Erie Railroad

Rockefeller went to the hungriest railroad for his first rebates. Having learned as a clerk that posted freight rates were negotiable, Rockefeller targeted the smaller Erie, which needed traffic. Erie turned a 60 cent posted rate into a 10 cent rebate per barrel for the three biggest refiners, worth about $50,000 a year when most refiners lost money.

Jay Gould wanted big refiners shipping on Erie to boost its traffic so he could manipulate its stock. The offer went only to the three biggest Cleveland refiners.

Founders▶ 30:00

Erie's rebates were the product of earlier stacked advantages. Rockefeller borrowed heavily to grow, used his size to win transportation rebates, then used the extra profit to buy competitors. Gould's rebate offer would not have come without the borrowing, the growth and the focus on transportation.

The framing is one advantage stacked on another, with each step making the next possible. Rebates added $50,000 a year in profit while most other refiners could not break even.

Founders▶ 30:15

Standard Oil bought Erie's tank cars and got first call on them. The cash-strapped Erie sold Standard a fleet of tank cars. Standard got first call on the cars, paid a lower freight rate and collected rent when the railroad used them for other refineries.

The deal was part of Rockefeller's move from contracts to outright ownership of pipelines, tank farms, loading facilities and overseas wholesale shipping. Rivals' refineries ended up using Standard's distribution services, which added to its cash. Erie sold wide-gauge tank cars to Standard.

Founders▶ 30:41

Rockefeller resold shipping to rivals and earned on volume he didn't refine. Later Rockefeller got a rebate on his rivals' shipments too, and sold shipping to them at better rates than they could get alone. Standard refined about 1,500 barrels a day but shipped 4,200.

The source calls it a pattern: "Looking for points of leverage and finding hidden sources of profits is something he's going to do over and over again."

Founders▶ 30:00

Gould won Erie, then used the weakened line as a teaching platform. Gould, barely past 30, beat Vanderbilt in the Erie fight in the 1870s, alongside Jim Fisk. He then used the wounded line as a platform to teach northeastern roads what the business was about.

The line he won was short of cash, which is why it later sold tank cars to Standard Oil and gave rebates to its biggest refiners.

Founders