From: acquiredfm
At the time of Standard Oil’s rise, industrial capitalism in America was “raw and new,” and “the rules of the game were unwritten” [07:46:00]. Standard Oil effectively “wrote the rules” that would later become standard business practices, which subsequently led Congress to write rules about them [08:02:00].
Unwritten Rules and Early Legal Loopholes
Early in the 1800s, America was still young, predating the Civil War, Texas, and California, and corporate law was in its infancy [08:30:00]. Companies could not own property or operate outside their own states [01:08:50]. The ability to incorporate a business freely was a recent development, but national corporations were not yet a concept [01:09:36].
To circumvent these limitations and consolidate the industry nationwide, Flagler devised an innovative financial and corporate law structure: the joint stock company [01:10:06]. This structure allowed Standard Oil to buy and hold shares in other joint stock companies across different states [01:10:52]. On January 10, 1870, the partnership was abolished, and all assets were poured into the new Standard Oil Company of Ohio, capitalized with a million dollars in liquid assets, an unprecedented amount for an American enterprise at the time [01:11:45].
The Trust System
To overcome the interstate commerce issue, Standard Oil implemented the “trust” system [01:12:44]. The trust would hold shares in companies across the country, allowing trustees to manage these corporations, which were legally situated within their own states [01:12:59]. Dividends from all controlled companies flowed to the individual shareholders of Standard Oil of Ohio, bypassing the company itself to avoid legal issues [01:13:56]. This innovation in corporate structure is considered the birth of the modern American economic corporation [01:15:51].
The South Improvement Company
A significant early challenge came from the arrangement with railroads. Standard Oil, through Flagler, negotiated a secret agreement with the three largest railroads (Pennsylvania, New York Central, and Erie Railroads) [01:20:47]. They set up a shell corporation called the South Improvement Company (SIC) [01:22:27].
The deal fixed high shipping prices for all oil producers but offered a 50% discount to SIC members (primarily Standard Oil) [01:24:43]. More egregiously, SIC members would receive a “drawback” or kickback from the revenue generated by non-member oil producers [01:25:32]. This meant competitors were literally paying Standard Oil [01:26:20].
The agreement was kept informal, with no written documentation, to avoid scrutiny [01:32:30]. When asked in federal depositions, John D. Rockefeller claimed no involvement in the “Southern Improvement Company,” leveraging the misnaming of the entity [01:21:40].
News of the SIC deal spread, causing “literal rioting in the streets in Titusville” [01:27:47]. Public opinion began to turn against Standard Oil [01:28:10]. Although the railroads initially hesitated, Standard Oil used the threat of the SIC to coerce Cleveland refiners into selling their operations [01:28:51]. In six weeks (February to April 1872), Standard Oil acquired 22 of 26 refineries in Cleveland, an event known as the “Cleveland Massacre” [01:31:47]. Ultimately, not a single barrel was shipped under the SIC agreement, as its existence alone provided the leverage needed for acquisitions [01:32:20].
Public Scrutiny and the Sherman Antitrust Act
By 1877, Standard Oil controlled 90% of the oil business in America [01:33:12]. While consumers benefited from continuously upgraded products and lower costs, competitors, suppliers (railroads, pipelines), and retailers felt the squeeze [01:58:31]. Standard Oil’s aggressive tactics, including threatening to open competing grocery stores if retailers didn’t exclusively sell their kerosene, further inflamed public sentiment [01:46:49].
The public, fueled by long-standing American skepticism of monopolies and centralized power, became increasingly concerned about Standard Oil’s “octopus” reach [01:57:57].
In 1889, Ohio Senator John Sherman, whose campaign had been supported by Rockefeller himself, proposed an “anti-trust bill” [01:52:52]. The Sherman Antitrust Act passed in July 1890, outlawing “all trusts and business combinations… in restraint of trade” [01:53:32]. However, the term “in restraint of trade” was undefined, leading Standard Oil and Rockefeller to initially view the act as a win, believing it would appease the public without genuinely curtailing their power [01:54:05]. Rockefeller even continued to be a major donor to Senator Sherman’s re-election campaign in 1891 [01:54:27].
Despite its passing, it would take another 21 years for the Sherman Antitrust Act to actually bring down Standard Oil, marking the beginning of the end for the company [01:51:52]. The long-term impact of the dissolution of Standard Oil, and the subsequent formation of major oil companies like Exxon, Mobil, and Chevron, would continue to shape the industry for over a century [02:21:58].