonna kill this industry that could make everything great because consumers won't trust it. All these businesses will go out, go out of business because the prices are so low, because every time there's a gusher, you know, the prices drop so much. These people are all gonna go out of business anyway, and, like, Standard Oil is the antidote to social Darwinism, which is bad, which is, is killing th- the golden goose here. And so, uh, the way he sort of makes this argument is, it was a cooperative success. It was for the general good. It was our moral imperative. It was downright Christian for me to do this and provide this service.
- DRDavid Rosenthal
And certainly, any of the, you know, competitors or suppliers or partners or the like who ended up taking Standard Oil stock got fabulously wealthy by doing so. Like, how could you argue that that was bad for them?
- BGBen Gilbert
He really seems to have deeply believed that this, like, invisible hand, the Adam Smith concept of, you know, the, the invisible hand that sort of guides the, the free market, that it kinda just takes too long, and there's a lot of bad stuff that happens along the way. Like, academically, sure, it makes sense that the free market will work itself out, but, like, when you actually look at the businesses today and the people running those businesses today, there's gonna be a bunch of hardships and dirt along the way. You might have whole industries that die out because they never sort of reach their full potential. Like, he, he very much... It's not-... communist. Like, it, and it's not real- it's not social, it's- it's this interesting, like, uniquely American viewpoint on actually social Darwinism, and free market capitalism is a bad thing, and everybody just eating each other's lunch and, and eliminating all the profit in every industry, uh, and, and potentially to our own detriment is bad.
- DRDavid Rosenthal
Uh, yeah, and you know, um, and Chernow even, even talks about this. Like, in, in some ways, uh, what w- what Rockefeller was trying to do and what Standard became shared just as much, um, you know, intellectual grounding as with, like, Marx and communism as it did with Adam Smith and capitalism. [chuckles] Like, uh, it was, uh, um, it, it was this view that, like, "Hey, pure individual competition is not actually, like, the most ideal status," and, like, some form of collectivism, in this case, collectivism in the form of a company, Standard Oil, uh, was the best path.
- BGBen Gilbert
Yeah. And the place where it kind of falls down is where he sort of says like: "Look, if we just knife fight to the death, someone's gonna win, and ultimately, that one is gonna be me, because I'm the best at this." And, like, he's probably right. But this notion of like, "So therefore, everyone should allow me to save them," at truly... In, like, a very, you know, evangelical Christian way, like, "I'm gonna go and save, you know, and, and bring them into my business church," uh, is, is very much how he sort of thought about it. "And come into the light, and, and embrace the Standard Oil." [chuckles]
- DRDavid Rosenthal
[chuckles] Literally, the light. I love it.
- BGBen Gilbert
And, you know, uh, just dripping with irony in the way that I'm drawing these, these parallels-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... here.
- DRDavid Rosenthal
Oh, can we talk about the Standard Oil logo while we're, while we're at it?
- BGBen Gilbert
Yeah, one second. The, uh, I... And we should get to that. The- uh, it kind of falls down where, like, him accelerating the death of all of these businesses and saying, "Eh, it was inevitable, and at least they're getting some upside now," the benevolence argument does seem to fall down there a little bit.
- DRDavid Rosenthal
Yeah. [exhales] I, uh... I mean, so, like, uh, perhaps maybe the most blatant example to me is, uh, the grocers, [chuckles] right? Like, that letter sent out-
- BGBen Gilbert
Totally
- DRDavid Rosenthal
... writing to grocers saying, like, [chuckles] "If you don't do what we want, we are going to literally burn down your houses," you know, [chuckles] metaphor- or "We are gonna metaphorically burn down your houses," like, it's unreal.
- BGBen Gilbert
Right. There, there are places where, like, it, it made sense for him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers, but those places are far more limited than the number of places where they actually reached and exerted their power.
- DRDavid Rosenthal
Yep. Uh, sidebar on the, on the logo, 'cause-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... it's, uh, so great. It, it's this, like... We'll, we'll see if we can link to it in the show notes. Uh, it- you'll recognize it when you see it. It's this red, white, and blue-
- BGBen Gilbert
Oh, it's the Amoco logo-
- DRDavid Rosenthal
Oh
- BGBen Gilbert
... now.
- DRDavid Rosenthal
Yeah, it's the, it's the Amoco logo. Yeah, yeah. Uh, which was- Amoco was, uh-
- BGBen Gilbert
California
- DRDavid Rosenthal
... Standard of Ohio?
- BGBen Gilbert
Oh, wait, uh-
- DRDavid Rosenthal
California was Chevron.
- BGBen Gilbert
That's true.
- DRDavid Rosenthal
Was that either Ohio or New Jersey? Uh, I think it was Ohio that became Amoco. I could be wrong on that, though.
Episode duration: 2:36:40
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