JOHN D. ROCKEFELLER: CALCULATION AND CONTROL
The business career of John D. Rockefeller exemplifies several of the themes raised in Glenn Porters The Rise of Big Business. Rockefeller personified the drive toward economic integration that was so prominent a tendency in our period. In many industries, business leaders strove to eliminate competition or merge with competitors. In the petroleum industry, Rockefeller led a similar drive, but he had even greater motivation. Oil production was less easily controlled than supplies in other industries, for by the "law of capture," oil belonged to those who pumped it out of the ground. (Producers could not restrict production, hoping for better times, because neighboring wells might be pumping oil out of the same underground pool, thus stealing their supply.)
Rockefeller aimed to control the twin problems of overproduction and competition, which together created a large supply of crude oil, drove prices down, and threatened profits. His solution was many-sided, but consisted initially in the horizontal integration of nearly all the refineries in the country. By controlling this crucial phase in oil production, Rockefeller was able to control the price and the quantity of crude oil. His Standard Oil, as the largest purchaser, was able to dictate prices. In achieving control, Rockefeller also had the aid of special rebates on the railroads that transported his oil. This made his transportation costs lower than competitors. Eventually, he controlled the pipelines through which crude oil passed, and later he engaged in an aggressive marketing strategy, underselling competitors to drive them out of business. By 1880, his Standard Oil Trust controlled 90% of refining capacity in the United States - a near monopoly.
Who was the man behind the Standard Oil Trust? John D. Rockefeller kept out of the limelight, and unlike Andrew Carnegie, published very little. Like Ford, he went to great lengths to avoid courtroom testimony, and, when on the stand, displayed the art of forgetfulness. He preferred to work behind the scenes, and perhaps his secrecy added to the publics sense of his immense power. In his time, he gained as much ill-fame as Henry Ford gained popularity.
Rockefellers personality exemplified a secular version of the Puritan ethic, and the total separation of morality and business practices. The ethics of fair play, open dealings, and honesty meant little to him. It was rather as an economic calculator and controller that the Puritan in him came out. Even as a teenager he kept a ledger, accounting for every penny of income and expense - down to his weekly dime to the poor and foreign missions. For if religion and morality had no place in business, John Rockefeller gave them their due on Sundays.
He learned his business morality at an early age. When his itinerant father was home, he taught his son how to get on in the world of business:
I cheat my boys every chance I get, I want to make em sharp. I trade with the boys and skin em and I just beat em every time I can. I want to make em sharp.
Thus, at an early age, John D. learned the ethics that would prepare him for the business world.
Rockefeller was not a pioneer in the technology of the oil industry. He believed, with Carnegie, that "pioneering dont pay." Others proved that refined oil could be carried long distances without damage to its quality, and only then did Rockefellers Standard Oil Company construct a pipeline for refined oil. Nor was Rockefeller a swashbuckling adventurer like Jay Gould in the economic jungle of the late 19th century. His enemies were waste and competition; his goals, efficiency in production and stability of prices. His tools were meticulous attention to detail and a masterly manipulation of power. He was calculating, indefatigable, patient, and without scruples.
Both Carnegie and Ford drove costs down, but neither did so with the attention to minutiae that Rockefeller displayed. He learned that 39 rather than 40 drops of solder were sufficient to close a barrel. He kept track of the stoppers in his barrels, once writing his barrel factory this now famous note:
Last month you reported, on hand, 1,119 bungs. 10,000 were sent you beginning this month. You have used 9,572 this month. You report 1,092 on hand. What has become of the other 500?
Rockefeller knew that a few pennies multiplied a thousand times a day in a thousand different ways meant millions of dollars.
The Puritan in Rockefeller came out also in a supreme righteousness which actually bolstered his unscrupulousness. Of his plan for gaining control of competing refineries, he is thought to have said:
I had our plan clearly in mind. It was right. I knew it as a matter of conscience. It was right between me and my God. If I had to do it tomorrow, I would do it again in the same way - do it a hundred times.
It was his lack of scruples, bolstered by his sense of utter scrupulousness, that issued in the incredible stories of industrial generalship that fill the pages of Ida Tarbells History of the Standard Oil Company. On the one side was the man who gave to the church and served as a Baptist deacon; on the other side was the man who thought nothing of driving his competitors to the wall and of running the most efficient network of industrial espionage in its time.
Rockefeller exemplifies a type of entrepreneurial personality. But fascination with the personality should not let us lose sight of the significance of his business history. Within a little more than a decade of the Pennsylvania oil boom Rockefeller began his march toward monopoly. A decade later, by 1880, he had almost achieved it, controlling 90% of the refineries andin many parts of the countrythe prices consumers paid for their illuminating oil.
There has never again been such control of the oil industry by a single corporation. As new oil fields opened up at the turn of the century, and new uses for oil in home heating and automobiles were developed, competitors rushed into the oil business. Moreover, in 1911 public animosity towards the Standard Oil Trust finally resulted in a successful government suit to break it into some 39 parts.
But if people believed that the legal dissolution of the Standard Oil Trust would permanently return the oil business to small, independent, highly competitive producers, they were mistaken. In the first place, long after the breakup, stock ownership remained concentrated in the same hands and the new firms respected each others territorial imperatives. Even today, the Rockefellers have a sizable holdings of stock in Mobil Oil, the Standard Companies in Ohio, Indiana, and California, and foreign companies. They hold about 60% of the stock of the largest industrial corporation in the United States, Exxon (Standard of New Jersey).
In the second place, although there were now many oil companies where once a single company had dominated the industry, true competition and laissez-faire did not survive the recurrent problems of overproduction. Rockefeller had restricted production and help up prices in the late 19th century. In the 20th century, corporations were aided by the government in achieving the same result. By the 1920s, oil production expanded, competition increased, and prices fell. But, as in so many other areas, during the depression of the 1930s, government stepped in to help the oil industry solve problems it could not solve by itself. Federal and state governments were given the power to set production quotas. In effect, government took over John D. Rockefellers function, determining how much oil was to be produced in order that a restricted supply would raise prices to the consumer.
The recent "energy crises" of the 1970s, catalyzed by Arab restriction in the production of Mideast Oil, raised gasoline prices in the United States, but seem to have aided rather than harmed the major oil companies. Many, for example, reported record profits during 1973-1974. High prices for consumers and high profits for the companies led, as in Rockefellers time, to demands that the big oil companies be broken up. In 1976 a congressional committee approved a bill to force the separation of production from refining and marketing in the eighteen largest oil companies. In theory this would make for greater competition and lower prices.
The political clout of the oil companies ensured that the legislation was not enacted. Even if it had been, not much would change. The legislation certainly would not have reduced the oil companies to mom-and-pop businesses. If broken up, Exxons producing arm would become the nations fourth largest company, its refining and marketing arm the second largest.
Recently, the large oil companies have begun diversifying into other energy fields; and in the last few years there has been a trend toward greater concentration of oil resources as oil companies have bought other oil companies to get large reserves of oil without risky investments in exploration. But these changes are relatively insignificant compared to two larger issues: should vital energy resources be privately controlled by those whose interest is short-term gain rather than long-term social benefit, and can the United States develop and win support for a long-range energy policy that weans industry and consumers from over-dependence on oil?
(* = Paperback, although some may be out of print.) None of the following is required.
ANDREW CARNEGIE: SELF-MADE MAN, SOCIAL DARWINISM, AND SOCIAL REALITY
Andrew Carnegie may be the most useful individual for our study. Our readings for this part bring together many of the significant questions in the history of big business in the 19th century. We examine Carnegies business career, the methods used to achieve superiority in the steel industry, and the way competition and combination shaped that industry. We study the philosophical justifications for amassing great fortunes while many lived in property, in Carnegies Gospel of Wealth and Stewardship. In Katherine Stones "The Origins of Job Structures in the Steel Industry," we have evidence for our concern about what industrial capitalism did to the nature of work. Also we will touch on the reality behind the myth of rags-to-riches.
Carnegies business career illustrates themes we have encountered in Glenn Porters The Rise of Big Business. Here is another Rockefeller, the fanatical cost-cutter, keeping track of every keg of nails and pile of rocks. And here is illustrated Porters theme of the "bureaucratization" of business. Applying what he learned from the railroads, the nations first big business, Carnegie threw out instinct, intuition and tradition, and substituted a strict, systematic accounting of costs. Putting his managers on their merit, he carefully watched their performance. Success was rewarded; friendship and loyalty meant nothing for those who failed. Here, too, in Carnegies drive to cut wages and replace men with machines, is a precursor of the methods of Henry Ford, which we will study later.
Carnegie provides a neat contrast to Rockefellers strategy of combination. Where Rockefeller first achieved dominance in the oil industry by means of horizontal combination (buying out or eliminating competitors in one phase of production - refining), Carnegie chiefly integrated vertically. The great accomplishment of Carnegie Steel lay in its fusion of the previously scattered stages of iron and steel production and the elimination of middlemen who, taking their cut at each stage of production, raised costs. In the production process itself, Carnegies aim was continuous flow; this was achieved when the ore was heated but once during the whole process and at the end, was poured directly into ingots on moving railroad cars. Beyond production itself, Carnegie integrated vertically, achieving sources of coke and ore on the raw materials side and establishing his own branch offices on the sales side.
Although not a real risk-taker, Carnegie was always ready to employ new technology, once it was proven effective. His willingness to scrap serviceable machinery for more efficient units continually astonished British observers. But Carnegie knew where the profit lay; the name of the game was cost-cutting, and if a new machine paid for itself in lower costs, he gladly junked the old one. And like Henry Ford, Carnegie was willing to hold down dividends to stock holders so that profits could be reinvested in expanding and modernizing production.
If Carnegie eliminated competition, it was not by buying out his competitors the way Rockefeller did. It was primarily because he could make steel at a lower cost than any other producer. He love competition, and, had he gone on, it is possible that he would have achieved an almost monopolistic position in the steel industry by sheer dint of efficient production. But he did not go on. J.P. Morgan made him an offer he could not refuse ($480 million), and he sold out to what emerged as the largest American corporation, United States Steel. Either way, as it happened, or as it may have happened, the steel industry was plagued with overproduction. In the end, some form of concentration into fewer and larger corporations was likely.
There is an irony in the fact that Carnegie sold out to the trust-makers. Generally he avoided horizontal combinations (trusts, pools, mergers) which aimed to restrain production and keep up prices. He loved the competitive jungle. Indeed, he became the foremost business theorist of the law of competition and of its Social Darwinism variation, the survival of the fittest.
Most American businessmen were not philosophical enough to be Social Darwinists. That is not surprising, since the intellectuals and preachers, not businessmen, usually develop the theories that justify an economic system. Business leaders knew and cared little about Darwin or social philosophy. Daniel Drews logic was irrefutable: "Book learning is something, but thirteen million dollars is something, and a mighty sight more." Most businessmen had little need of unusual or sophisticated justifications for ruthless behavior in the marketplace. After all, the acquisitive instinct and competitive individualism had a central place in the American system already with the Puritans in the 1600s. In an elaboration of theological doctrines, some Puritans argued that the accumulation of wealth proved ones holiness and thus ones salvation. In a later elaboration it was argued that poverty resulted not from environmental conditions over which the individual had no control, but from laziness. In the mid-1700s, the secular Puritan, Benjamin Franklin, denounced the giving of charity to the poor. Charity went:
...against the order of God and Nature, which perhaps has appointed want and misery as the proper punishments for, and cautions against... idleness and extravagance.
In other words, poverty was a punishment for waste and idleness and a goad to hard work. Those who succeeded were those who worked hard and displayed a Christian character. God rewarded them; it was He, said Rockefeller, who "gave me my money."
If business slowed down and people were thrown out of work, then that was in "the nature of things." The cycles of boom and bust, and the "laws" of supply and demand could not be "artificially" altered by government intervention or trade union demands. If some suffered, that was too bad. The Reverend Henry Ward Beecher preached against the railroad strikers during the depression of the 1870s on the grounds that "the necessities of the great railroad companies demanded that there be a reduction of wages." Those who rebelled were simply "ignorant of political economy." "It was true that $1 a day was not enough to support a man and five children, if a man would insist on smoking and drinking beer. Was not a dollar a day enough to buy bread? Water cost nothing." And Beechers well-fed congregation laughed in accord.
Andrew Carnegie probably would not have laughed. Perhaps more than most businessmen of his day, he felt some remorse at the ruthlessness and materialism his quest for success entailed, and he feared a rebellion of the poor. Hence, he devoted his energies to spreading justifications for the accumulation of wealth and the existence of poverty. Your reading, "Wealth," (reprinted at the end of the course guide), is Carnegies most famous statement.
Carnegie took his Social Darwinism from the British social thinker, Herbert Spencer. But at bottom, Social Darwinism was good old competitive capitalism, bolstered by an apparently scientific but rather shaky analogy to the Darwinian theory of biological evolution. Human society, the theory went, evolved out of struggle. The economic arena was a jungle of competing animals. Out of this competitive struggle, the fittest survived and the unfit fell by the wayside. This was as it should be. The academic Social Darwinist, William Graham Sumner, insisted on the doctrines harsh logic: "A drunkard in the gutter is just where he ought to be. Nature is working away at him to get him out of the way..."
There was no room for humanitarianism in business affairs. Governments and individuals were not to interfere with the winnowing process, for out of the struggle production expanded, the unfit were eliminated, and the most talented were raised to positions for power and influence. Those who accumulated wealth and power deserved it, having won the struggle to survive and having proved their fitness for economic governance.
Social Darwinism supported laissez-faire. Governments could not interfere with private property in any way, except to protect it from strikers, but certainly not to regulate corporations. (Herbert Spencer even went so far as to oppose public education as an unwarranted invasion of the natural economic order by outside forces.) Clearly Social Darwinism was a justification for ruthless capitalism in its most energetic, violent, and exploitative period.
Carnegie agreed with Social Darwinism - up to a point. In his business affairs, and despite occasional nods of friendship in the direction of workers, Carnegie was ruthless. But Carnegie had inner doubts about his behavior, his treatment of workers, his vast wealth. Also, as is clear from the very first sentence of his article, "Wealth," he saw a danger to societyand peoples loyalty to capitalism -- in the rigid class divisions which his own business behavior was helping to create. He needed, therefore, to justify to himself and to the public, capitalist behavior.
He did it in many ways, but two deserve special attention. First, he constantly praised American democracy and the absence of any hereditary ruling class. True, the United States had been good to him, but his constant emphasis on the theme must also have been designed to assure himself and others that in America at least, the race was fair. People were not born into positions of power and wealth; everyone began the struggle to survive on an equal footing as far as class or environment were concerned. Innate talent and energy alone determined success. Therefore, those at the bottom had no cause to complain.
Secondly, Carnegie developed an idea of stewardship, which had the advantage of being consistent with his other ideas. He argued that every generation had to make its own success; hence, he opposed handing down huge inheritances to the next generation. He urged the rich to administer their wealth during their own lifetime for the good of society. Who better to administer vast sums of wealth than those whose possession of them proved that they were able, talented people? Carnegie spent millions on peace, libraries, parks, and concert halls. All of these, he claimed (apparently trying to avoid a contradiction with his Social Darwinism) were not forms of charity, but ways to aid and encourage those who wished to help themselves.
Carnegies gospel of stewardship thus sought to justify his wealth not only by seeking to prove that he deserved it, but that he would do good with it. But also, his libraries and concert halls for the people must have been intended to serve as pacifiers of the working class. Perhaps Carnegie felt that the class divisions, which clearly worried him in the opening paragraphs of his article, "Wealth," could be softened by a show of benevolence.
Carnegies doctrines raised as many questions as they answered. There was still a question of democratic control: by what right did an individual, however successful and talented, allocate societys wealth as he saw fit? The obviously elitist assumptions of the dogma could not be stilled by the simple assertion that Carnegie knew what was best for society. Perhaps he knew best how to make steel and fortunes, but that was something else again.
Moreover, much of Carnegies wealth represented not Carnegies superior talents (fine as they were), or the benefits of new machinery, but the labor of his workers whose wages he cut, whose hours he lengthened (in some cases to 12 hours a day), and whose output he speeded up. Many steel workers said: "Wed rather they hadnt cut our wages and let up spend the money for ourselves. What use has a man who works 12 hours a day for a library anyway?"
As events proved, by right of the law of the jungle. In two articles written in 1886, Carnegie had staked out a relatively liberal position on the labor question. He asserted that the right to join a union was "no less sacred than the right of manufacturers to enter into associations." Yet these sentiments meant nothing during the Homestead strike of 1892. Unable to stomach the job himself, Carnegie left Henry Clay Frick to destroy the steelworkers union by armed force. In practice, Carnegie naturally followed the laws of capitalist accumulation of profit toward cost-cutting, wage reduction, and total control over the labor process without interference of a union.
In Katherine Stones "The Origins of Job Structures in the Steel Industry," we can see what the results meant for workers, and in the process, gain further insight into one of our key questions, how industrial capitalism transformed the nature of work. The strike at Homestead involved more than a reduction of wages. The companys defeat of the union meant the destruction of the skilled workers control over the process of production. The defeat accelerated the transfer of knowledge, skill, and control from workers to managers, chemists, and engineers, often college-trained people brought in from the outside. More and more the blue-collar work force was homogenized into a semi-skilled mass.
But as the work force became homogenized and the skilled workers control over output was removed, two problems appeared to managers. First, the emergence of a unified class consciousness among workers, all robbed of their skills and occupying similar positions; and second, the slackening of incentives, now that the workers themselves did not control output. The managerial answer to these problems was in part to create an artificial job hierarchy of many levels and classifications - most steps of which bore little relation to real skill differences. With this new ladder, workers would have more reason to work hard, if only to move up from Class I to Class II laborer. Their concerns, furthermore, would be individualized. Each would think more of climbing his way up the ladder than of unity with fellow workers to remove the ladder.
This artificial ladder was not the only weapon in the steel owners arsenal. The industry employed thousands of eastern European immigrants. At first, many of them were simply glad to have a job, even if it meant a 12-hour day at 16¢ an hour. In hard times many went back to the old country, draining the working class of large reservoirs of discontent. Later, in 1919, these immigrants joined in the great (and ultimately unsuccessful) steel strike, but for a time they were a force that served managerial interests.
But as a factor in labor relations, the hierarchical reorganization so well analyzed in Stones article is more important in our study because it shows how industrial capitalism first beat workers down (in the Homestead strike), limited their control over production, took away their skills, and then, to avoid the consequences of working-class consciousness, re-created largely artificial occupational ladders which workers could climb, if only from semi-skilled I to semi-skilled II. Thus, slight upward mobility was made possible in the steel factories, to counter the actual process by which the work force was homogenized.
Could people in fact lift themselves up out of poverty? Andrew Carnegie leapt from bobbin boy in the textile mills to millionaire steel baron, but how many others did? How many workers went from rags to riches? How many even climbed from the working class to self-employment?
In the first part of the course guide, I argued that in the late 19th century, the opportunities for self-employment were shrinking. The Carnegies, those who rose from rags to riches, were quite rare. But what of the masses of people? Thousands of them simply dropped out of the records and probably wandered around, a mass of terribly poor people. For those who can be followed in the records, some upward mobility occurred. Rarely, however, did laborers rise from the working class to self-employment, much less from rags to riches. For blacks, there was no social mobility at all. For whites, especially native-born Americans, there were three kinds. First, as might have happened in the steel industry, small steps up the occupational ladders within the working class. Second, the acquisition of a home, and an automobile, these kinds of private property having now to serve as a substitute for the more substantial ideas of productive private property of earlier times (discussed in the first part). And third, for the most fortunate, movement up into white-collar work which, in the 20th century, also substituted for self-employment as a sign of middle-class status.
In summary, what happened in the late 19th century was that skills, control, and knowledge were taken from production workers, the opportunities for self-employment shrank, and small steps up an infinitely graded ladder served as the main form of occupational mobility for most Americans. Carnegie preached that struggle and self-help and hard work would bring wealth and power to the talented. Yet real opportunities even for the so-called talented were shrinking; opportunities even for workers with skills were eliminated in Carnegies own shops. The very achievements of men like Carnegie closed off opportunities to those who followed, creating huge corporations that only the wealthiest could challenge.
It was not by accident that at the turn of the century one of the most popular self-help stories was Elbert Hubbards "A Message to Garcia." The story did not call for a person of bold independence and initiative, but for one who could take orders and carry out decisions, with no questions asked. Not the robber baron, not the industrial pioneer, but the organization man. It was a far cry from the independent farmer or artisan of the early 19th century; it was a sign of how far the Carnegies and Rockefellers had reshaped the American economy and its opportunities.
SUPPLEMENTAL READING MATERIAL
Please read the article entitled "Wealth" by Andrew Carnegie, located at the end of this course guide.
My introductory lecture to this section provides an interpretation of Carnegie and suggests problems to guide your reading. Here are several specific questions that will also help you focus your study. (Not to be handed in.)
(* = Paperback, although some may be out of print.) None of the following is required.
WRITTEN ASSIGNMENT 1
The questions following will help you synthesize and evaluate the main points in all the material you have read to date, as well as in an additional book, Josephsons The Robber Barons. You must use:
Topic For Writing Assignment
Discuss the question of whether big business leaders like Carnegie, Rockefeller, Ford, Morgan and Gould were Robber Barons or Industrial Statesmen. Did they, in following their self-interest, fleece the public and hinder economic and social developments? Or did they develop the productive and organizational forces of the economy in ways that were beneficial for the society as a whole, even if their own motives were purely "selfish?"
Other questions, some of which you will have to discuss, include the following (this list does not exhaust the central points you may deal with):
Length: Up to 7 pages (no more).