WEBVTT NOTE The Rise of Big Business: The Failure of Trusts and Cartels 1 00:00:00.000 --> 00:00:12.000 Well, 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. 2 00:00:12.000 --> 00:00:26.000 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. 3 00:00:26.000 --> 00:00:36.000 The basic reference is the theme of orthodox historiography, so to speak, of almost all historians up until a few years ago. 4 00:00:36.000 --> 00:00:48.000 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. 5 00:00:48.000 --> 00:01:00.000 Big 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. 6 00:01:00.000 --> 00:01:14.000 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. 7 00:01:14.000 --> 00:01:21.000 These are essentially programs to reform big business, the big business monopoly which arose in the free market. 8 00:01:21.000 --> 00:01:30.000 So in my view, the rigid view is that the story is almost exactly the opposite. 9 00:01:30.000 --> 00:01:38.000 In other words, what happened with the rise of big business and large-scale industry was a truly progressive, in the small-p sense, 10 00:01:38.000 --> 00:01:46.400 industrial progress, standard of living, productivity, etc. on the free market, many big business 11 00:01:46.400 --> 00:01:53.280 interests would like to achieve monopoly through cartels and trusts, etc. on the free market. 12 00:01:53.280 --> 00:01:57.840 These things were launched in many areas, but they almost all failed miserably because 13 00:01:57.840 --> 00:02:04.320 of the winds of competition, and then, having seen that these things failed, various big 14 00:02:04.320 --> 00:02:31.720 The basic interpretation then becomes that the essences of these movements are the turning 15 00:02:31.720 --> 00:02:36.160 to the state apparatus to perform the monopolizing function that could not be achieved on the 16 00:02:36.160 --> 00:02:37.160 free market. 17 00:02:37.160 --> 00:02:43.000 Now, to do this requires a certain amount of funflammery. 18 00:02:43.000 --> 00:02:48.360 As far as I mentioned this morning about illusions of the opium of the people, I might differ 19 00:02:48.360 --> 00:02:50.480 with them on whether this opium is necessary or not. 20 00:02:50.480 --> 00:02:55.720 At any rate, it's certainly necessary to achieve the goals that the people wanted to achieve. 21 00:02:55.720 --> 00:03:03.040 If you want to turn to the free market to arrive at a monopolization, cartelization, 22 00:03:03.040 --> 00:03:07.760 if you want to turn to the government to do this, one of the things you have to do is 23 00:03:07.760 --> 00:03:13.400 to realize, of course, that in a democracy, in a country where voting, of course, is endemic, 24 00:03:13.400 --> 00:03:19.400 you can't tell the public, we have to have the ICC and the FTC and et cetera, et cetera, 25 00:03:19.400 --> 00:03:23.600 insurance regulation, blah, blah, blah, almost not to infinity, because we want to monopolize 26 00:03:23.600 --> 00:03:48.600 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. 27 00:03:48.600 --> 00:03:56.600 This cartelization was accomplished, so we have a great paradox of monopolization in the name of anti-monopolization. 28 00:03:56.600 --> 00:04:09.600 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. 29 00:04:09.600 --> 00:04:14.600 So it was easy to sell this kind of movement. 30 00:04:14.600 --> 00:04:22.600 On that basis, to do that, however, you needed, of course, the alliance with the intellectuals. 31 00:04:22.600 --> 00:04:28.600 To successfully sell this great con game, a great show game in the American public, 32 00:04:28.600 --> 00:04:43.600 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. 33 00:04:43.600 --> 00:04:51.600 The social workers, the economists, the sociologists, social scientists, settlement house workers, etc., etc. 34 00:04:51.600 --> 00:05:08.600 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. 35 00:05:08.600 --> 00:05:13.920 They also needed, in this partnership, this partnership or statism, 36 00:05:13.920 --> 00:05:18.480 they also needed to bring out of existence a group of labor unions. 37 00:05:18.480 --> 00:05:23.400 I don't deal too much with this in the lecture, but to some extent, 38 00:05:23.400 --> 00:05:31.040 industrial unionism, industrial, the polyparia arises in the sense of a group of industrial employees. 39 00:05:31.040 --> 00:05:36.360 And the colonizing interests felt that they also needed a disciplined labor force 40 00:05:36.360 --> 00:05:41.160 be willing to go along with this and take a junior partnership role in this great tripartite alliance. 41 00:05:41.160 --> 00:05:44.960 This is when the labor force was founded in the form of the American Federation of Labor 42 00:05:44.960 --> 00:05:47.000 and Samuel Goldberg's own great... 43 00:05:47.000 --> 00:05:50.200 so the embodiment of co-responsible and co-unionism. 44 00:05:50.200 --> 00:05:55.080 So we begin to forge then, in the progressive period, solidified during World War I, 45 00:05:55.080 --> 00:05:59.520 continuing on really ever since in various forms. 46 00:05:59.520 --> 00:06:03.120 We begin to forge what I call a triple alliance later on, 47 00:06:03.120 --> 00:06:12.120 between four various groups of big business interests, progressive intellectuals and responsible labor unions. 48 00:06:12.120 --> 00:06:15.120 These form the great center of American life. 49 00:06:15.120 --> 00:06:23.120 They form the matrix of the consensus, and of course all sorts of differences within that consensus, differences of emphasis. 50 00:06:23.120 --> 00:06:31.120 I think this really, starting a progressive period, really forms the matrix for American life from then on, up until the present. 51 00:06:31.120 --> 00:06:39.120 I think the important lesson for ourselves right now is that we're still living under this kind of triple alliance. 52 00:06:39.120 --> 00:06:44.120 What we see in the progressive period is the emergence of the current system. 53 00:06:44.120 --> 00:06:51.120 The seeds are prying out the culmination of the present system of this triple alliance. 54 00:06:51.120 --> 00:07:00.120 What the intellectuals get out of the triple alliance, and I'll deal with a little bit more later on, 55 00:07:00.120 --> 00:07:06.120 is essentially power, prestige, and PELF out of the system. 56 00:07:06.120 --> 00:07:11.120 They get the cushy jobs in the establishment. 57 00:07:11.120 --> 00:07:19.120 Also, they get something else. I want to anticipate later on what your sixth order is going to be. 58 00:07:19.120 --> 00:07:26.120 They also get, they have a feeling, which begins to arise in this period, which hits them later on. 59 00:07:26.120 --> 00:07:29.120 In addition to the power and power, they have the ideological feeling. 60 00:07:29.120 --> 00:07:33.120 The laissez-faire capitalism is outmoded for one reason or another. 61 00:07:33.120 --> 00:07:37.120 It's only fit for agrarian system or whatever, a small business. 62 00:07:37.120 --> 00:07:41.120 They don't like Marxian socialism because it's too... 63 00:07:41.120 --> 00:07:46.120 it's too aesthetic, it's too class struggle-oriented, too proletarian. 64 00:07:46.120 --> 00:07:50.120 So what they're looking for is a third way, a middle way, a third way or whatever, 65 00:07:50.120 --> 00:07:55.120 which will harmonize all classes under the great aegis of the federal government or the central government 66 00:07:55.120 --> 00:08:02.120 with the Triple Alliance with them and big business and responsible unionism in power. 67 00:08:02.120 --> 00:08:05.120 As I said, there'd be different emphases. 68 00:08:05.120 --> 00:08:10.120 And they figure they find this system and this new system of where we want to call it. 69 00:08:10.120 --> 00:08:14.120 There are many names for it, corporate, state, it's not one of my favorites. 70 00:08:14.120 --> 00:08:20.120 And they find this very cozy alliance which will harmonize all classes, which will bring the public together. 71 00:08:20.120 --> 00:08:23.800 everybody will find his place in the great 72 00:08:23.800 --> 00:08:25.400 sort of status system 73 00:08:25.400 --> 00:08:30.080 it's not, of course, unique to the United States, there's something else I'm really anticipating again 74 00:08:30.080 --> 00:08:34.600 but at any rate, it's not unique to the United States, it's also going on in Western Europe 75 00:08:34.600 --> 00:08:37.960 in Germany, in Italy, in France, in Britain, in various degrees 76 00:08:37.960 --> 00:08:40.180 the search for the new system, the new system of the 77 00:08:40.180 --> 00:08:42.140 mixed economy, or whatever you want 78 00:08:42.140 --> 00:08:46.000 state monopoly capitalism, or whatever you want to call it 79 00:08:46.000 --> 00:08:49.300 and the search takes different forms in different countries 80 00:08:49.300 --> 00:09:15.460 The first step in this analysis is the rise of big business, point out, just give a few examples, 81 00:09:15.460 --> 00:09:29.460 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. 82 00:09:29.460 --> 00:09:36.460 So 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. 83 00:09:36.460 --> 00:09:43.460 Incidentally, this is just sort of one little note, sort of a side thing, side anecdote. 84 00:09:43.460 --> 00:09:50.460 Very little revisionist work has been done about the origin of the antitrust law, the original, the Sherman Act, 1890. 85 00:09:50.460 --> 00:09:53.460 The only thing I have to say about that, well, just two small points. 86 00:09:53.460 --> 00:09:56.460 One is it was put in by the Republicans. 87 00:09:56.460 --> 00:10:01.460 The Republicans have always been, of course, committed to a high tariff. 88 00:10:01.460 --> 00:10:08.460 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. 89 00:10:08.460 --> 00:10:14.460 You can't really have even a fairly successful trust in an industry without a high tariff to keep out foreign competition. 90 00:10:14.460 --> 00:10:23.460 And 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. 91 00:10:23.460 --> 00:10:31.460 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. 92 00:10:31.460 --> 00:10:42.460 Apparently Senator Sherman, of course, was a distinguished highly conservative Ohio Republican, was trying to run for the presidency in 1888, if it was. 93 00:10:42.460 --> 00:10:52.460 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. 94 00:10:52.460 --> 00:11:22.460 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 95 00:11:22.460 --> 00:11:50.460 The Heroic Rise of Big Business on the Market 96 00:11:52.460 --> 00:12:08.460 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. 97 00:12:08.460 --> 00:12:17.460 The 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. 98 00:12:17.460 --> 00:12:36.460 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. 99 00:12:36.460 --> 00:12:42.460 And he was always driving, his major interest was in minimum cost. 100 00:12:42.460 --> 00:12:47.460 Apparently, and here again, of course, I'm a little more by the side of it, apparently, 101 00:12:47.460 --> 00:12:51.460 many of the other inventors, for example, he was trying to invent a light bulb, a serviceable 102 00:12:51.460 --> 00:12:54.460 light bulb, which was apparently extremely difficult. 103 00:12:54.460 --> 00:12:57.460 And he saw that you have to have, he was the first person to say you have to have a high 104 00:12:57.460 --> 00:13:01.460 resistance in the wire in order to cut down the cost of the copper wire. 105 00:13:01.460 --> 00:13:04.460 Apparently, it's one of the major items of cost. 106 00:13:04.460 --> 00:13:09.740 Apparently, all the other inventors that were sort of competing with them in this, like Maxim and Swann and these people, 107 00:13:09.740 --> 00:13:16.700 were constantly concentrating on a lamp of low resistance, which apparently would be more durable. 108 00:13:16.700 --> 00:13:24.780 And presumably, they were doing this for aesthetic purposes, that this would somehow fit more into their build-up show. 109 00:13:24.780 --> 00:13:29.460 Whereas Edison was interested, but on the other hand, it would be too expensive to be really practical, and so 110 00:13:29.460 --> 00:13:37.460 That isn't immediately so, you have to have this, you have to work on the idea of a high-resistance lamp. 111 00:13:37.460 --> 00:13:41.460 And he did this throughout, he chose electric lighting over other possible areas, as I mentioned, 112 00:13:41.460 --> 00:13:48.460 because he thought this would have to be the highest expected profits to be reaped in electric lighting. 113 00:13:48.460 --> 00:13:56.460 He chose to work on incandescent lights over arc lights because he figured this would be the higher profitability. 114 00:13:56.460 --> 00:14:03.460 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. 115 00:14:03.460 --> 00:14:06.460 You can usually even think in terms of a higher cost. 116 00:14:06.460 --> 00:14:11.460 And they're the first ones to think in these terms in the electric business. 117 00:14:11.460 --> 00:14:20.460 So it's constantly interesting. You can analyze each part of the course, each element, and constantly see how to minimize that particular element. 118 00:14:20.460 --> 00:14:26.460 He works on a highly efficient dynamo in order to cut coal as much as possible. 119 00:14:26.460 --> 00:14:30.460 And the same way with the transmission network. 120 00:14:30.460 --> 00:14:33.460 And he develops feeder networks, again, on this whole basis. 121 00:14:33.460 --> 00:14:39.460 His whole motivation was toward lowering costs, thereby increasing profits. 122 00:14:39.460 --> 00:14:43.460 In 1883, he develops the three-wire system, which saves... 123 00:14:43.460 --> 00:14:45.460 Well, first of all, he cuts... excuse me. 124 00:14:45.460 --> 00:14:54.460 In 1883, he develops a two-network feeder system which cuts the cost of copper by 85% for the enormous, most incredible cost cut. 125 00:14:54.460 --> 00:15:00.460 Then in 1883, he works out a three-wire system which cuts the cost of copper another 63%. 126 00:15:00.460 --> 00:15:10.460 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. 127 00:15:10.460 --> 00:15:23.460 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. 128 00:15:23.460 --> 00:15:37.460 And again, which of course gives the consumer the incentive to economize in peak loads and all the rest of it. 129 00:15:37.460 --> 00:15:47.460 So he develops, on this basis, he develops central station lighting and generators and electric lights and all the rest of it. 130 00:15:47.460 --> 00:15:55.460 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. 131 00:15:55.460 --> 00:16:03.460 This of course becomes a weakness, finally, because you don't delegate authority or interest in any aspect. 132 00:16:03.460 --> 00:16:18.460 First he finally comes a cropper in a sense, in the creativity end of things, refusing to consider the idea of an alternating current. 133 00:16:18.460 --> 00:16:26.460 And here you have a case of another independent, creative, hard-nosed type, George Westinghouse, 134 00:16:26.460 --> 00:16:33.460 What comes up with the alternating current generator is even more efficient and less costly and so on. 135 00:16:33.460 --> 00:16:45.460 Interestingly enough, you had to have an alternating current in order to have any kind of transmission beyond a very high density area. 136 00:16:45.460 --> 00:16:48.460 And both of these guys are extremely independent. 137 00:16:48.460 --> 00:16:55.460 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. 138 00:16:55.460 --> 00:17:11.460 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. 139 00:17:11.460 --> 00:17:20.460 Westinghouse, 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. 140 00:17:20.460 --> 00:17:42.460 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. 141 00:17:42.460 --> 00:17:48.460 He continues to go along with independent Westinghouse Company. 142 00:17:48.460 --> 00:17:53.460 Angers the Establishment has a big stock war in the stock market with the Morgans and Wins. 143 00:17:53.460 --> 00:17:59.460 And generally plays an extremely heroic role both at us and Westinghouse 144 00:17:59.460 --> 00:18:05.460 because they are exemplary non-lobber baron type big businessmen. 145 00:18:12.460 --> 00:18:25.460 Westinghouse 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. 146 00:18:25.460 --> 00:18:37.220 After this quick survey of the electric industry, we get of course the famous example of so-called 147 00:18:37.220 --> 00:18:43.860 evil Robert Marantyne Monopoly, which is the standard oil in Germany, Rockefeller. 148 00:18:43.860 --> 00:18:46.700 In many of these cases, by the way, you have sort of the so-called Horatio Alger model 149 00:18:46.700 --> 00:18:47.700 of work. 150 00:18:47.700 --> 00:18:52.380 In many of these cases, these big businessmen start very poor, they start with grocers or 151 00:18:52.380 --> 00:19:00.380 or something like that, as Rockefeller did, and they worked themselves up purely from scratch without any kind of establishment help. 152 00:19:00.380 --> 00:19:10.380 Rockefeller starts in Cleveland as a poor bookkeeper, a low-income bookkeeper, and he becomes a commission grocer. 153 00:19:10.380 --> 00:19:15.380 He gets funds, he saves up money in the classic group pattern. 154 00:19:15.380 --> 00:19:30.380 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. 155 00:19:30.380 --> 00:19:41.380 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. 156 00:19:41.380 --> 00:19:46.380 He's near the source of oil in western Pennsylvania. He's got this in eastern Ohio. 157 00:19:46.380 --> 00:19:52.380 And so Cleveland becomes a regular place, the found oil refinery, period. 158 00:19:52.380 --> 00:20:00.380 In the 1870s, he sets up the Standard Oil Company of Ohio, a corporation. 159 00:20:06.380 --> 00:20:10.380 While this is being done, while he sets himself up very quickly, 160 00:20:10.380 --> 00:20:29.380 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. 161 00:20:29.380 --> 00:20:34.380 And during this period, while he's developing, 162 00:20:34.380 --> 00:20:37.220 Mark Rockefeller is developing one of the largest oil refineries, 163 00:20:37.220 --> 00:20:40.740 the price of kerosene goes down plummets with competition, 164 00:20:40.740 --> 00:20:43.100 with expansion of the market and expansion of production. 165 00:20:43.100 --> 00:20:45.940 The wholesale price of kerosene, for example, in 1863, 166 00:20:45.940 --> 00:20:50.860 was $0.45 a gallon, and in a fairly short period of time, 167 00:20:50.860 --> 00:20:56.620 in about a decade or so, it goes down to about $0.06 a gallon. 168 00:20:56.620 --> 00:21:02.620 So we have a constant lowering of the price of heresy during the so-called building up of the so-called monopoly. 169 00:21:02.620 --> 00:21:07.620 It's a peculiar thing. In economics, at least those economists were bitterly opposed to monopoly. 170 00:21:07.620 --> 00:21:11.620 The usual argument against monopoly is that monopoly restricts production and raises prices. 171 00:21:11.620 --> 00:21:19.620 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, 172 00:21:19.620 --> 00:21:24.620 which is what usually happens in this period. 173 00:21:24.620 --> 00:21:46.620 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. 174 00:21:46.620 --> 00:21:52.620 And, well, get back to him. Get back to him. It's Rockefeller. 175 00:21:52.620 --> 00:22:01.620 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. 176 00:22:01.620 --> 00:22:05.620 He got secret rebates, or even some secret rebates. 177 00:22:05.620 --> 00:22:11.620 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. 178 00:22:11.620 --> 00:22:15.620 Every company and almost every shipper in almost every field got rebates. 179 00:22:15.620 --> 00:22:19.620 Rebates were the methods by which the railroaders competed amongst themselves. 180 00:22:19.620 --> 00:22:23.620 In other words, cutting prices from lists. 181 00:22:23.620 --> 00:22:29.620 It's actually a method. Your list price is $2 a bushel for whatever it is, for widgets. 182 00:22:29.620 --> 00:22:35.620 If you order 200 bushel, they'll give you a buck and a half. 183 00:22:35.620 --> 00:22:40.620 This is sort of the ordinary method of competing in the business world. 184 00:22:40.620 --> 00:22:48.620 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. 185 00:22:48.620 --> 00:22:54.620 Aside from that, Rockefahr finally developed his own pipelines, where, of course, you don't really use railroads at all. 186 00:22:54.620 --> 00:22:59.620 And so it's far from sort of building his whole empire up on rebates. 187 00:22:59.620 --> 00:23:08.620 By the late 1870s, he was really shifting to building pipelines rather than using railroads at all. 188 00:23:08.620 --> 00:23:16.620 He tries a monopoly cartel kind of arrangement with the South Improvement Company in 1871, 189 00:23:16.620 --> 00:23:22.620 which was for he and various other various railroads and various oil companies, oil refineries get together, 190 00:23:22.620 --> 00:23:26.620 and they make an agreement that they were banned together on this cartel arrangement 191 00:23:26.620 --> 00:23:31.620 and they would allocate quotas of shipments between railroads, each railroad gets a signed quotas of oil, 192 00:23:31.620 --> 00:23:37.620 and Pennsylvania Railroad is supposed to get 45% and Erie Railroad 27.5% and so forth. 193 00:23:37.620 --> 00:23:45.620 and return, the oil refiner is supposed to get larger rebates and allocate their shipments 194 00:23:45.620 --> 00:23:52.620 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 195 00:23:52.620 --> 00:24:02.620 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 196 00:24:02.620 --> 00:24:10.620 The reason why cartels tend to collapse, and we'll see this time and time again, it's almost a litany of collapse. 197 00:24:10.620 --> 00:24:14.620 Well, there are two basic reasons, one is internal and the other is external. 198 00:24:14.620 --> 00:24:21.620 A group of companies get together and decide, well, first of all, the usual model for cartels, or the usual model is 199 00:24:21.620 --> 00:24:25.620 the average person thinks of people getting together and raising prices almost automatically. 200 00:24:25.620 --> 00:24:31.620 Say, you know, there are 12 steel companies, let's say, and they all get together at Union League Club for martinis 201 00:24:31.620 --> 00:24:45.620 This is the usual layman's view of, as Adam Smith once said, that businessmen are always trying to conspire to raise prices. 202 00:24:45.620 --> 00:24:55.620 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. 203 00:24:55.620 --> 00:25:09.620 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. 204 00:25:09.620 --> 00:25:13.620 So the idea of cutting production is like a bone in the throat, many self-respecting businessmen. 205 00:25:13.620 --> 00:25:21.620 And 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. 206 00:25:21.620 --> 00:25:29.620 And this is the sort of negotiation, there you need very lengthy negotiations, and it never really gets resolved satisfactorily. 207 00:25:29.620 --> 00:25:34.620 Usually, of course, the cut is on the basis of historic production. 208 00:25:34.620 --> 00:25:41.620 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, 209 00:25:41.620 --> 00:25:50.620 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%. 210 00:25:50.620 --> 00:25:55.620 Well, you think that was fairly simple. However, there are a lot of problems with that. 211 00:25:55.620 --> 00:25:58.620 One thing is that there are always changes in business. 212 00:25:58.620 --> 00:26:01.620 One company might be suddenly coming up with a new process which could expand its production, 213 00:26:01.620 --> 00:26:04.620 hopefully its share of the market by a lot next year. 214 00:26:04.620 --> 00:26:07.620 So it doesn't want to cut back. They don't want to cripple themselves. 215 00:26:07.620 --> 00:26:10.620 Hey, we're going to have a great new process coming out. We're not going to cripple. 216 00:26:10.620 --> 00:26:15.620 We're not going to cut our share of the market by 10%. We could probably expand it another 20%. 217 00:26:15.620 --> 00:26:17.620 So you have all these fantastic tensions. 218 00:26:17.620 --> 00:26:34.620 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, 219 00:26:34.620 --> 00:26:44.620 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. 220 00:26:44.620 --> 00:26:51.620 And 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. 221 00:26:51.620 --> 00:26:59.620 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. 222 00:26:59.620 --> 00:27:05.060 However, for you, since you're a great guy and a fellow rotarian and a good customer, 223 00:27:05.060 --> 00:27:08.740 and I make it $8 a box, $8.50 a box, I don't tell anybody. 224 00:27:08.740 --> 00:27:13.660 So then of course Jim loves this and he, you know, triples his purchases. 225 00:27:13.660 --> 00:27:18.660 And of course in a few months, as things go, the word leaks out, secrets aren't kept real 226 00:27:18.660 --> 00:27:19.660 long anyway. 227 00:27:19.660 --> 00:27:23.660 So then the competitor finds out that this guy's secretly covered up, he denounces him 228 00:27:23.660 --> 00:27:29.660 Berle for chiseling and scabbing and whatever the corporate analog for scabbing is. 229 00:27:29.660 --> 00:27:33.660 He says, that's for him. I will cut the list at age 50 and so forth and so on. 230 00:27:33.660 --> 00:27:36.660 And everybody else follows him at the end of the cartel. 231 00:27:36.660 --> 00:27:39.660 This is the internal pressure of breaking cartel. 232 00:27:39.660 --> 00:27:43.660 The external pressure is that other guys look around. 233 00:27:43.660 --> 00:27:48.660 Hey, the widget industry just had a cartel and they've increased their points by 30%. 234 00:27:48.660 --> 00:27:51.660 They're making a high profit. Let's nip in there. 235 00:27:51.660 --> 00:27:59.660 So the outside pressure is the other guys from Canada, or from new entrepreneurs, or guys who have previously been independent capitalists. 236 00:27:59.660 --> 00:28:03.660 Let's produce some widget plans. Let's get in on this bonanza. 237 00:28:03.660 --> 00:28:09.660 Alright, so they get in on the widget bonanza. And what are the existing widget companies going to do? 238 00:28:09.660 --> 00:28:14.660 They're up the creek, so to speak, because they can only do two things. 239 00:28:14.660 --> 00:28:20.660 Either the new guy will undercut the cartel and you've had it, once again, the cartel busts. 240 00:28:20.660 --> 00:28:24.660 Or you can say, well, let's let these guys in on the quota, but then you have to make a new quota, 241 00:28:24.660 --> 00:28:31.160 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. 242 00:28:31.160 --> 00:28:34.160 And this is a, again, a fantastic moment, right? 243 00:28:34.160 --> 00:28:38.660 And even if they do it, some new guy will come, and a second new guy will come, and the whole thing goes bust. 244 00:28:38.660 --> 00:28:46.660 So what happens is that in the process of trying to form a cartel, inevitably, with a combination of internal pressure and external pressure, 245 00:28:46.660 --> 00:28:55.660 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. 246 00:28:55.660 --> 00:29:00.660 It keeps other companies out or keeps prices from being cut. 247 00:29:00.660 --> 00:29:07.660 Of course, I'm not going to get into the railroad caper now because it really pre-sees the period I want to focus on. 248 00:29:07.660 --> 00:29:12.660 But in the case of the railroads, as Coco points out, the railroads are regulation. 249 00:29:12.660 --> 00:29:15.660 and it's Hilton's point, George Hilton's point right now 250 00:29:15.660 --> 00:29:21.660 these, JP Morgan and other people try to desperately keep forming pool after pool 251 00:29:21.660 --> 00:29:25.660 cartel after cartel in the 1870s and early 80s 252 00:29:25.660 --> 00:29:30.660 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 253 00:29:30.660 --> 00:29:35.660 and it's in a few months or so, some other railroad comes in and the secret rebates 254 00:29:35.660 --> 00:29:37.660 and the whole thing collapses 255 00:29:37.660 --> 00:29:40.660 so then you have to turn to the state apparatus to enforce it 256 00:29:40.660 --> 00:29:48.660 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. 257 00:29:48.660 --> 00:29:56.660 If you tell the public, secret rebates are an evil thing, they're monopolistic, it sounds bad, secret in the first place. 258 00:29:56.660 --> 00:29:58.660 Anything secret sounds evil. 259 00:29:58.660 --> 00:30:07.660 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. 260 00:30:07.660 --> 00:30:14.660 So, this is why, of course, in the Bismarck period, and later in Germany, when cartels come in a big way, 261 00:30:14.660 --> 00:30:20.660 the German government is enforcing it to the hilt. If you're a steel company in Germany, you have to join the cartel, 262 00:30:20.660 --> 00:30:24.660 you have to accept the cartel's decisions are enforceable by the government, by the courts and the police, 263 00:30:24.660 --> 00:30:29.660 and if you violate any decisions, you're going to be in trouble. 264 00:30:29.660 --> 00:30:33.660 Anyway, in the case of the South Improvement Company, they did not have the government apparatus behind them, 265 00:30:33.660 --> 00:30:46.660 The other big charge about not only Rockefeller, but many other companies in that period, I mentioned this in this bibliography, 266 00:30:46.660 --> 00:30:54.660 and I'm going to go into it in detail in lectures, is the way Rockefeller achieved his ends, his monopoly status, 267 00:30:54.660 --> 00:30:59.660 the way many other corporations achieved monopoly status is through what's known as predatory price cutting. 268 00:30:59.660 --> 00:31:10.660 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. 269 00:31:10.660 --> 00:31:23.660 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. 270 00:31:23.660 --> 00:31:30.660 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. 271 00:31:30.660 --> 00:31:36.660 I don't think there's one authentic case in this, empirically. Maybe there is, but I don't know of any. 272 00:31:36.660 --> 00:31:43.660 Those economists who have studied this in some detail have found out that the cases are all a mythology. 273 00:31:43.660 --> 00:31:49.660 John McGee has done a classic article in San Diego, New Jersey, the alleged predatory price-cutting layer, 274 00:31:49.660 --> 00:31:56.660 Richard Zerbe for the American Sugar Refining Company and Kenneth Elzinga for the Unpowdered Trust 275 00:31:56.660 --> 00:32:02.660 demonstrating that it's never happened. There's good arguments in economic theory why it shouldn't happen. 276 00:32:02.660 --> 00:32:08.660 One thing, it's a very risky business. The first place, the big company is not necessarily more competitive than the small company. 277 00:32:08.660 --> 00:32:16.660 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. 278 00:32:16.660 --> 00:32:20.660 Secondly, a large company is taking heavier losses when they're doing this. 279 00:32:20.660 --> 00:32:24.660 If they have a larger volume of business there, they're going to be in very bad trouble. 280 00:32:24.660 --> 00:32:26.660 And they don't know when this thing is going to end. 281 00:32:26.660 --> 00:32:30.660 This is another problem. How more of this supposed war is going to go on? 282 00:32:30.660 --> 00:32:36.660 Thirdly, supposing they drive the other guy out, because they have a lot of bankrupt oil refineries around. 283 00:32:36.660 --> 00:32:40.660 What happens to these bankrupt oil refineries? They don't get blown up. 284 00:32:40.660 --> 00:32:45.660 Somebody buys them at auction, picks them up for a sawn, and then waits for standard oil, 285 00:32:45.660 --> 00:33:03.660 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. 286 00:33:03.660 --> 00:33:10.660 So it's an extremely risky kind of procedure to undertake. 287 00:33:10.660 --> 00:33:17.420 Also, one of the peculiar things is that nobody seems to worry about, everybody's worried 288 00:33:17.420 --> 00:33:18.420 about the beginning of the process. 289 00:33:18.420 --> 00:33:22.940 If you're really interested in both the consumer, I as a consumer and you as consumers, we should 290 00:33:22.940 --> 00:33:25.980 be very happy about this as long as the price war is going on. 291 00:33:25.980 --> 00:33:30.340 What we should be saying is, hey, it's terrific, you know, giving their oil away and selling 292 00:33:30.340 --> 00:33:34.420 it for a penny a gallon or something, great, terrific, we'll wait until they drive everybody 293 00:33:34.420 --> 00:33:37.140 out and we raise the price, then they finally get their so-called monopoly price, then we 294 00:33:37.140 --> 00:33:38.140 can belly-ache. 295 00:33:38.140 --> 00:33:39.140 It does have some belly-aching now. 296 00:33:39.140 --> 00:34:02.140 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. 297 00:34:02.140 --> 00:34:05.140 And here was the argument they used. The interesting thing is they get into the argument. 298 00:34:05.140 --> 00:34:19.140 I 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. 299 00:34:19.140 --> 00:34:34.140 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. 300 00:34:34.140 --> 00:34:41.140 And the interesting thing is they felt they could even get away with this, while I'm arguing with them. 301 00:34:41.140 --> 00:34:51.140 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., 302 00:34:51.140 --> 00:34:58.140 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, 303 00:34:58.140 --> 00:35:14.140 Basically, 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. 304 00:35:14.140 --> 00:35:44.140 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 305 00:35:44.140 --> 00:35:59.140 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. 306 00:35:59.140 --> 00:36:01.140 The Bill of Refinery has to see a force in the bio. 307 00:36:01.140 --> 00:36:04.140 Finally, I'm not going to paint black mail these SOBs. 308 00:36:04.140 --> 00:36:08.140 I'm getting out of this thing. I'm not going to try to achieve them all by the hull of it. 309 00:36:08.140 --> 00:36:11.140 Which is sort of a natural result of this whole process. 310 00:36:11.140 --> 00:36:15.140 Unless, as I say, the government steps in, prevents them from building new plants to begin with. 311 00:36:19.140 --> 00:36:24.140 Well, Standard Oil, as they had natural advantages, entrepreneurial advantages, 312 00:36:24.140 --> 00:36:33.140 They had this location in Cleveland. They had the first one to really move into large-scale marketing. 313 00:36:33.140 --> 00:36:43.140 The first one to build bulk stations. They were more efficient as managers and entrepreneurs in the rest of the competition. 314 00:36:43.140 --> 00:36:49.140 They wind up by the 1880s with 90% of the US oil refining. 315 00:36:49.140 --> 00:36:54.140 You can't get much higher than that. 316 00:36:54.140 --> 00:36:59.140 By 1899 we have the new standard law of New Jersey, 317 00:36:59.140 --> 00:37:04.140 as a whole new company to the various state and world companies. 318 00:37:04.140 --> 00:37:14.140 By the 1880s and 1890s they had approximately 87% of refining, 86% of the marketing. 319 00:37:14.140 --> 00:37:17.140 They never had much more than a third of the crude oil, by the way. 320 00:37:17.140 --> 00:37:31.140 So what happens to them? Well, I'm going to talk more about the efficiency of standard oil first. 321 00:37:31.140 --> 00:37:37.140 One of the things which standard oil pioneered, and Rockefeller pioneered in the days when there was still standard oil in Ohio, 322 00:37:37.140 --> 00:37:44.140 was they were the first guys to reduce freight costs by having large carloads, by having trainloads lost, 323 00:37:44.140 --> 00:37:53.140 by having a regular steady flow of traffic, fixed amount per day, train loads, etc. 324 00:37:53.140 --> 00:38:09.140 They are first class really carrying their own fire insurance and provide their own terminal facilities for the oil, and so forth. 325 00:38:09.140 --> 00:38:28.140 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. 326 00:38:28.140 --> 00:38:32.580 The, one of the things I guess which should be, it's kind of a cute thing I guess I should 327 00:38:32.580 --> 00:38:37.980 mention a little bit, which Alan Nevins exposed, Alan Nevins exposed some of the great myths 328 00:38:37.980 --> 00:38:45.540 in this book on power, the myth of the buffalo explosion, this is the thing where Rockefeller 329 00:38:45.540 --> 00:38:52.980 was supposed to have sent agents in to blow up a competing oil company, called the Buffalo 330 00:38:52.980 --> 00:38:57.020 ivid Company I guess it was, Buffalo Lubricating Company. 331 00:38:57.020 --> 00:39:05.060 And the theory was that the Standard Oil people had induced an employee to pack a safety valve 332 00:39:05.060 --> 00:39:10.140 with plaster and thereby cause it to blow up. 333 00:39:10.140 --> 00:39:13.940 First place, nothing was blown up by them. 334 00:39:13.940 --> 00:39:16.500 There are a lot of interesting things about this sort of story. 335 00:39:16.500 --> 00:39:19.340 First place, nothing was blown up because the plaster broke. 336 00:39:19.340 --> 00:39:24.340 So there was nothing, there was no explosion, number one. 337 00:39:24.340 --> 00:39:31.340 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. 338 00:39:31.340 --> 00:39:38.340 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. 339 00:39:38.340 --> 00:39:49.340 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. 340 00:39:49.340 --> 00:39:53.340 Two, it was supposed to break when the valve blew open. It wasn't that it broke by accident. 341 00:39:53.340 --> 00:40:09.340 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. 342 00:40:09.340 --> 00:40:26.340 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. 343 00:40:26.340 --> 00:40:35.340 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. 344 00:40:35.340 --> 00:40:39.340 Every facet of this myth turns out to be incorrect. 345 00:40:39.340 --> 00:40:43.340 There's a similar thing, it has nothing to do with the subject, it has to do with the historians. 346 00:40:43.340 --> 00:40:50.340 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. 347 00:40:50.340 --> 00:40:54.340 This has been beautifully exploded by, what's his name? 348 00:40:54.340 --> 00:40:56.340 Al Gordon Wasson. 349 00:40:56.340 --> 00:41:04.340 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, 350 00:41:04.340 --> 00:41:13.340 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. 351 00:41:25.340 --> 00:41:30.340 Rockefeller is another important thing for political front. 352 00:41:30.340 --> 00:41:47.340 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. 353 00:41:47.340 --> 00:41:59.340 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, 354 00:41:59.340 --> 00:42:06.340 The Bostwick's, the Prats, the Brewster's, the Roger's's, the Archibald's, and these names keep popping up from then on. 355 00:42:09.340 --> 00:42:18.340 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. 356 00:42:18.340 --> 00:42:23.340 During the Eisenhower administration, the Secretary of State, of course, was John Foster Gullis. 357 00:42:23.340 --> 00:42:32.340 and I think Frost mentioned this morning who's a partner of Salerno and Cromwell who's a standard oil essentially whore. 358 00:42:32.340 --> 00:42:40.340 But not only that, Dulles is something which is not only known to certain genealogists, students of genealogy in the modern world. 359 00:42:40.340 --> 00:42:46.340 Dulles was married to Janet Pomeroy Avery, who happened to be the first cousin of Johnny Rockefeller Jr. 360 00:42:46.340 --> 00:42:51.340 which makes Dulles a kinsman, a member of the Rockefeller family, of important sense. 361 00:42:51.340 --> 00:42:57.340 And then we had Alan W. Dulles, his brother, who was the head of the CIA, also of some importance in foreign policy making. 362 00:42:57.340 --> 00:43:03.340 And then we had his sister Eleanor Lansing Dulles, a big shot on the Asia desk of the State Department. 363 00:43:03.340 --> 00:43:11.340 And then we had this undersecretary of state with a beloved figure from Boston named Charles Christian Herter. 364 00:43:11.340 --> 00:43:19.340 And Christian Herter was a dynamic, charismatic fellow that I lived with, if you remember, which made him even more charismatic. 365 00:43:19.340 --> 00:43:33.340 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. 366 00:43:33.340 --> 00:43:44.340 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. 367 00:43:44.340 --> 00:43:55.340 But what happens to the standard-law monopoly, the 90% or essentially 90%? 368 00:43:55.340 --> 00:44:00.340 What happens to it is it begins to crack, and it cracks before the dissolution, before the antitrust action. 369 00:44:00.340 --> 00:44:13.340 The 90% by 1911, for example, the 90% begins to collapse to about 60-65%, which is a considerable slippage. 370 00:44:13.340 --> 00:44:23.340 Award to some more figures here. In 1899, Standard Oil had 90% of the refining in the United States, oil refining. 371 00:44:23.340 --> 00:44:29.340 1904 to 1907, it was down 84%. By 1911, it was down 80%. By 1921, it was down to 50%. 372 00:44:29.340 --> 00:44:38.340 The number of refiners increases from 67% in 1899 to 147% in 1921. 373 00:44:38.340 --> 00:44:43.340 What happens is, new competitors come up. In the first place, standard oil, this happens to many big businesses. 374 00:44:43.340 --> 00:44:45.340 Many big businesses become overly big and overly bureaucratic. 375 00:44:45.340 --> 00:44:47.340 We were talking this morning about bureaucracy and the problem. 376 00:44:47.340 --> 00:44:51.340 But what happens is, I mentioned a little bit about Xerox and Polaroid, 377 00:44:51.340 --> 00:44:55.340 but what happens is, if the situation is fluid enough and market-free enough, new firms pop up 378 00:44:55.340 --> 00:45:03.340 which take advantage of the mistakes of the old firms, the bureaucratic regressiveness of the old firms. 379 00:45:03.340 --> 00:45:07.340 What happens is that the standard oil begins to fall behind in the oil revolution 380 00:45:07.340 --> 00:45:09.340 because there are several oil revolutions. 381 00:45:09.340 --> 00:45:15.340 One was the fact that the major production of oil begins to shift, of course, from kerosene to gasoline, for two reasons. 382 00:45:15.340 --> 00:45:20.340 Obviously, electricity begins to come up to replace kerosene in the open lamps. 383 00:45:20.340 --> 00:45:24.340 And secondly, because the automobile begins to come up and gasoline becomes increasingly important there. 384 00:45:24.340 --> 00:45:27.340 Standard oil falls behind in the shift. 385 00:45:27.340 --> 00:45:38.340 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. 386 00:45:38.340 --> 00:45:45.340 Secondly, as new standard oil forces have always been concentrated in the western Pennsylvania and eastern Ohio oil fields. 387 00:45:45.340 --> 00:45:55.340 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. 388 00:45:55.340 --> 00:46:06.340 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. 389 00:46:06.340 --> 00:46:17.340 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. 390 00:46:17.340 --> 00:46:35.340 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. 391 00:46:35.340 --> 00:46:44.340 Also, even though Standard Oil had led the field in the old days, in the 1880s and 90s, in bulk stations and things like that, 392 00:46:44.340 --> 00:46:51.340 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. 393 00:46:51.340 --> 00:46:56.340 You have to think of it first. It's one of these things that somebody mentioned today, I think, that you have to... 394 00:46:56.340 --> 00:47:02.340 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. 395 00:47:02.340 --> 00:47:07.340 But the independents lead Standard Oil in developing the idea of a gasoline and filling station. 396 00:47:07.340 --> 00:47:11.340 They also lead the idea of a petrochemicals later on. 397 00:47:11.340 --> 00:47:15.340 The whole petrochemical industry essentially was, Standard Oil was way behind in that. 398 00:47:15.340 --> 00:47:21.340 And the idea of tank cars and that whole business, again, is essentially led by the independents. 399 00:47:25.340 --> 00:47:30.340 Incidentally, another big monopoly, beginning to an alleged hopeful monopoly, 400 00:47:30.340 --> 00:48:00.340 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. 401 00:48:00.340 --> 00:48:05.340 The first firms that begin to develop the basic oxygen process in the thirties are small German companies. 402 00:48:05.340 --> 00:48:08.340 And then the small American companies begin to adopt them. 403 00:48:08.340 --> 00:48:15.340 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. 404 00:48:15.340 --> 00:48:19.340 Okay, they aren't a steel business. 405 00:48:19.340 --> 00:48:28.340 We have, again, a sort of Horatio-Alger thing with Carnegie and Frick, who's working on Superior Coke. 406 00:48:28.340 --> 00:48:33.340 Carnegie is working on superior steel. They have an integrated kind of company. 407 00:48:33.340 --> 00:48:43.340 The first one is leasing iron ore from Minnesota, having an ore carrier fleet, and having an integrated corporation. 408 00:48:43.340 --> 00:48:52.340 They developed the Carnegie Steel Company, which had something like 25 to 30 percent of total steel production in the 1890s. 409 00:48:52.340 --> 00:49:12.340 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. 410 00:49:12.340 --> 00:49:22.340 The idea, as Arthur Dilling, a very neglected economic historian in this period, pointed out what happened is these guys got carried away. 411 00:49:22.340 --> 00:49:25.340 They realized there were great efficiencies in large-scale production and large-scale distribution. 412 00:49:25.340 --> 00:49:27.340 They saw that happening in the eyes of big business. 413 00:49:27.340 --> 00:49:32.340 Therefore, they felt that big is good and bigger must be better, and biggest must be still better. 414 00:49:32.340 --> 00:49:35.340 They didn't realize there were diseconomies in large-scale production. 415 00:49:35.340 --> 00:49:38.340 When you get larger and larger and larger, something's going to crack. 416 00:49:38.340 --> 00:49:46.340 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. 417 00:49:46.340 --> 00:49:51.340 And so you can understand why they want to develop a merger, a monopoly set up. 418 00:49:51.340 --> 00:49:54.340 And you'll see how the whole thing began to crack. 419 00:49:54.340 --> 00:50:02.340 Not only iron and steel and oil, but almost every other industry to boot. 420 00:50:02.340 --> 00:50:08.340 During the 1880s and 1890s, there were approximately over 700 iron and steel companies in the United States. 421 00:50:08.340 --> 00:50:12.340 There were numerous attempts at pools and cartels, and they all flopped. 422 00:50:12.340 --> 00:50:18.340 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. 423 00:50:18.340 --> 00:50:25.340 It's an only interesting point, I think, made by Weinstein or Sklar, some other great conspiratorial historian. 424 00:50:25.340 --> 00:50:30.340 One of the effects of the Sherman Anti-Trust Act, if you outlaw cartels, voluntary cartels, 425 00:50:30.340 --> 00:50:36.840 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. 426 00:50:36.840 --> 00:50:44.940 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. 427 00:50:44.940 --> 00:50:53.240 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. 428 00:50:53.240 --> 00:50:59.940 This might have been the intended effect of the Sherman Act and the trust act, to stimulate, to encourage mergers, 429 00:50:59.940 --> 00:51:14.940 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. 430 00:51:14.940 --> 00:51:23.940 The key figures are two great Morgan persons in that period, Judge Gary, and I mentioned 431 00:51:23.940 --> 00:51:29.060 George W. Perkins, who will pop up more and more in my series in these lectures, and I'm 432 00:51:29.060 --> 00:51:32.660 a partner of J.P. Morgan and Company. 433 00:51:32.660 --> 00:51:33.660 So what happens to USD? 434 00:51:33.660 --> 00:51:36.700 What's the result of all this great merger? 435 00:51:36.700 --> 00:51:44.700 First place, the price of USD shares in 1901 was $55 a share, by 1904 it's down to $9. 436 00:51:44.700 --> 00:51:57.700 Profits 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. 437 00:51:57.700 --> 00:52:04.700 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. 438 00:52:04.700 --> 00:52:12.700 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, 439 00:52:42.700 --> 00:52:49.700 for the industry, trying to get an agreement to raise prices and cut production. 440 00:52:49.700 --> 00:52:53.200 So what happens to the 1907? Here's Judge Gary with enormous prestige for the U.S. steel 441 00:52:53.200 --> 00:52:57.140 company with 60% of the market, with J.P. Morgan and his great power behind him. And 442 00:52:57.140 --> 00:53:02.340 what happens to the Gary dinner? It's like a total bomb out. And by 1908, which means 443 00:53:02.340 --> 00:53:07.140 only a year or so after the Gary dinners, there's secret price cutting. Odd bless it. 444 00:53:07.140 --> 00:53:11.540 Secret price cutting, especially by the smaller competitors right there under the table. And 445 00:53:11.540 --> 00:53:16.540 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. 446 00:53:16.540 --> 00:53:19.540 The end of eating for Gary, for some time. 447 00:53:23.540 --> 00:53:28.540 It's only with World War I, as Melvin O'Rofsky points out, his great work, his big deal in the Wilson administration, 448 00:53:28.540 --> 00:53:34.540 it's only with a glorious combination of the progressive ideal, which is World War I, 449 00:53:34.540 --> 00:53:38.540 that Judge Gary finally finds his munition life. 450 00:53:41.540 --> 00:53:47.540 So what happens with USDL? USDL has a continuing, it's really like, you know, just as triumphant, social Darwinism in work. 451 00:53:49.540 --> 00:53:55.540 USDL has a steady decline in the share of the market from then on. 1901 it had 63% of ingots in castings, for example. 452 00:53:56.540 --> 00:54:03.540 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. 453 00:54:04.540 --> 00:54:09.540 Constantly, it's a really crummy company, and it's about the effects of it. 454 00:54:11.540 --> 00:54:14.900 Again, they were technically extremely conservative and bureaucratic. 455 00:54:14.900 --> 00:54:19.900 Not only were they the last guys to adopt the basic oxygen system, which was fairly recently, 456 00:54:19.900 --> 00:54:23.900 they were also almost the last guys to shift from the Bessemer process to the open heart process, 457 00:54:23.900 --> 00:54:28.900 which, the big shift occurred during the first two decades of the 20th century. 458 00:54:28.900 --> 00:54:31.900 The US still had enormous investment in Bessemer equipment, Bessemer plants, 459 00:54:31.900 --> 00:54:35.900 and it was very difficult for them to shift, and that was it, too damn bad. 460 00:54:35.900 --> 00:54:39.900 So the other independents pop up, you know, who were not Bessemer, 461 00:54:39.900 --> 00:54:43.900 They were not heavily committed to Bessemerism and adopted the open horse method. 462 00:54:43.900 --> 00:54:47.900 Also, for US Steelers, Ray Sloan entered the growing field of lighter steel product. 463 00:54:47.900 --> 00:54:51.900 They were committed, and I think this goes along with Bessemer method. 464 00:54:51.900 --> 00:54:57.900 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. 465 00:54:57.900 --> 00:55:04.900 And they were one of the last to adopt the, having scrap, recycling of scrap. 466 00:55:04.900 --> 00:55:07.900 One of the last to adopt stainless steel and alloys. 467 00:55:07.900 --> 00:55:10.900 One of the last without the continuous rolling mill, one of the last to... 468 00:55:10.900 --> 00:55:14.900 They refused to buy a structural steel platen, for example, figured it would never work. 469 00:55:16.900 --> 00:55:20.900 And so, time and again, area after area, US Steel flubs the dub. 470 00:55:20.900 --> 00:55:26.900 I think it's directly related to their genesis, US Steel and its basic nature. 471 00:55:26.900 --> 00:55:32.900 They were locked into heavy steel, obsolete equipment, obsolete process, and a monopoly kind of mentality. 472 00:55:32.900 --> 00:55:49.900 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. 473 00:55:49.900 --> 00:56:01.900 So, 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. 474 00:56:01.900 --> 00:56:13.900 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. 475 00:56:13.900 --> 00:56:19.900 Having failed in the realm of economics, the efforts of the U.S. Steel Group were to be shifted to politics. 476 00:56:19.900 --> 00:56:23.900 I think this is beautiful, sort of sums up, I think not only the U.S. Steel Group for the whole bowl of wax. 477 00:56:23.900 --> 00:56:27.900 Having failed in the realm of economics, their efforts shift to politics. 478 00:56:27.900 --> 00:56:41.900 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. 479 00:56:41.900 --> 00:56:51.900 And 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. 480 00:56:51.900 --> 00:56:55.900 Not exactly, there's nothing about him. Yeah, it's sort of a pipe-pipe. 481 00:56:55.900 --> 00:57:01.900 He keeps being bombarded with quotations from the great Gabriel Coco, from libertarian to richer literature. 482 00:57:01.900 --> 00:57:04.900 And he's completely out of here, he's completely hopped up about it. 483 00:57:04.900 --> 00:57:08.900 He keeps writing letters saying, I don't believe in the free market, I hate the free market. 484 00:57:08.900 --> 00:57:10.900 Too bad, fella.