Rockefeller defends big business

Regulate but don’t destroy

“What are, in your judgment, the chief advantages of industrial combinations?”

The question was posed to John D. Rockefeller in 1899 as part of a federal investigation into the activities of the large industrial combinations known as trusts. The Standard Oil Company, headed by Rockefeller, was one of the biggest trusts in America, and regularly came under attack for the great power it exercised over the oil industry and American business more generally. The investigative commission gave Rockefeller a chance to rebut the charges.

He declined to do so in person. Instead he composed a written response, the better to make his case succinctly and accurately. He began with a general answer to the question of the advantages of combination. “All the advantages that can be derived from a cooperation of persons and an aggregation of capital,” he said.

He elaborated: “Much that one man cannot do alone, two can do together, and once admit the fact that cooperation, or what is the same thing, combination, is necessary on a small scale, the limit depends solely on the necessities of business. Two persons in partnership may be may be a sufficiently large combination for a small business, but if the business grows, or can be made to grow, more persons and more capital must be taken in it. The business may grow so large that a partnership ceases to be a proper instrumentality for its purposes, and then a corporation becomes a necessity.”

These principles applied in many countries, including Britain, from which the United States inherited much of its approach to law. Yet in America the question of combination took peculiar form. “Our federal form of government, making every corporation created by a state foreign to every other state, renders it necessary for persons doing business through corporate agency to organize corporations in some or many of the different states in which their business is isolated.”

In the beginning, states had chartered corporations one by one, each charter requiring specific legislative approval. Over time, the states adopted general incorporation laws, under which individuals seeking a charter simply had to meet general standards and file general forms. Meanwhile the federal government—that is, Congress—had chartered a few corporations for particular purposes, such as the Bank of the United States and the Union Pacific Railroad, but it never adopted a general incorporation law. Consequently the vast majority of corporations operated under state charters.

This created the necessity Rockefeller described of arranging combinations of state corporations in order to do business in several states. “Instead of doing business through the agency of one corporation, they must do business through the agency of several corporations,” he said. Until the 1890s American industrialists had confined their activities, for the most part, to the domestic American market. But Rockefeller and others were now eyeing foreign markets, which could require enlarging their combinations so as to include foreign partners. “It will be found helpful and possibly necessary to organize corporations in such countries, for Europeans are prejudiced against foreign corporations, as are many of the people of our states,” he said.

Some critics of capitalism opposed bigness per se, preferring a time when businesses were small and people in business met their customers face to face. Rockefeller thought this position didn’t merit rebuttal; the golden age, if it ever existed, was not going to return. “It is too late to argue about the advantage of industrial corporations,” he said. “They are a necessity.” They had lifted millions out of rural poverty, providing work and products that eased modern life. Rockefeller didn’t mention it directly, but Standard Oil’s best-selling product was kerosene, which cheaply and conveniently lighted homes that formerly had been cast into darkness or the flickering of tallow candles upon the setting of the sun.

“And if Americans are to have the privilege of extending their business in all the states of the

Union, and into foreign countries as well, they are a necessity on a large scale and require the

agency of more than one corporation,” he continued, regarding the advantages provided by industrial combinations. The big companies commanded the capital necessary to innovate; they could identify and retain the most talented workers and managers; and they benefited from economies of scale in production and distribution.

Rockefeller related his own forty years of experience in the oil business. “Our first cooperation was a partnership and afterwards a combination in Ohio,” he said. “That was sufficient for a local refining business. But dependent solely on local business, we should have failed years ago. We were forced to extend our markets and to seek for export trade”—at first to neighboring states, then around the country, and finally abroad. “This latter made the seaboard cities a necessary place of business, and we soon discovered that manufacturing for export could be more economically carried on at the seaboard, hence, refineries at Brooklyn, at Bayonne, at Philadelphia, and necessary corporations in New York, New Jersey and Pennsylvania.”

Greater scale suggested novel approaches to transport. “We soon discovered as the business grew that the primary method of transporting oil in barrels would not last,” Rockefeller said. “The package often cost more than the contents, and the forests in the country were not sufficient to supply the necessary material for an extended period of time. Hence we devoted attention to other methods of transportation, adopted the pipeline system, and found capital equal to the necessities of the business.” Pipelines were economically efficient but administratively complex. “To operate the pipeline system required franchises from the states in which they were

located, and consequently corporations in those states, just as railroads running through different

states are forced to operate under separate state charters.” Moreover, pipelines were expensive to build. “To perfect the pipeline system of transportation required in the neighborhood of fifty millions of capital. This could not be maintained or obtained without industrial combination.” What began as convenience evolved into necessity. “The entire oil business is dependent upon

this pipeline system. Without it every well would shut down and every foreign market would be

closed to us.”

The changes wrought immense benefit to America. “Every step taken was necessary in the business if it was to be properly developed, and only through such successive steps and by such combination is America today enabled to utilize the bounty which its land pours forth, and to furnish the world with the best and cheapest light ever known, receiving in return therefor from foreign lands nearly $50,000,000 dollars per year, most of which is distributed for payment of American labor,” Rockefeller said. This last point was important. Business was often portrayed as the rival or enemy of labor; Rockefeller wanted the commission to keep in mind that absent Standard Oil, that $50 million would vanish and workers would be commensurately poorer.

Standard Oil was one corporation among many. “It is a pioneer, and its work has been of incalculable value,” Rockefeller acknowledged. But its story was repeated elsewhere. “There are other American products besides oil for which the markets of the world can be opened, and legislators will be blind to our best industrial interests if they unduly hinder by legislation the combination of persons and capital requisite for the attainment of so desirable an end.”

Rockefeller was asked what disadvantages or dangers the public experienced from the activities of the industrial combinations. He responded forthrightly. “The dangers are that the power conferred by combinations may be abused; that combinations may be formed for the speculations in stocks rather than for conducting business; and that for this purpose prices may be temporarily raised instead of being lowered,” he said. “These abuses are possible to a greater or less extent in all combinations, large or small.”

Yet such dangers were inherent in modern life. “This fact”—that abuse was possible in any combination—“is no more an argument against combinations than the fact that steam may explode is an argument against steam,” Rockefeller said. “Steam is necessary and can be made comparatively safe. Combination is necessary and its abuses can be minimized”—by prudent legislation and oversight. “Otherwise our legislators must acknowledge their incapacity to deal with the most important instrument of industry.” Congress so far had not succeeded in this task, because the lawmakers approached the problem with the wrong intention. “Hitherto most legislative attempts have been efforts not to control but to destroy; hence their futility.”

What kind of legislation did Rockefeller suggest, then?

“First, federal legislation under which corporations may be created and regulated, if that be possible,” Rockefeller said. Corporations operating nationally ought to be incorporated nationally; otherwise they would remain subject to the current patchwork of state laws and policies. Yet Rockefeller recognized that states guarded their authority jealously. “Second, in lieu thereof,” he continued, “state legislation as nearly uniform as possible, encouraging combinations of persons and capital for the purpose of carrying on industries, but permitting state supervision, not of a character to hamper industries, but sufficient to prevent frauds upon the public.”

Rockefeller didn’t get federal incorporation. Even today states monopolize the chartering of businesses. Nor did the states make their laws as uniform as Rockefeller desired, tempting corporations to play one against the other, as they still do. The tension he identified in legislation on corporations—between the desire to control and the desire to destroy—remains with us as well.

As for Standard Oil, it was broken up by trustbusters in 1911, but decades later, when antitrust thinking had changed, some of the pieces were allowed to come back together to form Exxon Mobil, which in early 2022 was the largest oil company in the world not owned by a national government.