Rockefeller and His Benefit to the Economy

John D. Rockefeller was born in Richfield, New York July 8^th 1839. Rockefeller was not born into a wealthy family; his father was a traveling medical salesman of "miracle" cures for afflictions such as cancer. Rockefeller was later taken out of school in 1855 at the age of sixteen because of scandalous behavior of his father. Due to this behavior his father had several illegitimate children which caused obvious discontent in his family. The very year Rockefeller dropped out of school he acquired his very first job of being a bookkeeper on the day of September 26th, a day which meant so much to him that he celebrated it every year for the remainder of his life (McGill, 1). Rockefeller took his work very seriously and worked very hard at his job and received only 50 cents a day for his work. This rigorous work ethic will later shape not only the life of John D. Rockefeller but will revolutionize and invigorate the world wide economy by increasing the purchasing power of individuals in nearly every market he touched^.

Rockefeller's entrepreneurial career started when he founded a company with Samuel Andrews in 1862. Andrew's, an inventor, had discovered an inexpensive and efficient way to purify crude oil. Oil had been discovered in the Midwest and Rockefeller took this oil and refined it into a cheap source of fuel and lighting, kerosene. Previously the world relied on a much more expensive source of fuel for lighting which came from whale oil. Before Rockefeller only the rich could afford proper lighting because of the great expense of the whaling industry. Rockefeller wrote one of his partners, "Let the good work go on. We must ever remember we are refining oil for the poor man and he must have it cheap and good." Or as he put it to another partner: "Hope we can continue to hold out with the best illuminator in the world at the lowest price." With this determination and strive for efficiency, Rockefeller almost entirely eliminated the whaling industry. "The impact of this new fuel was devastating to the whaling industry, and statistics show a great reduction in the number of whaling ships during this time. In 1846 there were 735 American whaling ships, killing whales at an alarming rate, but, in 1876, the number of ships was reduced to 39. By 1924 there were no American whaling ships left" (McGill, 1).

In 1870 Rockefeller took his company public and Standard Oil was formed and Rockefeller was the majority stockholder. "Even after 20 years in the oil business, "the best . . . at the lowest price" was still Rockefeller's goal; his Standard Oil Company had already captured 90 per cent of America's oil refining and had pushed the price down from 58 cents to eight cents a gallon. His well-groomed horses delivered blue barrels of oil throughout America's cities and were already symbols of excellence and efficiency. Consumers were not only choosing Standard Oil over that of his competitors; they were also preferring it to coal oil, whale oil, and electricity. Millions of Americans illuminated their homes with Standard Oil for one cent per hour; in doing so, they made Rockefeller the wealthiest man in American history" (Folsom, 1).

Rockefeller found new and innovative ways to increase efficiency at his refineries. He built his refineries extremely well and employed plumbing and building teams himself to decrease the cost of labor of building his refineries. He also eliminated costs buy constructing his own barrels in which to ship the oil. "Coopers charged $2.50 per barrel; Rockefeller cut this to $.96 when he bought his own tracts of white oak timber, his own kilns to dry the wood, and his own wagons and horses to haul it to Cleveland. There with machines he made the barrels, then hooped them, glued them, and painted them blue. Rockefeller and Andrews soon became the largest refiners in Cleveland" (Folsom, 1).

From the very beginning Rockefeller's main goal of achieving greater efficiency was reducing the amount of waste his refineries were producing. While his partner was working on getting more kerosene from each barrel of crude oil, Rockefeller was looking for ways to market the byproducts of the process. While other competing firms would just dump their waste in the river Rockefeller devised a way to use that waste to power his machines at the refineries and to market the rest as lubricants.

Rockefeller envisioned large vertically integrated companies as a more efficient way of achieving efficiency and low costs. He did not believe that smaller competing firms could prosper. Improve or perish was Rockefeller's approach. "We will take your burden," Rockefeller said. "We will utilize your ability; we will give you representation; we will all unite together and build a substantial structure on the basis of cooperation," "Many oil men rejected Rockefeller's offer, but dozens of others all over America sold out to Standard Oil" (Folsom, 1).

Buying firms was sometimes a tricky business for Standard Oil. Rockefeller's approach was to pay the value of what the property was worth at the time he bought it. "Outmoded equipment was worth little, but good personnel and even good will were worth a lot. Rockefeller had a tendency to be generous because he wanted the future good will of his new partners and employees. "He treated everybody fairly," concluded one oil man. "When we sold out he gave us a fair price" (Folsom, 1). However some firms refused to sell at the price offered and demanded prices far above the market value, and when Rockefeller refused to purchase at that price they called him immoral and attacked his business practices, even though they were quite fair.

Some people viewed Standard Oil's acquisition as unfair. They claimed that Standard Oil was setting prices so low that smaller more inefficient firms could not stand up against them. This is known to economists as "predatorial pricing". CATO, a free-market and well respected "Think-tank" comments on this issue, "The classic article on predatory pricing was written by economist John McGee in 1958.[4] McGee examined the famous 1911 Standard Oil antitrust decision that required John D. Rockefeller to divest his company. Although at that time popular folklore held that Rockefeller had "monopolized" the oil refinery business by predatory pricing, McGee showed that Standard Oil did not engage in predatory pricing; it would have been irrational to have done so." McGee goes on to say "Judging from the record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect. Whereas there may be a very few cases in which retail kerosene peddlers or dealers went out of business after or during price cutting, there is no real proof that Standard's pricing policies were responsible. I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, to reduce competition. To do so would have been foolish; and, whatever else has been said about them, the old Standard organization was seldom criticized for making less money when it could readily have made more."

The idea of predatory pricing was somewhat put to rest when economists began to prove that setting the price below not only market levels but below profit margins would actually incur the largest amount of losses to the largest firm because of the greater volume of sales compared to the smaller firm. As George Stigler once described it, the victim of alleged predation, such as that supposedly engineered by Standard Oil, could go to a lender and say:

"There is a threat of a three-month price war, during which I will lose $10,000, which unfortunately I do not possess. If you lend me $10,000, I can survive the price war--and once I show your certified check to Rockefeller the price war will probably never be embarked upon. Even if the price war should occur, we will earn more by cooperation afterward than the $10,000 loss, or Rockefeller would never embark upon the strategy."

"Thus, lenders may have a financial incentive to aid the prey. There is also the possibility that larger firms, which have their own "deep pockets," will acquire the victims if it seems profitable to do so" (Easterbrook, 1).

Regardless of this issue, the group of individuals who benefit most from reduced pricing is always the consumer. Standard Oil's pricing left more money in the pockets of not only the producer's of the world, but in the pockets of the most impoverished men and women of the world. William H. Libby, Standard's foreign agent said to the governor general of India, "I may claim for petroleum that it is something of a civilizer, as promoting among the poorest classes of these countries a host of evening occupations, industrial, educational, and recreative, not feasible prior to its introduction; and if it has brought a fair reward to the capital ventured in its development, it has also carried more cheap comfort into more poor homes than almost any discovery of modern times."

Rockefeller also had many other obstacles to combat, and one of them was foreign competition and the Russian-American Oil War. The Russian's had the largest oil mining fields in the world and were Standard Oil's largest opposition on a global scale. "The Russian-American oil war was hotly contested for almost 30 years after 1885. In most markets, Standard's known reliability would prevail, if it could just get its price close to that of the Russians. In some years this meant that Rockefeller had to sell oil for 5.2 cents a gallon-leaving almost no profit margin-if he hoped to win the world. This he did; and Standard often captured two-thirds of the world's oil trade from 1882 to 1891" (Folsom, 1).

An American historian and journalist, Allan Nevins once wrote "The [foreign] stations were kept in the same beautiful order as in the United States. Everywhere the steel storage tanks, as in America, were protected from fire by proper spacing and excellent fire- fighting apparatus. Everywhere the familiar blue barrels were of the best quality. Everywhere a meticulous neatness was evident. Pumps, buckets, and tools were all clean and under constant inspection, no litter being tolerated . . . . The oil itself was of the best quality. Nothing was left undone, in accordance with Rockefeller's long-standing policy, to make the Standard products and Standard ministrations, abroad as at home, attractive to the customer." It was this policy and reliance that gave Standard Oil the competitive edge against the seemingly impossible task of victory against the Russians.

Standard Oil was a shining example of American individualism and hard work and brought thousands of jobs to not only the hard working Americans but on a global scale. Rockefeller delivered an excellent product and a cheap rate and helped improve the growth of the domestic and global economies of the world. However, there were unfortunate circumstances enacted upon the legacy of Rockefeller's hard work and life-long pursuit of efficiency. Beaurocrats in Washington passed legislation known as the Sherman Anti-Trust act which took his entire life's work and gave it away against his will and split Standard oil into thirty-four separate firms. Ignoring their oath to protect the property rights of their citizens, the politicians felt that they had done justice for the American people.

"Rockefeller after that however, in his retirement, became the richest man in America's history and dedicated the remainder of his life to philanthropy and service to his fellow man. Some historians haven't liked the way Rockefeller made his money, but few have quibbled with the way he spent it. Before he died, he had given away about $550,000,000, more than any other American before him had ever possessed. It wasn't so much the amount that he gave as it was the amazing results that his giving produced. Healing the sick and feeding the poor was also part of Rockefeller's Christian mission. Not state aid, but Rockefeller philanthropy, paid teams of scientists who found cures for yellow fever, meningitis, and hookworm" (Folsom, 1).

Throughout his career Rockefeller helped build the infrastructure necessary for a growing nation and economy, and even in his retirement he was dedicated to the advancement of his fellow man.

John D. Rockefeller demonstrated the priceless value and effectiveness of the rugged individual through hard work and commitment to a set of work ethics and morals that helped shape America. In doing so, John D. Rockefeller invented the "American Dream".

Works Cited

Bradley, Robert. Oil, Gas, and Government: The U.S. Experience. D.C.: Cato Institute,

Forthcoming.

Bringhurst, Bruce. Antitrust and the Oil Monopoly: The Standard Oil Cases,. New York:

Greenwood Press, 1979.

Collier, Peter, and David Horowitz. The Rockefellers: An American Dynasty. New York:

Holt, Rinehart and Winston, 1976.

DiLorenzo, Thomas. The Myth of Predatory Pricing.: Cato Institute, February 28, 1992

Policy Analysis no. 169

Easterbrook, Frank. "Predatory Strategies and Counterstrategies," University of Chicago

Law Review 48 (1981)

Folsom, Burton Jr. John D. Rockefeller and the Oil Industry, Vol. 38 No. 10.

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McGill, Sara Ann. John D. Rockefeller, 2005