John D. Rockefeller (1839-1937) was a man whom history views with unfair controversy. America’s first legitimate billionaire, Rockefeller was worth $1.4 billion at the time of his death ($270 billion in 2022 dollars), equivalent to 1.5 percent of GDP, making him the richest American in history.
He was a self-made man who made his fortune as the founder of Standard Oil by facilitating an improvement in the average person’s quality of life through affordable oil-based products. His business practices laid the foundations for the big-business structures and playbooks that are still in effect today.
During his lifetime he was always a controversial figure, but his reputation suffered particular harm when journalist Ida Tarbell published The History of Standard Oil, which painted Rockefeller as a ruthless raider who frequently played dirty to destroy any competition willing to challenge him. In reality, Tarbell’s father was a rival oil businessman who decided to work against Standard Oil, and when he couldn’t compete on its level, he was driven out of business. Ida Tarbell presented a story in which honest men were making a good living until the evil Rockefeller appeared and stole it from them. This was an untruthful and unfair portrayal.
Development of an Industry
While Tarbell’s book is mostly stories about Rockefeller bullying businesses to either join him or go to war with him, it presents a detailed look at the early history of the oil industry. Prior to the 19th century, oil was not understood and it was viewed as a nuisance as it seemed to bubble out of the ground and contaminate fresh water. Eventually, someone had the idea to take this substance and bring it to a lab for study where it was discovered that it could easily burn. The first drillers showed up in Western Pennsylvania where this black substance was in high quantity and the oil industry was born.
The early days of the oil industry were a time when the black gold was incredibly easy to access and the barrier to entry for any new businesses was much lower than it is today. There was a ton of waste and a ton of inefficiency. Many people were getting rich quick and saw no reason to improve their business models. Drillers would often run out of barrels before they finished pumping and they would let the excess oil flow away, damaging the environment while also letting their product go to waste. Refiners specialized in turning the raw oil into kerosene, a process that retained sixty percent of the original oil’s quantity; they threw away the remaining forty percent, dismissing it as waste while also damaging the environment again. During the 1860s this industry was new and demand for oil from the Civil War and post-war boom made this occupation easy money for those who entered it. But like all booms, it could not last. When it did finally go bust, only the strongest businessmen survived.
While there would be many strong businessmen in this industry, only one would dominate it to be remembered today as a titan, John D. Rockefeller. Rockefeller’s success was due to many factors, but one of the most important was his pioneering of vertical integration into his business to cut costs. First, he hired plumbers to be directly employed by him instead of subcontracting the work which cut his costs for the pipes at his refineries. Second, he decided to directly manufacture his own barrels instead of buying from third party suppliers. This enabled him to have a product suited for his needs while it reduced his costs on the item by about sixty percent. These practices allowed him to reduce costs along with reducing dependence on other people or businesses outside of his control which increased his efficiency.
While other refiners were throwing away their byproducts from producing kerosene, Rockefeller was busy trying to see how these products could be useful. Through this he produced gasoline and petroleum jelly, along with other never-before-seen creations. He would utilize these new products in his business while also selling them to consumers. This increased revenues, and more importantly his profits, as the costs were already largely covered through the kerosene-making process.
One of the most controversial points of Rockefeller’s career concerned the Southern Improvement Company in 1872. Although he is probably the most remembered member of this scheme in modern days, the Southern Improvement Company was conceived by the heads of the major railroad companies where they colluded to divvy up industrial transportation before roads and modern vehicles existed. Under this scheme, Standard Oil and other large companies were given rebates and discounts on their shipping while small companies had to pay inflated rates.
This scheme would be made public and after its exposure, government authorities would work to put a stop to it. While Rockefeller benefitted from the scheme, he seemed to have little confidence in the good faith of the railroad companies. Determined not to have his business’s success be dependent on their power, he would go on to innovate oil pipelines as a way to transport his products on his own terms.
Part of the reason why the Southern Improvement scandal left a large blemish on Rockefeller’s reputation was because he went on to acquire 22 of Cleveland’s 24 oil refineries in what was called the Cleveland Massacre. This would initiate a pattern that Rockefeller frequently employed when conducting business. He would meet with a competitor and show them his books. The competitor would see that Rockefeller was too big and too efficient to compete against and he would be given the opportunity to sell his company to Standard Oil while being provided with an executive level job in the larger organization where he could make more money but would no longer be his own boss, or he could reject the deal and compete with Rockefeller.
Men like Ida Tarbell’s father who refused the deal would often find themselves out of business while men who took the deal became rich.
The Consumer Won
Rockefeller was larger than his domestic competitors and one of the weapons he wielded in business was the ability to sustain a price war. Some business battles would become so fierce that both sides would sell their products at a loss and the winner would be the one who didn’t go bankrupt. The real winner in these fights were the consumers, who were able to buy kerosene at cheaper prices.
While we are taught to view Standard Oil as a monopoly, we are also made to believe that monopolies are evil because they can gouge the customer without fear of being undersold. The reality was the opposite in regards to Standard Oil. While they did make significant profits, their profits were largely the results of cost efficiency and not higher prices. In fact, between 1870 and 1897 the price of kerosene fell from 26 cents a gallon to 6 cents a gallon.
While Rockefeller was ruthless to his competition, his duty was not to prop them up. He became a leader in his industry through hard work, his dedication to efficiency, and through innovation.
In doing so, he raised the quality of life for tens of millions of people while employing hundreds of thousands. He should be remembered today as a hero, not a villain. He left the world a better and more prosperous place than when he found it.
The post Why John D. Rockefeller Is a Hero Worth Celebrating, Not a Villain was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.