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The breakup of Standard Oil

14 min read

From: acquiredfm

This article covers the period of Standard Oil from 1890 through its breakup in 1911 [00:01:17]. It also explores John D. Rockefeller’s legacy and philanthropy, and how the world today is shaped by his influence [00:01:27]. A key debate is where Standard Oil crossed the line from legitimate business practices, like operational efficiency and economies of scale, into abuses of power to grow profits [00:01:35].

Context: The Sherman Antitrust Act [00:08:31]

In 1890, the Sherman Antitrust Act had just passed [00:08:31]. John D. Rockefeller viewed it as dead-on-the-vine legislation, with nothing to fear [00:01:08]. The key modifying clause in the act was “in restraint of trade,” which was undefined at the time, making the legislation seem ineffective [00:08:50]. Despite this, Standard Oil had achieved significant market dominance, controlling 90% of the kerosene market [00:09:31].

Trouble began brewing in Ohio, where state legislators were upset with Rockefeller and Standard Oil [00:10:30]. In 1890, Ohio State Attorney General David Watson filed a case against Standard Oil, arguing that as an Ohio corporation, it was violating state laws by conducting illegal interstate commerce through its trust structure [00:10:54].

By 1892, the case reached the Ohio Supreme Court, which ruled against Standard Oil, ordering the dissolution of its trust [00:11:41]. To circumvent this, Standard Oil’s lawyers had a pre-existing escape plan [00:12:12]. New Jersey state corporate law at the time allowed corporations to hold stock in other out-of-state corporations without needing a trust structure [00:12:57]. This loophole allowed Standard Oil to reorganize and transfer all its assets into the new Standard Oil of New Jersey [00:13:43].

This overhaul was largely “shadow play,” a charade to appease the courts [00:14:17]. The executive committee was formally dissolved, but its members simply became presidents of 20 affiliated companies, continuing to rule as absolutely as before from Manhattan [00:14:31].

Rockefeller’s Retirement and Philanthropy [00:15:56]

Around this time, Rockefeller began to drift away from the daily operations of Standard Oil, suffering from health issues and the burden of managing his immense wealth and charitable requests [00:16:24]. He felt he had perfected the machinery of Standard Oil and his divine task was done, leading him to want to pass the reins to younger men [00:17:44].

At this point, Rockefeller was generating 24 million invested outside the company in railroads, real estate, and banks [00:26:36]. By the time he officially retired, he was worth about 80 million from a U.S. Steel roll-up [00:27:54]. In 1902, his personal net worth was approximately 1% of the U.S. GDP [00:28:35].

He struggled with how to best distribute his wealth, receiving thousands of letters a week asking for money [00:22:09]. This philanthropic burden led to a nervous breakdown and physical changes, including losing all his body hair (alopecia) [00:24:19].

In 1891, he recruited Frederick Gates to help manage his philanthropic endeavors [00:29:38]. Together, they essentially invented modern philanthropy [00:32:38]. Their approach was systematic and organizational, distinct from traditional tithing [00:33:13].

Notable philanthropic projects include:

  • Spelman College: Financed the building of this HBCU women’s college in Atlanta in the early 1880s, named after his wife Seti Spelman [00:33:36]. Rockefeller was an abolitionist and advocate for Black rights after the Civil War [00:34:51].
  • University of Chicago: Started as a movement in the early 1880s to build a Baptist university [00:36:23]. Rockefeller became involved and, after initial setbacks, the project moved to Chicago [00:38:07]. He deliberately avoided putting his name on the university to prevent public perception of seeking favor for his business practices [00:39:05].
  • Rockefeller Institute for Medical Research (later Rockefeller University): Established in 1901 in New York City on a Manhattan farm [00:42:53]. This institution focused on pure basic research, giving scientists control over expenditures, a revolutionary concept at the time [00:43:40]. It produced 38 Nobel laureates and contributed to breakthroughs like culturing the syphilis agent, identifying oncogenic viruses, discovering blood groups, developing methadone, and devising the AIDS drug cocktail [00:44:17]. Winston Churchill praised Rockefeller’s endowment of research as a “milestone in the progress of the race” [00:45:51].
  • Modern Medical Education and Public Health: Working with Simon Flexner, the head of the Rockefeller Institute, they adapted the Johns Hopkins four-year medical school model and spread it to other universities nationwide, standardizing medical education [00:48:41]. They also funded the creation of the first schools of public health at Johns Hopkins and Harvard, then globally [00:50:04].

In 1913, the Rockefeller Foundation was formally chartered, institutionalizing Rockefeller’s philanthropic efforts for indefinite perpetuation [00:51:37].

The Road to Dissolution [00:56:40]

Despite Rockefeller’s reduced involvement, the company’s dividend increased from 11% to 33% by 1899 [00:54:04]. The share price of Standard Oil also surged, rising from 458 in 1899 [00:54:49]. Between 1893 and 1901, $250 million was paid out to shareholders [00:55:30]. This profitability was before the mass adoption of the automobile, which would later make gasoline a valuable product from a previously “useless” byproduct [00:55:50].

In 1897, the state of Ohio again brought charges against Standard Oil, arguing they were still breaking laws despite the New Jersey reincorporation [00:57:25]. Rockefeller was called to testify and feigned senility to evade questions [00:58:12]. Though Standard Oil won the case, it helped shift public opinion against them [00:59:00].

During the 1896 presidential election, Standard Oil contributed a quarter-million dollars to Republican William McKinley’s campaign, who defeated populist William Jennings Bryan [00:59:25]. McKinley’s campaign manager, Mark Hanna, a high school friend of Rockefeller, sent a telegram upon McKinley’s victory reading, “God is in his heaven, all is right with the world” [01:00:43].

However, in 1898, New York’s governor, Theodore Roosevelt, began to challenge the trusts, including Standard Oil [01:01:36]. In a strategic move to neutralize him, Standard Oil and its allies got Roosevelt nominated as Vice President on McKinley’s 1900 re-election ticket, believing the role would render him ineffective [01:04:31]. McKinley won in a landslide [01:05:05].

In September 1901, McKinley was assassinated, making Theodore Roosevelt president [01:05:19]. This was Standard Oil’s “worst nightmare” [01:06:04].

The Role of Investigative Journalism [01:06:26]

Simultaneously, in September 1901, pioneering journalist Ida Minerva Tarbell began working on “The History of Standard Oil” for McClure’s Magazine, to be released in serial form [01:06:39]. This marked the birth of modern investigative journalism [01:07:26]. Historian Daniel Yergin called it “maybe the single most influential book on business ever published in the United States” [01:07:53]. Tarbell and her colleagues became known as “muckrakers,” a term coined by Theodore Roosevelt himself [01:08:10].

Tarbell had a personal connection: her father was an oil producer in Titusville who was “flattened” by Standard Oil, and her brother became a senior executive at Pure Oil, a competitor Standard Oil allowed to exist for appearances [01:09:09].

Tarbell’s work, after a year of research, meticulously documented Standard Oil’s machinations, including the Cleveland Massacre and secret subsidiaries [01:10:51]. She revealed that railroads were sending information about competitors’ shipments to Standard Oil offices [01:16:54].

The series ran for 19 monthly installments, tripling McClure’s circulation [01:18:18]. Standard Oil’s traditional response of silence, which had worked against local press, backfired with a national publication, making them appear “super freaking guilty” [01:17:28]. The profitability of the advertising-driven media model, partly funded by trusts like Standard Oil, ironically enabled the very investigative journalism that exposed them [01:13:50].

Federal Antitrust Suit and Rockefeller’s Evasion [01:20:57]

In 1904, Standard Oil attempted to apply its usual playbook, making campaign donations to Theodore Roosevelt for his re-election [01:19:17]. After his landslide victory, Roosevelt, feeling he had a mandate, stated, “We bought the son of a b----, but he wouldn’t stay bought” [01:20:05].

In February 1905, Congress passed a unanimous resolution urging states to conduct antitrust investigations into Standard Oil [01:21:06]. This led to multiple state cases, and Missouri subpoenaed Rockefeller to testify [01:21:16]. Rockefeller went into hiding for two years, literally on the lam, with warrants for his arrest issued by Ohio [01:21:38]. He even sent perpetual resignation letters to Standard Oil executives, who refused to accept them, fearing potential jail time for themselves [01:22:37]. An executive, Henry Rogers, was quoted saying they told Rockefeller, “If any of us had to go to jail, he would have to go with us” [01:24:21].

On November 18, 1906, Roosevelt directly ordered the U.S. Attorney General to file a federal antitrust suit against Standard Oil in Missouri [01:25:21]. The grounds were a violation of the Sherman Antitrust Act, specifically being “in restraint of trade” [01:25:55].

The Supreme Court Decision [01:28:29]

After years of legal battles, the case reached the Supreme Court. On May 15, 1911, Chief Justice Edward White read the decision in Standard Oil v. United States [01:28:34]. The Supreme Court upheld the lower court’s decision, finding Standard Oil was indeed “in restraint of trade” and ordered its irrevocable breakup into 34 separate companies within six months [01:29:12].

White, a conservative and business-friendly figure, used the opportunity to define “in restraint of trade” through his “reasonableness doctrine,” suggesting that not all restraints were unlawful, only “unreasonable” ones [01:42:36]. This angered progressives like Roosevelt and Tarbell, who sought to imprison Standard Oil executives and deter future monopolies [01:43:25].

Immediate Aftermath and Economic Impact [01:35:10]

When Rockefeller received the news of the Supreme Court ruling while golfing, he famously advised his golfing partner, a local Catholic priest, to “buy some Standard Oil stock right now” [01:35:53].

The breakup was an “inestimable service” and the “luckiest stroke of Rockefeller’s career” [01:37:12]. His net worth, estimated at 900 million by 1913, just two years after the breakup, due to the stock pops and the shift to the gasoline market [01:50:57]. In inflation-adjusted terms, this was about 470 billion in today’s terms, making him the richest person in American history [01:51:13]. He earned more money in retirement than while actively working [01:37:05].

The dissolution took effect on December 1, 1911 [01:39:13]. The 34 resulting companies became publicly listed, revealing their true underlying assets and profitability [01:38:28]. For example, Standard Oil of New Jersey’s shares rose from 595 within a year, and Standard Oil of Indiana’s from 9,500 [01:39:33]. Newspapers even began running daily box scores tracking Rockefeller’s net worth [01:40:07].

The former Standard Oil executives, who were titular presidents of separate companies, now truly were [01:40:41]. Yet, they continued to meet daily for coffee at 10:30 at Standard Oil’s former headquarters, a defiant gesture [01:40:58]. The phrase “The king is dead, long live the king” was evoked, as Standard Oil was “dead” but its constituent parts “lived” on [01:41:13].

The New Standard Oil Companies [01:47:24]

The breakup also fostered innovation [01:45:50]. Younger talents within the organization, previously stifled by the centralized structure, now had opportunities to rise [01:46:00]. Dr. William M. Burton of Standard Oil of Indiana, for instance, patented a “cracking” process in 1913 that yielded a far higher percentage of gasoline from crude oil, leading to “incredible windfall royalties” for Standard Oil of Indiana [01:46:34].

Many of the 34 spin-offs became major oil companies:

  • Standard Oil of New Jersey (Esso) became Exxon [01:47:38].
  • Standard Oil of New York became Mobil [01:48:37].
  • Standard Oil of Indiana became Amoco [01:48:40].
  • Standard Oil of California became Chevron [01:48:42].
  • Standard Oil of Ohio (Sohio) was acquired by BP [01:48:48].
  • Ohio Oil Company became Marathon (and Speedway brand) [01:48:56].
  • Atlantic Refining Company (Arco) was partially acquired by Sunoco and then BP, with its brand later sold to Marathon [01:49:04].
  • Continental Oil became Conoco, now ConocoPhillips [01:49:24].
  • South Penn Oil Company became Pennzoil [01:49:30].

Exxon and Mobil, as a re-conglomeration, account for more than half of the original Standard Oil business prior to 1911 [01:49:54].

Reflections and Modern Parallels [02:02:49]

The dissolution of Standard Oil was intended to increase competition and benefit consumers [01:41:45]. While Standard Oil’s monopolistic practices did at times become consumer harmful by raising prices [02:07:37], their standardization and operational excellence had also benefited consumers previously [01:42:01].

By 1911, Standard Oil’s market share had already eroded to 64%, with at least 147 other refining companies competing [02:07:54]. The maturation of oil discovery and drilling technology meant much more oil was available, naturally driving down their market share regardless of the breakup [02:08:39].

There are strong parallels between the Standard Oil story and big tech today [02:09:36].

  • Market Dynamics: Just as the oil market changed with the automobile and new discoveries, the tech market constantly evolves with new paradigms like Web3 [02:10:48]. The idea that “big tech has settled” or “this game is over” has been proven wrong, as new companies and markets continuously emerge [02:11:13].
  • Innovation vs. Regulation: Regulation, by definition, limits innovation [02:14:38]. Paradigm shifts and new technologies often break monopolies naturally, raising questions about whether legal intervention is always necessary, especially if there’s no immediate widespread value destruction [02:15:05].
  • Acquisition as Monopoly: Standard Oil’s roll-up of competitors through the Cleveland Massacre is directly comparable to Facebook’s acquisition of Instagram and WhatsApp [02:16:54].
  • Corporate Ossification: The “old guard” at Standard Oil became ossified in their views, failing to adapt to changing realities, similar to how leadership at some large tech companies might be perceived today [02:20:26].
  • Press and Agendas: The dual nature of the press—doing important investigative work while also having human biases and agendas—remains true today, as seen with media coverage of big tech [02:21:23].

Legacy of Rockefeller’s Wealth [01:53:50]

By his death in 1937, Rockefeller’s remaining fortune, largely in family trusts, was about 315 billion in 2021 dollars) [01:53:57]. The Rockefeller family, now seven generations in with about 170 heirs, still maintains an estimated $11 billion fortune (2016), largely due to extensive philanthropy [01:54:18]. Unlike the “shirtsleeves to shirtsleeves in three generations” adage, the Rockefeller family has managed their wealth with remarkable discretion and continuity, largely avoiding major public feuds or scandals [01:55:31].

Many institutions and places that don’t bear the Rockefeller name were touched by their philanthropy:

  • John D. Rockefeller Jr. financed and directed the construction of carriage roads in Acadia National Park [01:57:31].
  • He largely funded the restoration of Colonial Williamsburg [01:58:25].
  • He contributed $5 million to assemble land for the Great Smoky Mountains National Park [01:58:50].
  • Abby Aldrich Rockefeller was the brainchild behind the Museum of Modern Art (MoMA), built on land that was once the first Rockefeller mansions in New York [01:59:08].
  • Rockefeller Center was Jr.’s main business project, attracting media organizations like NBC [02:00:00].
  • Jr. donated $8.5 million in 1945 to buy the land for the United Nations building in New York [02:01:15].
  • He bought up land for what would become much of Grand Teton National Park [02:01:37].
  • Rockefeller investments also include large areas of Redwood State Park and Embarcadero Center in San Francisco [02:01:52].

The Standard trademark was doled out to the 34 child companies, with each owning rights in different states [02:22:10]. In some states, like California (where Chevron owns it), a few gas stations still carry the “Standard” logo [02:22:20].

In a significant recent development, in December 2020, the Rockefeller Foundation pledged to dump its fossil fuel holdings [02:23:16]. This means the descendants of the original oil money are now pledging divestment from the industry that created their wealth [02:23:39].

Grade: A [02:31:11]

From a pure shareholder value perspective, the breakup of Standard Oil was an A [02:28:46]. It allowed the market to truly see the value of each underlying business and its assets, leading to significant stock appreciation for the constituent parts [02:29:56]. This was the “OG value unlock” [02:29:56].

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