Standard Oil Part I

so history and facts going up through 1890 who got the truth is it you is it you is it you who got the truth now welcome to season 9 episode 4 of acquired the podcast about great technology companies and the stories and playbooks behind them i'm ben gilbert and i'm the co-founder and managing director of seattle-based pioneer square labs and our venture fund psl ventures and i'm david rosenthal and i am an angel investor based in san francisco and we are your hosts today's episode is 150 years in the making david somehow we missed this ipo if or when it happened can we get a go can we can we still get uh get secondary shares we'll see let's get a little spv i think it might be of a spin-off or something like that at this point uh at least the standard oil that we will cover today never ipo'd it was privately held the whole time its financials were kept very secret that that must be why we we have missed

it until now david yeah it must be must be well this episode on standard oil is of course the oil monopoly founded in the 1870s by john d rockefeller the wealthiest person in modern human history embarrassingly until i had started to do the research i didn't realize the oil in standard oil did not refer to gasoline at least until much much later in the life of the company standard oil model t was like 1910 or so like totally standard oil pre-dates the ford model t by like 40 years yeah so well so yeah john d becomes the wealthiest person in like you know modern human history before gasoline yeah gasoline later turns out compounding uh compounding can kind of show up especially when the second business line gets layered on top but we will get into it listeners the other thing that is crazy that i want to point out i didn't realize how much standard oil is very much with us today despite being famously broken up the parts went

on to become both exxon and mobile marathon amico which of course is now a part of bp chevron and several other companies when you look at a gas station you are probably looking at some remnant of standard oil just wild just wild we will get much more into that next time yep so this one will be at least a two-parter it turns out the company responsible for creating the entire modern energy industry has a lot of wild stories so uh we uh we will uh in part one here just go through probably the sherman antitrust act but we'll see how far we get yeah we're gonna talk about standard oil today and then next time will be legacy all right before we dive in i would like to welcome our presenting sponsor for all of season nine pilot.com pilot is the backbone of the modern financial stack for startups and is back themselves by all-star investors like sequoia index bezos expeditions and stripe they are truly the gold standard

for startup bookkeeping they are truly the gold standard for startup bookkeeping ben do you know who else started their career as a bookkeeper john d john d rockefeller that's right today he would have started his career working for pilot uh so great now over to our conversation with pilot co-founders wasim dahir and jessica mckeller so for nearly every technology startup finance and accounting is not one of the things that matter and that you should do in-house so this is not a new idea startups have been outsourcing their finance and accounting for decades what changed that enabled you to actually build pilot as a technology company around this so i think there are really two trends that enable pilot to exist now sort of at this unique moment in time the first is really the rise of fintech the rise of sas the rise of the cloud and this back office stuff meaning even 10 years ago if you look at the

landscape stripe didn't really exist expensify didn't really exist gusto didn't exist your bank statement was literally a thing that arrived in an envelope at your home or your office so the fact there are these best of breed electronic systems that you can use to help you run your back office and that they all have apis is what enables a key portion of what we do which is the ability to programmatically ingest and transform data from a variety of data sources the second thing though i think is really a shift in the consumer's behavior which is that again you know even 10 years ago probably what the business owner wanted to do was to go downtown with the shoebox receipts to visit their accountant in person and you know talk to them in a office with a lot of mahogany or whatever and actually what the business owner wants now is the convenience of it being done electronically of being done well

being able to take care of this stuff you know it's saturday at 11 pm in their pajamas amazing yeah i don't know too many founders who are excited to go down to their accountant's office these days exactly wonderful you can learn more about pilot and whether they can help your company eliminate the pain of tax prep and bookkeeping by going to pilot.com acquired and thanks to a seaman jessica all acquired listeners if you use that link will get 20 off your first six months of service super excited to have y'all with us this season and uh seriously go check them out they're the best for sure love pilot all right well listeners before david takes us in as always this show is not investment advice david and i may have investments in the companies we discuss this is like information entertainment uh yeah if you go look let us know if you find the standard oil stock ticker you know we'd love to go check it out

evaluate no um yeah without further ado standard oil maybe pitchbook has some data on them all right uh well before we dive in here um we owe like a thank you like a shout out love we just owe love i just want to give a lot of love to ron chernow who is one of like america's just like greatest historians biographer of hamilton biographer and uh he wrote the book that hamilton's based on the play right that hamilton is based on yep and also wrote titan the biography the definitive biography of john davis and rockefeller that is the main source for this episode like seriously i know we talk about a lot of books on this this show but like pause this podcast right now go get this book in your preferred you know hardcover it's so good it's so good so good in fact without chernow's work we probably would not have ended up doing an episode on this like this the book was good enough that it sort of

uh emboldened david and i to tech podcasters to say you know what feels like it's within the scope of our show it's super rare so thank you and and uh i i got us i think the perfect place to to start is with uh with one of turnout's one of ron's quotes at the very beginning in the introduction to titan where he says the story of john d rockefeller transports us back to a time when industrial capitalism was raw and new in america and the rules of the game were unwritten as yet oh boy and this is just like i think more than anything we've covered on this show like standard oil wrote the rules like all the rules that we assume that we just assume are the rules the way business is done the way business is done the unwritten rules they wrote the unwritten rules and then you know congress wrote rules about them but we'll get to that we'll get to that yeah i mean the the era that you're thinking

that we should think of here you know this isn't the wild wild west this is the wild wild east like we're 30 40 years after our nation was founded here in the early 1800s the freaking civil war hasn't even happened yet nope no texas no california yes certainly early in corporate law but we're early in like all forms of human organization in uh in the united states law what is law uh speaking of okay so we start in 1810 in new york in anchram new york which is actually like not that far from manhattan it's about two hours by car north of manhattan but back in those days was a different world uh we start there with the birth of william avery rockefeller big bill big bill uh he would also go on to have a another nickname a big bill was one of those he was a large man um his other nickname was devil bill which he got because of his profession that he would grow up to participate of course we're talking about john

rockefeller's father here um devil bill big bill was literally a snake oil salesman you know like people use the term like oh like you know oh ben he's a snake oil salesman like no no like bill this is where the term comes from he sold medicines out of his like pack that he rode into town on a horse that like professed to be a doctor but you know they didn't do it and then he didn't do anything and then he got out of town before anybody realized uh wow that was his profession so one day when he is 26 years old in 1836 he rolls into a new unsuspecting community to offload his uh his his uh goods on shall we say richford new york which was in far far far away in central new york state and um there he encounters the davison family and uh the davisons are are quite quite unlike bill and the rockefeller they're upstanding they are upstanding they are devout religious christian followers extremely religious

very puritanical uh one might say in their attitudes more is except for the fact that they are baptist we're going to talk about that more in one sec but they're like for the moment they are they're quite different than bill's uh they have different moral compass than bill shall we say well yeah and they're wealthy that is the other thing they are quite wealthy so bills wild bills young bills big bills eyes light up when he sees the davison ranch and he uh so the story goes i think this is actually true one of his like um sort of tricks of the trade uh if you will was he would perfect he would pretend to be deaf uh and he would carry like a like a chalk slate around his neck and write on it and pretend to be deaf and couldn't speak and he's at the davison house and he's doing this little charade and he hears the uh i think eldest no second eldest daughter of the davisons a woman named eliza

pretty young girl say i would marry that man if he weren't deaf and dumb and miraculously oh my god the beauty of young eliza cures bill of his affliction and he can speak and he can hear amazing so the patriarch of the davidson family one john davison uh remember that name uh he's a little suspicious of what's going on here but nonetheless uh bill woo's eliza and they are married shortly thereafter they get married they settle down you know bill builds a house shack like literally people like built their houses back then a little ways down the road uh and they move in and the house you know it's a nice house so you know bill's like well we need a housekeeper here uh and i've got this old you know friend nancy uh why don't we why don't we have nancy move in with us and be our housekeeper well it turns out nancy was his girlfriend yeah oh this old friend you know she could help with the kids how you know

the housekeeping they didn't have kids yet but well not yet but again miraculously i don't know how both eliza and nancy start having kids [Laughter] you know you know what are the odds all right so we're we're we're painting the picture here like you've got this unbelievable swirling concoction of well-to-do religious by the book mom side of the family dad's side of the family uh not quite as uh upstanding of a human being uh perhaps uh always seeing all the angles that type of thing but here they mix and one july evening all of these forces swirl together and july 8th 1839 eliza gives birth to her second child in the host in the house they name him it's the first son they decide to name this child after eliza's father it was john davison they named the boy john davison rockefeller uh oh boy does little jd have a lot of both john davison and wild bill rockefeller in him so on the rockefeller side

uh little john is like he's like totally captivated by his dad by the way bill doesn't stop you know going off to test he's gone for months at the time uh when he comes back john like totally dotes on him he thinks he's the best he he would even for like the rest of his life rockefeller would like intensely defend his father chernow would write that in no area did bill impress his eldest son more or did his eldest son prove more impressionable than in the magical realm of money big bill had an almost sensual love of cash and enjoyed flashing plump rolls of bills and indeed one of bill's companions at the time would say of him quote the old man had a passion for money that amounted almost to a craze i never met a man who had such a love of money except of course for his son in the future and this is where we start to get into the ways in which his son would become like him but different and the the like

him is of course in this love for making as much money as possible the way in which it is different you know bill would come back from these trips and he would have a fat wad of cash and he would take the hundred dollar bill and he would put it on the outside he'd make sure that everybody knew that there was at least one maybe lots of hundreds in this fat wad of cash whereas john d would grow up and detest shows of wealth i mean the smallest house on the nicest street in cleveland and never ever even boarding a friend's yacht because ugh you know that your ostentatiousness offends me in my sensibilities and so it's just interesting to see i'm gonna keep being that person on on the show who's like interjecting ways in which he mixes his mother's side of the family into these lessons from his father oh totally well so speaking of you know his mother we said a minute ago that the davisons were

baptists and that was pretty um well not unique but um pretty different than some of the original protestant groups that had come to america you know a generation or two before the baptist you know like if think about it if you're american or know anything about american history you think baptist you think like church revivals you think like big showy you know theatrical uh the whole point was to evangelize and to recruit they didn't think that they were like the chosen people they were going off to the new land to be by themselves like no no we're gonna take over the world here we want everybody on our side right it was an evangelical religion which uh bodes really well for a religion growing and prospering and continuing when you can you know have uh an uh a mandate to keep bringing more people into the fold totally so here's where these these two sides of john's you know uh maternal and

paternal sides here seem like oil and water oil and water david they're not the baptists are all about the money they think money is also great they just think it's great for a different reason which is that the more money the more influence the more you know followers we can recruit into the fold and this also has a huge impact on on jd he would say later quote i believe the power to make money is a gift from god just as are the instincts for art music and literature to be developed and used to the best of our ability for the good of mankind having been endowed with the gift i possess the gift to make money i believe it is my duty to make money and still more money and to use the money i make for the good of my fellow man boom i mean duty he heard the word duty in there about making money that is god has asked him to go forth and make as much money as humanly possible it is this incredibly unique thing about john d

rockefeller where when you describe him as one of the wealthiest businessmen of all time and a philanthropist it's very different than the way that you would describe today's billionaires as wealthy people and it's not one then the other it's not career and then philanthropy like john d held these things to be intertwined that he should go make as much money as possible to give no penny away in any deal and any business dealing to always get as much as he could and to be simultaneously incredibly philanthropic and the the the purpose of making this money was to be philanthropic as if he were a better charitable allocator than anybody you know walking away from any deal that that uh you know he was a part of with any bit of edge totally i mean we're gonna we'll get much more into this as we go but like in every dimension wealth power control philanthropy impact john d makes like you know uh bill gates or mark zuckerberg look

like just children like it's uh it's wild uh so all this you know this upbringing this sort of you know amelia that he's growing up in uh in new york in 1853 when john is 14 and sort of you know a teenager sort of just on the cusp of manhood uh bill sweeps in comes back from one of his trips and decides announces that he is going to move the family away from new york to ohio specifically to strongville which ben is you know is right next to cleveland for sure strongsville ohio it's uh one of many wonderful suburbs of the cleveland area uh cleveland boy this is like this is like your homecoming this episode it's true like a lot of this episode takes place in places that were within like a half hour drive where i grew up oh so great so the stated reason for you know the move is that bill wants to go open new territories for uh for his business but there's actually another reason which is uh

he's got another new girlfriend back in new york named margaret uh and he wants to keep the families more separate oh boy uh so when they get to ohio wait so i'm sorry he got another family in new york and he's trying to create distance so there's children with three different wives that he's trying to yeah he's not moving to ohio to get closer to another family he's moving to ohio to get more distance more distance between his two well he kind of has i don't know exactly how this works out but so nancy the girlfriend he never married her he had kids with her he never married her uh he only married eliza but he wants to marry this new girlfriend and he's kind of things like i mean this is the world that america was back then he's like well if i just get you know like a state border between the two of them great i don't see why i can't have that's true there's no internet state registries are probably pretty

hard to you know go look something up in a different state wow uh so they showed they moved to ohio uh and at first before bill marries his second wife concurrently margaret um he sends uh he sends jon and his little brother william to a boarding house in cleveland to go to like a real high school in in cleveland um and that goes on for about uh two years and then when when bill actually marries uh margaret he sends a note to he sends a letter to john and says ah you know this uh schooling thing and the plans have changed and i i can't really pay anymore for you and william to go to school so you i'm basically deputizing you now as head of household uh and uh you're gonna have to drop out and get a job and find a way to support the family best of luck son talk about a wild thing to just hear and totally hijack your life plans totally uh this this really was not what john was planning but um

he does drop out of school and he decides remember he's got this this love of money he's like what what can i do um to make money well what if i sort of stay close to the money uh so he goes he pays 40 and does a three month crash course over the summer in bookkeeping and decides that he's gonna become a bookkeeper and this is gonna be his his path to supporting the family ever the sensible fellow uh when he finishes his his training and he's off to go get a job he decides that the way he's gonna job search is he gets a directory of all the businesses in cleveland and he looks up what their credit ratings are and decides that he's only gonna target the ones with the best credit ratings he's smart i mean to the extent that he thinks that the the access to capital is the thing that you know he wants to be close to you may as well only be a part of businesses with the best access to capital strength leads to

strength right so uh the story goes that he pounds the pavement for six weeks he goes to every firm on his list they all reject him but he's undeterred uh and he he just starts back up at the top so he goes to see all these companies like at least two some of them three times finally one company uh the partnership of hewitt and tuttle uh their two partners hewitt was the senior partner and tuttle was the junior partner they probably just get so tired of this little kid the 16 year old kid banging on their door that they're like all right fine you you can start you can you can work here you can be a junior bookkeeper this happens on september 26th 1855.

i get this for the rest of rockefeller's like 80 plus year life he celebrates september 26th as his job day i love this like more sacred than the birthday job day was the day it's like the day he was you know baptized into capitalism by being able to make money in the world absolutely uh and literally it's like it's like this is the big deal every year in his life like it's bigger than the birthday it's his job day except he's you know he's starting in labor not in capital but but he he makes the transition pretty quick don't worry so he gets to work uh he becomes basically like the best bookkeeper uh that history had seen before or since uh at least until pilate and um chernow writes about about about this john betrayed a special affinity for accounting and an almost mystic faith in numbers for rockefeller ledgers were sacred books that guided decisions and saved one from fallible emotion

uh well of course they're sacred like the the numbers in the books are money it's the divine you know god-given path to be close to the money and get as much of it as possible yeah i mean absent the divinity this is very buffet-esque i mean at a young age having this sort of respect and obsession with the numbers it's it's wild how uh i didn't talk about this earlier but they're actually supposedly also when john was a younger kid he would also like go to the general store and and buy like uh a big block of candy and cut it up into little pieces and then sell the little pieces or no no way to other kids yeah just like uh buffett and uh gum right yep sticks of gum yep uh so um so he goes to work uh uh in this firm now now what is uh what is hewitt in tuttle they are a merchant trading firm that specializes in produce commodities so think like you know like foodstuffs like things that people would eat you know

meat uh vegetables produce stuff that's coming off of the farms that you know is in the rural areas that we were just talking about going into cities like cleveland i assume they mostly dealt in stuff the foodstuffs that came into cleveland to then be you know sold in stores and consumed by the new newly rising urban populace right or lake erie i mean lake erie was a unbelievable sort of means of transport all the great lakes moving stuff around from canada the other great lakes states coming in the st lawrence seaway from the atlantic ocean just a lot moved by boat then totally totally so um uh john d is rising quickly through the ranks uh pretty much immediately they give him a 50 raise because he's doing so well even his little kid uh in 1850 the uh beginning of 1857 uh so not quite two years after uh john joins the firm tuttle the junior partner leaves uh to go seek his own you know fortunes uh out from uh the under

the thumb of the senior partner hewitt and who it's like all right well john you're you're you're my new uh partner not partner but you know you're gonna take uh tuttle's role here um john is like well that's nice are you gonna pay me like a partner and uh uh here it's like uh dude you're like 17 years old like no um john is undeterred though and uh this is pretty crazy so you know he's like head of household supporting his family he's already making a lot of money he's got this great role um but the next year in 1858 he's like i i think i'm doing the work of a partner in a merchant trading firm i'm gonna go be a partner in a merchant trading firm so he hooks up with a much older uh gentleman named maurice clark that he had met doing his accounting his bookkeeping training and they go in 50 50 on a new merchant firm called clark and rockefeller and like doing the same thing still produce and meats and treat

food stuff exactly foodstuffs produce uh things go like okay at first for a couple years like uh they actually was like 18 59 60. yeah 59.60 uh they actually they managed between the two of them to put four thousand dollars in capital into the firm to start it to start the trading operations which like was a lot of money uh and rockefeller put in half of it it wasn't rockefeller like finding ways to borrow from devil bill at like kind of i mean there's like 10 interest rates and 15 it was kind of like devil bill was kind of figuring out ways to take advantage of his son devil bill definitely had his hands and uh had his sticky fingers in all this uh that is for sure um so things go like you know okay but they have some losses they actually have to bring in a third partner uh i think in 1860 uh to sort of shore up some losses and bring more capital into the firm but then in the next year in

1861 and just to put a point on that the the reason the capital is so important is like they basically need to uh have enough on hand to basically make the purchases and then hold the inventory until they can go and sell it because they're not you know the there's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle yep so you know things are going okay and then 1861 something big happens in america yeah like very big the north goes to war with the south yeah fort sumter the civil war uh one rockefeller doesn't fight in the civil war despite being what would he be 21 22 years old at that point in time like prime fighting age he hires a substitute uh there was technically a loophole he was as if you were head of family you didn't have to fight he was effectively head of his family he even has a you know rockefeller's very um careful in how he

messages the strife going on in his family he never throws his data to the bus he always holds everyone at least outwardly in the highest of esteem uh and so the way that he sort of drops a hint here at some point is he says that you know how could i how could i go fight in the war when the business would die it was young it was fledgling uh and you know so many relied on it and that's sort of his him alluding to like look like my whole family kind of needs this business to stay alive yeah so um so he doesn't go fight uh although he he was a strict abolitionist and that was a big part of the baptist cause um uh he doesn't go fight uh but for his business that you know he needs to survive the war is a pretty big boon for commodity prices specifically food stuff prices i mean you got to supply an army with food somehow uh yeah there are a lot more orders in demand for you know pork belly and the like coming in thanks to the war

so this drives up the price of foodstuffs uh through the roof in 1862 the first like full year of the war the firm clerk and rockefeller they make a profit a trading profit of 17 000 which i believe was four times all the money that they had made in all the previous years of operations of the firm so like wow they are living large like they're swimming in profits they literally don't they can't buy enough uh enough goods to trade enough enough produce to uh foodstuffs to try to make more money they got to put this money somewhere so what do they do well right around this time people in cleveland are starting to hear about an interesting development that's happening not too too far away in western pennsylvania in a tiny little hamlet called titusville in western pennsylvania and maybe i bet some ben's obviously smiling here uh some of you are maybe smiling hours of but probably most of you are like

uh what are you talking about here like titusville pennsylvania like i have no idea where you're going with this everyone knows david that the center of the oil world is not the middle east or russia or alaska or texas texas but western pennsylvania western pennsylvania that's right so i had no freaking clue until reading titan doing the research for this episode for like decades the entire like the center of the oil industry in the world was this small little town for like 50 years for like 50 like literally i mean there were some producers some oil oil mines uh oil rigs elsewhere but like very small like most of the oil in the world came from titusville pennsylvania and we should and not just titusville but other you know uh oil creek and other areas of western pa that had had oil discovers so this is all going on it's not that far away from from cleveland uh for the first couple years of this going

on up until the civil war the whole industry is just based there in titusville they drill for the oil the oil comes out of the ground they refine the oil they make kerosene which is what when we say they were refining like it was a pretty uh rough process i mean they were i think pretty early they figured out you could use sulfuric acid to refine and separate the kerosene out but like a crap ton of sulfuric acid and like doing this in like large wooden boxes with cracks in it everywhere and it's just sloshing around and spilling all over the ground like it is a gnarly process of quote unquote refining yeah super super gnarly but right as rockefeller and clark have all this money that they need to have something to do with people come up with the idea like so the with the oil they were finding it into kerosene kerosene the main use was to burn in lamps uh and like where do you need lamps and

artificial light more than anywhere else you need it in cities uh people realize you don't actually have to refine the oil in the same place that you drill for the oil so all of a sudden now people like wait wait we can buy the oil that comes out of the ground crude oil from titusville bring it into our cities refine it in the cities and then sell it sell the kerosene in the city for unlike that's like a really good business that's a good place to park some capital totally and like at the same time all these interesting tailwinds are happening where cities are blowing up i mean you have this sort of like uh industrial revolution that's happening where people don't just live in in the uh rural areas and farm anymore they're starting to be a lot more industry in cities you have for a while only rich people could basically get oil to to you know burn at night most people would just the sun would go

down and then they'd have no light they'd go to bed but like whales whale oil yeah whaling industry which i think if you isn't that uh in the where hathaway of berkshire hathaway hathaway came from from the originally the whaling industry but kerosene's like way cheaper than whale oil which had a massive shortage and it's obviously terrible that we kill whales to harvest the oil oil like way cheaper way more plentiful it's a pretty clean thing to burn relative to the other stuff that people were trying to burn so unlikely you'll like die of fumes in your house right so this is huge you know and the key word you said you know it's cheaper of course easier to drill into the ground than go like harpoon a whale and you know all that it's really bad to drill in the ground too people aren't thinking that at the point at this point in time yeah this is an infinite resource here yeah totally um but the plentiful is the key word

so like you said it was only rich people that used whaling oil that they could have light at night but the new demand like with the civil war going on the war and then and then industrialization afterwards you need light for commerce for like industry like it's not just so that rich people can have light you need to like operate factories and like do all this stuff you need light so there's a lot of demand um and kerosene is the answer so rockefeller is like oh okay okay cool like this is a new commodity uh they start trading a little bit in this uh clark and rockefeller um they start making some profits but of course rockefeller is feeling a little hesitant to do too much of it because he's like ah this is speculative like who knows when this will dry up and you know there's already been some like boom bust cycles in this like food stuffs are kind of our thing so you know i don't want to dabble too much

in this speculative weird oil thing we don't want to dabble too much into that and and i think initially they were trading crude um but then like i said people start to realize wait a minute we can we can refine in the cities and this is like really like early knowledge this is like uh this would be like in uh i don't know 2011 if somebody came to you and well like hey there's this thing called bitcoin and now don't just buy it but like i know how to set up rigs to mine it you know and like why don't we just take some old computers you have and like find it uh so this is like really hard to get knowledge and it just so happens that the one guy in cleveland a guy named samuel andrews who knows how to refine oil is buds with rockefeller's partner clark well that works out he's like a chemist right he's a he's a chemist yeah i mean chemist in quotes here well but there's like real science involved in like applying

the sulfuric acid and yeah no like you know separating the kerosene from the gasoline and other crap that's left over that you don't have anything to do with which by the way they just pour that stuff into the river oh totally in fact it's a fun little cleveland trivia there's a uh so everyone knows like the or a lot of people though the cuyahoga river caught fire many times there's this great um uh great lakes brewing company beer called burning river ale or something and that's where it comes from totally because under the cover of night these refineries would like have all this extra gasoline left over cars wouldn't be a thing for 30 40 more years they thought the gasoline was like useless and they would just like drip it into the river yeah oh awful god just wild just wild so andrew's the chemist who knows how to how to refine kerosene uh he's buds with clark he goes to clark one day in the

office in the you know with the the the merchant office that they have and uh he asked if he's like hey i think it'd be a pretty good investment uh i know how to do this nobody else around here really knows how to do this i think it'd be a good investment why don't you invest in me and we'll set up a refinery and we'll start refining here in cleveland so the story goes that uh clark is like look man like we're buds but like i'm not i'm not too interested in this like we're really we we really just don't have the cash like i wish i could but we don't have the cash but rockefeller overhears what's going on and he pipes in and he's like hey actually i think that's that's that's not a bad idea i'm interested in that uh and clark of course knows that you know rockefeller is really good at this stuff and he's like okay uh fine they turn around they invest four thousand dollars on the spot to go set up a new refinery

wow i think which is a lot of money that's the same amount of money that they started the firm with uh but they've got all this cash down so later that year they open the excelsior works refinery and a strategically chosen spot in town ben you'll probably know exactly where this is in the flats right uh yeah i think in the flats it's uh an area that has access both to the cuyahoga river and to the terminus of new rail lines that are going into cleveland yeah and like super industrial area actually in the last few years has been like an amazing amount of renovation and like cool stuff that's going on there so you have this like interesting confluence of the river and like everything left over from the standard standard oil days and like the steel boom that happened in cleveland and now this redevelopment but yeah it's totally the the city area that's up against the waterfront huh interesting we'll have to

go do uh do a field trip there for sure we'll do a trove a trip okay so raqqa this is like he is like a pig in mud here i mean like he was a bookkeeper he's so meticulous he loves money he loves profit he was focused on trading before but now he's got this operation this refinery and he becomes like literally he's like the morris chang of oil refineries like he's experimenting with constantly tweaking the process you know andrew's the the chemist is like dude i'm like the technical talent but rockefeller's like everything around it the operations how crude comes in how they refi like where things are located in the factory he's a b testing like he's doing oh wow all sorts of stuff he's always looking like any efficiency and it's all with a view to it it's not just like like better is good but it's all the view to like profit like profitability like we want to run this as lean as possible make as much god

told me to make a profit and i am here to make a profit by the way put a pin in that morris chang thing because there's an interesting way that they are very much like tsmc that i want to talk about later oh let's come back so he's focused like this is so different you know there are other people that are setting up refineries in cleveland and elsewhere but they're just like they're just picking up hundred dollar bills off the ground like they don't care about optimization they don't care about like uh you know efficiency they're just like look hey it's a gold rush like we're just like like give me the gold and i'll just take as much of it as possible if it goes away tomorrow that's fine yep it's high margin dollars just flying out of the ground it's a rockefeller though like he's uh you know all of this the behavior of the other folks this causes huge gyrations in price like it really is

it's like the early days of bitcoin i mean still today in crypto like things are flying around like all the time like prices could be you know 12 dollars a barrel they could be 12 cents a barrel for oil and it all depends on i mean two things one is who found what and two is what do people believe people have found recently and so like prices would be impacted by word of mouth traveling and saying hey i heard there's a big gusher going on in this city right now and people would be like well i guess i'm not going to buy for a while because i heard there's a big gusher and so prices are going to go down yep so rockefeller though like he's he's just got this vision where he's like oh man the more profit i make the more money and more capital i can put into this the more oil i can hold the more i can produce and when the price crashes i'll just keep buying like i'll just keep he's like he buys the dip like over

and over and over again uh and because his operations are so much more efficient and so much more profitable he can he can afford to pay like more than anybody else he can afford to hold this stuff longer he's like really thinking long term in a way that none of his other competitors are oh and we should say like when we say he's tweaking stuff he's so so much more profitable he is both horizontally and vertically integrating so like let's talk about vertically integrating first he's doing things like realizing geez we're hiring a lot of like plumbers to come in and oh this is so good i love this lay this pipe every time we do a build out and so they do things like hire their own plumber and hire their own blacksmiths and decide actually we should do this ourselves and that way we can save all this money on piping instead of buying it from a third party contractor later down the road he even

plants a forest like buys up a forest so that they can uh cut down the trees themselves to build the barrels out of their own barrels and they save all this money rather than buying barrels from somebody else and then of course they can innovate on the barrel making process so he figures out oh if we treat the wood in the forest then it's lighter and cheaper to ship back to the refinery so we save all this money on transportation so that's like the vertical integration side of things which would be crazy enough but he's also horizontally integrating he's figuring out that wait we do this process how else can we how can we sort of use the whole buffalo like what can we sell the gasoline for what i think they invent vaseline yes they i think they buy the company that invents vaseline but yeah they like like petroleum jelly which is one of the byproducts they commercialize it right they figure out how to use every little

piece of everything that they're doing to go you know there's a new market invented for every little by-product of the standard oil production process so great so uh rockefeller is like i mean he he's he's like found his calling here like this is like divine like uh uh passion here there's just one problem which is the partner clark clark is like not so into how much capital uh rockefeller is tying up in the business here he's like uh hey we're like merchant traders the point is profits and then we keep the profits and rockefeller's like no like reinvested r d and like capex and uh and inventory um so uh rockefeller starts going around all the banks and all the financers in cleveland and lining up he's just not not even using just the profits from their operations he's getting more external financing to finance growth here oh totally like when i when i say both vertically and horizontally integrating like in the

horizontal sense he is obsessed with trying to figure out how to be the sole supplier of oil to the world like as soon as he figures out that there's economies of scale here he's like okay cool how do we like start the flywheel get as much capital as possible build out as much production as possible start having agreements with whoever's got rights to the land as possible so we can start vending to the world yup and own this super strategic choke point of refining in cities so uh clark is like spooked by all this uh chernow has this amazing quote that he finds from rockefeller i don't know where he found this this i should look up in the in the notes at the at the end of titan this is so good rockefeller apparently like wrote or said this at some point clark was an old grandmother and was scared to death because we owed money to the banks so great so rockefeller engineers a coup this is so

good like and and clark's summer clark's brothers are also partners in the business at this point in time they get into all these arguments so john baits them one day into threatening that uh that they should just dissolve the partnership and john's like okay great let's dissolve the partnership because he knows that if if he goes to them and says look i don't think you guys first of all i don't think you are risk tolerant enough second of all i don't think you're upstanding like i don't think you're men of god the way that i am and therefore i don't think you're worthy business partners because i think you're gonna be a risk to the business uh and so i want out like he knows that he loses leverage by doing that so that's why he baits them into you know doing their normal thing of getting all up at a fit and saying we're gonna back out yup totally so he rockefeller immediately goes to the

local paper uh and places a notice that the partnership is dissolving and that there's gonna be an auction for uh the assets of the partnership including the oil refineries and it sets up this showdown where the clark brothers and rockefeller bid against each other for each other's 50 uh stake in the business which is by the way a great way to do it like if you've got a partnership that's blowing up like all right whoever wants to pay more to buy the other person out is the person that should get to own the whole thing and so the idea of a bidding war between the two of them to figure out how to figure out how to value the business makes total sense between the two principles uh so rockefeller though remember he's got he's been going and getting the relationships with all the banks and financers he lines up financing in advance of the auction so he's got basically unlimited resources although it's still

the price ends up stressing him out he buys clark's 50 of the oil business for two thousand five hundred dollars and in exchange also gives clark rockefeller's it gives gives clark his 50 share of the produce trading which by the way that that's something he probably buys them out for like three to four million dollars something like that in 2021 yeah yeah so you know good good chunk of change yeah but that 50 that's 72 500 or you know however you want to think about it that's 50 of standard oil right there wow rockefeller would say later it was the day that determined my career probably bigger than job day i felt the bigness of it but i was as calm as i am talking to you now he's talking to his biographer later he's just like this is like what we're gonna see like this man has ice not ice water like literally like solid ice running through his veins it's crazy so so this was a big price

it was more than rockefeller wanted to pay but this happens in 1865 in the beginning of february of 1865 back to what's going on in america two months later general lee surrenders to grant and the civil war is over and with the civil war over what's less important commodity produce trading and what is all of a sudden a hell of a lot more important oil industry urbanization everything well because all these soldiers are coming back and getting jobs in factories like you have sort of an industrial boom here and it's interesting how rockefeller is sort of obsessed with i'm not a speculator you know i'm not one of these people rushing to prospect you know various plots of land in western pennsylvania we are you know it's funny that it's i would say a picks and shovels play but actually this predates the gold rush by 50 years so it's it's pre-picks and shovels well it depends which gold rush i think the california gold rush was

even a little earlier but like it would go on for a long time i don't know when levi's was started that would be another good one to do someday totally i guess the point to make here is he's doing the predictable reliable stable very strategic part of the value chain he's not out prospecting land yeah well and that you know to just doubly underscore strategic like this you know i don't know it did did rockefeller know the war was going to end in two months i mean probably i think sherman's probably march into the sea at this point um uh but uh but yeah just being able to see after the war how important this is so chernow writes quote the war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine which had yielded a rival illuminant called camphine the war had also disrupted the whaling industry and led to a doubling of whale oil prices moving into the vacuum

kerosene emerged as an economic staple and was primed for a furious post-war boom this burning fluid extended the day in cities and removed much of the lonely darkness from rural life soon john d rockefeller would reign as the undisputed king of that world [Laughter] so he's now got the oil operations the refining business all to himself december of 1865 the war is over all this is going on he opens a second refinery in cleveland next to the excelsior works with a new name that he really he chooses he wants to he wants to let everybody know that his oil his kerosene his business his operations is going to be bigger than anyone else it's going to be the best quality there's not going to be any low quality kerosene coming out of this and it is gonna rain from c to c what does he call the new operation standard oil well the uh first it's the factory is standard works the standard works and then it becomes oh really yeah uh so the

first one was the first refinery was the excelsior works and then the standard works is the name that he chooses the standard he's setting the standard and importantly yeah it's about setting industry standards i mean for him he was observing i know i'm hammering home on this like speculators and cowboys thing but like especially after the war you've got all these soldiers who are trying to figure out what to do with their lives and they're going and they're you know working and drilling and so you have all these people that have i think in the book it refers to someone with a gun and a canteen and and uh you know their plot of land in pennsylvania and like i think rockefeller is basically observing that the kerosene that could power the world is uh volatile in price people are scared that it's not safe because it's being refined in questionable ways and so people's houses are burning down you

have you know like there's not professionalization in the kerosene industry the way that he wants to bring it so this this notion of standard is almost like kind of like the tsmc chip yield thing like everything that comes off of our line is super high quality it's it's totally that is that is exactly the same analogy like this is not necessarily easy stuff to do you can do it cheaply and poorly um but they're gonna set the standard so and by the way at this point he's now figured out that he can run the factory on gasoline so the standard oil factories are burning less coal than their competitors and using the gasoline byproduct oh that's so great so they're literally feeding themselves yep ah so you said something a minute ago when you're talking about this you said selling this oil this kerosene to the world so by the very next year in 1866 you know america is a big market and is going to grow hugely especially after

the civil war but do you know what's a bigger market the rest of the world especially at this point in time i mean america is not america yet it's i don't know how many hundreds a few hundred million people tops oh no no well it's 300 million people now so three three oh sorry i'm at the global population it's a few hundred million so oh that's a good question i don't know what the global population is around then but yeah i mean america is probably 30 40 million people yeah maybe if that uh you keep talking i'm gonna google this okay okay great well so by the very next year in 1866 the fledgling standard oil company is already selling two-thirds of their kerosene overseas primarily to europe so like one-third domestic two-thirds two-thirds international already 31 million people in 1865. wow god that's so crazy to think about america having 31 million people uh so they're selling all this um they're

selling most of their their you know oil overseas uh he sends he dispatches rockefeller dispatches his little brother william who's now working in the business to new york city to go handle all of the export business for standard oil do you know the story about when he went to new york city and needed to raise i think it was fifty thousand dollars oh i don't know oh yeah well it's a great story so uh this is in chernow's book rockefeller has a bit of his father in him uh sort of a flair for showmanship and he really needs fifteen thousand dollars like he needs a loan pretty quickly and he's sort of looking around for financiers for it and um you know he he dresses very nicely and he presents himself nicely and he walks in areas where he's sure to bump into people and at some point someone stops his carriage and looks over and says oh mr rockefeller could you could you use a 50 000 loan and of course rockefeller is like

jackpot and he sort of looks at him like without breaking and he looks at him he goes hmm could you give me 24 hours to think it over yeah and of course by doing that he gets like the best terms on the loan i'm not sure i really need this he's unbelievable at like getting his hands on way more capital at way better terms than other people would be able to oh so good so good that uh uh that story was so good i think that one that happened back in cleveland right was that in cleveland i think that one was in cleveland yep yep but uh but now that now that they're now that william's in new york and the family's got the family uh has got operations in new york they can get like you know like oh mr mr sir rockefellers could you use 250 000 or 500 000 so pretty soon they're like bringing a bazooka to a like a fistfight with with the other refiners out there and it's kind of like uh this whole this whole

like part of the story just reminded me so much of like the uber days you remember when uber went out and raised all that money totally oh we're gonna flatten lyft and uh and dede and all the global competitors that like ah it was totally it was the uber playbook except like it really worked speaking of uber right after uh william goes to new york the sort of um shall we say emile michael character of uh uh of standards stretching a metaphor i'm stretching all right i'm stretching it too far but uh an interesting uh colorful character comes into the fold in the fledgling standard oil empire i uh i've been posting on twitter like all the fun stuff like just because i've been enjoying this research so much and i posted about this guy henry morrison flagler on uh on twitter and uh andy sparks replied to my tweet with i think like the best the best one-liner about flagler possible he says quote

flagler was a savage oh and he was really like he was like you know rockefeller he's driven by this divine calling he's willing to go to the mat he's willing to do just about whatever but it was flagler and then some of the other lieutenants that he brought in that were like they're the ones who did the dirty work oh yeah because rockefeller needed to you know he needed to preserve plausible deniability left right and center especially once he figured once they figured out all the business tactics that were really going to let them press their advantage you know he had some he had some very bad lieutenants so he could stay as plausibly good as possible although he would rockefeller was for sure the one pulling the strings so flagler ends up coming into the business coming into the business because um he has a wealthy relative uh named steven harkness who hears about what's going on and wants to

invest like equity dollars into this new standard operation uh so he invests a hundred thousand dollars in in the operation which oh my goodness like i i didn't actually find like what the you know sort of net worth of the harkness family ends up being because of this but like enormous yeah it has to be just generational wealth and his his sort of one term that he asked for as part of investing is that he wants i think maybe flagler was his nephew or something he wants flagler to join the firm as treasurer to quote keep an eye on his investment and so flagler joins and literally this is what i tweeted he keeps a quote on his desk at standard oil for all the time he's working there the quote says do unto others as they would do unto you and do it first oh my goodness so flagler takes over the negotiations for shipping of oil with the railroads you can if you know anything about standard oil you can see where this is

going uh when rockefeller was running negotiations with the railroads uh he always was able to get pretty good rates uh shipping rates because he had a batna being there in cleveland on lake erie totally it's during the during the summer months in the spring and fall we can ship way cheaper by sending it you know out by water by water yep so all the the crude coming in from titusville to be refined in uh in in cleveland at standard uh could come in over the water or by rail and then when it was going out to then go off to the rest of the country and the rest of the world he he had another option flagler he's like oh this is nice that's cute [Laughter] let's exercise our power a different way yeah what about if we go to the railroads and we're like hey guys it's really expensive to operate these railroads um what would you say if we were to guarantee a really really really large amount of

minimum shipments of oil that we'll do with you in exchange for us guaranteeing you guys like an unbelievable amount of volume that we'll do on your railroads you give us an equally unbelievable rate shipping rate like cost of of doing this the railroads are like uh yeah that sounds good except but the railroads are like wait a minute but you don't make that much you don't make that much money yeah well and where's all this oil gonna come from well specifically the railroads think this sounds really good because with the amount of volume that they're talking about this means they can run dedicated lines of just oil tank cars so not mixed trains with like box cars and oil cars like just oil tanks between titusville and cleveland with no stops so if you think about operating a railroad like if you have different types of product that you're loading on onto the trade that takes more time and

money and they were gonna they were like being forced to stop to pick up like one car and exactly and then all these stops that just adds up you know it costs money right you know time is money here so they they love this but as you said ben they're like well how uh you know uh henry like this is a this is a great idea but how are you gonna do it you don't have enough capacity and two other things before we answer that question one is um just to give like the magnitude of how much this helped them it lets them own way less cars also like the railroad they get to go from something like needing to have 150 cars to be able to like make the same amount of money on like 40 or something just like dramatically smaller and the other thing is standard oil has started to like really build up some credibility here because when people were putting oil on trains before like they were sloshing around in like open wooden

boxes and like standard oil pioneered you know hey we're gonna put them in like tanks and then eventually metal tanks and it really like eventually we're going to make railroad cars that are like the car itself is just a tank yep and fast forwarding a little bit like oh railroads what if we made those tanks for you uh but we're getting ahead of ourselves so flag was like don't worry guys i got this so he goes around to all the other refiners like everybody else in cleveland and he's like hey guys i have negotiated a great rate for all of us do y'all want to come on board together and we'll all like pool our you know our shipments that we're all getting in from titusville and uh by doing this all together we've got this great rate and he's this is an offer that they can't refuse and not only can they sort of not refuse it because uh what happens if we say no but like this is their major cost driver

like they're in a commodity industry at this point and so transportation is like distribution of the oil is actually the big driver of the business yup yup so okay everybody's like well this is fantastic fighter's like okay great great let's do this but uh you know one thing like um let's not write any of this down okay let's just keep this all this little gentleman's agreement between all of us and the railroads nobody we don't need any feds you know sniffing around here feds quote unquote if they're even more anything well basically if anybody ever asks us if we have an agreement there's no agreement that we everybody can look at each other and go i haven't seen an agreement yup totally so this agreement comes to be known as the lakeshore agreement uh because that was the lakeshore railroad was the main railroad that they they did this with uh and this is huge uh so by doing this until this point in time

cleveland as a city so if you forget the individual companies of which standard is one within within cleveland but just think about production refining refining production of oil in america cleveland was actually the number two largest center for oil refining behind pittsburgh at this time once they do this deal cleveland is like fast-tracked and becomes number one and standard and rockefeller and flagler they're like they're like the they're like the godfather they're like they just brought all the other families in cleveland like to heal like they run you know the collective now and this starts a playbook of like either we if there's oil leaving the city either it's ours or we have some agreement in place where like it's good for us even if it's not actually ours and maybe it'll eventually become ours yep so they dominate cleveland cleveland becomes the number one oil center in uh uh production refining

center in america um but you know that's not enough for young rockefeller uh he's got his sights set on the whole industry like pittsburgh philadelphia there is some refining happening in titusville some in west virginia some in new york he wants all of it so how how's he gonna do this as you alluded to at the top of the show there actually is no legal framework at this point in time for businesses to operate outside their own states yeah they can't importantly uh they cannot own property in other states yeah they can't they can't own property they can't have operations um you know like literally this you know the united states was like this is all changing after the civil war but it was united states like the states were the sovereign you know or near sovereign entities here totally and it's really only recently that you could just sort of incorporate your own business as you please at all without getting express

written consent from the government i mean in the days of england and early in the us like incorporating a company a corporation was like the government's granting you a special right to operate this business and so already literally blown wide open that you can just start a company but we're not yet to the era of like oh i can start a national corporation yep so they think for a while this this whole little crew at standard oil in cleveland about how they're going to do this they know that if they want to consolidate the whole industry in the whole country they need a a lot of capital and b an ability to operate outside the borders of ohio so flagler comes up with this idea this is amazing he actually likes it it's financial and corporate law innovation innovation did you find did you read about how uh he comes up with a new structure that they that they uh use or uh i guess was an old structure but

that they wasn't very popular but they turned to the joint stock company did you read about how flagler who was not a lawyer drew up the actual like incorporation oh wasn't it on like a like a yellow legal path yeah like unlike the equivalent of a yellow legal pad no letterhead yeah totally which partially i think was uh just because that's how like this was still you know wild west type stuff uh but also i think they didn't want anybody to really know about this they wanted this to be super secret so flagler comes up with the ideas like ah these joint stock companies which i mean i think like wasn't the dutch east india company uh i think some stock company so he takes this idea uh but not many other companies were doing it if we he says if we were a joint stock company then we could buy and we could buy shares in in other joint stock companies we could also sell shares in ourselves you know to raise money or or

to strategic partners who we might want to have a vested interest in our success this is interesting this might solve some of the you know capital requirements um uh okay well well that's interesting and also this like selling shares to raise equity capital thing rockefeller is like my god that is brilliant how did i not think of this before totally the best elegance and it's flagler that comes up with this it's amazing so on january 10th 1870 they abolish the old partnership and they pour all of its assets into the new joint stock company the standard oil company of ohio boom uh it's it's born uh but uh and and by assets they capitalized this new joint stock corporation with 1 million dollars of liquid assets like that is how uh enormous this had become already uh unheard of i don't think that there was uh any other organized enterprise in america with that amount of capital period any other industry like already

that's how big this is and we're still just getting started so this doesn't solve the interstate commerce issue though so they come up with another absolutely brilliant and diabolical plan to solve this which is the trust uh and um what they decide to do is they say like okay technically companies can't own shares and other companies outside the state but what if we create a trust then this trust holds shares in companies all around the country the trust could have some trustees that sort of get to decide what happens with maybe all the companies that roll up to the trust we can sort of uh make sure that these corporations each of which are nicely situated inside their own state and don't own any property outside their own state but like we the trustees sort of get to decide how those companies might work together yup and there's no law that says that officers of you know any given company can't be trustees of

of a trust that owns shares in other companies so this is this is the loophole around it so they create this trust and the trustees just uh a dictate to the other companies that they purchase what to do but also b this is important all the dividends from all the other companies the trustees designate the beneficiaries as the individual shareholders of standard oil of ohio so nothing ever touches the actual company standard oil of ohio it all goes to the trustees and then to the individual shareholders and that's how they get around this interesting so even the so the the standard the individuals who own the corporation yep literally everybody on the cap table ha end up being the sort of you know puppeteer controller and beneficiaries of all these other entities so rockefeller comes up with the idea he's like oh this is amazing he comes up with the idea that none of them are going to take a salary

they're going to focus solely on these dividends that are coming in as like a source of of value and income but also even more importantly focus on the appreciation of the value of you know this whole enterprise uh this was like this was new thinking like now people are listening to people like uh yeah duh like uh why else would you you know do start a company or join a startup nobody had ever thought this way before like the idea that equity and dividend could like that that could be your primary you know source of income and wealth generation and that you could use that to incentivize new people who you're bringing into the organization as employees or partners or companies you're buying like yeah the the idea that like your competitors could become your friends by being able to offer them ownership in the joint combined company where as we win in this industry and this industry gets bigger we all win by holding shares

of this thing together yep this is liter this is the birth of the modern american economic corporation uh churnell writes whatever the debates about his ethics economists and historians have unanimously extolled rockefeller's role as a pioneer of the modern corporation and then quoting from another biographer of rockefeller rockefeller must be accepted as the greatest business administrator america has ever produced and it's this so this is how well this works in the very first year of the trust uh 1870 first year of all this getting set up remember there's one million dollars in total capital that gets put into this into this structure they pay a 105 dividend at the end of the year including also reinvesting tons of cash flow back into the business and you know expanding and buying other companies so like the million dollars that was in there they pay over a million dollars out to the shareholders

and have many other millions of dollars to go do other things it's crazy like they're they're extremely profitable and they're growing like crazy yeah and let's talk about this uh rockefeller's argument to the societal benefit for a moment which is like a it's silly that these state borders are preventing like why should that really be a thing like to the extent that i've been able to rapidly expand in cleveland and we've been able to create great product for consumers at a low price like quality of life for people has gotten better and like that has all happened because we've expanded here why shouldn't we just be able to do that for people everywhere and his argument is really like this is for the betterment of consumers now my competitors when i move into these states probably don't like it but like ultimately the american public wins and he's right he's totally right uh just like uh you know jeff bezos

would probably say the same thing today or with amazon or the like well speaking of today and uh facebook and amazon and great companies we have a great company that we want to tell you about our second sponsor of season nine pitch book well i'm gonna try and figure out how to work a standard oil thing in here david uh do you think standard oil is in pitchbook probably i mean like i can't stop thinking about the fact that they organized this whole structure they paid a 105 dividend the first year like oh man like if if pitchbook had data on this feel like you know raising a like massive growth round from softbank and then paying out all the money again at the end of the year like i want to start seeing this stuff in pitchbook unprecedented in business history well uh listeners as you know pitchbook has the best that both the the widest and the deepest data on private companies um in the world i mean if they're they're

the leading financial data provider for venture capital for private equity for all companies looking at m a they have 3.1 million companies and over one and a half million deals so maybe like half of those 3.1 million companies are probably spin-offs of standard oil and actually reconsolidated you know maybe a little bit less but uh i will tell you that uh uh i'm an excited and um uh raving user 96 of their clients rate pitch books coverage of private companies better than any other data provider and uh actually a few people have dm'd me in the the slack about this but we've got a great offer for you you can explore pitch books database firsthand by signing up to get limited access that's free access to the largest database of private market intel for two whole weeks so you can sign up at pitchbook.com acquired or click the link in the show notes and see how pitch book can help you so thank you to our friends

over at pitchbook indeed thank you pitchbook so david they've now got the structure in place to become a national trust and expand here how do they do that what happens ah this is so so great from just like story is like i'm so the smile on my face is so cheesy right now whether it's juicy yeah great grade is up for debate um so you know the structure the joint stock company they can buy and hold stock and other in other companies the company they can issue shares holder than them what are they going to do here remember we said the railroads are the most strategic important like supplier and chokepoint for the industry standard goes to the three biggest railroads the pennsylvania railroad the storied huge enormous pennsylvania railroad i think that's on a monopoly board it is it is literally on a monopoly board like that uh pennsylvania the new york central and the erie railroads and they say uh

so we got this new thing this new thing lets us do things with other companies do you want to cooperate do you want to go how about we all do something together uh and the railroad's like oh yeah we like doing stuff this sounds pretty good so they get together they set up a shell corporation called the south improvement company oh this is so juicy so here's the deal which is intentionally nebulously named yes yes and in fact later in life when uh rockefeller would be getting grilled in in federal depositions uh he would be asked if he was ever a director or involved in the southern improvement company it's not a thing no idea standard oil was never involved in the southern improvement company oh my goodness so great obviously he was not perjuring himself by saying that because the questioner got the name wrong though i think he did perjure himself in other sic related i think he did yeah

um so here's the deal standard oil is gonna set up and control most of the south improvement company through there through their new you know trust and joint stock corporation structure the railroads will own a token amount but the railroads and the principal you know owners of the railroads the individuals they're going to issue some standard oil is going to issue them some stock so that uh you know these guys now have a have a little little skin in the game with uh with standard oil uh all the interests are aligned here well and the railroads had a problem that they needed solved which was that like because of the boom bust nature of everything that's going on their cars especially oil uh and the sort of remember that thing that i mentioned earlier where people are deciding not to buy because they hear it's going to be cheaper soon because they know there's a big gusher like this whole thing is like totally screwing

with the railroads not to mention the fact that with intense competition among the railroads just like there was intense competition among all of the non-sort of standard oil oil companies like a lot of the profits are just being arbitraged away and so they've got like unpredictable demand they've got you know booms and busts they've got this situation especially with oil where like uh certain types of oil in certain areas were so insanely cheap that like everybody's going out of business because no one can make any money the same sort of thing is happening happening in the railroad industry and so if there's like a cooperation opportunity for the railroads and you know rockefellers offering them i can kind of solve your problem here and we can sort of smooth out business then it really comes down to like it's really hard to run a business when prices are fluctuating and they're not fixed so

clearly the answer is to fix the prices [Laughter] oh my goodness okay so we ascribe no virtue to this i think that the the the the the jury on this whole thing and and we'll get to this later in the episode and and certainly in part two of like what parts of this were good and what parts of this were bad like it's both there there's lots of both that happened all through this story yep okay so the three three biggest railroads and standard they get together in this south improvement company and they say here's what we're gonna do all the railroads we're gonna we're gonna set a new fixed price there's now a fix literally a fixed price for shipping oil on railroads to everybody out there all anybody's shipping oil there's one single fixed price and it's really high like whatever it was before like it's like a like a multiple of that it's it's really high except for anybody who's a member with us of

the south improvement company you'll get a 50 discount on that fixed price and it goes even further this is just like oh just twisting the knife here anybody else anybody who's a member of our little uh our little company here one might say uh a little cartel low cartel yeah also they will receive a uh a little dividend a little kickback they call it technically a drawback from any revenue that anybody any other oil producers that are not part of this that ship on the railroads part of that revenue from the really high price that they're charging they're just going to give some of that revenue to the comp competitors that are part of this little cabal here this is the most mind-blowing part of the deal like not only do you get a rebate for shipping with us so that way the price is actually way cheaper but you also get a rebate even when you're not the shipper i mean they call it this this drawback but like

other people ship stuff with us and thank you because you are a nice member of our organization you're gonna get some of that money and so your competitors are just paying you like it's the craziest system ever i don't know what the formal definition of the crime of racketeering is but this sounds like whatever it is i think this fits the case well there's a couple different ways that there this story draws parallels to microsoft but this reminds me so much of that cpu licensing thing that they did do you remember this in the early windows days the deal that microsoft cut with i think it was ibm was yeah uh you know you guys can um uh can use windows and uh that's great and it's whatever operating system you want any computers that that have a cpu in them that that don't have you know that aren't running windows you're also going to pay us for those cpus and uh that's the deal they signed and

so microsoft basically ended up with you know the monopoly the entire industry because ibm's like well wait a minute whether we're putting windows on these machines we're not we're paying for it and so i think windows it is and actually i don't know if it was windows yet it might have been dos if only gates and uh bomber and jeff rakes and and all the like had had if they'd had our episodes here on standard royal to listen to before they put that stuff in writing uh history would have been different it turns out yes that this may have been a flash point once uh once the the public realized how egregious this sort of it sounded there is literal rioting in the streets in titusville in in reaction to this once once word gets out like literally like people are like fighting in the streets they're like banging up and destroying you know standard uh uh tanks and property and like i mean it's truly heads i win tails

you lose for standard oil versus their competitors yep yep and and the railroads and rockefeller like like this this this is the point where public opinion really starts to uh uh start to get concerned about standard oil in particular informed by the competitors because the public public is like great like we're getting so much stuff so reliably for so cheap this is awesome yup uh so the railroads they know they've maybe gone a little bit too far and they're like uh guys i don't know that we can actually do this and uh rockefeller and flagler they're like it's okay let's just like hold out for a couple weeks i think we're gonna be fine we're gonna go do some stuff and we'll get back to you so during these few weeks when the this deal has not yet gone into into effect yet but rumors of it are spreading throughout the industry flagler and rockefeller go around to all the other refiners in cleveland keep in mind many of them are

in very rough shape right now because like a the fluctuations but b oil prices are getting driven down so far that like people are trying to produce and make profit on this but like because of this like crazy inflation then deflation thing that happens like a lot of these companies are slowly on their way to going out of business anyway yep and they're already like kind of in you know brought to heal by standard by the the lakeshore deal where they're already sharing capacity so now flagler and rockefeller go to them and say like you know that great rate that we organized for you it's over y'all have heard about this uh south improvement company thing it's happening uh so the way we see it you basically have two choices you can stay nominally independent and you can die or you can just sell your operations to us come in and join the fold get some standard oil shares we'll even give you stock

and then we can all profit from this amazing deal that we have and there's something larry says like rockefeller says own shares of standard oil and your family will never go hungry yeah so as ida tarbell who we're going to talk much about next time uh wrote in in her investigative reporting on standard oil this is what she claimed that the the standard pitch was to uh to other folks about joining the scheme uh quote you see this scheme is bound to work it means an absolute control by us of the oil business there is no chance for anyone outside but we are going to give everybody a chance to come in you are to turn over your refinery to my appraisers and i will give you standard oil company stock or cash as you prefer for the value that we put on your business i advise you to take the stock it will be for your own good uh so they're literally just saying like they're deciding what value they're

gonna pay for all these refiners and of course they're they're the offer that they put in is like 25 to 50 percent of book value yeah what what they what the refiners even paid to build the factories in the first place and rockefeller's argument is like well we're just going to shut most of these down anyway i mean we're actually doing them a favor by taking this thing that's just going to go out of business over the next few years giving them some shares in our company as like a you know we don't want to be you know too terrible to these guys they're our our fellow countrymen and they're also in our industry and we're just bringing them in we're giving them some shares and i you know i'm gonna write the whole thing off anyway so it's it's a crap factory so over a period of six weeks from february 1872 to april 1872 standard oil buys 22 of the 26 other refineries that are operating in cleveland

and this comes to be known as the cleveland massacre uh and then once they already own all the refineries in cleveland they're like all right we're done you know we don't really even uh need this uh south improvement company thing anyway and i guess the public doesn't like it so um we're not gonna do it and apparently not a single barrel was ever shipped using the south improvement company they never documented anything but structure like that it was all set up and agreed upon but then they didn't actually ever need to to do it because they used it as leverage to just go and roll everyone up anyway and this was this was the tipping point so obviously this was the cleveland refiners first but then immediately after they go to pittsburgh they go to philadelphia they go to west virginia they don't even have to set up some ploy shell corporation like the south improvement company they just go to all

the other other refiners in these cities and they're like y'all heard about what happened in cleveland we're coming here next so you want some shooters you want some shares yep uh by 1877 standard oil controls 90 of the oil business in america zero percent as barons put it consumers of kerosene had no choice but to purchase the product from a standard company not that they complained standards policy was to upgrade the product continuously while lowering the costs in order to frighten away potential competitors and increase sales i just want to say david like just like tsmc it's like yup i think it's something like 70 percent of the leading edge cpus flow through the island of taiwan and you know 50 are actually tsmc manufactured by tsmc and like we're all better for it as consumers and i think it's just fascinating this notion of like we're gonna keep lowering prices the product's gonna keep getting better and at the end

of the day it actually is good for consumers oh and we're gonna get huge and super profitable along the way yeah well and you know asml and uh you know all the equipment manufacturers they're kind of like the railroads here right although amazingly the uh uh this cooperation with the railroads really didn't lead to standard oil squashing the railroads like they stayed really good businesses for a long time well they did for other industries uh or at least i think they did i don't know enough to say about the railroads uh they certainly stayed independent but you know rockefeller and flagler and this whole crew like these guys are paranoid as well right like they are they do realize after they've just gone and consolidated the whole oil industry they know that the railroads do have strategic leverage over them uh and again remember like the oil refined they let the other refiners stay in business they just you know bought

them and gave them standard oil shares they're like they're worried about the railroad so like we don't want them having strategic leverage over us how can we co-opt them so i mentioned earlier tank cars yeah what was the deal here so right around this time standard starts going to all the big railroads and they're like you know we've saved you all this money on opex now you get to run trains directly you know no stops no box cars this is great for you but you know these tank cars these modern tank cars you know me to steal and they'll like um that's a lot of cat-backs for you to keep building and we just keep sucking up all this shipping volume with y'all what if we just make these cars for you and we lease them back to you we'll take on the capex to make the cars and we'll lease them to you at a really low rate so what's the play here so chernow writes about this he says as the owner of almost all the

erie and new york central tank cars standard position standard oil's position grew unassailable at a moment's notice it could crush either railroad by threatening to withdraw its tank cars doe tank car is no business you can keep running this great business for y'all but you know you mess with us we can withdraw our tank cars wow and so now they've got 90 market share of kerosene and they've got this relationship with the railroad where they basically are going to get the most favorable rates without the com without a railroad going out of business like they can squeeze every last bit of juice and then they take it one step further again so while all this is going on there's a new by the way david you laughing through this like maniacal plan you're like the nicest like it's so scary because i'm like oh i just have implicit trust in you like you're so kind and you're so warm and you're so and like you're like

and then they take it one step further and then they stab the knife in the back again and it's so great oh i just like it's just this is such a like good story i love it not condoning this behavior by any stretch of the imagination but um an important pillar of american history uh a critical part of american history so okay uh the they take it one more step further and this is really the the coup de grasse here so as they're doing all these deals and said you know and and standard oil is becoming this octopus as it would be known uh uh a derogative term derogatory term by its critics uh octopus you know uh like you think the goldman sachs vampire squid sucking on america was bad like literally the standard oil octopus is bigger than 10 vampire squids uh so there's a new technology that people are thinking about with regard to oil not gasoline not yet that's coming later but uh all of the you know the oils being moved

around either by water or on railroads people are thinking that like there might be a way to move oil much much much more efficiently uh so the concept of pipelines already existed but really short distance pipelines uh from literally from the derricks from the from the wells to the railroad depots so this this would be like you know a mile at most uh they would pump oil through pipes to the railroad depots or to the you know shipping depots or whatever to then load it up in cars and get it out of there some people start thinking like well i wonder if we could pump oil a lot farther than just a mile or two and meanwhile the remnants of the industry that haven't yet been consolidated by standard uh they're looking for any kind of you know hail mary pass to get get some leverage back in the industry so they decide that they're all gonna go in together against standard and try and again the

railroads they know they can't get any concessions out of the railroads they're going to try and develop a pipeline a long distance pipeline so in 1877 they do this they band together and they form the tidewater pipeline company this just sounds like a scandal right off the bat like the name tidewater pipeline why would you name it i mean it's 1870 like i or 1877. i have no idea um and uh they're gonna first the goal is that they're gonna uh pipe oil from titusville directly to baltimore on the on the on the seafront they then shorten it to williamsport pennsylvania which is still 110 miles this would be like an amazing proof of concept that this would work isn't that where like the little league world series is it is it is yeah i don't know why william's port was where they wanted to pipe this stuff to but they do end up piping it so standard though fights them tooth and nail on this like they're

they're like uh uh a bunch of the execs want to go hire thugs to go like smash the pipeline and do all this stuff and they do right like they've like the pipelines get smashed and they light stuff on fire and uh no actually rockefeller's like he he reigns in his his exuberant execs on this and says no no we're gonna fight it with every like you know uh political you know uh leverage that we have which they do but they don't succeed and in 1879 the pipeline turns on and it works and i think a bunch of people in standard like probably like pissed at john i like don't understand why he let this happen and you know how could this this be terrible and rockefeller is like oh don't worry i have a plan now remember this is just one route that this new pipeline has opened up you know from titusville to williamsport rockefeller's like i got all the railroads in my pocket they go around to the railroads and they

tell the railroads they instruct the railroads to cut shipping rates so far down on this line that literally like they're basically paying anybody who's willing to ship by railroad uh on this line to to ship so it's actually the pipeline even though they invested all this money in building it and it's so much more efficient so much cheaper than running a rail car because at standard oils pressure the railroads have now lowered prices so far in response it's not economic to use the pipeline so they starve them out so this is like the the bezos versus diapers.com thing where bezos is like i can sell diapers at a loss forever you don't understand that is totally what happens so the tidewater pipeline company is like up against the wall they're about to go bankrupt they can't compete and by march of 1880 they sell a minority stake in the pipeline to standard oil the standard assumes control of the

pipeline takes all the technology immediately turns around and go builds out and goes and builds out four more major pipelines from titusville to cleveland to manhattan to philadelphia to buffalo this is the best part brutal uh so they build these you know now pipelines that are huge do you know what land they build the pipelines on this is the most cold-blooded thing in the whole freaking episode no okay so who would have land rights in straight lines oh they're between cities standard oil goes to the railroads and they're like my friends my friends we've got this really exciting new thing that we're working on we're friends you know you you uh we we help you you help us how about how about we use your land how about we build our pipelines right along next to your railroads and then it'll just be a little reminder sitting to you right there reminder to y'all that we don't need you that we've built on your land

you're looking at your competition every single time you glance out of a train car so if you ever you know want to try and screw us on prices wow just remember we've got an alternative right there wow oh my god so by the way did you do you know the deal was sprint random uh business trivia fact i mean i said this on another required episode i think we've talked about this before yeah that sprint that a lot of uh telephone lines were laid along rail lines yeah it's the southern pacific railroad spr oh yeah that's right that's right and exactly for this reason like hey we need someone who's already eminent domain a bunch of land that we can go directly in a straight line from one city to another boom yep crazy now i i don't know for sure but i didn't see anywhere that the railroads got any like uh equity stake in these pipelines wow all right so i fully take back my comment earlier that it seems like

the railroads made it out okay well i think they actually did i mean this was kind of rockefeller's style and standard oil style is like we're not gonna we're gonna let you live we're gonna be benevolent dictators we're gonna let you continue you're just gonna remember that you know our knife is pressed against your back at all at all times yeah okay so after this uh it's done i mean this is this is the story of how standard oil became standard oil like rockefeller standard like they have one they have one on a scale that nobody has ever won before or since their competitors are obliterated new upstart technologies are co-opted all of the suppliers you know are reduced to total lackeys um the customer we didn't talk about the customers uh this is great so at least in america most it's great i'm now thinking about how you're i'm saying this is a great story this is a great story most kerosene was sold at retail in

america in grocery stores so right in the sort of early 1880s standard decides to run the same playbook that they've run with the railroads with the grocery stores in america uh they go to them and they say hey uh you know it's it's expensive for you to um set up and give shelf space and everything to all of these cans that are all you know non-standardized of standard oil kerosene in your stores from now on all standard kerosene needs to be sold in standard canisters that we set the terms on and we fix the price uh and we tell you where you can put it in your stores and any uh so some stores uh you just sort of bristle at this and say they're not gonna do it standard sends out a letter uh in mississippi they had a particular problem with this they send out a letter to all the grocers in mississippi they say if you do not buy our oil we will start a grocery store chain to compete with you and sell goods at

cost and put you all out of business this is in writing sent to all of them uh wow so those are the customers um it's like you can just feel the american public and washington getting stirred up about like okay monopolies are pretty bad like we really need some legislation about this yeah as uh as um chernow writes by this point in time rockefeller's creation could only be discussed in superlatives it was the biggest and richest the most feared and most admired business organization in the world wow wow in 1883 uh official standard oil headquarters moves to manhattan to new york city and rockefeller himself 26 broadway to manhattan to 26 broadway uh do you know which is the building that they have constructed uh for the standard oil headquarters 26 broadway right on wall street do you know what is right outside of 26 broadway today no the bowl the charging bowl no way literally right outside 26 broadway

i also didn't know you know the bull was only put there in like 1989 i think oh no i would have assumed it was there through the 80s i totally would have thought yeah it's actually hasn't been it was put there after the 1987 uh stock market crash ah interesting but uh so rockefeller and uh you know his brother and all his their lieutenants you know they moved to new york also around this time they just like buy up midtown uh so uh the rockefeller moves uh to right off fifth avenue uh in the 50s it was a 54th street maybe i actually don't have it written down it's either like 53rd or 54th street right off fifth avenue he buys a house moves in there uh you know just like just really right there you know between the park and and between rockefeller center you know like no there is no rockefeller center they build freaking rockefeller center which he had nothing to do with that was uh it was being endowed by his son but yeah

yeah just actually uh we'll probably talk about this more next time i didn't realize it was columbia university's campus um there and when junior decided to get in and start building developing building rockefeller center they lease it from colombia and then they ultimately buy it fascinating yeah well part two i mean we'll have a lot to say about um universities and rockefellers in new york and um we haven't touched a lot on the personal side of rockefeller other than saying he was deeply deeply religious and um believed he should make a lot of money and then and then do interesting things with it there's a lot of like very good things he does with it that i think we'll we'll save for part two and a lot of his idiosyncratic things around like being afraid of death and wanting to live a long time and his health obsessions and i think a lot of that especially starts to show up in his old age but david bring us bring us home

here to 1890. yeah so i mean this is like it's funny we're gonna you know recount now what will ultimately become the beginning of the the downfall of of standard oil but like i don't know like it's weird being at this moment in the story because they've literally won like i don't think we've ever had this before like the only thing that can bring them down is the government like uh it's such a wild position uh to talk about or a paradigm shift i mean the other thing is like well the pipelines could have been that but then they just co-opted them well but i'm referring to like electricity and lights in houses but they very quickly were saved by the fact that conveniently right around the same time we had any thirst that we had for oil before once you have the the car like rockefeller got so much richer in his retirement from his shares of standard oil which became you know the things that powered us moving around the

country in cars than he ever got from kerosene so it was like a paradigm shift could have disrupted and did disrupt the core kerosene business but like the thing that happened at the same time was so much bigger than anything they ever could have imagined and i i think that standard was also making some investments into electricity and electrical utilities uh i don't know how how deep they got into the business but but all i'm saying is monopolies even if you don't trust bust them are always at risk of being disrupted by a paradigm shift totally fair point um not in this case though uh [Laughter] not in this case so uh you know it's funny i i always assumed uh you know what i knew of the standard oil story before doing all the research was that it was the 1890 sherman antitrust act that brought down standard oil it wasn't for another 21 years indeed it was yes it was the sherman antitrust act but it was not for

21 years uh so the we'll close with the wild story of the sherman antitrust pill so ohio senator john sherman uh brother of general william tecumseh sherman uh no way great hero of the civil war wow unbelievable i think they're you know you know how we joke about how there like must have been 10 people in silicon valley in like the 1970s and 1980s right i think there must have been like 10 people in america at this point in time so senator john sherman uh as uh in 1889 as like the sort of public sentiment is starting to shift against this huge octopus monopoly proposes an anti-quote-unquote anti-trust bill in the u.s in the federal senate uh it turns out that just a few years earlier uh when sherman was running for office uh in ohio guess who one of his biggest campaign supporters was uh rockefeller yes that would be correct so this is like like hmm you're biting the hand that feeds you here yeah uh

and uh so the act you know does pass but but sherman makes the political gamble that like the the political power and stature that he's gonna get from doing this is gonna be worth more than the money that he's going to get from rockefeller and standard going forward the act ends up passing in july of 1890 outlawing all trusts and business combinations in the united states of america that were this is the key modifier quote unquote in restraint of trade but they don't define what in restraint of trade means it's just like uh it's up to some judge to set president it's up to some judge to set precedent and everybody thinks oh well nobody's really gonna like there's no legal precedent for what that means so that's never really gonna become an issue and in fact rockefeller and standard oil viewed this as a win they were like oh great the public is now going to feel like the us government has taken action

they have heard them they're going to curtail standards power but they're not actually going to curtail anything that we do we're going to keep doing exactly what we've been doing and in fact when sherman runs for re-election in ohio the very next year in 1891 do you know who once again one of his biggest donors was is it rockefeller again it was john d rockefeller fascinating uh how funny is that the act that ends up bringing them down he is the biggest or one of the biggest donors after the act passes to the senator that introduces it huh yeah so uh so that's you know it there's some there's some controversy as we alluded to and we'll talk more about next time in the state of ohio uh a couple years later but mostly it's smooth sailing and uh in 1896 rockefeller is like well i guess it's been a good run i'm going to hang it up i'm gonna retire i'm gonna focus on my philanthropy uh and uh i'm gonna leave one of my

lieutenants john archbold and uh and my son john rockefeller jr who's about to graduate from uh brown university i'm going to leave them in charge i'm going to go retire to my estate and i'm going to focus on doing good works but key mistake he didn't fully leave no no he did not he's like well just in title only i'll kind of stick around but of course that's a as president right or as chairman of course that's not how the public would view it they're like no your name's still on the door oh he's gonna get dragged back to the witness stand in the in the years to come so yeah no sunset ride off for him no that's where we're gonna leave it for now but uh yeah what a story truly all right i have a few uh as we get into the analysis here of a few uh a few fun points i want to make but first we want to thank the final sponsor of this episode nordvpn so we've talked about nord on previous episodes

this is one where i think we used to do these community shout outs david this feels more like a community shout out to me than it does a sponsorship um but of course nord is a a a great company and um we do formally work with them as a as a partner much like many other youtubers and podcasters everywhere so you've probably heard about them in other places um but uh you know especially our thanks to tom oakman and the rest of the founders there for listening to the show and um being a part of the acquired community and and seeing in slack it's it's just so cool but uh for folks who haven't heard on other episodes this company has a wild story behind it it is a thousand person company that serves 15 million people globally that is founded in lithuania founded by 2012 by some childhood friends they haven't taken a dollar of outside funding it's totally bootstrapped and so it's this incredible

european like startup bootstrapping success story to build the huge business that they've built today so if you're looking for a vpn service look no further you can sign up at nordvpn.com acquired by clicking the link in the show notes and you can use a coupon code acquired at checkout our thanks to nordvpn indeed thank you they're almost like uh almost like the pipeline for internet traffic built built on much more uh much less uh sinister david i listen to these sponsorships just to hear how you steer it into our episode content it's perfect uh so great thank you tom and everybody annoyed i i want to talk a little bit about like that we used to do these narrative sections when we do ipos i want to talk about like the public sentiment versus rockefeller's defense so like the public sentiment here and and when we say public it's less at this point in history the actual public and more about their competitors who are

sort of making a bigger deal out of this because all the public knows is there's this really big company they provide things kerosene mostly that i use in my life and it gets to me in a consistent way at a stable price like it's it is good for consumers like if you think about the consumer welfare standard about uh of of antitrust like this really isn't bad for consumers it could get there if standard oil is the only company and they sort of wield that pre that power to raise prices and stuff like that but at this point it's it's really like their competitors hate their guts and especially anybody who's sort of been coerced to cooperate with them the railroads the pipelines like anyone in their orbit the retailers like it sucks for them too and so you've got this beginnings of like really stirred up public sentiment against this company that's like by some views you know the most evil capitalist structure of all time i mean

the the americans ever since we got here from england and here i i you know my family immigrated at some point so i certainly didn't come from england but uh ever since the original uh anglo people came over from europe and settled america there's been this incredible hatred of monopolies in particular because our country was founded on like equality and and people having the right to be free and the free market like we don't want this government like the government was a monopoly in in england and that's where we were running from well and still to this day there's like huge skepticism amongst americans of any political party like of centralized government power right so even there's this interesting like very american stripe that runs through people that is i can't quite put my finger on why but i don't like big stuff and i don't like concentration of power and i didn't like it when it was concentrated in a

government and i don't like it now when it's concentrated in the rich people and that shows up all the way through to today i mean that's a defining characteristic of the national conversation now and of course rockefeller's defense to all this is saying look social darwinism is bad like without standard oil rolling everyone up you just have all these people producing non-standard products that consumers can't tr they're going to kill this industry that could make everything great because consumers won't trust it all these businesses will go up go out of business because the prices are so low because every time there's a gusher you know the prices drop so much these people are all going to go out of business anyway and like standard oil is the antidote to social darwinism which is bad which is is killing the golden goose here and so the way he sort of makes this argument is it was a cooperative success it was

for the general good it was our moral imperative it was downright christian for me to do this and provide this service and certainly any of the you know competitors or suppliers or partners or the like who ended up taking standard oil stock got fabulously wealthy by doing so like how could you argue that that was bad for them he really seems to have deeply believed that this like invisible hand the adam smith concept of you know the the invisible hand that sort of guides the the free market that it kind of just takes too long and there's a lot of bad stuff that happens along the way like academically sure it makes sense that the free market will work itself out but like when you actually look at the businesses today and the people running those businesses today there's going to be a bunch of hardships and dirt along the way you might have whole industries that die out because they never sort of

reach their full potential like he very much it's not communist like it's not real it's not social it's it's this interesting like uniquely american viewpoint on actually social darwinism and free market capitalism is a bad thing and everybody just eating each other's lunch and eliminating all the profit in every industry uh and potentially to our own detriment is bad yeah and you know um chernow even even talks about this like in in some ways uh what what rockefeller was trying to do and what standard became shared just as much um you know intellectual grounding as with like marks and communism as it did with adam smith and capitalism like uh it was uh um it was this view that like hey pure individual competition is not actually like the most ideal status and like some form of collectivism in this case collectivism in the form of a company standard oil uh was the best path yeah and the place where it kind of

falls down is where he sort of says like look if we just knife fight to the death someone's gonna win and ultimately that one is gonna be me because i'm the best at this and like he's probably right but this notion of like so therefore everyone should allow me to save them truly in like a very you know evangelical christian way like i'm gonna go and save you know and bring them into my business church is is very much how he sort of thought about it you come into the light and and embrace the standard oil literally the light i love it and you know just dripping with irony in the way that i'm drawing these these parallels here oh can we talk about the standard oil logo while we're while we're at it yeah one second the uh and we should get to that the it kind of falls down where like him accelerating the death of all of these businesses and saying it was inevitable and at least they're getting some upside now

the benevolence argument does seem to fall down there a little bit yeah i uh i mean so like perhaps maybe the most blatant example to me is uh the grocers right like that letter sent out totally writing to grocers saying like if you don't do what we want we are going to literally burn down your houses you know metaphor or we are going to metaphorically burn down your houses like it's unreal right there there are places where like it made sense for him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers but those places are far more limited than the number of places where they actually reached and exerted their power yep uh sidebar on the on the logo because it's uh so great it's this like we'll see if we can link to it in the show notes uh you'll recognize it when you see it it's this red white and blue oh it's the amico logo now yeah it's the

amico logo yeah yeah uh which way amico was uh standard of ohio oh wait california was chevron was that the ohio or new jersey uh i think it was ohio that became amico i could be wrong i think you're right i'll fact check that while you're um but yeah it's this red white and blue oval with in the middle of the oval this like grecian column looking torch like olympic torch looking indiana uh indiana oh interesting uh like olympic torch looking uh you know column with with a fire burning on top of it like and interestingly i think the standard oil of indiana company adopted a different logo but then when they turned into amaco they adopted a something that looks a lot more like the original standard oil logo interesting interesting the other thread i want to talk about here in narratives is rockefeller and standard oil as a organization but rockefeller is a person is really like the prototype of so much

of american culture today like he is he was simultaneously viewed as this like you know sinister villain and as this great hero and like people you know people hated him but people wanted to be him and i feel like like everything is that a rap lyric i feel like that's i feel like it must be well i mean jay-z would name uh you know his uh his label rockefeller records like you know there's a reason for that uh but um but like everything that like i feel like the public feels about you know bezos zuckerberg musk like everybody all these billionaires today like this was the prototype this was the first time that americans felt this way there's um there's this great quote in titan uh that says the general public was of two minds and viewed the new entrepreneurs of which rockefeller was the foremost as alternatively sinister and heroic by 1888 rockefeller began to pop up in fawning magazine features about rich americans

but he was also singled out as a notorious trust king in joseph pulister's world and other papers the press kept up an editorial drum beat against standard oil demanding vigorous state and federal anti-trust action at the same time that he's in like the equivalent of you know like vanity fair as like the new elite and i think he started embracing that later like for a while his policy was don't talk to the press and then sort of later started opening up to this idea of like geez maybe it's probably a good idea for me to have a positive image out there like silence is not doing me any favors yeah all right power oh power okay so what are what are our power categories here so as hamilton helmer would put forth in his wonderful book seven powers counter positioning scale economies switching costs network economies process power branding and cornered resource and what i would uh put forth here is i think and i

haven't rigorously looked at each one i think standard oil at various points in its first 20 25 years of existence exerted every single one of these but the domineering one the one that enabled them to do everything that they did with scale economies yeah i no argument from me on scale economies being the most important one here i mean literally that was all the machinations with the competitors with getting with getting the volume in the lakeshore deal uh with doing the deals with the railroads it was all about it was all about economies of scale so for sure uh yeah did they use all of the others what do you what's what's your thought on counter positioning i think in being a pure play refinery that was located in a different location than the then like is there a reason there's no one else should have done an off-site refinery because they had too much vested interest in an on-site refinery

i'm not sure that's a good question i i'm not sure that it was there was any reason why they couldn't but i think all the folks who were in the producing world like the drilling and the crude world they were just so it was just such a gold rush mentality that like it was not professionalized yeah yeah it was not well it was not professional they were just they were just chasing the quick profits and like they were distracted they weren't thinking long term but i i don't think there was any reason why they couldn't have set up refining businesses in other in other locations the counter positioning feels a little thin yeah all the others like switching costs for sure uh with the all the railroad deals and the tank cars and all that um network economies yeah i mean they build uh like the the retail distribution with the standard cans and um actually is that all scale economies though is there any network effect here

where it's better for one customer that other customers exist like do any does anybody ever sort of have a relationship between customers that's a good question maybe not i mean network economies were certainly less common in a pre-telephone era yep yeah maybe not maybe that's more of a stretch process power certainly especially over time as it got more and more complicated um branding i mean they named themselves standard and then they became that yup yup uh and then yeah i mean they had lots of cornered resources eventually they cornered the resource on all the crude in the eastern united states they eventually actually owned all the land rights right to actually produce the yeah they did eventually get into exploration and production um i think when it was you know it was much later i want to say it was in the 1880s 1890s maybe when big oil deposits started being discovered elsewhere in america

yeah and then they get they got in into that in in bigger ways fascinating um okay you cool with moving to playbook let's do it so i have one playbook theme that we didn't touch enough the rest of the episode and i have sort of a long quote but i want to i want to say it from um uh from chernow's book here and this is in particular around the period where lots of uh there's a lot of fluctuation in prices there's a race to the bottom lots of people are going out of business and this is sort of rockefeller um you know sort of uh you know talking about how they're going to weather the storm and you know swallow everyone else up what made an expeditious shutdown of outmoded rivals vital to rockefeller was that he borrowed heavily to build gigantic plants so that he could drastically slash his unit costs even his first partner maurice clark remembered that the volume of trade was always what he regarded as paramount

importance early on rockefeller realized that the capital intensive refining business in this business sheer size mattered greatly because it translated into economies of scale once describing the foundation principle of standard oil he said it was the theory of the originators the larger the volume the larger the opportunities for the economies and consequently the better the opportunities for giving the public a cheaper product without the dreadful competition of the late 60s ruining the business during his career rockefeller cut the unit costs of refined oil almost in half and he never deviated from the gospel of industrial efficiency there's so much tied up here but one of them is this is kind of the first venture capital business like we talked a lot on the tsmc episode about these massive fixed costs i mean they're investing 100 million dollars in fabs over the next three years and then it's all a volume game like how

much can you get the plants at full capacity as fast as possible because the the unit costs can can be super small because your your variable costs are super low but it's all about that gigantic capital investment of the fixed costs i love it there's the tsmc payoff i love it they're two hours later you know the other thing that uh that i was just thinking the whole time as you were reading that quote was uh was andreessen mark andres and strength leads to strength right like this is the original strength leads to strength business totally and this is this is him justifying rolling up all these other producers where he's basically like look we gotta the best thing for consumers is to run as much consumer demand through one capital structure as possible so we can just absorb all the fixed costs and then make the variable costs as low as possible yeah it'd be fun to think about we're on such

a kick here with this these like types of businesses is there is there ever a kind of business or industry where like this this uh broader max not scale economies per se but this broader maximum of strength leads to strength is that ever not the case uh it's always the case i think but it's like in in varying strokes like especially where industry industries where there's not fixed costs or where there's low fixed costs like think about a restaurant business like sure there's the there's like you know you have to assuming that you don't own the building and you're leasing everything and you even lease the equipment then you're like geez what is really the you know the capex you're kind of just like at the whim of can you produce a better product and get a little bit more margin than you're you know the person down the street yeah or maybe maybe this is kind of similar to it also would apply to the restaurant business

like any time where if you're competing on like uh uh the highest end of quality uh like uh like um something's gotta be really boutique like i'm thinking like a fine dining restaurant like that's okay where strength might lead to strength in terms of its brand but if it were to like raise a bunch of capital expand go have a you know uh a bunch more restaurants value is scarcity then yeah exactly yeah yeah okay okay that's a that's a case where strength wouldn't lead to strength in the same way but so many venture capital businesses and businesses that scale as large as we're talking about in the last few episodes we've been talking about like the largest businesses the world has ever known um yeah it's amazing how this dynamic applies totally well for grading on this one listeners we are going to combine value creation value capture and grading um we already talked a lot about the component of this value creation

section where how does the value created for the world compare to value destruction i think we've talked a lot about that in this episode but we haven't spent a lot of time on like how does the value that standard oil created compared to the value that they captured for themselves which i think is sort of the the interesting one to look at here and like a terrible example is wikipedia where there's no company that creates any more value in the world but captures so little of it whereas you look at a google and they create a lot of value but they're enormously profitable based on it and so some some interesting numbers uh with with standard oil so we know that they you know um you know we're responsible for this sort of like kerosene boom in the united states and uh and the world and i think let's save the gas car conversation for for the next episode and i absolutely want to have a conversation around

climate and i think we should save that for the next episode too but in this one let's just look at the shape of the business by this this period of time so standard oil in the mid 1880s employed a hundred thousand people which that's probably the first time a company ever employed a hundred thousand people like governments probably did but did corporations would be hard to imagine uh especially in a world where there are only 30 million people in the united states totally they had dividends of between 50 and 200 percent to all shareholders per year which of course were private shareholders it was mostly rockefeller and his partners that's just like uh i just want to underline that again that's just like that is balling out of control that's a very very profitable business oh my god the amount of capital invested in the business literally anywhere from half to two times that being dividended out to shareholders

every single year while you continue investing capital and growing ball so hard they want to find you yep uh and then the last thing i want to throw out is um this period between 1890 where we're ending this episode to 1900 they grew tremendously so they had annual earnings where we're leaving the story off of somewhere between 10 and 20 million dollars which inflation adjusted is like a 30 x so it's really like three to five hundred million in terms of the amount of earnings profit that they were generating per year in today's dollars by 1900 they 6x that so over a decade they actually grew tremendously so it sort of depends whether we're thinking about the business in this 10 to 20 million dollar era or in the like 60 plus million dollar era you know by by the turn of the century but i think that gives you a good shape of like this is a business that was spitting off cash david the way that you

were just just describing for us that employed a hundred thousand people that kept america and europe's lights on uh and uh and like i i don't i don't because it's been so long since this happened we don't have like sec filings telling us uh the here's literally the amount of of value they were able to capture versus create but i think the way i would sort of look at this one and talk about this is uh you can tell from the business practices that we've harped on this and this entire episode that every time they created value they looked around to capture every single scrap of it that they possibly could rather than let consumer surplus exist or their competitors participate in the upside that they were creating or partners well and i think even um the numbers that we have uh scant uh data such as it is again wish we had pitchfork back in the day but uh the numbers that we have i think are also misleading like because to you

know they do seem a little small you're like wait a minute you guys are talking about how this is a business on the scale that no other business in america has ever been before but inflation adjusted you know even in by 1900 you're talking about a few billion dollars of cash flow like that's dwarfed by companies today but i don't think these numbers tell the whole story because so much of the capital in this business was a being recycled and b not accounted for because of the crazy decentralized trust structure um we'll talk about this much more in the next episode but when it ultimately gets broken up you know you said at the top of the show the the children companies that come out of standard oil exxon mobil chevron the bulk of of bp british petroleum now like amko like all of these companies um you know it wasn't until the rise of the fang era in the last 10 to 15 years before that exxon mobil was by far the

largest market cap company in the world and that was just one of the children that came out of this company like the value that was tied up here was immense that's a much better way to look at it you're right i also think inflation-adjusting these things is probably the wrong way to look at it i was thinking about this more in the context of rockefeller's personal wealth which will dissect in depth on the next uh the next installment here but sure you can inflation adjust wealth and you can inflation adjust profits but really what you should be doing is looking at them as a percentage of the gdp at that time right and so like let's look at 1900 so standard oil in 1900 produced 60 million dollars in earnings and rather than inflation adjust that let's look at it relative to the total gdp which was 24 billion dollars okay so 60 million dollars divided by 24 billion dollars so 0.25 of the entire country's gdp

is standard oils profits and i exposed gdp really based on that revenue yeah so you know assuming they had i don't know 33 operating margins i'm kind of pulling a number on a thin air but that feels reasonable i'm wondering i don't know how they're defining profits here i don't think this is gap account gap accounting doesn't even exist at this point in time that might be that might be the dividend the annual dividend oh the earnings being the no the dividend because the data source we pulled this from had dividends differently let's assume that that standard oil's revenue represented something like 1 of america's gdp probably a little bit shy but something like that that i think is the right way to frame the amount of like the amount of money that was flowing through this one company at the time yeah wow that is a that is a significant scale yep so i think the question is that you know that we wanted to ask on grading is

like standard oil becoming a monopoly in this way versus if the industry were to have played out with unfettered individual competition which of course is a counter factual that we have no idea but how can we get a sense of what the shape of that could have looked like you know it's just this really like this makes me think about uh china what's going on in china right now um you know i think the uh chinese political economic philosophy is uh really aligned with the standard oil view of the world right which is that like uh hey unfettered competition is fine in the early days of an industry uh but then you gotta come in and you gotta like uh consolidate it you can consolidate it through the government's hand in the case of china in this case uh it was through rockefeller's hand um but uh but that's what you need to enter uh a phase of maturity in an industry and as we were just saying you know

rockefeller's argument is like all of this was good for consumers this was great for consumers this was great for america it's like in the most recent amazon letter to shareholders when jeff bezos calculates the amount of consumer surplus you know the the amount like he's like if you look how much amazon shareholders have profited on us existing amazon employees have profited and amazon customers it's by far the customers who have won yes so good student of history but yeah rockefeller is making the same point here i think it's really interesting yeah yeah so it would have happened i mean i think it's probably a um again counterfactual impossible to know but there is definitely a world where the kerosene industry doesn't develop in anywhere near uh the same scale or or impact or size and again ups and downs there too like if you're looking at things purely from a climate perspective you'd say well

yeah that would be better although then you'd have like more decentralized craziness with people dumping gasoline into rivers like i don't know i'm gonna throw this out there and say i think the world would end up in no no different of a place i think it would have been totally net even and the only difference would be that the you know rockefeller family foundation wouldn't be as large i think give or take a few years i think the whole thing would have played out pretty similarly and we would have ended up in the same sort of uh major players in the oil world that we have today yep and maybe maybe all of the you know the the standard oil children the exons the mobiles the chevrons et cetera that could have been an independent development refiner you know growing on their own and not being a part of standard oil and then having to get spun out yep that's a good point that's a really good

point i mean rockefeller was a genius in so many levels he brought the like morris chang level of thought and discipline to the business but eventually other people would have done that too uh yeah he's not unique yep i mean it might have been a little more annoying where like you had to get uh those two types of kerosene sitting next to each other on the shelf and you need to go make sure to buy the compatible one for whatever apparatus lamp you had at home and that would have been a slight bummer but like i don't know i i i think uh rockefeller made a lot of arguments that served his purpose and as fun as it is to sort of imagine and uh and sort of theorycraft why why he was right and how that would have played out i think net net we would have consumed about the same amount of oil between then and now consumers would have spent about the same amount of money on oil between then and now and we would have about the same

number of players we have today so let's see if i can translate right it sounds like you're you're arguing for like a grade of like a c like a passing grade like oh well it depends what we're grading like right in terms of creating a bunch of value and capturing as much as you know we could a plus right right right uh in terms of the grade of like um the development of this industry in america uh as it did versus a non-standard oil path yeah i guess that is what i'm arguing what do you think i'm not feeling strongly any different way i think that's a uh i think that's a really good argument um you know it's funny i feel like if peter thiel were here as a guest with us he would be vehemently arguing the opposite uh that uh uh you know it's it's the zero to ones it's the like yes anybody could have done this yes you know other people might have but like rockefeller did it right and in the absence of somebody

doing it uh then it might not have happened and without all this standardization in the oil industry then we wouldn't have had all the unbelievable lifestyle upgrades that we've all had over the last 150 years because of the advent of uh unified oil ecosystem yep yeah like you like your electric cars and teslas and the like well you know no kerosene back in the day no gasoline thereafter you know we don't advance to the level of technology and development you know that we're that we're at now oh like i mean people just you know if if the car was much more inconvenient to drive or that waited another 30 years to develop i mean then like there's a zillion knock-on effects of america doesn't innovate in all sorts of other ways and people don't have a lot of other products that we all take for granted in our lives now yep all right so i think my answer uh i don't have a strong point of view i

think i'm gonna go a notch higher than you to uh be um just because i really do see both sides here uh both one side being the argument that like this all would have happened the same way anyway and the other side being yeah but like you need rockefeller like no rockefeller doesn't happen um mostly though the other reason i'm gonna go with the bees i just really love telling this story well that that i could tell i could tell all right carve outs carve outs let's do it two for me both are related the first more related than the second the first one is uh the movie there will be blood with daniel day lewis if you are jonesing for some uh uh good old-fashioned extremely violent uh early oil days i think it's like an unbelievable i mean i wasn't there so i have no idea but unbelievable articulation of what it would be like to go and prospect an oil field and the risks involved in that and the

personalities involved in that and the deception and the the way that um you know the rogue entrepreneurs were organizing labor to and capital to make these things happen it's like i haven't i saw the movie maybe six months ago but i thought about it so many times especially in regards to like titusville and some of those and in researching this and my second is only tangentially related because it is actually about a gold rush not the oil rush but the tv show deadwood with timothy elephant i am worried that that's very good it's excellent i am one of three seasons in right now i just finished the first season it's so good the characters are so compelling the acting's great uh i actually got uh tipped to it when i was doing the research for um the andreas and horowitz episode uh mark i think mentioned that it was his favorite tv show and so i should check that out if it's marc andreessen's

favorite tv show that's it um awesome the halton cast fire uh oh really right which is also great yeah he talked i've never seen it but which i mean given what we do here i need to i need to watch it i do you do so uh go watch deadwood it's it's awesome nice love it and uh there will be blood i i said i've never seen it i'm like so oh yeah you need to see that in gangs of new york yeah which i also have never seen huh that's right it wasn't um my uh there will be blood it's set in california right uh it's somewhere out west yeah that sounds right i think uh i think it is i think it's set in uh uh southern california but anyway uh my carve out is completely unrelated i'm sure i could think of some the standard oil octopus tentacles reached so far that i probably could think of some connection but uh but i'm not going to uh is the um the secret base youtube channel which is part of sb nation uh the uh sports uh uh news

website uh it's so good and in particular uh there i've liked this uh this channel their work for a long time these guys are so uh they just do like irreverent histories of like sports moments and teams um in particular they just did a seven part series on the atlanta falcons uh it's probably like five or six hours in total uh and it's so good it's so funny and just like so um the whole like premise of the history is they uh they take um they do a lot of great graphics on the channel so they take the um a visual representation of the win loss uh differential uh for the team where like you know if the the horizontal x the x axis is a 500 record and then going down below is losing and then going up above is is a winning overall record and basically the whole history of the atlanta falcons their wing as they call it because it's all you know losses down into the red almost exactly mirrors the falcons logo

that if you like tilt that tilt it up on its side so that the the x-axis becomes vertical it really looks like the falcons logo brittle it's so uh it's so funny but yeah very very well done highly recommend sorry to any falcons fans out there oh but it's like a love letter to atlanta and the falcons like it's it's it's so fun they did actually did one uh i don't think i made this my car but they did one on the mariners uh a year or two ago that was equally equally good we'll link to that one too equally unpretty yup all right well listeners thank you for joining us on part one of this epic journey we are excited to take you on part two here uh we are very interested in your feedback in between episodes and i think we're gonna leave ourselves enough time to make sure we have this out in the wild before recording the next one so join us in the slack to come talk about it acquire.fm slack email us at acquiredfm

uh or acquiredfm gmail.com or uh tweet at us at acquiredfm on twitter and uh if you like this share it with a friend if you are in the oil and gas industry we love your perspective i think you know i'm very interested to to learn from folks uh who this is their bread and butter and i think with that thank you to pilot.com the greatest bookkeeper since john d rockefeller himself pitchbook and nordvpn and uh listeners we'll see you next time we'll see you next time who got the truth is it you is it you is it you who got the truth now huh

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