The Rise of Big Business: The Failure of Trusts and Cartels

0:00Well, the theme for the next... I really don't know, I must apologize. I'm very poor at estimating how long any given set of stuff is going to take me to do, so I don't know if I'm going to finish this in one lecture or two. But at any rate, the theme for the next block of stuff is the rise of big business and the failure of trusts and cartels, covering essentially the late 19th century and the early 20th. The basic reference is the theme of orthodox historiography, so to speak, of almost all historians up until a few years ago. That the rise of the state regulation, federal regulation, progressive period, essentially comes about because we have the rise of big business in the late 19th century, of large-scale industry.

0:48Big business became monopolistic in close, and because of the evils of monopoly were then perceived by a rising group of workers, farmers, and reform intellectuals. And these guys got together and then corrected these evils through the great measures of the progressive period, the new freedom, the new era, the new nationalism, the new deal, the fair deal, the great society, etc. etc. These are essentially programs to reform big business, the big business monopoly which arose in the free market. So in my view, the rigid view is that the story is almost exactly the opposite. In other words, what happened with the rise of big business and large-scale industry was a truly progressive, in the small-p sense, industrial progress, standard of living, productivity, etc. on the free market, many big business interests would like to achieve monopoly through cartels and trusts, etc. on the free market.

1:53These things were launched in many areas, but they almost all failed miserably because of the winds of competition, and then, having seen that these things failed, various big The basic interpretation then becomes that the essences of these movements are the turning to the state apparatus to perform the monopolizing function that could not be achieved on the free market. Now, to do this requires a certain amount of funflammery.

2:43As far as I mentioned this morning about illusions of the opium of the people, I might differ with them on whether this opium is necessary or not. At any rate, it's certainly necessary to achieve the goals that the people wanted to achieve. If you want to turn to the free market to arrive at a monopolization, cartelization, if you want to turn to the government to do this, one of the things you have to do is to realize, of course, that in a democracy, in a country where voting, of course, is endemic, you can't tell the public, we have to have the ICC and the FTC and et cetera, et cetera, insurance regulation, blah, blah, blah, almost not to infinity, because we want to monopolize The Great Shell Game of Our Century was accomplished by telling the public that we are doing this in the name of combating monopoly, in the name of anti-trust, in the name of restricting the evils of big business.

3:48This cartelization was accomplished, so we have a great paradox of monopolization in the name of anti-monopolization. This, of course, could be soluble to the public, as it was a great tradition of anti-monopoly rhetoric and ideology in the part of the public. So it was easy to sell this kind of movement. On that basis, to do that, however, you needed, of course, the alliance with the intellectuals. To successfully sell this great con game, a great show game in the American public, The cartilaging interests needed a cadre of intellectuals, a group of intellectuals that formed its feet, and they had it in the form of the progressive intellectuals, in my view.

4:43The social workers, the economists, the sociologists, social scientists, settlement house workers, etc., etc. etc. etc. This whole cadre of professional intellectuals which arose during the late 19th century and by the early 20th of various reasons which were trying to develop were ready and willing to perform this kind of feat, this kind of alliance. They also needed, in this partnership, this partnership or statism, they also needed to bring out of existence a group of labor unions. I don't deal too much with this in the lecture, but to some extent, industrial unionism, industrial, the polyparia arises in the sense of a group of industrial employees.

5:31And the colonizing interests felt that they also needed a disciplined labor force be willing to go along with this and take a junior partnership role in this great tripartite alliance. This is when the labor force was founded in the form of the American Federation of Labor and Samuel Goldberg's own great... so the embodiment of co-responsible and co-unionism. So we begin to forge then, in the progressive period, solidified during World War I, continuing on really ever since in various forms. We begin to forge what I call a triple alliance later on, between four various groups of big business interests, progressive intellectuals and responsible labor unions. These form the great center of American life. They form the matrix of the consensus, and of course all sorts of differences within that consensus, differences of emphasis.

6:23I think this really, starting a progressive period, really forms the matrix for American life from then on, up until the present. I think the important lesson for ourselves right now is that we're still living under this kind of triple alliance. What we see in the progressive period is the emergence of the current system. The seeds are prying out the culmination of the present system of this triple alliance. What the intellectuals get out of the triple alliance, and I'll deal with a little bit more later on, is essentially power, prestige, and PELF out of the system. They get the cushy jobs in the establishment.

7:11Also, they get something else. I want to anticipate later on what your sixth order is going to be. They also get, they have a feeling, which begins to arise in this period, which hits them later on. In addition to the power and power, they have the ideological feeling. The laissez-faire capitalism is outmoded for one reason or another. It's only fit for agrarian system or whatever, a small business. They don't like Marxian socialism because it's too... it's too aesthetic, it's too class struggle-oriented, too proletarian. So what they're looking for is a third way, a middle way, a third way or whatever, which will harmonize all classes under the great aegis of the federal government or the central government with the Triple Alliance with them and big business and responsible unionism in power.

8:02As I said, there'd be different emphases. And they figure they find this system and this new system of where we want to call it. There are many names for it, corporate, state, it's not one of my favorites. And they find this very cozy alliance which will harmonize all classes, which will bring the public together. everybody will find his place in the great sort of status system it's not, of course, unique to the United States, there's something else I'm really anticipating again but at any rate, it's not unique to the United States, it's also going on in Western Europe in Germany, in Italy, in France, in Britain, in various degrees the search for the new system, the new system of the mixed economy, or whatever you want state monopoly capitalism, or whatever you want to call it and the search takes different forms in different countries The first step in this analysis is the rise of big business, point out, just give a few examples, A few examples of the rise of big business, how big business arose on the market performing a progressive and even heroic role, progressive in a small T, and then how they try to achieve trust and cartel and how they all flop.

9:29So that's going to be sort of the theme of the first, before we get to the progressive period, we set the stage for it. Incidentally, this is just sort of one little note, sort of a side thing, side anecdote. Very little revisionist work has been done about the origin of the antitrust law, the original, the Sherman Act, 1890. The only thing I have to say about that, well, just two small points. One is it was put in by the Republicans. The Republicans have always been, of course, committed to a high tariff. The high tariff is known to the Democrats of the days and other laissez-faire types, or quasi laissez-faire types, as the mother of trusts. You can't really have even a fairly successful trust in an industry without a high tariff to keep out foreign competition.

10:14And the Republicans, of course, being committed to a high tariff, had to show that they were really just as anti-monopolistic as the Democrats, and so they put through the Sherman Act. And number two, this is a kind of cute little story. I really have no evidence of what I haven't followed up on. I should throw a hat at anybody interested in following this lead. Apparently Senator Sherman, of course, was a distinguished highly conservative Ohio Republican, was trying to run for the presidency in 1888, if it was. And he thought he was going to get the Republican nomination. He was apparently shafted out of it, partially by the work of a certain General Russell Alger, who was the head of the Diamond Match Company, a monopoly match company. match company. And apparently Alger paid off some of the Sherman delegates, at least this is the charge, bribed them with pieces of silver of one sort or another. And got them to shift away to somebody else. Anyway, in the course of this thing, Sherman loses out. And when the Sherman, when President Harrison signed the Sherman Antitrust Act, his reporter said in one of his aides, General Sherman just fixed, I mean, excuse me, some of the Sherman just fixed General Alger. In other words, interpreting the Sherman Antitrust Act is essentially a bitter

11:22The Heroic Rise of Big Business on the Market I'm going to blush a little bit here to say that by accident I'm starting off the electric industry and I'm trying, and Thomas Edison, I know, of course, infinitely less about it than Forrest McDonald, so I'm just going to be very, I'm not going to pretend any omniscience on the subject of Thomas Edison.

12:08The main point I wanted to stress here is that, as I mentioned at the point that Forrest mentioned this morning, that Edison's major interest was in profitability. His whole thrust of his invention, his spirit of invention, was motivated by profits. He was only really interested in profits, which he directed his energy to that phase of electricity, that phase of inventions in general, which he considered to have the most profitable opportunities. And he was always driving, his major interest was in minimum cost. Apparently, and here again, of course, I'm a little more by the side of it, apparently, many of the other inventors, for example, he was trying to invent a light bulb, a serviceable light bulb, which was apparently extremely difficult.

12:54And he saw that you have to have, he was the first person to say you have to have a high resistance in the wire in order to cut down the cost of the copper wire. Apparently, it's one of the major items of cost. Apparently, all the other inventors that were sort of competing with them in this, like Maxim and Swann and these people, were constantly concentrating on a lamp of low resistance, which apparently would be more durable. And presumably, they were doing this for aesthetic purposes, that this would somehow fit more into their build-up show. Whereas Edison was interested, but on the other hand, it would be too expensive to be really practical, and so That isn't immediately so, you have to have this, you have to work on the idea of a high-resistance lamp. And he did this throughout, he chose electric lighting over other possible areas, as I mentioned, because he thought this would have to be the highest expected profits to be reaped in electric lighting.

13:48He chose to work on incandescent lights over arc lights because he figured this would be the higher profitability. They start off by saying that the price of the electric light has got to be at least as low as the price of the gas light. It can't be any higher. You can usually even think in terms of a higher cost. And they're the first ones to think in these terms in the electric business. So it's constantly interesting. You can analyze each part of the course, each element, and constantly see how to minimize that particular element. He works on a highly efficient dynamo in order to cut coal as much as possible. And the same way with the transmission network. And he develops feeder networks, again, on this whole basis.

14:33His whole motivation was toward lowering costs, thereby increasing profits. In 1883, he develops the three-wire system, which saves... Well, first of all, he cuts... excuse me. In 1883, he develops a two-network feeder system which cuts the cost of copper by 85% for the enormous, most incredible cost cut. Then in 1883, he works out a three-wire system which cuts the cost of copper another 63%. The result of the war was to reduce the cost of copper per lamp from $25 per lamp to $1.50 just in a few years' time. He develops the meter, the whole concept of the meter, in order to get people, you know, soak the guy when they're out there, make them pay as they're using the electricity, which is a brilliant, purely, you know, profit-oriented kind of thinking.

15:23And again, which of course gives the consumer the incentive to economize in peak loads and all the rest of it. So he develops, on this basis, he develops central station lighting and generators and electric lights and all the rest of it. One of the things about Edison is that he's a typical creative genius. He insists on running everything himself, apparently, every aspect of the business. This of course becomes a weakness, finally, because you don't delegate authority or interest in any aspect. First he finally comes a cropper in a sense, in the creativity end of things, refusing to consider the idea of an alternating current.

16:18And here you have a case of another independent, creative, hard-nosed type, George Westinghouse, What comes up with the alternating current generator is even more efficient and less costly and so on. Interestingly enough, you had to have an alternating current in order to have any kind of transmission beyond a very high density area. And both of these guys are extremely independent. In both cases, I think, they were told by all the big shots and experts of the day, all the scientists and engineers and mathematicians that it can't work. In both cases, they ignore the experts. In both cases, they make a lot of mistakes in the sense that they go off on kooky tangents.

17:11Westinghouse, for example, has spent a large portion of the later years of his life trying to find an atmospheric engine to generate power out of the atmosphere. Westinghouse refused to go along with the attempt to have a trust in the electric industry with the formation of General Electric, inspired by J.P. Morgan, who lived with great and spiraling trusts. He continues to go along with independent Westinghouse Company. Angers the Establishment has a big stock war in the stock market with the Morgans and Wins. And generally plays an extremely heroic role both at us and Westinghouse because they are exemplary non-lobber baron type big businessmen.

18:12Westinghouse built up his company, by the way, being outside of the Morgan Empire, he built up his company largely apparently on his own funds and funds of his friends, at least originally. After this quick survey of the electric industry, we get of course the famous example of so-called evil Robert Marantyne Monopoly, which is the standard oil in Germany, Rockefeller. In many of these cases, by the way, you have sort of the so-called Horatio Alger model of work. In many of these cases, these big businessmen start very poor, they start with grocers or or something like that, as Rockefeller did, and they worked themselves up purely from scratch without any kind of establishment help.

19:00Rockefeller starts in Cleveland as a poor bookkeeper, a low-income bookkeeper, and he becomes a commission grocer. He gets funds, he saves up money in the classic group pattern. He borrowed his money from his father, from relatives, from friends and associates, and he founds Rockefeller, Andrews, and Flagler Company in 1867, going to oil refining shortly after oil was discovered. And he continues to work on making the business more and more efficient. He has there, being in Cleveland, he's centrally located. He's got the Lake Erie water route. He's near the source of oil in western Pennsylvania. He's got this in eastern Ohio.

19:46And so Cleveland becomes a regular place, the found oil refinery, period. In the 1870s, he sets up the Standard Oil Company of Ohio, a corporation.

20:06While this is being done, while he sets himself up very quickly, The price of kerosene, of course, in this period, the major use of oil was not, of course, gasoline, which only comes in later with the automobile, the kerosene, which was used as the big illuminant for lighting and so forth. And during this period, while he's developing, Mark Rockefeller is developing one of the largest oil refineries, the price of kerosene goes down plummets with competition, with expansion of the market and expansion of production. The wholesale price of kerosene, for example, in 1863, was $0.45 a gallon, and in a fairly short period of time, in about a decade or so, it goes down to about $0.06 a gallon.

20:56So we have a constant lowering of the price of heresy during the so-called building up of the so-called monopoly. It's a peculiar thing. In economics, at least those economists were bitterly opposed to monopoly. The usual argument against monopoly is that monopoly restricts production and raises prices. It's a rather odd thing to attack so-called monopoly where the result of the whole thing is a constant increase in production, a constant lowering of price, which is what usually happens in this period. Andrew Carnegie, again with Pittsburgh, very near Cleveland, becoming the big steel city. Carnegie starts off as a poor Scottish immigrant, gets money from friends and associates, saves up some money, develops steel business, and through plowing back up profits. Again, the old sort of classic model.

21:46And, well, get back to him. Get back to him. It's Rockefeller. One of the charges is, of course, one of the famous charges, a classic textbook charge, is the reason why Rockefeller was able to build up standard rules and monopolies, because he got rebates from the railroads. He got secret rebates, or even some secret rebates. Well, one of the problems with that is almost everybody got rebates in that day. I mean, rebates is sort of like a general thing. Every company and almost every shipper in almost every field got rebates. Rebates were the methods by which the railroaders competed amongst themselves. In other words, cutting prices from lists. It's actually a method. Your list price is $2 a bushel for whatever it is, for widgets. If you order 200 bushel, they'll give you a buck and a half.

22:35This is sort of the ordinary method of competing in the business world. So you had almost everybody getting rebates. So the whole rebate thing is really a big row of herring, apparently, and the alleged rise of Rockefahr. Aside from that, Rockefahr finally developed his own pipelines, where, of course, you don't really use railroads at all. And so it's far from sort of building his whole empire up on rebates. By the late 1870s, he was really shifting to building pipelines rather than using railroads at all. He tries a monopoly cartel kind of arrangement with the South Improvement Company in 1871, which was for he and various other various railroads and various oil companies, oil refineries get together, and they make an agreement that they were banned together on this cartel arrangement and they would allocate quotas of shipments between railroads, each railroad gets a signed quotas of oil, and Pennsylvania Railroad is supposed to get 45% and Erie Railroad 27.5% and so forth.

23:37and return, the oil refiner is supposed to get larger rebates and allocate their shipments and what happens to that, what happens to the Sound Improvement Company cartel is what happens to virtually every cartel in the history of the world I know this is a very sweeping statement, but I'm willing to go out on a limb and say that virtually every cartel in the history of the world, it collapses very very quickly unless the government steps in and supports it The reason why cartels tend to collapse, and we'll see this time and time again, it's almost a litany of collapse. Well, there are two basic reasons, one is internal and the other is external. A group of companies get together and decide, well, first of all, the usual model for cartels, or the usual model is the average person thinks of people getting together and raising prices almost automatically.

24:25Say, you know, there are 12 steel companies, let's say, and they all get together at Union League Club for martinis This is the usual layman's view of, as Adam Smith once said, that businessmen are always trying to conspire to raise prices. Well, the point is, it's not that they wouldn't like to do that. They all like to have higher prices. However, there's one big catch and one reason why it can't be done over Martini or the Union League Club. The reason is, that in order to raise prices, you have to cut production, you have to cut ship, and no businessman likes to cut production, every businessman likes to increase production, likes to expand, etc. So the idea of cutting production is like a bone in the throat, many self-respecting businessmen.

25:13And then, aside from, even if you accept the idea in principle, you have to sit down and really hammer it out, how much are you going to cut, who's going to cut what. And this is the sort of negotiation, there you need very lengthy negotiations, and it never really gets resolved satisfactorily. Usually, of course, the cut is on the basis of historic production. So if the steel industry, let's say, got together in a cartel and they say, well, let's say, 1963, US Steel has 20% of the market, and Jones & Lockley has 8% or whatever, let's do it on that basis, and each guy, each producer will cut his production, let's say, by 10%. Well, you think that was fairly simple. However, there are a lot of problems with that. One thing is that there are always changes in business.

25:58One company might be suddenly coming up with a new process which could expand its production, hopefully its share of the market by a lot next year. So it doesn't want to cut back. They don't want to cripple themselves. Hey, we're going to have a great new process coming out. We're not going to cripple. We're not going to cut our share of the market by 10%. We could probably expand it another 20%. So you have all these fantastic tensions. What almost always happens with a cartel, if they finally do get together and agree on cutting production, you cut production here, you ship this here, I'll take that market, and so on and so on, And two things happen. One is that the firms themselves, the individual firms, they look at the situation. They won't have higher profits, presumably, because they've raised their price.

26:44And they look at the thing and they agree to cut production, they say, and they agree to cut sales. But then on the dead of night, they go out and say, look, you're getting a lot of profits here. I'm going to cut production a little bit. It's secret. You go to Jim, your big buyer, you say, look, I have an agreement that the price of widgets is going to be $10 a box. However, for you, since you're a great guy and a fellow rotarian and a good customer, and I make it $8 a box, $8.50 a box, I don't tell anybody. So then of course Jim loves this and he, you know, triples his purchases. And of course in a few months, as things go, the word leaks out, secrets aren't kept real long anyway. So then the competitor finds out that this guy's secretly covered up, he denounces him Berle for chiseling and scabbing and whatever the corporate analog for scabbing is.

27:29He says, that's for him. I will cut the list at age 50 and so forth and so on. And everybody else follows him at the end of the cartel. This is the internal pressure of breaking cartel. The external pressure is that other guys look around. Hey, the widget industry just had a cartel and they've increased their points by 30%. They're making a high profit. Let's nip in there. So the outside pressure is the other guys from Canada, or from new entrepreneurs, or guys who have previously been independent capitalists. Let's produce some widget plans. Let's get in on this bonanza. Alright, so they get in on the widget bonanza. And what are the existing widget companies going to do? They're up the creek, so to speak, because they can only do two things.

28:14Either the new guy will undercut the cartel and you've had it, once again, the cartel busts. Or you can say, well, let's let these guys in on the quota, but then you have to make a new quota, you have to carve out a new quota for this new widget company, which means all the existing firms have to take another big cut in their production. And this is a, again, a fantastic moment, right? And even if they do it, some new guy will come, and a second new guy will come, and the whole thing goes bust. So what happens is that in the process of trying to form a cartel, inevitably, with a combination of internal pressure and external pressure, New companies coming in and old companies secretly cutting prices. The thing collapses, it only collapses unless the government steps in and prevents it from happening. It keeps other companies out or keeps prices from being cut.

29:00Of course, I'm not going to get into the railroad caper now because it really pre-sees the period I want to focus on. But in the case of the railroads, as Coco points out, the railroads are regulation. and it's Hilton's point, George Hilton's point right now these, JP Morgan and other people try to desperately keep forming pool after pool cartel after cartel in the 1870s and early 80s and they all say great great, we're going to raise our freight rates, we're going to cut shipping, allocate shipments and so on and so on and do it and it's in a few months or so, some other railroad comes in and the secret rebates and the whole thing collapses so then you have to turn to the state apparatus to enforce it In the case of the railroads, one of the first things the ICC did, of course, in the name of attacking monopoly, was to outlaw secret rebates.

29:48If you tell the public, secret rebates are an evil thing, they're monopolistic, it sounds bad, secret in the first place. Anything secret sounds evil. If you sell the policy to the public on that basis, what you're doing in the outlaw secret rebates is you're outlawing the major method by which a cartel is broken internally. So, this is why, of course, in the Bismarck period, and later in Germany, when cartels come in a big way, the German government is enforcing it to the hilt. If you're a steel company in Germany, you have to join the cartel, you have to accept the cartel's decisions are enforceable by the government, by the courts and the police, and if you violate any decisions, you're going to be in trouble. Anyway, in the case of the South Improvement Company, they did not have the government apparatus behind them, The other big charge about not only Rockefeller, but many other companies in that period, I mentioned this in this bibliography, and I'm going to go into it in detail in lectures, is the way Rockefeller achieved his ends, his monopoly status,

30:54the way many other corporations achieved monopoly status is through what's known as predatory price cutting. You get this incidentally, if any of you, of course, have taught undergraduates, somehow the entire undergraduate population of America has absorbed this mythology of where they got it from. Anyway, the idea is, well, A&P or Stanton Oil, whatever, the way they got big because they cut their costs, they literally took losses, they were bigger than the other guys, they took losses, they drove the other guys out of business, and then they raised prices. This is a famous model where you lower your prices, you take losses, and then you drive the other guys out and you suddenly raise prices again. I don't think there's one authentic case in this, empirically. Maybe there is, but I don't know of any. Those economists who have studied this in some detail have found out that the cases are all a mythology.

31:43John McGee has done a classic article in San Diego, New Jersey, the alleged predatory price-cutting layer, Richard Zerbe for the American Sugar Refining Company and Kenneth Elzinga for the Unpowdered Trust demonstrating that it's never happened. There's good arguments in economic theory why it shouldn't happen. One thing, it's a very risky business. The first place, the big company is not necessarily more competitive than the small company. I mentioned last night about the pushcart puddler. If A&P tried this with a pushcart puddler, I don't think they would win out. Secondly, a large company is taking heavier losses when they're doing this. If they have a larger volume of business there, they're going to be in very bad trouble. And they don't know when this thing is going to end. This is another problem. How more of this supposed war is going to go on?

32:30Thirdly, supposing they drive the other guy out, because they have a lot of bankrupt oil refineries around. What happens to these bankrupt oil refineries? They don't get blown up. Somebody buys them at auction, picks them up for a sawn, and then waits for standard oil, The Legend of Hypothetical Standard Law case where you finally at last get a chance to raise your rates, your prices, after absorbing these losses for many years, and all of a sudden you see this pest from around the corner, nipping in and undercutting him, and he starts off with almost no capital costs. He's bought this refinery for next to nothing. So it's an extremely risky kind of procedure to undertake. Also, one of the peculiar things is that nobody seems to worry about, everybody's worried about the beginning of the process.

33:18If you're really interested in both the consumer, I as a consumer and you as consumers, we should be very happy about this as long as the price war is going on. What we should be saying is, hey, it's terrific, you know, giving their oil away and selling it for a penny a gallon or something, great, terrific, we'll wait until they drive everybody out and we raise the price, then they finally get their so-called monopoly price, then we can belly-ache. It does have some belly-aching now. The German steel industry, I think, or German business in general, was petitioning the West German government to resume the idea of a post-war cartel, which they had dropped after World War II. And here was the argument they used. The interesting thing is they get into the argument.

34:05I wish I had this thing with me. They said in effect, if you don't impose cartels now, what you're going to have is big businesses are going to drive out the small business out of existence and then they're going to raise prices. So therefore, the argument then is, we should impose an inefficient compulsory cartel now to keep these inefficient crummy firms in business and raise prices in strict reduction now because otherwise if you don't do that, you'll have an efficient monopoly somehow in the future, which might raise prices. And the interesting thing is they felt they could even get away with this, while I'm arguing with them. So, as I say, there have been many studies of this, but what apparently happened with the way in which Rockefeller and the Sugar Trust and the Gunpowder Trust, etc., the way they are trying to establish their monopoly is not by driving, by taking losses and trying to drive firms out of business and absorbing all these headaches,

34:58Basically, by buying them up, by merger kind of agreement, you make an agreement, you buy them up, you try to have efficiency on a large scale, supposed efficiency on a very large scale production, which is essentially what Rockefeller did. The thing that happened, and I'm anticipating a little bit now, but one of the things that happened then was that when this sort of thing occurs, when Rockefeller tries to buy up old refineries, or the sugar, glucose company, whatever, tries to buy up old glucose plants, what you have then is something like farm price supports. The government says, we stand ready to buy old soybeans at X dollars a bushel, which is way above the market price. It means you start developing a new industry in the world, the industry is building plants to sell to Rockefeller, building refineries that Rockefeller The government isn't coercibly keeping new firms out. What you have is new guys, great heroic entrepreneurs, saying, OK, I can follow them in another refinery, but I'm choked on this.

35:59The Bill of Refinery has to see a force in the bio. Finally, I'm not going to paint black mail these SOBs. I'm getting out of this thing. I'm not going to try to achieve them all by the hull of it. Which is sort of a natural result of this whole process. Unless, as I say, the government steps in, prevents them from building new plants to begin with.

36:19Well, Standard Oil, as they had natural advantages, entrepreneurial advantages, They had this location in Cleveland. They had the first one to really move into large-scale marketing. The first one to build bulk stations. They were more efficient as managers and entrepreneurs in the rest of the competition. They wind up by the 1880s with 90% of the US oil refining. You can't get much higher than that. By 1899 we have the new standard law of New Jersey, as a whole new company to the various state and world companies.

37:04By the 1880s and 1890s they had approximately 87% of refining, 86% of the marketing. They never had much more than a third of the crude oil, by the way. So what happens to them? Well, I'm going to talk more about the efficiency of standard oil first. One of the things which standard oil pioneered, and Rockefeller pioneered in the days when there was still standard oil in Ohio, was they were the first guys to reduce freight costs by having large carloads, by having trainloads lost, by having a regular steady flow of traffic, fixed amount per day, train loads, etc.

37:53They are first class really carrying their own fire insurance and provide their own terminal facilities for the oil, and so forth. And they were the first guys to come up with standard oil, come up with important technological innovations in the oil refining business, the burden cracking process, the flash process applied to oil, and so forth, and so on, byproducts, improving lubricants, distributing, as I mentioned before, and so forth. The, one of the things I guess which should be, it's kind of a cute thing I guess I should mention a little bit, which Alan Nevins exposed, Alan Nevins exposed some of the great myths in this book on power, the myth of the buffalo explosion, this is the thing where Rockefeller was supposed to have sent agents in to blow up a competing oil company, called the Buffalo ivid Company I guess it was, Buffalo Lubricating Company.

38:57And the theory was that the Standard Oil people had induced an employee to pack a safety valve with plaster and thereby cause it to blow up. First place, nothing was blown up by them. There are a lot of interesting things about this sort of story. First place, nothing was blown up because the plaster broke. So there was nothing, there was no explosion, number one. One of the stories here is that the owner of this independent Buffalo Loot Company is supposed to be a heroic chap named Charles Matthews. The actual situation, well, there are several things on Devon's list, sort of like a litany here, sort of packing every facet of this myth. One was that safety valves were usually packed because it was better as a safety measure to prevent gas leakage, so it was not the usual thing about packing the valve.

39:49Two, it was supposed to break when the valve blew open. It wasn't that it broke by accident. Safety values very often broke. Three, the Matthews, their associates, were former despondent employees of the banking law company, which is a subsidiary of Standard, who were engaging in all sorts of illegal activities. And finally, they built their plant purely for the purpose of selling it to standard wealth for this merger kind of process, for the quote blackmail unquote operation. So every one of these, and of course finally the guy who was supposed to have done this, Mr. Archibald, of course one of the big associates, knew nothing of any of this stuff at all.

40:35Every facet of this myth turns out to be incorrect. There's a similar thing, it has nothing to do with the subject, it has to do with the historians. There's a similar myth about J.P. Morgan getting his first, earning his first dollar by selling the effective arms of the Civil War. This has been beautifully exploded by, what's his name? Al Gordon Wasson. Showing every facet of this myth, not only is every facet of this thing wrong, not only the arms weren't defective and so forth, and J.P. Morgan had nothing to do with it, Every historian repeated the story, and he kept embellishing it, not only copying from the previous story, but embellishing it with more stuff against Morgan.

41:25Rockefeller is another important thing for political front. The Rockefeller, for the very beginning, for almost the very beginning, and continuing on to the present day, really, which is, I think, the importance of this, has always been associated not only with the whole family, many members of this family, but also a whole bunch of other families, a family association, both in investment and, I think, also in politics. So we have a combination of the Rockefeller, John D. Rockefeller family, his brother, William Rockefeller, and his descendants, the Harkness family, the Flagler family, the Payne and Whitney comes into the descendants of the Payne, The Bostwick's, the Prats, the Brewster's, the Roger's's, the Archibald's, and these names keep popping up from then on. I can't resist at this point, and we're completely out of alignment here, I can't resist this, I might not get to it later on, about Rockefeller and Pratt.

42:18During the Eisenhower administration, the Secretary of State, of course, was John Foster Gullis. and I think Frost mentioned this morning who's a partner of Salerno and Cromwell who's a standard oil essentially whore. But not only that, Dulles is something which is not only known to certain genealogists, students of genealogy in the modern world. Dulles was married to Janet Pomeroy Avery, who happened to be the first cousin of Johnny Rockefeller Jr. which makes Dulles a kinsman, a member of the Rockefeller family, of important sense. And then we had Alan W. Dulles, his brother, who was the head of the CIA, also of some importance in foreign policy making. And then we had his sister Eleanor Lansing Dulles, a big shot on the Asia desk of the State Department.

43:03And then we had this undersecretary of state with a beloved figure from Boston named Charles Christian Herter. And Christian Herter was a dynamic, charismatic fellow that I lived with, if you remember, which made him even more charismatic. But Christian Herta, this again was not really highlighted in the press at the time, was married to a Pratt, his wife in other words was a member of the Pratt family, which fits into the Rockefeller-Pratt conspiracy mule of the Eisenhower administration. Anyway, I want to emphasize the fact that the Rockefellers and their associates continue on, sort of real loyal associates from then on, both in economics and politics. But what happens to the standard-law monopoly, the 90% or essentially 90%?

43:55What happens to it is it begins to crack, and it cracks before the dissolution, before the antitrust action. The 90% by 1911, for example, the 90% begins to collapse to about 60-65%, which is a considerable slippage. Award to some more figures here. In 1899, Standard Oil had 90% of the refining in the United States, oil refining. 1904 to 1907, it was down 84%. By 1911, it was down 80%. By 1921, it was down to 50%. The number of refiners increases from 67% in 1899 to 147% in 1921. What happens is, new competitors come up. In the first place, standard oil, this happens to many big businesses.

44:43Many big businesses become overly big and overly bureaucratic. We were talking this morning about bureaucracy and the problem. But what happens is, I mentioned a little bit about Xerox and Polaroid, but what happens is, if the situation is fluid enough and market-free enough, new firms pop up which take advantage of the mistakes of the old firms, the bureaucratic regressiveness of the old firms. What happens is that the standard oil begins to fall behind in the oil revolution because there are several oil revolutions. One was the fact that the major production of oil begins to shift, of course, from kerosene to gasoline, for two reasons. Obviously, electricity begins to come up to replace kerosene in the open lamps. And secondly, because the automobile begins to come up and gasoline becomes increasingly important there. Standard oil falls behind in the shift. Having emphasized Kerosene or its existence, it begins to be slower than its competitors in realizing what's going on and swinging with a new system.

45:38Secondly, as new standard oil forces have always been concentrated in the western Pennsylvania and eastern Ohio oil fields. And we begin to find that after 1900, from 1900 to 1920 approximately, we begin to find new oil fields in Texas and California, the mid-continent oil field. All these oil fields are going to be discovered, and the standard oil is late in realizing, and late in taking advantage of it, and late in getting crude oil in there, getting refineries to absorb it. So, for example, in 1899, 63% of the oil refined was kerosene. In 1919, only 15% was kerosene. It was a big shift against me. And the independence, new independence coming up, like Tidewater Oil Company, Gulf Oil Company, which of course is essentially Mellon, the Mellon family, and the Tidewater Associated Oil Company, are much more alive for this whole new shift in economic and technological data.

46:35Also, even though Standard Oil had led the field in the old days, in the 1880s and 90s, in bulk stations and things like that, the independents lead Standard Oil in things like gasoline stations. The idea of the filling station for gasoline is supposed to be a brand new thing. You have to think of it first. It's one of these things that somebody mentioned today, I think, that you have to... It's easy once somebody shows you the way. It's easy to think of a gasoline station after somebody else has thought of it and put it into effect. But the independents lead Standard Oil in developing the idea of a gasoline and filling station. They also lead the idea of a petrochemicals later on. The whole petrochemical industry essentially was, Standard Oil was way behind in that. And the idea of tank cars and that whole business, again, is essentially led by the independents.

47:25Incidentally, another big monopoly, beginning to an alleged hopeful monopoly, US Steel, which I'll get to in a second, another Morgan company established in 1901 as a supposed monopoly in the steel business, fantastically retrogressive, the last firm to install the basic oxygen process, which is the biggest thing since the early 1900s in the steel business, for one reason is because of course they had lousy and bureaucratic management, and another reason they had all this investment in previous processes which they felt they were stuck with. The first firms that begin to develop the basic oxygen process in the thirties are small German companies. And then the small American companies begin to adopt them. U.S. Steel is the last to swing with a new dispensation, and therefore the share of the market has been slipping for a long, long time.

48:15Okay, they aren't a steel business. We have, again, a sort of Horatio-Alger thing with Carnegie and Frick, who's working on Superior Coke. Carnegie is working on superior steel. They have an integrated kind of company. The first one is leasing iron ore from Minnesota, having an ore carrier fleet, and having an integrated corporation. They developed the Carnegie Steel Company, which had something like 25 to 30 percent of total steel production in the 1890s. Now we come to Morgan and his associate, or agent, or whatever you want to call him, Judge Elbert H. Gary who developed the U.S. Steel Company as a merger of a whole bunch of steel companies, including Federal Steel, in 1901, which developed out of a series of mammoth mergers.

49:12The idea, as Arthur Dilling, a very neglected economic historian in this period, pointed out what happened is these guys got carried away. They realized there were great efficiencies in large-scale production and large-scale distribution. They saw that happening in the eyes of big business. Therefore, they felt that big is good and bigger must be better, and biggest must be still better. They didn't realize there were diseconomies in large-scale production. When you get larger and larger and larger, something's going to crack. You're not going to become too bureaucratic, you're going to have too much management dead wood and not enough internal market or whatever. And so you can understand why they want to develop a merger, a monopoly set up. And you'll see how the whole thing began to crack. Not only iron and steel and oil, but almost every other industry to boot.

50:02During the 1880s and 1890s, there were approximately over 700 iron and steel companies in the United States. There were numerous attempts at pools and cartels, and they all flopped. Finally, there was a series of mammoth mergers. They figured, if we can't cartelize, maybe we can just merge, which seems to be simpler and more permanent. It's an only interesting point, I think, made by Weinstein or Sklar, some other great conspiratorial historian. One of the effects of the Sherman Anti-Trust Act, if you outlaw cartels, voluntary cartels, A voluntary cartel, one of the things you do is you stimulate mergers, because a merger is not really a cartel, it's not a conspiracy, it's simply merged. So you have an over-stimulation of mergers by the so-called anti-monopoly law that really leads to, you know, a lot of mergers and trust. And this might have been, I don't know, because very few people have really studied anti-trust law, Sherman Act and so forth, and the origins of it, but I have a sort of a deep dark hunch.

50:53This might have been the intended effect of the Sherman Act and the trust act, to stimulate, to encourage mergers, against cartels. At any rate, he had a series of mammoth mergers, they wind up in US Steel, and yet, US Steel is a merger of approximately 138 companies, starting off with controlling 60% of them that are in the steel market. The key figures are two great Morgan persons in that period, Judge Gary, and I mentioned George W. Perkins, who will pop up more and more in my series in these lectures, and I'm a partner of J.P. Morgan and Company. So what happens to USD? What's the result of all this great merger? First place, the price of USD shares in 1901 was $55 a share, by 1904 it's down to $9.

51:44Profits drop precipitately. In 1902, profits were 16% on investment. By 1904, it was down to 8%. Not too hot. We experiment and we're too wrong. And one of the things that happened, one of the reasons, one of the things that happened, this is an interesting thing here about this whole merger cartel problem. See, if you have a big merger, you can either raise, you can get your monopoly price by cutting production, dropping a lot of plants and raising prices,

52:42for the industry, trying to get an agreement to raise prices and cut production. So what happens to the 1907? Here's Judge Gary with enormous prestige for the U.S. steel company with 60% of the market, with J.P. Morgan and his great power behind him. And what happens to the Gary dinner? It's like a total bomb out. And by 1908, which means only a year or so after the Gary dinners, there's secret price cutting. Odd bless it. Secret price cutting, especially by the smaller competitors right there under the table. And This leaves, finally, an open price-cutting when the guys find out about it and the whole thing cracks. The whole Gary dinner has collapsed. The end of eating for Gary, for some time.

53:23It's only with World War I, as Melvin O'Rofsky points out, his great work, his big deal in the Wilson administration, it's only with a glorious combination of the progressive ideal, which is World War I, that Judge Gary finally finds his munition life. So what happens with USDL? USDL has a continuing, it's really like, you know, just as triumphant, social Darwinism in work. USDL has a steady decline in the share of the market from then on. 1901 it had 63% of ingots in castings, for example. 1911 to 15, it was down 52%. 1920s it was 46%, by 1950s it was about 32%. I'm sure it's less than that. Constantly, it's a really crummy company, and it's about the effects of it.

54:11Again, they were technically extremely conservative and bureaucratic. Not only were they the last guys to adopt the basic oxygen system, which was fairly recently, they were also almost the last guys to shift from the Bessemer process to the open heart process, which, the big shift occurred during the first two decades of the 20th century. The US still had enormous investment in Bessemer equipment, Bessemer plants, and it was very difficult for them to shift, and that was it, too damn bad. So the other independents pop up, you know, who were not Bessemer, They were not heavily committed to Bessemerism and adopted the open horse method. Also, for US Steelers, Ray Sloan entered the growing field of lighter steel product. They were committed, and I think this goes along with Bessemer method. They were committed to heavy steel, so they weren't swinging with, they weren't adapted to the idea of lighter steel products, of sheet steel, strip steel.

54:57And they were one of the last to adopt the, having scrap, recycling of scrap. One of the last to adopt stainless steel and alloys. One of the last without the continuous rolling mill, one of the last to... They refused to buy a structural steel platen, for example, figured it would never work. And so, time and again, area after area, US Steel flubs the dub. I think it's directly related to their genesis, US Steel and its basic nature. They were locked into heavy steel, obsolete equipment, obsolete process, and a monopoly kind of mentality. There's an excellent article, a journal article, which I forgot to mention, but it was written by Walter Adams on the quarterly Journal of Economics about ten years ago or so, on US Steel's failure to adopt the oxygen, basic oxygen process.

55:49So, that's the steel caper. As Gabriel Coco says in a clinical conservatism quote, I know you're supposed to have read it, but I think it's a pretty good quote from it. The steel industry was competitive before the World War, and the efforts of the House of Morgan to establish control and stability over the steel industry by voluntary private economic means had failed. Having failed in the realm of economics, the efforts of the U.S. Steel Group were to be shifted to politics. I think this is beautiful, sort of sums up, I think not only the U.S. Steel Group for the whole bowl of wax. Having failed in the realm of economics, their efforts shift to politics. This is kind of a cute thing about Coco. This is an aside. I've been very influenced by the Coco view of the progressive era, and many other libertarian, conservative, and butcher philosophers.

56:41And we've been pushing a lot of Coco stuff in our literature. There's no Coco as far as up the wall. I mean, Coco is not exactly a very swinging type to begin with. Not exactly, there's nothing about him. Yeah, it's sort of a pipe-pipe. He keeps being bombarded with quotations from the great Gabriel Coco, from libertarian to richer literature. And he's completely out of here, he's completely hopped up about it. He keeps writing letters saying, I don't believe in the free market, I hate the free market. Too bad, fella.