Standard Oil Part 1

We dive into original American capitalist mega winner, Standard Oil, and its legendary founder John D. Rockefeller. This company and man almost defy characterization — Elon, Bezos, Gates, Buffett... they've got nothing on old John D. Not only was Rockefeller the wealthiest person in modern human history, his company wrote the blueprint for today's corporations and everything we now know about business and capitalism. Pull up a chair and get ready to hear how this hillbilly, nobody kid from the sticks grew up to became the richest person in the world, creating a legend along the way that would become the American Dream... *Links:* - Titan by Ron Chernow: https://www.amazon.com/gp/product/1400077303/ - Episode sources: https://www.acquired.fm/episodes/standard-oil-part-i#sources *Carve Outs:* - There Will Be Blood: https://www.imdb.com/title/tt0469494/ - Deadwood: https://www.imdb.com/title/tt0348914/ - SB Nation's Secret Base Atlanta Falcons series: https://youtu.be/Lx_ORMhpmoU *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ben Gilbert?

  So history and facts going up through

• 0:05David Rosenthal?

  1890.

• 0:25Ben Gilbert?

  Welcome to season nine, episode four of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 0:40David Rosenthal?

  And I'm David Rosenthal and I am an angel investor based in San Francisco.

• 0:46Ben Gilbert?

  And we are your hosts. Today's episode is 150 years in the making. David, somehow we missed this IPO if or when it happened.

• 0:56David Rosenthal?

  Can we still get secondary shares? Put together a little SPV?

• 0:59Ben Gilbert?

  I think it might be of a spinoff or something like that at this point.

• 1:02David Rosenthal?

  Ah, okay.

• 1:03Ben Gilbert?

  At least the Standard Oil that we will cover today never IPOed. It was privately held the whole time. Its financials were kept very secret. That must be why we have missed it until now, David, surely.

• 1:16David Rosenthal?

  Ah, yeah, must be, must be.

• 1:18Ben Gilbert?

  Well, this episode on Standard Oil is, of course, the oil monopoly founded in the 1870s by John D. Rockefeller, the wealthiest person in modern human history. Embarrassingly, until I had started to do the research, I didn't realize the oil in Standard Oil did not refer to gasoline, at least until much, much later in the life of the company.

• 1:39David Rosenthal?

  Automobiles, Model T was like 1910 or so.

• 1:43Ben Gilbert?

  Totally. Standard Oil predates the Ford Model T by like 40 years.

• 1:47David Rosenthal?

  Yeah. John D. becomes the wealthiest person in like modern human history before gasoline. This is a different kind of oil.

• 1:56Ben Gilbert?

  Yeah, gasoline helped later. Turns out compounding can kind of show up, especially when the second business line gets layered on top, but we will get into it. Listeners, the other thing that is crazy that I want to point out, I didn't realize how much Standard Oil is very much with us today. Despite being famously broken up, the parts went on to become both Exxon and Mobil, Marathon, Amoco, which of course is now a part of BP, Chevron, and several other companies. When you look at a gas station, you are probably looking at some remnant of Standard Oil.

• 2:29David Rosenthal?

  Just wild.

• 2:30Ben Gilbert?

  So this one will be at least a two parter. It turns out the company responsible for creating the entire modern energy industry has a lot of wild stories. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:58David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 3:19Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 3:41David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:59Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A.com/acquired for $1,000 off, and just tell them that Ben and David sent you. All right. Well, listeners, before David takes us in, as always, this show is not investment advice. David and I may have investments in the companies we discuss.

• 4:34David Rosenthal?

  Unlikely in this case.

• 4:36Ben Gilbert?

  This is for information, entertainment. Let us know if you find the Standard Oil stock ticker. We'd love to go check it out, evaluate. No, without further ado, Standard Oil.

• 4:46David Rosenthal?

  Maybe PitchBook has some data on them.

• 4:49David Rosenthal?

  All right. I just want to give a lot of love to Ron Chernow, who is one of like America's greatest historians, biographer of Hamilton.

• 5:01Ben Gilbert?

  He wrote the book that Hamilton's based on, the play, right?

• 5:03David Rosenthal?

  The book that Hamilton is based on, yep. And also wrote Titan, the definitive biography of John Davis and Rockefeller, that is the main source for this episode.

• 5:13Ben Gilbert?

  It's so good.

• 5:14David Rosenthal?

  It's so good. And I think the perfect place to start is with one of Chernow's quotes at the very beginning in the introduction to Titan, where he says, "The story of John D. Rockefeller transports us back to a time when industrial capitalism was raw and new in America, and the rules of the game were unwritten as yet." I think more than anything we've covered on this show, Standard Oil wrote the rules.

• 5:42Ben Gilbert?

  The way business is done.

• 5:44David Rosenthal?

  The way business is done, the unwritten rules. They wrote the unwritten rules. And then, you know, Congress wrote the rules about them, but we'll get to that.

• 5:54Ben Gilbert?

  The era that we should think of here, you know, this isn't the wild, wild west. This is the wild, wild east. We're 30, 40 years after our nation was founded here in the early 1800s. The freaking civil war hasn't even happened yet.

• 6:07David Rosenthal?

  Nope. No Texas, no California.

• 6:09Ben Gilbert?

  Yeah, certainly early in corporate law, but we're early in like all forms of human organization in the United States.

• 6:16David Rosenthal?

  Law? What is law? Speaking of, okay, so we start in 1810 in Incrim, New York, which is actually like not that far from Manhattan, but back in those days was a different world. We start there with the birth of William Avery Rockefeller.

• 6:35Ben Gilbert?

  Big Bill.

• 6:36David Rosenthal?

  He would also go on to have another nickname. His other nickname is Devil Bill,

• 6:42David Rosenthal?

  which he got because of his profession that he would grow up to participate. Of course, we're talking about John Rockefeller's father here. Devil Bill, Big Bill, was literally a snake oil salesman. You know, like people use the term like, oh, like, oh, Ben, he's a snake oil salesman. Like,

• 6:58Ben Gilbert?

  This is where the term comes from.

• 7:00David Rosenthal?

  He sold medicines out of his like pack that he rode into town on a horse that like professed to be a doctor, but didn't do anything. And then he got out of town before anybody realized.

• 7:12David Rosenthal?

  So one day when he is 26 years old in 1836, he rolls into a new unsuspecting community to offload his goods on, shall we say, Richford, New York, far, far, far away in central New York state. There he encounters the Davison family. The Davisons are quite unlike Bill and the Rockefeller clan.

• 7:39Ben Gilbert?

  They're upstanding.

• 7:41David Rosenthal?

  They are upstanding. They are devout, religious, Christian followers. They have a different moral compass than Bill, shall we say?

• 7:49Ben Gilbert?

  Well, yeah, and they're wealthy.

• 7:52David Rosenthal?

  That is the other thing. They are quite wealthy. So Bills, Wild Bills, Young Bills, Big Bills, eyes light up when he sees the Davison Ranch. And he, uh, so the story goes, I think this is actually true. One of his like sort of tricks of the trade, if you will, was he would pretend to be deaf. And he would carry like a chalk slate around his neck and write on it and pretend to be deaf and couldn't speak. And he's at the Davison house and he's either doing this little charade. And he hears the second eldest daughter of the Davisons, woman named Eliza, pretty young girl, say, uh, I would marry that man if he weren't deaf and dumb.

• 8:30David Rosenthal?

  And miraculously, oh my God, the beauty of young Eliza cures Bill of his affliction. And he can speak and he can hear. Amazing. So the patriarch of the Davison family, one John Davison, remember that name. He's a little suspicious of what's going on here, but nonetheless, Bill woos Eliza and they are married shortly thereafter. They get married, they settle down, you know, Bill builds a house shack, like literally people like built their houses back then, uh, a little ways down the road. Bill's like, well, we need a housekeeper here and I've got this old, you know, friend Nancy.

• 9:15David Rosenthal?

  Why don't we have Nancy move in with us and be our housekeeper? Well, it turns out Nancy was his girlfriend.

• 9:21Ben Gilbert?

  Yeah. Oh, this old friend, you know, she could help with the kids, the housekeeping. All right. So we're painting the picture here. Like you've got this unbelievable swirling concoction of well-to-do, religious, by-the-book mom's side of the family, dad's side of the family. Not quite as upstanding of a human being.

• 9:42David Rosenthal?

  But here they mix and one July evening, all of these forces swirl together. And July 8th, 1839, Eliza gives birth to her second child. It's the first son. They decide to name this child after Eliza's father. It was John Davison. They named the boy John Davison Rockefeller.

• 10:07David Rosenthal?

  And oh, boy, does little JD have a lot of both John Davison and Wild Bill Rockefeller in him. So on the Rockefeller side, little John is like totally captivated, totally dotes on him. He thinks he's the best. He would even for like the rest of his life Rockefeller would intensely defend his father. Chernow would write that in no area did Bill impress his eldest son more, or did his eldest son prove more impressionable than in the magical realm of money. Big Bill had an almost sensual love of cash and enjoyed flashing plump

• 10:51David Rosenthal?

  rolls of bills. And indeed, one of Bill's companions at the time would say of him, quote, "The old man had a passion for money that amounted almost to a craze. I never met a man who had such a love of money." Except, of course, for his son in the future.

• 11:07Ben Gilbert?

  And this is where we start to get into the ways in which his son would become like him, but different. And the like him is of course, in this love for making as much money as possible. The way in which it is different, you know, Bill would come back from these trips and he would have a fat wad of cash and he would take the hundred dollar bill and he would put it on the outside. He'd make sure that everybody knew that there was at least one, maybe lots of hundreds in this fat wad of cash. Whereas John D would grow up and detest shows of wealth. I mean, the smallest house on the nicest street in Cleveland. He mixes his mother's side of the family into these lessons from his father.

• 11:45David Rosenthal?

  Oh, totally. Well, so speaking of, you know, his mother, the Davisons were Baptist. And that was, well, not unique, but pretty different than some of the original Protestant groups that had come to America, you know, a generation or two before. The Baptists, you think like church revivals, you think like big, showy theatrical, the whole point was to evangelize and to recruit. They didn't think that they were like the chosen people that were going off to the new land to be by themselves. They're like, no, no, we're going to take over the world here. We want everybody on our side.

• 12:19Ben Gilbert?

  It was an evangelical religion.

• 12:21David Rosenthal?

  Totally. So here's where these two sides of John's maternal and paternal sides here seem like oil and water. Oil and water.

• 12:30Ben Gilbert?

  David.

• 12:32David Rosenthal?

  They're not. The Baptists are all about the money. They think money is also great. They just think it's great for a different reason, which is that the more money, the more influence, the more followers we can recruit into the fold. And this also has a huge impact on JD. He would say later, quote, "I believe the power to make money is a gift from God, just as are the instincts for art, music, and literature to be developed and used to the best of our ability for the good of mankind. Having been endowed with the gift I possess, the gift to make money, I believe it is my duty to make money and still more money and to use the money I make for the good of my fellow man."

• 13:17Ben Gilbert?

  Boom. I mean, duty. He heard the word duty in there about making money that is God has asked him to go forth and make as much money as humanly possible. It is this incredibly unique thing about John D. Rockefeller where when you describe him as one of the wealthiest businessmen of all time and a philanthropist, it's very different than the way that you would describe today's billionaires as wealthy people. And it's not one then the other. It's not career and then philanthropy. John D. held these things to be intertwined, that he should go make as much money as possible and to be simultaneously incredibly philanthropic.

• 13:59Ben Gilbert?

  And the purpose of making this money was to be philanthropic, as if he were a better charitable allocator than anybody.

• 14:07David Rosenthal?

  In every dimension, wealth, power, control, philanthropy, impact. John D. makes Bill Gates or Mark Zuckerberg look like children. Like, it's wild. So, in 1853, when John is 14 and just on the cusp of manhood, Bill swoops in, comes back from one of his trips, and decides, announces that he is going to move the family away from New York to Ohio. Specifically to Strongville, which Ben is, you know, is right next to Cleveland.

• 14:43Ben Gilbert?

  For sure. Strongsville, Ohio. It's one of many wonderful suburbs of the Cleveland area.

• 14:48David Rosenthal?

  Yeah. This is like your homecoming this episode.

• 14:51Ben Gilbert?

  It's true. Like a lot of this episode takes place in places that were within like a half hour drive of where I grew up.

• 14:56David Rosenthal?

  Oh, so great. So the stated reason for the move is that Bill wants to go open new territories for his business. But there's actually another reason, which is he's got another new girlfriend back in New York named Margaret, and he wants to keep the families more separate. But he wants to marry this new girlfriend. And he's kind of thinking like, this is the world that America was back then. He's like, well, if I just get like a state border between the two of them, great. I don't see why I can't have two wives.

• 15:25Ben Gilbert?

  That's true. There's no internet. State registries are probably pretty hard to go look something up in a different state.

• 15:31David Rosenthal?

  So they move to Ohio. And at first, before Bill marries his second wife concurrently, Margaret, he sends John and his little brother, William, to a boarding house in Cleveland to go to like a real high school in Cleveland. And that goes on for about two years. And then when Bill actually marries Margaret, he sends a letter to John and says, ah, you know, this schooling thing and the, well, plans have changed and I can't really pay anymore for you and William to go to school. So I'm basically deputizing you now as head of household and you're gonna have to drop out and get a job and find a way to support the family. Best of luck, son.

• 16:14Ben Gilbert?

  Talking about a wild thing to just hear and totally hijack your life plans.

• 16:19David Rosenthal?

  Totally. And this really was not what John was planning, but he decides, remember, he's got this love of money. He's like, whoa, what can I do to make money? Well, what if I stay close to the money? So he pays $40 and does a three-month crash course over the summer in bookkeeping.

• 16:38David Rosenthal?

  And decides that he's gonna become a bookkeeper and this is gonna be his path to supporting the family. Ever the sensible fellow, when he finishes his training and he's off to go get a job, he decides that the way he's gonna job search is he gets a directory of all the businesses in Cleveland and he looks up what their credit ratings are and decides that he's only gonna target the ones with the best credit ratings. He's smart.

• 17:07Ben Gilbert?

  I mean, to the extent that he thinks that the access to capital is the thing that, you know, he wants to be close to, you may as well only be a part of businesses with the best access to capital.

• 17:16David Rosenthal?

  Strength leads to strength, right? So the story goes that he pounds the pavement for six weeks. He goes to every firm on his list. They all reject him, but he's undeterred and he just starts back up at the top. So he goes to see all these companies, like at least two, some of them three times. Finally, one company, the partnership of Hewitt and Tuttle, they probably just get so tired of this little kid, the 16-year-old kid banging on their door that they're like, all right, fine, you can start, you can, you can work here, you can be a junior bookkeeper. This happens on September 26th, 1855. And get this, for the rest of Rockefeller's life, he celebrates September 26th as his job day.

• 18:00Ben Gilbert?

  I love this. Like more sacred than the birthday. Job day was the day, it's like the day he was baptized into capitalism by being able to make money in the world.

• 18:10David Rosenthal?

  Absolutely. And literally, it's like, this is the big deal every year in his life. Like, it's bigger than the birthday. It's job day. Except he's, you know, he's starting in labor, not in capital, but he makes the transition pretty quick. Don't worry. So he gets to work. He becomes basically like the best bookkeeper that history had seen before or since, at least until Pilot.

• 18:33David Rosenthal?

  Chernow writes about this. John betrayed a special affinity for accounting and an almost mystic faith in numbers. For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible emotion. Well, of course, they're sacred. The numbers in the books are money. It's the divine, you know, God given path to be close to the money and get as much of it as possible.

• 18:57Ben Gilbert?

  Absent the divinity, this is very Buffet-esque. I mean, at a young age, having this sort of respect and obsession with the numbers.

• 19:04David Rosenthal?

  Supposedly, when John was a younger kid, he would also like go to the general store and buy like a big block of candy and cut it up into little pieces and then sell the little pieces around to other kids. Yeah, just like Buffett and gum, right?

• 19:19Ben Gilbert?

  Yep.

• 19:19David Rosenthal?

  Sticks of gum.

• 19:20Ben Gilbert?

  Yep.

• 19:21David Rosenthal?

  So he goes to work in this firm. Now, what is Hewitt and Tuttle? They are a merchant trading firm that specializes in produce commodities, like foodstuffs, like things that people would eat, you know, meat, vegetables, produce stuff that's coming off of the farms, going into cities like Cleveland. I assume they mostly dealt in foodstuffs that came into Cleveland to then be sold in stores and consumed by the newly rising urban populace. So John D. is rising quickly through the ranks. Pretty much immediately, they give him a 50% raise because he's doing so well, even his little kid. In the beginning of 1857, so not quite

• 20:04David Rosenthal?

  two years after John joins the firm, Tuttle, the junior partner, leaves to go seek his own fortunes out from under the thumb of the senior partner Hewitt. And Hewitt's like, all right, well, John, you're you're my new partner, not partner, but you know, you're going to take Tuttle's role here. John is like, well, that's nice. Are you going to pay me like a partner? And he was like, dude, you're like 17 years old. Like, no. John is undeterred, though. This is pretty crazy. So he's like head of household, supporting his family. He's already making a lot of money. He's got this great role. But the next year, in 1858, he's like, I think I'm doing the work of a partner in a merchant trading firm.

• 20:49David Rosenthal?

  I'm gonna go be a partner in a merchant trading firm. So he hooks up with a much older gentleman named Maurice Clark that he had met doing his bookkeeping trading. And they go in 50/50 on a new merchant firm called Clark Rockefeller.

• 21:06Ben Gilbert?

  And like doing the same thing, still produce and meats and trading food stuff?

• 21:09David Rosenthal?

  Exactly. Foodstuffs, produce. Things go like, okay, at first, for a couple of years.

• 21:15Ben Gilbert?

  What is this, like 1859, 60?

• 21:18David Rosenthal?

  Yeah, 5960. They managed between the two of them to put $4,000 in capital into the firm to start the trading operations, which like was a lot of money. And Rockefeller put in half of it.

• 21:29Ben Gilbert?

  It wasn't Rockefeller, like finding ways to borrow from Devil Bill?

• 21:33David Rosenthal?

  Devil Bill definitely had his sticky fingers in all this. That is for sure. So things go like, okay, but they have some losses. They actually have to bring in a third partner, I think in 1860, to sort of shore up some losses and bring more capital into the firm.

• 21:48Ben Gilbert?

  And just to put a point on that, the reason the capital is so important is they basically need to have enough on hand to basically make the purchases and then hold the inventory until they can go and sell it. There's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle.

• 22:05David Rosenthal?

  Yep. So, you know, things are going okay. And then 1861, something big happens in America. Something very big.

• 22:15Ben Gilbert?

  The North goes to war with the South.

• 22:17David Rosenthal?

  Yeah. Fort Sumter, the Civil War. One Rockefeller doesn't fight in the Civil War despite being, what would he be 21, 22 years old at that point in time, like prime fighting age? He hires a substitute. There was technically a loophole. He was, if you were head of family, you didn't have to fight.

• 22:34Ben Gilbert?

  You know, Rockefeller is careful in how he messages the strife going on in his family. He never throws his dad under the bus. He always holds everyone at least outwardly in the highest of esteem. And so the way that he sort of drops a hint here at some point is he says, how could I go fight in the war when the business would die? It was young, it was fledgling and so many relied on it. And that's sort of him alluding to like, look, like my whole family kind of needs this business to stay alive.

• 23:02David Rosenthal?

  Yeah. So he doesn't go fight, but for his business that he needs to survive, the war is a pretty big boon for commodity prices, specifically food stuff prices.

• 23:18Ben Gilbert?

  I mean, you gotta supply an army with food somehow.

• 23:20David Rosenthal?

  Yeah, there are a lot more orders and demand for, you know, pork belly and the like coming in, thanks to the war. So this drives up the price of foodstuffs through the roof. In 1862, the first like full year of the war, the firm Clark and Rockefeller, they make a trading profit of $17,000, which I believe was four times all the money that they had made in all the previous years of operations of the firm.

• 23:46Ben Gilbert?

  Wow.

• 23:47David Rosenthal?

  They are living large, like they're swimming in profits. If you can't buy enough, they gotta put this money somewhere. So what do they do? Well, right around this time, people in Cleveland are starting to hear about an interesting development that's happening not too, too far away in Western Pennsylvania, in a tiny little hamlet called Titusville. Ben's obviously smiling here. Some of you are maybe smiling.

• 24:19Ben Gilbert?

  Yeah, I just did a zillion hours of.

• 24:23David Rosenthal?

  But probably most of you are like, uh, what are you talking about here? Like Titusville, Pennsylvania? Like, I have no idea where you're going with this.

• 24:31Ben Gilbert?

  Everyone knows, David, that the center of the oil world is not the Middle East, or Russia, or Alaska, or Texas, but Western Pennsylvania.

• 24:40David Rosenthal?

  Western Pennsylvania. That's right. So I had no freaking clue until reading Titan, doing the research for this episode, for like decades, the entire center of the oil industry in the world was this small little town.

• 24:59Ben Gilbert?

  For like 50 years.

• 25:00David Rosenthal?

  Like literally, I mean, there were some producers, some oil rigs elsewhere, but like very small, like most of the oil in the world came from Titusville, Pennsylvania.

• 25:12Ben Gilbert?

  Yeah, crazy.

• 25:13David Rosenthal?

  Just wild.

• 25:13Ben Gilbert?

  And not just Titusville, but Oil Creek and other areas of Western PA that had oil discovers.

• 25:19David Rosenthal?

  So this is all going on, it's not that far away from Cleveland. For the first couple of years of this going on, up until the Civil War, the whole industry is just based there in Titusville. They drill for the oil, the oil comes out of the ground, they refine the oil, they make kerosene.

• 25:34Ben Gilbert?

  When we say they were refining, like it was a pretty rough process. I think pretty early, they figured out you could use sulfuric acid to refine and separate the kerosene out, but a crap ton of sulfuric acid and like doing this in large wooden boxes with cracks in it everywhere. And it's just sloshing around and spilling all over the ground. Like it is a gnarly process of quote unquote refining.

• 25:58David Rosenthal?

  Yeah. Super, super gnarly. But right as Rockefeller and Clark have all this money that they need to have something to do with, people come up with the idea like, so that, with the oil, they're refining it into kerosene. Kerosene, the main use was to burn in lamps. And where do you need lamps and artificial light more than anywhere else? You need it in cities. People realize you don't actually have to refine the oil in the same place that you drill for the oil. So all of a sudden now, people are like, wait, wait, we can buy the oil that comes out of the ground, crude oil, from Titusville, bring it into our cities, refine it in the cities, and then sell the kerosene in the city. That's like a really

• 26:42David Rosenthal?

  good business. That's a good place to park some capital.

• 26:45Ben Gilbert?

  Totally. And at the same time, all these interesting tailwinds are happening where cities are blowing up. I mean, you have this sort of like industrial revolution that's happening where people don't just live in rural areas and farm anymore. There's starting to be a lot more industry in cities. You have, for a while, only rich people could basically get oil to burn at night. Most people would just, the sun would go down and then they have no light and they'd go to bed. But like whale oil.

• 27:11David Rosenthal?

  And they would use whale oil, yeah, from the whaling industry.

• 27:14Ben Gilbert?

  Which, isn't that where Hathaway of Berkshire Hathaway?

• 27:17David Rosenthal?

  Yes, that's where Hathaway of Berkshire Hathaway came from.

• 27:19Ben Gilbert?

  But kerosene's like way cheaper than whale oil, which had a massive shortage. And it's obviously terrible that we could kill whales to harvest the whale oil. Like way cheaper, way more plentiful. It's a pretty clean thing to burn relative to the other stuff that people were trying to burn.

• 27:33David Rosenthal?

  This is huge, you know, and the key word, you said, you know, it's cheaper, of course, easier to drill into the ground than go like harpoon a whale.

• 27:40Ben Gilbert?

  Yeah, this is an infinite resource here.

• 27:42David Rosenthal?

  Yeah, totally. But plentiful is the key word. So like you said, it was only rich people that use whaling oil that they could have light at night. But the new demand, like with the Civil War going on, the war and then industrialization afterwards, you need light for commerce, for like industry. Like it's not just so that rich people can have light. You need to like operate factories and like do all this stuff. You need light. So there's a lot of demand and kerosene is the answer. So Rockefeller's like, oh, okay, cool. Like this is a new commodity. Uh, they start trading a little bit in this at Clark and Rockefeller. They start making some profits.

• 28:24Ben Gilbert?

  But of course Rockefeller is feeling a little hesitant to do too much of it because he's like, ah, this is speculative. Like who knows when this will dry up? And, you know, there've already been some like boom bust cycles in this. Like food stuffs are kind of our thing. So I don't want to dabble too much in this speculative weird oil thing.

• 28:41David Rosenthal?

  And I think initially they were trading crude. But then, like I said, people start to realize, wait a minute, we can refine in the cities. And this is like really like early knowledge. This would be like in, I don't know, 2011. If somebody came to you and were like, hey, there's this thing called Bitcoin. And now, don't just buy it, but like, I know how to set up rigs to mine it. You know, and like, why don't we just take some old computers you have and like,

• 29:10David Rosenthal?

  so this is like really hard to get knowledge. And it just so happens that the one guy in Cleveland, guy named Samuel Andrews, who knows how to refine oil is buds with Rockefeller's partner, Clark.

• 29:26Ben Gilbert?

  Well, that works out. He's like a chemist, right?

• 29:28David Rosenthal?

  He's a chemist, yeah. Chemist, in quotes here.

• 29:31Ben Gilbert?

  Well, but there's like real science involved in like applying the sulfuric acid and, you know, separating the kerosene from the gasoline and other crap that's leftover that you don't have anything to do with.

• 29:42David Rosenthal?

  Which, by the way, they just poured that stuff into the river.

• 29:46Ben Gilbert?

  Oh, totally. In fact, this is a fun little Cleveland trivia. The Cuyahoga River caught fire many times. There's this Great Lakes Brewing Company beer called Burning River Ale.

• 29:56David Rosenthal?

  And this is where it comes from?

• 29:57Ben Gilbert?

  Totally, because under the cover of night, these refineries would have all this extra gasoline leftover, cars wouldn't be a thing for 30, 40 more years. They thought the gasoline was like useless and they would just like drip it into the river.

• 30:10David Rosenthal?

  Yeah. Oh.

• 30:12Ben Gilbert?

  Awful.

• 30:12David Rosenthal?

  God, just wild, just wild. So Andrews, the chemist who knows how to refine kerosene, he's buds with Clark. He goes to Clark one day in the office, the merchant office that they have. And he asks, he's like, hey, I think it'd be a pretty good investment. I know how to do this. Nobody else around here really knows how to do this. I think it'd be a good investment. Why don't you invest in me and we'll set up a refinery and we'll start refining here in Cleveland. So the story goes that Clark is like, look, I'm not too interested in this. But Rockefeller overhears what's going on and he pipes in and he's like, hey, actually, I think that's not a bad idea. I'm interested in that. And Clark, of course, knows that Rockefeller is really good at this stuff.

• 30:56David Rosenthal?

  And he's like, okay, fine. They turn around, they invest $4,000 on the spot to go set up a new refinery.

• 31:05Ben Gilbert?

  Wow.

• 31:06David Rosenthal?

  So later that year, they open the Excelsior Works Refinery in a strategically chosen spot in town. Ben, you'll probably know exactly where this is.

• 31:18Ben Gilbert?

  In the Flats, right?

• 31:19David Rosenthal?

  Yeah, I think in the Flats, it's an area that has access both to the Cuyahoga River and to the terminus of new rail lines that are going into Cleveland.

• 31:32Ben Gilbert?

  Yeah, and like super industrial area. Actually, in the last few years, there's been like an amazing amount of renovation and like cool stuff that's going on there. So you have this like interesting confluence of the river and like everything left over from the Standard Oil days and like the steel boom that happened in Cleveland and now this redevelopment. But yeah, it's totally the city area that's up against the waterfront.

• 31:52David Rosenthal?

  Huh, interesting. We'll have to go do a field trip there.

• 31:54Ben Gilbert?

  For sure.

• 31:55David Rosenthal?

  We'll do a troba trip.

• 31:58David Rosenthal?

  So he is like a pig in mud here. I mean, like he was a bookkeeper. He's so meticulous. He loves money. He loves profit. He was focused on trading before, but now he's got this operation, this refinery. And he becomes like, literally, he's like the Morris Chang of oil refineries. He's experimenting with constantly tweaking the process. You know, Andrews, the chemist is like, dude, I'm like the technical talent. But Rockefeller is like everything around it, the operations, how crude comes in, where things are located in the factory. He's A B testing, like he's doing.

• 32:33Ben Gilbert?

  Oh, wow.

• 32:33David Rosenthal?

  All sorts of stuff. He's always looking like any efficiency and it's all with a view to it. It's not just like better is good, but it's all with a view to like profitability. Like we want to run this as lean as possible, make as much money.

• 32:47Ben Gilbert?

  God told me to make a profit and I am here to make a profit. By the way, put a pin in that Morris Chang thing because there's an interesting way that they are very much like TSMC that I want to talk about later.

• 32:56David Rosenthal?

  Ooh, so he's focused, like this is so different. You know, there are other people that are setting up refineries in Cleveland and elsewhere, but they don't care about optimization. They don't care about efficiency. They're just like, look, hey, it's a gold rush. Like give me the gold and I'll just take as much of it as possible. If it goes away tomorrow, that's fine.

• 33:15Ben Gilbert?

  Yep. High margin dollars just flying out of the ground.

• 33:18David Rosenthal?

  All of this, the behavior of the other folks, this causes huge gyrations in price. Like it really is. It's like the early days of Bitcoin. I mean, still today in crypto, like things are flying around like all the time. Like prices could be $12 a barrel. They could be 12 cents a barrel for oil.

• 33:35Ben Gilbert?

  And it all depends on, I mean, two things. One is who found what and two is what do people believe people have found recently? And so like prices would be impacted by word of mouth traveling and saying, hey, I heard there's a big gusher going on in this city right now. And people would be like, well, I guess I'm not going to buy for a while because I heard there's a big gusher and so prices are going to go down.

• 33:55David Rosenthal?

  Yep. So Rockefeller though, he's just got this vision where he's like, oh man, the more profit I make, the more money, the more capital I can put into this, the more oil I can hold, the more I can produce. And when the price crashes, I'll just keep buying. Like I'll just keep it. He's like, he buys the dip like over and over and over again. And because his operations are so much more efficient and so much more profitable, he can afford to pay like more than anybody else. He can afford to hold this stuff longer. He's like really thinking long-term in a way that none of his other competitors are.

• 34:34Ben Gilbert?

  Oh, and we should say like, when we say he's tweaking stuff, he's so much more profitable, he is both horizontally and vertically integrating. So let's talk about vertically integrating first. He's doing things like realizing, geez, we're hiring a lot of plumbers to come in.

• 34:51David Rosenthal?

  Oh, this is so good. I love this.

• 34:53Ben Gilbert?

  Lay this pipe every time we do a build out. And so they do things like hire their own plumber and hire their own blacksmiths and decide, actually, we should do this ourselves. And that way we can save all this money on piping instead of buying it from a third-party contractor. Later down the road, he even plants a forest, like buys up a forest so that they can cut down the trees themselves to build the barrels out of.

• 35:21David Rosenthal?

  Make their own barrels. Yeah. Oh my gosh.

• 35:24Ben Gilbert?

  And they save all this money rather than buying barrels from somebody else. And then of course, they can innovate on the barrel making process. So he figures out, oh, if we treat the wood in the forest, then it's lighter and cheaper to ship back to the refinery. So we save all this money on transportation. So that's like the vertical integration side of things, which would be crazy enough. But he's figuring out that, wait, we do this process. How can we sort of use the whole buffalo? Like, what can we sell the gasoline for? I think they invent Vaseline.

• 35:52David Rosenthal?

  Yes, they, I think they buy the company that invents Vaseline. But yeah, they like, like petroleum jelly, which is one of the byproducts. They commercialize it. So Rockefeller is like, he's like, found his calling here. Like, this is like divine passion here. There's this one problem, which is the partner, Clark. Clark is like, not so into how much capital Rockefeller is tying up in the business here. He's like, hey, we're like merchant traders. The point is profits and then we keep the profits. And Rockefeller's like, no, like reinvest in R and D and like CapEx and inventory.

• 36:34David Rosenthal?

  So Rockefeller starts going around to all the banks and all the financiers in Cleveland and lining up. He's not even using just the profits from their operations. He's getting more external financing to finance growth here.

• 36:48Ben Gilbert?

  Oh, totally. Like when I say both vertically and horizontally integrating. In the horizontal sense, he is obsessed with trying to figure out how to be the sole supplier of oil to the world. Like as soon as he figures out that there's economies of scale here, he's like, okay, cool. How do we start the flywheel, get as much capital as possible, build out as much production as possible? Start having agreements with whoever's got rights to the land as possible. So we can start vending to the world.

• 37:17David Rosenthal?

  Yep. And own this super strategic choke point of refining in cities. So Clark is like spooked by all this. Turnout has this amazing quote that he finds from Rockefeller. I don't know where he found this. I should look up in the notes at the end of Titan. This is so good. Rockefeller apparently like wrote or said this at some point. Clark was an old grandmother and was scared to death because we owed money to the banks. So great. So Rockefeller engineers a coup.

• 37:49Ben Gilbert?

  This is so good.

• 37:50David Rosenthal?

  And some of Clark's brothers are also partners in the business at this point in time. They get into all these arguments. So John baits them one day into threatening that they should just dissolve the partnership. And John's like, okay, great. Let's dissolve the partnership.

• 38:04Ben Gilbert?

  Well, because he knows that if he goes to them and says, look, first of all, I don't think you are risk tolerant enough. Second of all, I don't think you're upstanding. And so I want out. Like, he knows that he loses leverage by doing that. So that's why he baits them into doing their normal thing of getting all up in a fit and saying, we're gonna back out.

• 38:22David Rosenthal?

  Yep, totally. So Rockefeller immediately goes to the local paper and places a notice that the partnership is dissolving and that there's going to be an auction for the assets of the partnership, including the oil refineries. And it sets up this showdown where the Clark brothers and Rockefeller bid against each other for each other's 50% stake in the business.

• 38:46Ben Gilbert?

  Which is, by the way, a great way to do it. Like, if you've got a partnership that's blowing up, all right, whoever wants to pay more to buy the other person out is the person that should get to own the whole thing. And so the idea of a bidding war between the two of them to figure out how to value the business makes total sense.

• 39:01David Rosenthal?

  Between the two principles. So Rockefeller, though, remember, he's been going and getting the relationships with all the banks and financiers. He lines up financing in advance of the auction. So he's got basically unlimited resources, although it's still the price ends up stressing him out. He buys Clark's 50% of the oil business for $72,500. And in exchange, also gives Clark, Rockefeller gives Clark his 50% share of the produce trading.

• 39:27Ben Gilbert?

  Which, by the way, that's something, he probably buys him out for like, $3 to $4 million, something like that, in $2021.

• 39:33David Rosenthal?

  Yeah, so good chunk of change.

• 39:35Ben Gilbert?

  Yeah.

• 39:36David Rosenthal?

  But that 50%, that's $72,500, or, you know, however you want to think about it. That's 50% of Standard Oil right there. Wow. Rockefeller would say later, "It was the day that determined my career." Probably bigger than job day. "I felt the bigness of it, but I was as calm as I am talking to you now." This is like what we're gonna see. Like, this man has ice, not ice water, like literally like solid ice running through his veins. It's crazy. So this was a big price. It was more than Rockefeller wanted to pay. But this happens in 1865, in the beginning of,

• 40:15David Rosenthal?

  in February of 1865. Back to what's going on in America. Two months later, General Lee surrenders to Grant and the Civil War is over. And with the Civil War over, what's less important? Commodity produce trading? And what is all of a sudden a hell of a lot more important? Oil, industry, urbanization, everything.

• 40:42Ben Gilbert?

  Well, because all these soldiers are coming back and getting jobs in factories. Like, you have sort of an industrial boom here. And it's interesting how Rockefeller is sort of obsessed with, "I'm not a speculator. You know, I'm not one of these people rushing to prospect, you know, various plots of land in Western Pennsylvania." It's funny that it's, I would say, a picks and shovels play. I guess the point to make here is he's doing the predictable, reliable, stable, very strategic part of the value chain. He's not out prospecting land.

• 41:14David Rosenthal?

  Yeah. To just doubly underscore strategic, did Rockefeller know the war was gonna end in two months? I mean, probably. I think Sherman's probably marching to the sea at this point. So Chernow writes, quote, "The war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine, which had yielded a rival illuminant called camphene. The war had also disrupted the whaling industry and led to a doubling of whale oil prices. Moving into the vacuum, kerosene emerged as an economic staple and was primed for a furious post-war boom. This burning fluid extended the day in cities and removed much of the lonely darkness from rural life. Soon, John D. Rockefeller would reign as

• 41:58David Rosenthal?

  the undisputed king of that world."

• 42:03David Rosenthal?

  Uh, so he's now got the oil operations, the refining business all to himself. December of 1865, the war is over. All this is going on. He opens a second refinery in Cleveland next to the Excelsior Works with a new name that he really, he chooses, he wants to let everybody know that his oil, his kerosene, his business, his operations is going to be bigger than anyone else. It's going to be the best quality and it is going to rain from sea to sea. What does he call the new operation?

• 42:40Ben Gilbert?

  Standard Oil.

• 42:42David Rosenthal?

  Well, at first it's the factory is the standard works and then it becomes-

• 42:45Ben Gilbert?

  Oh, really?

• 42:46David Rosenthal?

  Yeah. The first refinery was the Excelsior Works and then Standard Works is the name that he chooses. The standard. He's setting the standard.

• 42:56Ben Gilbert?

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

• 43:41Ben Gilbert?

  the way that he wants to bring it. So this notion of standard is almost like, kind of like the TSMC chip yield thing, like everything that comes off of our line is super high quality.

• 43:51David Rosenthal?

  Totally. That is exactly the same analogy. Like this is not necessarily easy stuff to do. They're going to set the standard.

• 43:58Ben Gilbert?

  And by the way, at this point, he's now figured out that he can run the factory on gasoline.

• 44:02David Rosenthal?

  Oh, I didn't realize that.

• 44:04Ben Gilbert?

  So the Standard Oil factories are burning less coal than their competitors and using the gasoline byproduct.

• 44:11David Rosenthal?

  Oh, that's so great. So they're literally feeding themselves.

• 44:14Ben Gilbert?

  Yep.

• 44:15David Rosenthal?

  Uh, so you said something a minute ago, when you're talking about this, you said selling this oil, this kerosene to the world. So-

• 44:24David Rosenthal?

  By the very next year in 1866, you know, America is a big market and is going to grow hugely, especially after the Civil War. But do you know what's a bigger market? The rest of the world.

• 44:38Ben Gilbert?

  Especially at this point in time. I mean, America is not America yet. It's probably 30, 40 million people.

• 44:45David Rosenthal?

  Yeah, maybe if that.

• 44:47Ben Gilbert?

  All right, you keep talking. I'm gonna Google this.

• 44:49David Rosenthal?

  Okay, okay, great. So by the very next year in 1866, the fledgling Standard Oil Company is already selling 2/3 of their kerosene overseas, primarily to Europe. So like 1/3 domestic, 2/3 international already.

• 45:07Ben Gilbert?

  31 million people in 1865.

• 45:10David Rosenthal?

  Wow. So they're selling most of their oil overseas. Rockefeller dispatches his little brother William, who's now working in the business, to New York City to go handle all of the export business for Standard Oil.

• 45:24Ben Gilbert?

  Do you know the story about when he needed to raise, I think it was $50,000?

• 45:35David Rosenthal?

  Ooh, I don't know.

• 45:36Ben Gilbert?

  Oh, yeah. Well, it's a great story. So this is in Chernow's book. Rockefeller has a bit of his father in him, sort of a flair for showmanship. And he really needs $15,000, like he needs a loan pretty quickly. And he's sort of looking around for financiers for it. And he dresses very nicely and he presents himself nicely and he walks in areas where he's sure to bump into people. And at some point, someone stops his carriage and looks over and says, "Oh, Mr. Rockefeller, could you use a $50,000 loan?" And of course Rockefeller is like, "Jackpot!" And he sort of looks at him like without breaking and he looks at him, he goes, "Hmm." Could you give me 24 hours to think it over?

• 46:16David Rosenthal?

  Yeah.

• 46:17Ben Gilbert?

  And of course, by doing that, he gets like the best terms on the loan.

• 46:21David Rosenthal?

  It's like, I'm not sure I really need this.

• 46:24Ben Gilbert?

  He's unbelievable at like getting his hands on way more capital at way better terms than other people would be able to.

• 46:31David Rosenthal?

  Oh, so good. Now that William's in New York and the family's got, the family has got operations in New York, they can get like, oh, Mr. Sir Rockefeller's, could you use $250,000 or $500,000? So pretty soon they're like bringing a bazooka to a like a fistfight with the other refiners out there. And it's kind of like this whole part of the story just reminded me so much of like the Uber days. You know, remember when Uber went out and raised all that money and it was like, oh, we're going to flatten Lyft and DD and all the global competitors that like, ah, it was totally, it was the Uber playbook, except it really worked.

• 47:12Ben Gilbert?

  Yep.

• 47:13David Rosenthal?

  Speaking of Uber, right after William goes to New York, the sort of, shall we say, Emile Michael character of, of Standard Oil.

• 47:25Ben Gilbert?

  You're stretching a metaphor here, David.

• 47:26David Rosenthal?

  All right, I'm stretching it too far, but an interesting colorful character comes into the fold in the fledgling Standard Oil empire. I, I've been posting on Twitter, like all the fun stuff, like just because I've been enjoying this research so much. And I posted about this guy, Henry Morrison Flagler on Twitter. And Andy Sparks replied to my tweet with, I think, like the best one liner about Flagler possible. He says, quote, Flagler was savage. And he was really like, you know, Rockefeller, he's driven by this divine calling. He's willing to go to the mat. He's willing to do just about whatever.

• 48:10David Rosenthal?

  But it was Flagler and then some of the other lieutenants that he brought in that were like, they're the ones who did the dirty work.

• 48:19Ben Gilbert?

  Oh, yeah, because Rockefeller, you know, he needed to preserve plausible deniability left, right and center, especially once they figured out all the business tactics that were really going to let them press their advantage. You know, he had some very bad lieutenants, so he could stay as plausibly good as possible.

• 48:36David Rosenthal?

  Rockefeller was for sure the one pulling the strings. So Flagler ends up coming into the business because he has a wealthy relative named Stephen Harkness, who hears about what's going on and wants to invest like equity dollars into this new Standard operation. So he invests $100,000 in the operation, which, oh my goodness, like, I didn't actually find like, what the net worth of the Harkness family ends up being because of this, but like, enormous.

• 49:05Ben Gilbert?

  Yeah, it has to be just generational wealth.

• 49:07David Rosenthal?

  And his sort of one term that he asked for as part of investing is that he wants, I think maybe Flagler was his nephew or something, he wants Flagler to join the firm as treasurer to quote, "keep an eye on his investment." And so Flagler joins and literally, this is what I tweeted, "He keeps a quote on his desk at Standard Oil for all the time he's working there." The quote says, "Do unto others as they would do unto you, and do it first."

• 49:39David Rosenthal?

  Oh, my goodness. So Flagler takes over the negotiations for shipping of oil with the railroads. If you know anything about Standard Oil, you can see where this is going. When Rockefeller was running negotiations with the railroads, he always was able to get pretty good rates, shipping rates, because he had a batna, being there in Cleveland on Lake Erie.

• 50:05Ben Gilbert?

  Totally. During the summer months and the spring and fall, we can ship way cheaper by sending it out by water.

• 50:13David Rosenthal?

  By water, yep. So all the crude coming in from Titusville to be refined in Cleveland at Standard could come in over the water or by rail. And then when it was going out to then go off to the rest of the country and the rest of the world, he had another option.

• 50:29David Rosenthal?

  Flagler, he's like, oh, this is nice. That's cute.

• 50:33Ben Gilbert?

  Let's exercise our power a different way.

• 50:35David Rosenthal?

  Yeah. What about if we go to the railroads? And we're like, hey, guys, it's really expensive to operate these railroads. What would you say if we were to guarantee a really, really, really large amount of minimum shipments of oil that we'll do with you? In exchange for us guaranteeing you guys like an unbelievable amount of volume that we'll do on your railroads. You give us an equally unbelievable shipping rate, like cost of doing this. Now railroads are like, uh, yeah, that sounds good.

• 51:10Ben Gilbert?

  Except the railroads are like, wait a minute, but you don't make that much oil. Where's all this oil going to come from?

• 51:16David Rosenthal?

  Well, specifically, the railroads think this sounds really good because with the amount of volume that they're talking about, this means they can run dedicated lines of just oil tank cars. So not mixed trains with like box cars and oil cars, like just oil tanks between Titusville and Cleveland with no stops. So if you think about operating a railroad, if you have different types of product that you're loading on to the train, that takes more time and money.

• 51:43Ben Gilbert?

  They were like being forced to stop to pick up like one car and add it to the train.

• 51:47David Rosenthal?

  Exactly. And then all these stops, that just adds up, you know, it costs money, right? You know, time is money here. So they, they love this, but as you said, Ben, they're like, well, how, Henry, like this is a great idea, but how are you going to do it? You don't have enough capacity.

• 52:02Ben Gilbert?

  And two other things before we answer that question. One is just to give like the magnitude of how much this helped them. It lets them own way less cars also, like the railroad, they get to go from something like needing to have 150 cars to be able to like make the same amount of money on like 40 or something just like dramatically smaller. And the other thing is Standard Oil has started to like really build up some credibility here because when people were putting oil on trains before, they were sloshing around in like open wooden boxes. And like Standard Oil pioneered, hey, we're going to put them in like tanks and then eventually metal tanks. And it really like professionalized the.

• 52:41David Rosenthal?

  And eventually we're going to make railroad cars that are like the car itself is just a tank.

• 52:45Ben Gilbert?

  Yep.

• 52:46David Rosenthal?

  And fast forwarding a little bit like, oh, railroads, what if we made those tanks for you? But we're getting ahead of ourselves. So Flagler's like, don't worry, guys, I got this. So he goes around to all the other refiners, like everybody else in Cleveland. And he's like, hey, guys, I have negotiated a great rate for all of us. Do y'all want to come on board together? And we'll all like pool our shipments that we're all getting in from Platteville. And by doing this all together, we've got this great rate. This is an offer that they can't refuse.

• 53:22Ben Gilbert?

  And not only can they sort of not refuse it because uh oh, what happens if we say no? But this is their major cost driver. They're in a commodity industry at this point. And so distribution of the oil is actually the big driver of the business.

• 53:36David Rosenthal?

  Yep. So, okay, everybody's like, well, this is fantastic. Flag is like, okay, great, great. Let's do this. But, uh, you know, one thing, let's not write any of this down. Okay?

• 53:47David Rosenthal?

  Let's just keep this all as a little gentleman's agreement between all of us and the railroads. Nobody, we don't need any feds, you know, sniffing around here. Feds, quote unquote, if they're even worthy then.

• 53:59Ben Gilbert?

  Well, basically, if anybody ever asks us if we have an agreement, there's no agreement. Everybody can look at each other and go, I haven't seen an agreement.

• 54:08David Rosenthal?

  Yep, totally. So this agreement

• 54:13David Rosenthal?

  comes to be known as the Lake Shore Agreement. Because that was the Lake Shore Railroad was the main railroad that they did this with. And this is huge. So by doing this, until this point in time, Cleveland as a city, so if you forget the individual companies of which Standard is one with in Cleveland. But just think about refining production of oil in America. Cleveland was actually the number two largest center for oil refining behind Pittsburgh at this time. Once they do this deal, Cleveland is like fast tracked and becomes number one. And Standard and Rockefeller and Flagland, they're like the Godfather. They they're like, they just brought all the other families in Cleveland like to heal. Like they run the collective now.

• 54:58Ben Gilbert?

  And this starts a playbook of like, if there's oil leaving the city, either it's ours or we have some agreement in place where like it's good for us, even if it's not actually ours. And maybe it'll eventually become ours.

• 55:11David Rosenthal?

  Yep. So they dominate Cleveland. Cleveland becomes the number one oil refining center in America. But you know, that's not enough for young Rockefeller. He's got his sights set on the whole industry, like Pittsburgh, Philadelphia. There is some refining happening in Titusville, some in West Virginia, some in New York. He wants all of it. So how's he going to do this? As you alluded to at the top of the show, there actually is no legal framework at this point in time for businesses to operate outside their own states.

• 55:47Ben Gilbert?

  Importantly, they cannot own property in other states.

• 55:51David Rosenthal?

  Yeah, they can't own property. They can't have operations. Literally, this, you know, the United States was like, this is all changing after the Civil War, but it was United States, like the states were the sovereign, you know, or near sovereign entities here.

• 56:06Ben Gilbert?

  Totally. And it's really only recently that you could just sort of incorporate your own business as you please at all without getting express written consent from the government. I mean, in the days of England and early in the US, like incorporating a company, a corporation was like, the government's granting you a special right to operate this business. And so already the doors are

• 56:28David Rosenthal?

  Needed a charter, literally.

• 56:30Ben Gilbert?

  Blown wide open that you can just start a company, but we're not yet to the era of like, oh, I can start a national corporation.

• 56:36David Rosenthal?

  Yep. So they think for a while, this whole little crew at Standard Oil in Cleveland about how they're going to do this. They know that if they want to consolidate the whole industry and the whole country, they need A, a lot of capital, and B, an ability to operate outside the borders of Ohio. So Flagler comes up with this idea.

• 57:00Ben Gilbert?

  It's financial and corporate law innovation.

• 57:03David Rosenthal?

  Innovation. Did you read about how he comes up with a new structure that they use, or I guess was an old structure, but that they, wasn't very popular, but they turned to the joint stock company. Did you read about how Flagler, who was not a lawyer, drew up the actual like incorporation?

• 57:20Ben Gilbert?

  Oh, wasn't it on like a yellow legal pad?

• 57:22David Rosenthal?

  Yeah, like on like the equivalent of a yellow legal pad.

• 57:24Ben Gilbert?

  No letterhead.

• 57:25David Rosenthal?

  Yeah, totally. Which partially I think was just because that's how like this was still, you know, Wild West type stuff. But also I think they didn't want anybody to really know about this. They wanted this to be super secret. So Flagler comes up with the idea it's like, ah, these joint stock companies, which I mean, I think like, wasn't the Dutch East India Company a joint stock company? She takes this idea, but not many other companies were doing it. He says, if we were a joint stock company, then we could buy shares in other joint stock companies. We could also sell shares in ourselves, you know, to raise money or to strategic partners who we might want to have a vested interest in our success. This is interesting.

• 58:08David Rosenthal?

  This might solve some of the capital requirements. Okay. Well, that's interesting.

• 58:14Ben Gilbert?

  And also this like selling shares to raise equity capital thing. Rockefeller is like, my God, that is brilliant. How did I not think of this before?

• 58:21David Rosenthal?

  Totally. And it's Flagler that comes up with this. It's amazing. So on January 10th, 1870, they abolish the old partnership and they pour all of its assets into the new joint stock company, the Standard Oil Company of Ohio. Boom, it's born. They capitalize this new joint stock corporation with $1 million of liquid assets. Like, that is how enormous this had become already. Unheard of. I don't think that there was any other organized enterprise in America with that amount of capital, period. Any other industry, like already, that's how big this is. And we're still just getting started.

• 59:02David Rosenthal?

  So this doesn't solve the interstate commerce issue though. So they come up with another absolutely brilliant and diabolical plan to solve this, which is the trust. And what they decide to do is they say, well, like, okay, technically, companies can't own shares in other companies outside the state. But what if we create a trust? Then this trust holds shares in companies all around the country.

• 59:36Ben Gilbert?

  The trust could have some trustees that sort of get to decide what happens with maybe all the companies that roll up to the trust. We can sort of make sure that these corporations, each of which are nicely situated inside their own state and don't own any property outside their own state. But like, we, the trustees, sort of get to decide how those companies might work together.

• 1:00:01David Rosenthal?

  Yep. And there's no law that says that officers of, you know, any given company can't be trustees of a trust that owns shares in other companies. So this is the loophole around it. So they create this trust and the trustees just A dictate to the other companies that they purchase what to do, but also B, this is important, all the dividends from all the other companies, the trustees designate the beneficiaries as the individual shareholders of Standard Oil of Ohio. So nothing ever touches the actual company, Standard Oil of Ohio. It all goes to the trustees and then to the individual shareholders. And that's how they get around this.

• 1:00:46Ben Gilbert?

  Interesting. So the individuals who own the corporation.

• 1:00:51David Rosenthal?

  Yep. Literally everybody on the cap table.

• 1:00:53Ben Gilbert?

  Ha. End up being the sort of puppeteer, controller and beneficiaries of all these other entities.

• 1:01:02David Rosenthal?

  So Rockefeller, he's like, oh, this is amazing. He comes up with the idea that none of them are going to take a salary. They're going to focus solely on these dividends that are coming in as like a source of, of value and income, but also even more importantly, focus on the appreciation of the value of, you know, this whole enterprise. This was new thinking. Like now people are listening to public, uh, yeah, duh, like equity.

• 1:01:30Ben Gilbert?

  Like, why else would you join a startup?

• 1:01:31David Rosenthal?

  Why else would you start a company or join a startup? Nobody had ever thought this way before. Like the idea that. Equity and dividend could like that that could be your primary source of income and wealth generation and that you could use that to incentivize new people who you're bringing into the organization as employees or partners or companies you're buying.

• 1:01:54Ben Gilbert?

  Yeah, the idea that like your competitors could become your friends by being able to offer them ownership in the joint combined company where as we win in this industry and this industry gets bigger, we all win by holding shares of this thing together.

• 1:02:10David Rosenthal?

  Yep. Chernow writes, "Whatever the debates about his ethics, economists and historians have unanimously extolled Rockefeller's role as a pioneer of the modern corporation." And then quoting from another biographer of Rockefeller, "Rockefeller must be accepted as the greatest business administrator America has ever produced." And it's this, so this is how well this works. In the very first year of the trust, 1870, first year of all this getting set up, remember there's $1 million in total capital that gets put into this structure. They pay a 105% dividend at the end of the year,

• 1:02:52David Rosenthal?

  including also reinvesting tons of cash flow back into the business and expanding and buying other companies. So like the million dollars that was in there, they pay over a million dollars out to the shareholders and have many other millions of dollars to go do other things.

• 1:03:08Ben Gilbert?

  It's crazy. They're extremely profitable and they're growing like crazy.

• 1:03:13David Rosenthal?

  Yeah.

• 1:03:13Ben Gilbert?

  And let's talk about this Rockefeller's argument to the societal benefit for a moment, which is like, A, it's silly that the state borders are preventing, like, why should that really be a thing? Like, to the extent that I've been able to rapidly expand in Cleveland and we've been able to create great product for consumers at a low price, quality of life for people has gotten better. And like, that has all happened because we've expanded here, why shouldn't we just be able to do that for people everywhere? And his argument is really like, this is for the betterment of consumers. Now, my competitors, when I move into these states, probably don't like it, but like, ultimately, the American public wins.

• 1:03:56David Rosenthal?

  And he's right.

• 1:03:59David Rosenthal?

  He's totally right. Just like Jeff Bezos would probably say the same thing today.

• 1:04:04Ben Gilbert?

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• 1:04:18David Rosenthal?

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• 1:04:32Ben Gilbert?

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• 1:04:42David Rosenthal?

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• 1:04:59Ben Gilbert?

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• 1:05:16David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:05:32Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:05:41David Rosenthal?

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• 1:05:52Ben Gilbert?

  So David, they've now got the structure in place to become a national trust and expand here. How do they do that? What happens?

• 1:06:01David Rosenthal?

  Ah, this is so great from just like this story. The smile on my face is so wide right now. Whether it's juicy. Yeah. Great. Great is up for debate. So, you know, the structure, the joint stock company, they can buy and hold stock in other companies that can issue shares, hold it in them. What are they going to do here? Remember we said the railroads are the most strategic, important supplier and choke point for the industry. Standard goes to the three biggest railroads, the Pennsylvania Railroad, the storied, huge, enormous Pennsylvania Railroad.

• 1:06:36Ben Gilbert?

  I think that's on a monopoly board.

• 1:06:38David Rosenthal?

  It is. It is literally on a monopoly board. Like that is how.

• 1:06:45David Rosenthal?

  Pennsylvania, the New York Central and the Erie railroads. And they say, uh, so we got this new thing. This new thing lets us do things with other companies.

• 1:06:56Ben Gilbert?

  Do you want to cooperate as a part of our new thing?

• 1:06:59David Rosenthal?

  Do you want to cooperate? How about we all do something together? And the railroads are like, oh yeah, we like doing stuff. This sounds pretty good. So they get together, they set up a shell corporation called the South Improvement Company. Oh, this is so juicy.

• 1:07:14Ben Gilbert?

  Which is intentionally nebulously named.

• 1:07:17David Rosenthal?

  Yes. And in fact, later in life, when Rockefeller would be getting grilled in federal depositions, he would be asked if he was ever a director or involved in the Southern Improvement Company.

• 1:07:30Ben Gilbert?

  Which of course is not a thing. I have no idea.

• 1:07:33David Rosenthal?

  Standard Oil was never involved in the Southern Improvement Company. Oh my goodness. So great. Obviously he was not perjuring himself by saying that because the questioner got the name wrong.

• 1:07:45Ben Gilbert?

  Though I think he did perjure himself in other SIC related.

• 1:07:49David Rosenthal?

  Yeah, I think he did. So here's the deal.

• 1:07:54David Rosenthal?

  Standard Oil is going to set up and control most of the South Improvement Company through their new trust and joint stock corporation structure. The railroads will own a token amount, but the railroads and the principal owners of the railroads, the individuals, they're going to issue some, Standard Oil is going to issue them some stock so that these guys now have a little skin in the game with Standard Oil. All the interests are aligned here.

• 1:08:21Ben Gilbert?

  Well, and the railroads had a problem that they need solved, which was that because of the boom bust nature of everything that's going on their cars, especially oil, and the sort of, remember that thing that I mentioned earlier where people are deciding not to buy because they hear it's going to be cheaper soon because they know there's a big gusher? Like, this whole thing is like totally screwing with the railroads. Not to mention the fact that with intense competition among the railroads, just like there was intense competition among all of the non-standard oil companies, a lot of the profits are just being arbitrage away. And so they've got unpredictable demand, they've got booms and busts, they've got this

• 1:09:02Ben Gilbert?

  situation, especially with oil, where like, certain types of oil in certain areas were so insanely cheap that like, everybody's going out of business because no one can make any money. The same sort of thing is happening in the railroad industry. And so if there's like a cooperation opportunity for the railroads and Rockefeller's offering them, I can kind of solve your problem here and we can sort of smooth out business.

• 1:09:26David Rosenthal?

  Ben, it really comes down to like, it's really hard to run a business when prices are fluctuating and they're not fixed. So clearly the answer is to fix the prices.

• 1:09:38David Rosenthal?

  Oh my goodness.

• 1:09:38Ben Gilbert?

  We ascribe no virtue to this. I think the jury on this whole thing, and we'll get to this later in the episode, and certainly in part two of like, what parts of this were good and what parts of this were bad. It's both. There's lots of both that happened all through this story.

• 1:09:52David Rosenthal?

  Yep. The three biggest railroads and Standard, they get together in this South Improvement Company, and they say, here's what we're going to do. All the railroads, we're going to set a new fixed price. There is now a fixed, literally a fixed price for shipping oil on railroads. To everybody out there, all, anybody who's shipping oil, there's one single fixed price and it's really high. Whatever it was before, like it's a multiple of that. It's really high. Except...

• 1:10:22David Rosenthal?

  For anybody who's a member with us of the South Improvement Company, y'all get a 50% discount on that fixed price. And it goes even further. This is just like, oh, just twisting the knife here. Anybody who's a member of our little, our little company here?

• 1:10:38Ben Gilbert?

  One might say a little cartel.

• 1:10:40David Rosenthal?

  Little cartel. Yeah. Also, they will receive a little dividend, a little kickback. They call it technically a drawback from any revenue that any other oil producers that are not part of this, that ship on the railroads, part of that revenue from the really high price that they're charging, they're just going to give some of that revenue to the competitors that are part of this little cabal here.

• 1:11:02Ben Gilbert?

  This is the most mind blowing part of the deal. Not only do you get a rebate for shipping with us, so that way the price is actually way cheaper, but you also get a rebate even when you're not the shipper. I mean, they call it this drawback, but like other people ship stuff with us and thank you because you are a nice member of our organization, you're going to get some of that money. And so your competitors are just paying you. It's the craziest system ever.

• 1:11:31David Rosenthal?

  I don't know what the formal definition of the crime of racketeering is, but this sounds like whatever it is, I think this fits the case.

• 1:11:38Ben Gilbert?

  Well, there's a couple of different ways that this story draws parallels to Microsoft, but this reminds me so much of that CPU licensing thing that they did. Do you remember this in the early Windows days? The deal that Microsoft cut with, I think it was IBM, was yeah, you guys can use Windows and that's great. And any computers that have a CPU in them that, that aren't running Windows, you're also going to pay us for those CPUs. And that's the deal they signed. And so Microsoft basically ended up with, you know, the monopoly, the entire industry because IBM is like, well, wait a minute. Whether we're putting Windows on these machines, we're not, we're paying for it. And so I think Windows it is. And actually, I don't know if it was Windows yet. It might have been DOS.

• 1:12:21David Rosenthal?

  If only Gates and Bomber and Jeff Rakes and all the like, if they'd had our episodes here on Standard Oil to listen to before they put that stuff in writing, uh, history could have been different.

• 1:12:33Ben Gilbert?

  It turns out, yes, this may have been a flashpoint. Once the public realized how egregious this sort of agreement sounded.

• 1:12:41David Rosenthal?

  I'll say, there is literal rioting in the streets in Titusville in reaction to this once word gets out, like literally, like people are like fighting in the streets. They're like banging up and destroying, you know, standard tanks and property and like.

• 1:12:57Ben Gilbert?

  I mean, it's truly heads I win, tails you lose for Standard Oil versus their competitors.

• 1:13:01David Rosenthal?

  Yep. This is the point where public opinion really starts to get concerned about Standard Oil.

• 1:13:07Ben Gilbert?

  In particular, informed by the competitors because the public, public is like, great, like we're getting so much stuff so reliably for so cheap. This is awesome.

• 1:13:16David Rosenthal?

  Yep. So the railroads, they know they've maybe gone a little bit too far and they're like, uh, guys, I don't know that we can actually do this. And Rockefeller and Flagler, they're like, uh, it's okay. Let's just like hold out for a couple of weeks. I think we're gonna be fine. We're gonna go do some stuff and we'll get back to you. So during these few weeks, when this deal has not yet gone into effect yet, but rumors of it are spreading throughout the industry, Flagler and Rockefeller go around to all the other refiners in Cleveland.

• 1:13:53Ben Gilbert?

  Keep in mind, many of them are in very rough shape right now because A, the fluctuations, but B, oil prices are getting driven down so far that like, people are trying to produce and make profit on this, but like, because of this crazy inflation then deflation thing that happens, like a lot of these companies are slowly on their way to going out of business anyway.

• 1:14:14David Rosenthal?

  Yep. And they're already kind of brought to heel by Standard by the Lake Shore deal where they're already sharing capacity. So now Flagler and Rockefeller go to them and say like, You know, that great rate that we organized for you, it's over. Y'all have heard about this South Improvement Company thing? It's happening. So the way we see it, you basically have two choices. You can stay nominally independent and you can die. Or you can just sell your operations to us, come in and join the fold.

• 1:14:47Ben Gilbert?

  Get some Standard Oil shares.

• 1:14:48David Rosenthal?

  We'll even give you stock. And then we can all profit from this amazing deal that we have.

• 1:14:58Ben Gilbert?

  And there's something Larry says, like Rockefeller says, own shares of Standard Oil and your family will never go hungry.

• 1:15:06David Rosenthal?

  Yeah. So as Ida Tarbell, who we're going to talk much about next time, wrote in her investigative reporting on Standard Oil, this is what she claimed that the standard pitch was to other folks about joining the scheme. Quote, "You see, this scheme is bound to work. It means an absolute control by us of the oil business. There is no chance for anyone outside, but we are going to give everybody a chance to come in. You are to turn over your refinery to my appraisers and I will give you Standard Oil Company stock or cash, as you prefer, for the value that we put on your business. I advise you to take the stock. It will be for your own good."

• 1:15:50David Rosenthal?

  So they're literally just saying like, they're deciding what value they're going to pay for all these refineries.

• 1:15:55Ben Gilbert?

  And of course, the offer that they put in is like 25 to 50% of

• 1:15:59David Rosenthal?

  Book value.

• 1:16:00Ben Gilbert?

  Yeah, what the refiners even paid to build the factories in the first place. And Rockefeller's argument is like, well, we're just going to shut most of these down anyway. I mean, we're actually doing them a favor by taking this thing that's just going to go out of business over the next few years, giving them some shares in our company as like a, you know, we don't want to be too terrible to these guys. They're our fellow countrymen and they're also in our industry and we're just bringing them in. We're giving them some shares and I, you know, I'm going to write the whole thing off anyway. So it's a crap factory.

• 1:16:27David Rosenthal?

  So over a period of six weeks, from February 1872 to April 1872.

• 1:16:35David Rosenthal?

  Standard Oil buys 22 of the 26 other refineries that are operating in Cleveland. And this comes to be known as the Cleveland massacre. And then, once they already own all the refineries in Cleveland, they're like, all right, we're done. You know, we don't really even need this South Improvement Company thing anyway. And I guess the public doesn't like it, so we're not going to do it.

• 1:16:58Ben Gilbert?

  And apparently, not a single barrel was ever shipped using the South Improvement Company. They never documented anything but structure. It was all set up and agreed upon, but then they didn't actually ever need to do it because they used it as leverage to just go and roll everyone up anyway.

• 1:17:17David Rosenthal?

  And this was the tipping point. So obviously, this was the Cleveland refiners first, but then immediately after, they go to Pittsburgh, they go to Philadelphia, they go to West Virginia. They don't even have to set up some ploy, Shell Corporation, like the South Improvement Company. They just go to all the other refiners in these cities and they're like, y'all heard about what happened in Cleveland? We're coming here next, so.

• 1:17:38Ben Gilbert?

  You want some shares?

• 1:17:39David Rosenthal?

  You want some shares? Yep.

• 1:17:42David Rosenthal?

  By 1877, Standard Oil controls 90% of the oil business in America. Nine zero percent.

• 1:17:56Ben Gilbert?

  As Barron's put it, "Consumers of kerosene had no choice but to purchase the product from a Standard company. Not that they complained, Standard's policy was to upgrade the product continuously while lowering the costs in order to frighten away potential competitors and increase sales." I just want to say, David, like, just like TSMC. It's like, yep, I think it's something like 70% of the leading-edge CPUs flow through the island of Taiwan and, you know, 50% are actually TSMC, manufactured by TSMC. And like. We're all better for it as consumers. And I think it's just fascinating this notion of like, we're going to keep lowering prices, the product's going to keep getting better. And at the end of the day, it actually is good for consumers. Oh, and we're going to

• 1:18:41Ben Gilbert?

  get huge and super profitable on the way.

• 1:18:43David Rosenthal?

  Yeah. Well, and you know, ASML and, you know, all the equipment manufacturers, they're kind of like the railroads here.

• 1:18:50Ben Gilbert?

  Right. Although amazingly, this cooperation with the railroads really didn't lead to Standard Oil squashing the railroads. Like, they stayed really good businesses for a long time.

• 1:19:01David Rosenthal?

  Well, they did for other industries. Or at least I think they did. I don't know enough to say about the railroads. They certainly stayed independent. But, you know, Rockefeller and Flagler and this whole crew, like, these guys are paranoid as well, right? Like, they do realize after they've just gone and consolidated the whole oil industry, they know that the railroads do have strategic leverage over them. And again, remember, like, the oil refiner, they let the other refiners stay in business. They just, you know, bought them and gave them Standard Oil shares. They're worried about the railroad. So like, we don't want them having strategic leverage over us. How can we co-opt them? So I mentioned earlier, tank cars.

• 1:19:45Ben Gilbert?

  Yeah. What was the deal here?

• 1:19:46David Rosenthal?

  So right around this time, Standard starts going to all the big railroads and they're like, you know, we've saved you all this money on OpEx. Now you get to run trains directly, you know, no stops, no boxcars. This is great for you. But these tank cars, these modern tank cars, you know, made of steel and the like, that's a lot of CapEx for you to keep building. And we just keep sucking up all this shipping volume with y'all. What if we just make these cars for you? And we lease them back to you. We'll take on the CapEx to make the cars. And we'll lease them to you at a really low rate.

• 1:20:23Ben Gilbert?

  So what's the play here?

• 1:20:25David Rosenthal?

  So Chernow writes about this. He says, as the owner of almost all the eerie and New York Central tank cars, Standard Oil's position grew unassailable. At a moment's notice, it could crush either railroad by threatening to withdraw its tank cars. No tank cars, no business. You can keep running this great business for y'all, but you know, you mess with us, we can withdraw our tank cars.

• 1:20:52Ben Gilbert?

  Wow. And so now they've got 90% market share of kerosene and they've got this relationship with the railroad where they basically are going to get the most favorable rates without a railroad going out of business.

• 1:21:07David Rosenthal?

  And then they take it one step further again. So.

• 1:21:13Ben Gilbert?

  By the way, David, you laughing through this like maniacal plan, you're like the nicest. It's so scary because I'm like, oh, I just have implicit trust in you. Like you're so kind and you're so warm and yourself and like, you're like, and then they take it one step further.

• 1:21:28David Rosenthal?

  And then they stab the knife in the back again. And it's so great. Oh, this is such a like good story. I love it. Not condoning this behavior by any stretch of the imagination.

• 1:21:40Ben Gilbert?

  An important pillar of American history.

• 1:21:42David Rosenthal?

  A critical part of American history. So, okay, they take it one more step further. And this is really the coup de grâce here. So as they're doing all these deals and setting, you know, and, and Standard Oil is becoming this octopus, as it would be known, a derogatory term by its critics, octopus, you know, like you think the Goldman Sachs vampire squid sucking on America was bad. Like literally the Standard Oil octopus is bigger than 10 vampire squids. So there's a new technology that people are thinking about with regard to oil, not gasoline, not yet. That's coming later. But all of the, you know, the oil is being moved around either

• 1:22:22David Rosenthal?

  by water or on railroads. People are thinking that like, there might be a way to move oil much, much, much more efficiently. So the concept of pipelines already existed, but really short distance pipelines, literally from the derricks, from the wells to the railroad depots. So this would be like, you know, a mile at most. They would pump oil through pipes to the railroad depots or to the, you know, shipping depots or whatever to then load it up in cars and get it out of there.

• 1:22:55David Rosenthal?

  Some people start thinking like, well, I wonder if we could pump oil a lot farther than just a mile or two. And meanwhile, the remnants of the industry that haven't yet been consolidated by Standard, they're looking for any kind of, you know, hail mary pass to get some leverage back in the industry. So they decide that they're all going to go in together against Standard and the railroads. They know they can't get any concessions out of the railroads. They're going to try and develop a pipeline, a long distance pipeline. So in 1877, they do this. They band together and they form the Tidewater Pipeline Company. This just sounds like a scandal right off the bat, like the name, Tidewater Pipeline Company.

• 1:23:40Ben Gilbert?

  Why would you name it that?

• 1:23:42David Rosenthal?

  I mean, it's 1877. I have no idea. And first, the goal is that they're gonna pipe oil from Titusville directly to Baltimore on the seafront. They then shorten it to Williamsport, Pennsylvania, which is still 110 miles. This would be like an amazing proof of concept that this would work.

• 1:24:00Ben Gilbert?

  Isn't that where like the Little League World Series is?

• 1:24:02David Rosenthal?

  It is, it is.

• 1:24:03Ben Gilbert?

  Yeah.

• 1:24:04David Rosenthal?

  I don't know why Williamsport was where they wanted to pipe this stuff to, but they do end up piping it. So Standard, though, fights them tooth and nail on this. A bunch of the execs want to go hire thugs to go like smash the pipeline and do all this stuff. Rockefeller is like, he reins in his exuberant execs on this and says, no, no, we're going to fight it with every like, you know, political leverage that we have, which they do. But they don't succeed. In 1879, the pipeline turns on and it works. And I think a bunch of people in Standard are like, probably like pissed at John, like don't understand why he let this happen. And, you know, how could this be terrible? Rockefeller is like, oh, don't worry. I have a plan.

• 1:24:49David Rosenthal?

  Now remember, this is just one route that this new pipeline has opened up, from Titusville to Williamsport. Rockefeller's like, I got all the railroads in my pocket. They go around to the railroads and they tell the railroads, they instruct the railroads to cut shipping rates so far down on this line that literally like they're basically paying anybody who's willing to ship by railroad on this line to ship. So it's actually the pipeline, even though they invested all this money in building it and it's so much more efficient, so much cheaper than running a railcar, because at Standard Oil's pressure, the railroads have now lowered prices so far in response, it's not economic to use

• 1:25:33David Rosenthal?

  the pipeline. So they starve them out.

• 1:25:36Ben Gilbert?

  This is like the Bezos versus diapers.com thing where Bezos is like, I can sell diapers at a loss forever. You don't understand.

• 1:25:43David Rosenthal?

  That is totally what happens. So the Tidewater Pipeline Company is like up against the wall. They're about to go bankrupt. They can't compete. And by March of 1880, they sell a minority stake in the pipeline to Standard Oil. Standard assumes control of the pipeline, takes all the technology, immediately turns around and goes and builds out four more major pipelines from Titusville to Cleveland to Manhattan to Philadelphia to Buffalo. So they build these now pipelines that are huge. Do you know what land they build the pipelines on? This is the most cold-blooded thing in the whole freaking episode.

• 1:26:26Ben Gilbert?

  No.

• 1:26:28David Rosenthal?

  Okay, so who would have land rights in straight lines?

• 1:26:33Ben Gilbert?

  Oh, the railroads.

• 1:26:34David Rosenthal?

  Between cities. Standard Oil goes to the railroads and they're like, my friends.

• 1:26:42David Rosenthal?

  We've got this really exciting new thing that we're working on. We're friends. We help you, you help us. How about we use your land? How about we build our pipelines right along next to your railroads? And then it'll just be a little reminder, sitting to you right there. Reminder to y'all that we don't need you, that we've built on your land.

• 1:27:04Ben Gilbert?

  You're looking at your competition every single time you glance out of a train car.

• 1:27:08David Rosenthal?

  So if you ever, you know, want to try and screw us on prices. Just remember, we've got an alternative right there.

• 1:27:15Ben Gilbert?

  Wow.

• 1:27:15David Rosenthal?

  Oh my God. So.

• 1:27:16Ben Gilbert?

  By the way, do you know the deal with Sprint? Random business trivia fact. I may have said this on another acquired episode.

• 1:27:22David Rosenthal?

  I think we've talked about this before. Yeah, that telephone lines were laid along railroads.

• 1:27:27Ben Gilbert?

  Yeah, it's the Southern Pacific Railroad, SPR.

• 1:27:30David Rosenthal?

  Oh yeah, that's right. That's right.

• 1:27:32Ben Gilbert?

  And exactly for this reason, like, hey, we need someone who's already eminent domained a bunch of land that we can go directly in a straight line from one city to another. Boom.

• 1:27:40David Rosenthal?

  Yep. Crazy. Now, I don't know for sure, but I didn't see anywhere that the railroads got any like equity stake in these pipelines.

• 1:27:50David Rosenthal?

  Wow.

• 1:27:51Ben Gilbert?

  All right. So I fully take back my comment earlier that it seems like the railroads made it out. Okay.

• 1:27:57David Rosenthal?

  Well, I think they actually did. I mean, this was kind of Rockefeller style and Standard Oil style is like, we're going to let you live. We're going to be benevolent dictators. We're going to let you continue. You're just going to remember that, you know, our knife is pressed against your back at all, at all times. Okay. So after this, it's done. I mean, this is the story of how Standard Oil became Standard Oil. Like Rockefeller, Standard, like they have won on a scale that nobody has ever won before or since. Their competitors are obliterated. New upstart technologies are co-opted. All of the suppliers are reduced to total lackeys. We didn't talk about the customers. Uh, this is great. So most kerosene was sold at retail in America in grocery stores.

• 1:28:43David Rosenthal?

  So right or in the sort of early 1880s, Standard decides to run the same playbook that they've run with the railroads, who with the grocery stores in America, they go to them and they say, hey, you know, it's expensive for you to set up and give shelf space and everything to all of these cans that are all, you know, non-standardized of Standard Oil kerosene in your stores. From now on, all Standard kerosene needs to be sold in Standard canisters that we set the terms on and we fix the price and we tell you where you're going to put it in your stores.

• 1:29:24David Rosenthal?

  So some stores, you know, sort of bristle at this and say they're not going to do it. Standard sends out a letter, in Mississippi, they had a particular problem with this. They send out a letter to all the grocers in Mississippi. They say, if you do not buy our oil, we will start a grocery store chain to compete with you and sell goods at cost and put you all out of business. This is in writing, sent to all of them.

• 1:29:49Ben Gilbert?

  You can just feel the American public and Washington getting stirred up about like, okay, monopolies are pretty bad. We really need some legislation about this.

• 1:30:00David Rosenthal?

  Yeah, as Chernow writes, "By this point in time, Rockefeller's creation could only be discussed in superlatives. It was the biggest and richest, the most feared and most admired business organization in the world."

• 1:30:15Ben Gilbert?

  Wow.

• 1:30:16David Rosenthal?

  Wow. In 1883, official Standard Oil headquarters moves to Manhattan, to New York City, and Rockefeller himself.

• 1:30:25Ben Gilbert?

  26 Broadway.

• 1:30:27David Rosenthal?

  To Manhattan, to 26 Broadway. Do you know which is the building that they have constructed for the Standard Oil headquarters? 26 Broadway, right on Wall Street. Do you know what is right outside of 26 Broadway today?

• 1:30:38Ben Gilbert?

  No.

• 1:30:39David Rosenthal?

  The Bull, the charging bull.

• 1:30:41Ben Gilbert?

  No way.

• 1:30:42David Rosenthal?

  Literally right outside 26 Broadway.

• 1:30:44Ben Gilbert?

  Ah.

• 1:30:45David Rosenthal?

  You know, the Bull was only put there in like 1989, I think.

• 1:30:49Ben Gilbert?

  Oh, no, I would have assumed it was there through the 80s.

• 1:30:52David Rosenthal?

  It was put there after the 1987 stock market crash.

• 1:30:55Ben Gilbert?

  Ah, interesting.

• 1:30:57David Rosenthal?

  So Rockefeller and, uh, you know, his brother and all of his, their lieutenants, you know, they moved to New York also around this time.

• 1:31:05David Rosenthal?

  They just like buy up midtown. So Rockefeller moves to right off Fifth Avenue in the 50s. Was it was it 54th Street? Maybe? I actually don't have it written down. It was either like 53rd or 54th Street, right off Fifth Avenue. He buys a house, moves in there, really right there, you know, between the park and, and between Rockefeller Center. You know, like, no, there is no Rockefeller Center. They build freaking Rockefeller Center.

• 1:31:28Ben Gilbert?

  Which he had nothing to do with. That was a, it was junior. Being endowed by his son, but yeah.

• 1:31:33David Rosenthal?

  We'll probably talk about this more next time. I didn't realize it was Columbia University's campus there.

• 1:31:38Ben Gilbert?

  Oh.

• 1:31:39David Rosenthal?

  When Junior decided to get in and start building, developing and building Rockefeller Center, they lease it from Columbia and then they ultimately buy it.

• 1:31:47Ben Gilbert?

  Fascinating.

• 1:31:49David Rosenthal?

  Yeah.

• 1:31:50Ben Gilbert?

  Well, part two, I mean, we'll have a lot to say about universities and Rockefellers in New York. And we haven't touched a lot on the personal side of Rockefeller, other than saying he was deeply religious and believed he should make a lot of money and then do interesting things with it. There's a lot of like very good things he does with it that I think we'll save for part two. And a lot of his idiosyncratic things around like being afraid of death and wanting to live a long time and his health obsessions. And I think a lot of that especially starts to show up in his old age. But David, bring us home here to 1890.

• 1:32:22David Rosenthal?

  Yeah. So, I mean, this is like, it's funny, we're gonna, you know, recount now what will ultimately become the beginning of the downfall of Standard Oil. But like, I don't know, like, it's weird being at this moment in the story because they've literally won. Like, I don't think we've ever had this before. The only thing that can bring them down is. The government.

• 1:32:43Ben Gilbert?

  Or a paradigm shift. I'm referring to like electricity and lights in houses, but they very quickly were saved by the fact that conveniently, right around the same time, any thirst that we had for oil before, once you have the car, Rockefeller got so much richer in his retirement from his shares of Standard Oil, which became, you know, the things that powered us moving around the country in cars than he ever got from kerosene. So it was like, a paradigm shift could have disrupted and did disrupt the core kerosene business, but like, the thing that happened at the same time was so much bigger than anything they ever could have imagined.

• 1:33:20David Rosenthal?

  I think that Standard was also making some investments into electricity and electrical utilities. I don't know how deep they got into the business.

• 1:33:31Ben Gilbert?

  But all I'm saying is monopolies, even if you don't trust bust them, are always at risk of being disrupted by a paradigm shift.

• 1:33:40David Rosenthal?

  Totally fair point. Not in this case, though. Not in this case. So, you know, it's funny. I always assumed, you know, what I knew of the Standard Oil story before doing all the research was that it was the 1890 Sherman Antitrust Act that brought down Standard Oil.

• 1:34:00Ben Gilbert?

  It wasn't for another 21 years.

• 1:34:02David Rosenthal?

  Indeed, it was. Yes, it was the Sherman Antitrust Act, but it was not for 21 years. So we'll close with the wild story of the Sherman Antitrust Bill. So, Ohio, Senator John Sherman, brother of General William Tecumseh Sherman.

• 1:34:21Ben Gilbert?

  No way.

• 1:34:22David Rosenthal?

  Great hero of the Civil War.

• 1:34:24Ben Gilbert?

  Wow.

• 1:34:25David Rosenthal?

  Unbelievable. You know how we joke about how there like, must have been 10 people in Silicon Valley in like, the 1970s and 1980s?

• 1:34:31Ben Gilbert?

  Right.

• 1:34:31David Rosenthal?

  I think there must have been like, 10 people in America at this point in time. So Senator John Sherman, in 1889, as like, the sort of public sentiment is starting to shift against this huge octopus monopoly, proposes an anti, quote unquote, antitrust bill in the US, in the federal senate. It turns out that just a few years earlier, when Sherman was running for office in Ohio, guess who one of his biggest campaign supporters was?

• 1:35:02Ben Gilbert?

  Rockefeller?

• 1:35:03David Rosenthal?

  Yes, that would be correct. So this is like, Like, hmm, you're biting the hand that feeds you here.

• 1:35:10Ben Gilbert?

  Yeah.

• 1:35:11David Rosenthal?

  So the act does pass, but Sherman makes the political gamble that like the political power and stature that he's going to get from doing this is going to be worth more than the money that he's going to get from Rockefeller and Standard going forward. The act ends up passing in July of 1890 outlawing all trusts and business combinations in the United States of America that were, this is the key modifier, quote unquote, in restraint of trade, but they don't define what in restraint of trade means.

• 1:35:44Ben Gilbert?

  Hmm, it's up to some judge to set precedent.

• 1:35:47David Rosenthal?

  And everybody thinks, oh, well, there's no legal precedent for what that means. So that's never really going to become an issue. And in fact, Rockefeller and Standard Oil viewed this as a win. They were like, oh, great. The public is now going to feel like the US government has taken action. They have heard them. They're going to curtail Standards' power, but they're not actually going to curtail anything that we do. We're going to keep doing exactly what we've been doing. And in fact, when Sherman runs for reelection in Ohio the very next year in 1891, do you know who, once again, one of his biggest donors was?

• 1:36:25Ben Gilbert?

  Is it Rockefeller again?

• 1:36:27David Rosenthal?

  It is John D. Rockefeller.

• 1:36:28Ben Gilbert?

  Fascinating.

• 1:36:31David Rosenthal?

  How funny is that? The act that ends up bringing them down, he is the biggest or one of the biggest donors after the act passes to the senator that introduces it.

• 1:36:41Ben Gilbert?

  Huh. Fascinating.

• 1:36:44David Rosenthal?

  So in 1896, Rockefeller is like, well, I guess it's been a good run. I'm going to hang it up. I'm going to retire. I'm going to focus on my philanthropy and I'm going to leave one of my lieutenants, John Archbold, and my son, John Rockefeller Jr., who's about to graduate from Brown University. I'm going to leave them in charge. I'm going to go retire in my estate and I'm going to focus on doing good works.

• 1:37:11Ben Gilbert?

  But key mistake, he didn't fully.

• 1:37:16Ben Gilbert?

  Leave.

• 1:37:17David Rosenthal?

  No, no, he did not.

• 1:37:19Ben Gilbert?

  He's like, well, just in title only. I'll kind of stick around as president, right? Or as chairman.

• 1:37:25David Rosenthal?

  Yeah.

• 1:37:25Ben Gilbert?

  But of course, that's not how the public would view it. They're like, no, your name's still on the door.

• 1:37:29David Rosenthal?

  Oh, he's going to get dragged back to the witness stand in the years to come.

• 1:37:33Ben Gilbert?

  So no, no sunset ride off for him.

• 1:37:36David Rosenthal?

  Yeah, what a story.

• 1:37:37Ben Gilbert?

  All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Legora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:37:50David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:38:07Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:38:22David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:38:46Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:39:05David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:39:35Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you. I want to talk a little bit about like the, we used to do these narrative sections when we do IPOs. I want to talk about like the public sentiment versus Rockefeller's defense. So like the public sentiment here, and when we say public, it's less at this point in history, the actual public and more about their competitors who are sort of making

• 1:40:19Ben Gilbert?

  a bigger deal out of this because all the public knows is there's this really big company. They provide things, kerosene mostly, that I use in my life and it gets to me in a consistent way at a stable price. Like it is good for consumers. Like if you think about the consumer welfare standard of antitrust, this really isn't bad for consumers. It could get there if Standard Oil is the only company and they sort of wield that power to raise prices and stuff like that. But at this point, it's really like their competitors hate their guts and especially anybody who's sort of been coerced to cooperate with them, the railroads, the pipelines, like anyone in their orbit, the retailers, like it sucks for them too.

• 1:41:01Ben Gilbert?

  And so you've got this beginnings of like really stirred up public sentiment against this company that's like, by some views, you know, the most evil capitalist structure of all time. Americans, ever since we got here from England, and you know, my family immigrated at some point, so I certainly didn't come from England, but ever since the original Anglo people came over from Europe and settled America, there's been this incredible Hatred of monopolies, in particular because our country was founded on equality and people having the right to be free and the free market. Like, the government was a monopoly in England, and that's where we were running from.

• 1:41:41David Rosenthal?

  Well, and still to this day, there's like huge skepticism amongst Americans of centralized government power.

• 1:41:51Ben Gilbert?

  Right. So even, there's this interesting, like, very American stripe that runs through people that is, I can't quite put my finger on why, but I don't like big stuff and I don't like concentration of power. And I didn't like it when it was concentrated in a government, and I don't like it now when it's concentrated in the rich people. And that shows up all the way through to today. I mean, that's the defining characteristic of the national conversation now. And of course Rockefeller's defense to all this is saying, "Look, social Darwinism is bad. Without Standard Oil rolling everyone up, you just have all these people producing non-standard products that consumers can't trust. They're gonna kill this industry that could make everything great because consumers won't

• 1:42:36Ben Gilbert?

  trust it. All these businesses will go out of business because the prices are so low because every time there's a gusher, you know, the prices drop so much. These people are all gonna go out of business anyway." And Standard Oil is the antidote to social Darwinism, which is bad, which is killing the golden goose here. And so, the way he sort of makes this argument is, it was a cooperative success. It was for the general good. It was our moral imperative. It was downright Christian for me to do this and provide this service.

• 1:43:06David Rosenthal?

  And certainly, any of the competitors, or suppliers, or partners, or the like who ended up taking Standard Oil stock, got fabulously wealthy by doing so. Like, how could you argue that that was bad for them?

• 1:43:19Ben Gilbert?

  He really seems to have deeply believed that this, like, invisible hand, the Adam Smith concept of, you know, the invisible hand that sort of guides the free market, that it kind of just takes too long. And there's a lot of bad stuff that happens along the way. Like, academically, sure, it makes sense that the free market will work itself out. But when you actually look at the businesses today, and the people running those businesses today, there's gonna be a bunch of hardships and dirt along the way. You might have whole industries that die out because they never sort of reach their full potential. It's not- Communist and it's not social. It's this interesting, like uniquely American viewpoint on actually social Darwinism and free market capitalism is a bad thing.

• 1:44:02Ben Gilbert?

  And everybody just eating each other's lunch and eliminating all the profit in every industry. And potentially to our own detriment is bad.

• 1:44:10David Rosenthal?

  Chernow even talks about this, like in some ways, what Rockefeller was trying to do and what Standard became, shared just as much intellectual grounding as with like Marx and communism as it did with Adam Smith and capitalism. It was this view that like, hey, pure individual competition is not actually like the most ideal status and like some form of collectivism, in this case, collectivism in the form of a company, Standard Oil, was the best path.

• 1:44:47Ben Gilbert?

  Yeah. And the place where it kind of falls down is where he sort of says, look, if we just knife fight to the death, someone's going to win. And ultimately that one is going to be me because I'm the best at this. And like, he's probably right. But this notion of like, so therefore everyone should allow me to save them at truly in like a very evangelical Christian way, like I'm going to go and save, you know, and bring them into my business church is very much how he sort of thought about it and he come into the light and embrace the standard oil.

• 1:45:22David Rosenthal?

  Literally the light. I love it.

• 1:45:23Ben Gilbert?

  And just dripping with irony in the way that I'm drawing these parallels here. It kind of falls down where like him accelerating the death of all of these businesses and saying, eh, it was inevitable and at least they're getting some upside now. The benevolence argument does seem to fall down there a little bit.

• 1:45:42David Rosenthal?

  Perhaps maybe the most blatant example to me is the grocers, right? Like that letter sent out.

• 1:45:49Ben Gilbert?

  Totally.

• 1:45:49David Rosenthal?

  In writing to grocers saying like, if you don't do what we want, we're going to metaphorically burn down your houses. Like it's unreal.

• 1:45:57Ben Gilbert?

  Right. There are places where like it made sense for him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers. But those places are far more limited than the number of places where they actually reached and exerted their power.

• 1:46:14David Rosenthal?

  Yep. Sidebar on the, on the logo, cause it's so great. We'll, we'll see if we can link to it in the show notes. You'll recognize it when you see it. It's this red, white and blue.

• 1:46:24Ben Gilbert?

  Oh, it's the Amoco logo now.

• 1:46:26David Rosenthal?

  Yeah. It's the Amoco logo. Yeah. Yeah. Amoco was a

• 1:46:29Ben Gilbert?

  California.

• 1:46:29David Rosenthal?

  Standard of Ohio.

• 1:46:31Ben Gilbert?

  Oh, wait.

• 1:46:31David Rosenthal?

  No, California was Chevron. Was that their Ohio or New Jersey? I think it was Ohio that became Amoco. I could be wrong on that.

• 1:46:37Ben Gilbert?

  I think you're right. I'll fact check that.

• 1:46:39David Rosenthal?

  But yeah, it's this red, white and blue oval with in the middle of the oval, this like Grecian column looking torch, like Olympic torch looking.

• 1:46:48Ben Gilbert?

  Indiana.

• 1:46:49David Rosenthal?

  Uh, Indiana. Oh, interesting. Like Olympic torch looking column with a fire burning on top of it.

• 1:46:56Ben Gilbert?

  And interestingly, I think the Standard Oil of Indiana company adopted a different logo, but then when they turned into Amoco, they adopted a, something that looks a lot more like the original Standard Oil logo.

• 1:47:08David Rosenthal?

  Interesting. The other thread I want to talk about here in narratives is Rockefeller and Standard Oil as a organization, but Rockefeller as a person is really like the prototype of so much of American culture today. Like he was simultaneously viewed as this like, you know, sinister villain and as this great hero, you know, people hated him, but people wanted to be him.

• 1:47:41Ben Gilbert?

  Is that a rap lyric?

• 1:47:43David Rosenthal?

  I feel like it must be. Well, I mean, Jay-Z would name, uh, you know, his, uh, his label Rockefeller Records. Like, you know, there's a reason for that. But like everything that like, I feel like the public feels about Bezos, Zuckerberg, Musk, you're like everybody, all these billionaires today, like. This was the prototype. This was the first time that Americans felt this way. There's this great quote in Titan that says, "The general public was of two minds and viewed the new entrepreneurs, of which Rockefeller was the foremost, as alternatively sinister and heroic. By 1888, Rockefeller began to pop up in fawning magazine features about rich Americans, but he was also singled out as a notorious trust king in Joseph Polister's

• 1:48:29David Rosenthal?

  World and Other papers. The press kept up an editorial drumbeat against Standard Oil demanding vigorous state and federal antitrust action." At the same time that he's in like the equivalent of, you know, like Vanity Fair as like the new elite.

• 1:48:44Ben Gilbert?

  And I think he started embracing that later. For a while, his policy was don't talk to the press. And then sort of later started opening up to this idea of like, geez, maybe it's probably a good idea for me to have a positive image out there. Like silence is not doing me any favors.

• 1:48:57David Rosenthal?

  Yeah.

• 1:48:59Ben Gilbert?

  All right. Power.

• 1:49:01David Rosenthal?

  Ooh, power. Okay. So what are, what are our power categories here?

• 1:49:06Ben Gilbert?

  So as Hamilton Helmer would put forth in his wonderful book, Seven Powers, counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And what I would put forth here is, I think, and I haven't rigorously looked at each one, I think Standard Oil at various points in its first 20, 25 years of existence exerted every single one of these, but the domineering one, the one that enabled them to do everything that they did was scale economies.

• 1:49:41David Rosenthal?

  No argument from me on scale economies being the most important one here. I mean, literally that was all the machinations with the competitors, with getting the volume in the Lake Shore deal, with doing the deals with the railroads. It was all about economies of scale. So for sure. What's your thought on counter positioning?

• 1:49:59Ben Gilbert?

  I think in being a pure play refinery that was located in a different location than the like, is there a reason that no one else should have done an offsite refinery? Because they had too much vested interest in an onsite refinery? I'm not sure.

• 1:50:14David Rosenthal?

  I'm not sure that it was, there was any reason why they couldn't. But I think all the folks who are in the producing world, like the drilling and the crude world, they were just so, it was just such a gold rush mentality that like.

• 1:50:27Ben Gilbert?

  It was not professionalized. Yeah.

• 1:50:29David Rosenthal?

  They were just chasing the quick profits and like they were distracted. They weren't thinking long term, but I, I don't think there was any reason why they couldn't have set up refining businesses in other locations.

• 1:50:40Ben Gilbert?

  The counter positioning feels a little thin.

• 1:50:42David Rosenthal?

  Yeah. All the others that like switching costs for sure. With the, all the railroad deals and then the tank cars and all that. Network economies. Yeah. I mean, they build the retail distribution with the standard cans and.

• 1:50:58Ben Gilbert?

  Actually, is that all scale economies though? Is there any network effect here where it's better for one customer that other customers exist? Does anybody ever sort of have a relationship between customers?

• 1:51:12David Rosenthal?

  That's a good question. Maybe not.

• 1:51:14Ben Gilbert?

  I mean, network economies were certainly less common in a pre-telephone era.

• 1:51:18David Rosenthal?

  Yeah, maybe not. Maybe that's more of a stretch.

• 1:51:21Ben Gilbert?

  Process power, certainly, especially over time as it got more and more complicated. Branding, I mean, they named themselves standard and then they became that.

• 1:51:29David Rosenthal?

  Yep. And then, yeah, I mean, they had lots of cornered resources.

• 1:51:34Ben Gilbert?

  Eventually they cornered the resource on all the crude in the Eastern United States. Cause they eventually actually owned all the land rights, right? To actually produce the.

• 1:51:42David Rosenthal?

  Yeah, they did eventually get into exploration and production. I think when it was, you know, it was much later. I want to say it was in the 1880s, 1890s, maybe when big oil deposits started being discovered elsewhere in America.

• 1:51:56Ben Gilbert?

  Yeah.

• 1:51:57David Rosenthal?

  And then they, they got in into that in, in bigger ways.

• 1:52:00Ben Gilbert?

  Fascinating. Cool. Moving to playbook.

• 1:52:03David Rosenthal?

  Let's do it.

• 1:52:04Ben Gilbert?

  So I have one playbook theme that we didn't touch enough the rest of the episode. And I have sort of a long quote, and this is in particular around the period where there's a lot of fluctuation in prices, there's a race to the bottom, lots of people going out of business. And this is sort of Rockefeller talking about how they're going to weather the storm and, you know, swallow everyone else up. What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he borrowed heavily to build gigantic plants so that he could drastically slash his unit costs. Even his first partner, Maurice Clarke, remembered that the volume of trade was always what he regarded as paramount importance. Early on, Rockefeller realized that the capital

• 1:52:46Ben Gilbert?

  intensive refining business, in this business, sheer size mattered greatly because it translated into economies of scale. Once describing the foundation principle of Standard Oil, he said it was the theory of the originators, the larger the volume, the larger the opportunities for the economies, and consequently, the better the opportunities for giving the public a cheaper product without the dreadful competition of the late 60s ruining the business. During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from the gospel of industrial efficiency. There's so much tied up here, but one of them is, this is kind of the first venture

• 1:53:30Ben Gilbert?

  capital business. Like, we talked a lot on the TSMC episode about these massive fixed costs. I mean, they're investing $100 million in fabs over the next three years. And then it's all a volume game. Like, how much can you get the plants at full capacity as fast as possible? Because the unit costs can be super small, because your, your variable costs are super low, but it's all about that gigantic capital investment of the fixed costs.

• 1:53:55David Rosenthal?

  I love it. There's the TSMC payoff. I love it.

• 1:53:59Ben Gilbert?

  Two hours later.

• 1:54:00David Rosenthal?

  You know, the other thing that, that I was just thinking the whole time as you were reading that quote was Andreessen, Marc Andreessen, strength leads to strength, right? This is the original strength leads to strength business.

• 1:54:12Ben Gilbert?

  Totally. And this is him justifying rolling up all these other producers where he's basically like, look, the best thing for consumers is to run as much consumer demand through one capital structure as possible, so we can just absorb all the fixed costs and then make the variable costs as low as possible.

• 1:54:30David Rosenthal?

  It'd be fun to think about, we're on such a kick here with these like types of businesses. Is there ever a kind of business or industry where like not scale economies per se, but this broader maximum of strength leads to strength? Is that ever not the case?

• 1:54:46Ben Gilbert?

  It's always the case, I think, but it's like in varying strokes, especially where industries where there's not fixed costs or where there's low fixed costs. Like think about a restaurant business. Assuming that you don't own the building and you're leasing everything and you even lease the equipment, then you're like, geez, what is really the, you know, the capex? You're kind of just like at the whim of can you produce a better product and get a little bit more margin than your, you know, the person down the street?

• 1:55:11David Rosenthal?

  Maybe this is kind of similar to, it also would apply to the restaurant business. Like any time where if you're competing on like the highest end of quality, like I'm thinking like a fine dining restaurant, that's a kid where strength might lead to strength in terms of its brand. But if it were to like raise a bunch of capital, expand, go have a, you know, a bunch more restaurants.

• 1:55:34Ben Gilbert?

  Oh, if your value is scarcity, then yeah, it's value destructive.

• 1:55:37David Rosenthal?

  Yeah. Okay. That's a case where strength wouldn't lead to strength in the same way. But so many venture capital businesses and businesses that scale as large as we're talking about in the last few episodes, we've been talking about like the largest businesses the world has ever known. Yeah, it's amazing how this dynamic applies.

• 1:55:59Ben Gilbert?

  Totally. Well, for grading on this one, listeners, we are going to combine value creation, value capture and grading. We already talked a lot about the component of this value creation section where how does the value created for the world compare to value destruction? I think we've talked a lot about that in this episode, but we haven't spent a lot of time on like, How does the value that Standard Oil created compare to the value that they captured for themselves, which I think is sort of the interesting one to look at here. And like a terrible example is Wikipedia, where there's no company that creates any more value in the world, but captures so little of it. Whereas you look at a Google and they create a lot of value, but they're enormously profitable based on it. And so some interesting numbers

• 1:56:44Ben Gilbert?

  with Standard Oil. So we know that they were responsible for this sort of like kerosene boom in the United States and the world. And I think let's save the gas car conversation for the next episode. And I absolutely want to have a conversation around climate. And I think we should save that for the next episode, too. But in this one, let's just look at the shape of the business by this period of time. So Standard Oil in the mid 1880s employed 100,000 people, which that's probably the first time a company ever employed 100,000 people. Governments probably did, but did corporations?

• 1:57:21David Rosenthal?

  It'd be hard to imagine, especially in a world where there are only 30 million people in the United States.

• 1:57:27Ben Gilbert?

  Totally. They had dividends of between 50 and 200% to all shareholders per year, which of course were private shareholders. It was mostly Rockefeller and his partners.

• 1:57:36David Rosenthal?

  I just want to underline that again. That's bawling out of control.

• 1:57:40Ben Gilbert?

  That's a very, very profitable business.

• 1:57:42David Rosenthal?

  Oh my God. The amount of capital invested in the business, literally anywhere from half to two times that, being divvended out to shareholders every single year while you continue investing capital and growing.

• 1:57:58Ben Gilbert?

  Ball so hard.

• 1:58:00David Rosenthal?

  They want to find you.

• 1:58:02Ben Gilbert?

  Yep. And then the last thing I want to throw out is this period between 1890, where we're ending this episode to 1900, they grew tremendously. So they had annual earnings where we're leaving the story off of somewhere between 10 and 20 million dollars, which Inflation adjusted is like a 30x. So it's really like 3 to 500 million in terms of the amount of earnings profit that they were generating per year in today's dollars. By 1900, they 6x'd that. So over a decade, they actually grew tremendously. So it sort of depends whether we're thinking about the business in this 10 to 20 million dollar era, or in the like 60 plus million dollar era, you know, by the turn of the century.

• 1:58:43Ben Gilbert?

  But I think that gives you a good shape of like, this is a business that was spitting off cash, David, the way that you were just describing for us, that employed 100,000 people that kept America and Europe's lights on. And because it's been so long since this happened, we don't have like SEC filings telling us, here's literally the amount of value they were able to capture versus create. But I think the way I would sort of look at this one and talk about this is, you can tell from the business practices that we've harped on this entire episode, that every time they created value, they looked around to capture every single scrap of it that they possibly could, rather than let

• 1:59:27Ben Gilbert?

  consumer surplus exist, or their competitors participate in the upside that they were creating, or partners.

• 1:59:35David Rosenthal?

  Well, and I think even the numbers that we have scant data such as it is, again, wish we had PitchBook back in the day. But the numbers that we have, I think are also misleading. They do seem a little small. You're like, wait a minute, you guys are talking about how this is a business on the scale that no other business in America has ever been before. But inflation adjusted, you know, even in by 1900, you're talking about a few billion dollars of cash flow that's dwarfed by companies today. But I don't think these numbers tell the whole story, because so much of the capital in this business was

• 2:00:17David Rosenthal?

  A, being recycled, and B, not accounted for because of the crazy decentralized trust structure.

• 2:00:25David Rosenthal?

  We'll talk about this much more in the next episode, but when it ultimately gets broken up, you know, you said at the top of the show, the children companies that come out of Standard Oil, Exxon, Mobil, Chevron, the bulk of BP, British Petroleum now, like Amco, like all of these companies, you know, it wasn't until the rise of the Fang era in the last 10 to 15 years, before that Exxon Mobil was by far the largest market cap company in the world. And that was just one of the children that came out of this company. The value that was tied up here was immense.

• 2:00:58Ben Gilbert?

  That's a much better way to look at it. You're right. I also think inflation adjusting these things is probably the wrong way to look at it. I was thinking about this more in the context of Rockefeller's personal wealth, which we'll dissect in depth on the next installment here. But sure, you can inflation adjust wealth and you can inflation adjust profits, but really what you should be doing is looking at them as a percentage of the GDP at that time.

• 2:01:23David Rosenthal?

  Right.

• 2:01:24Ben Gilbert?

  And so like, let's look at 1900. So Standard Oil in 1900 produced $60 million in earnings. And rather than inflation adjust that, let's look at it relative to the total GDP, which was $24 billion. Okay. So $60 million divided by $24 billion. So 0.25% of the entire country's GDP is Standard Oil's profits. And I suppose GDP really would be based on revenue. So, you know, assuming they had, I don't know, 33% operating margins.

• 2:02:07Ben Gilbert?

  I'm kind of pulling a number out of thin air, but that feels reasonable.

• 2:02:11David Rosenthal?

  Well, I don't know how they're defining profits here. I don't think this is GAAP account. GAAP accounting doesn't even exist at this point in time. That might be the dividend, the annual dividend.

• 2:02:20Ben Gilbert?

  Oh, the earnings being the...

• 2:02:21David Rosenthal?

  Yeah.

• 2:02:22Ben Gilbert?

  No, the dividend, because the data source we pulled this from had dividends differently. Let's assume that Standard Oil's revenue represented something like 1% of America's GDP, probably a little bit shy, but something like that. That I think is the right way to frame the amount of money that was flowing through this one company at the time.

• 2:02:40David Rosenthal?

  Yeah. Wow.

• 2:02:43David Rosenthal?

  That is a significant scale.

• 2:02:45Ben Gilbert?

  Yep.

• 2:02:46David Rosenthal?

  So I think the question is that, you know, that we wanted to ask on grading is like, standard oil becoming a monopoly in this way versus if the industry were to have played out with unfettered individual competition.

• 2:03:01Ben Gilbert?

  Which of course is a counterfactual that we have no idea, but how can we get a sense of what the shape of that could have looked like?

• 2:03:06David Rosenthal?

  You know, it's interesting. This really like, this makes me think about China and what's going on in China right now. You know, I think the Chinese political economic philosophy is really aligned with the standard oil view of the world, right? Which is that like unfettered competition is fine in the early days of an industry, but then you got to come in and you gotta like consolidate it. You can consolidate it through the government's hand in the case of China. In this case, it was through Rockefeller's hand, but that's what you need to enter a phase of maturity in an industry. And as we were just saying, you know, Rockefeller's argument is like, all of this was good for consumers. This was great for consumers. This was great for America.

• 2:03:51Ben Gilbert?

  It's like in the most recent Amazon letter to shareholders when Jeff Bezos calculates the amount of consumer surplus. He's like, if you look how much Amazon shareholders have profited on us existing, Amazon employees have profited and Amazon customers, it's by far the customers who have won.

• 2:04:10David Rosenthal?

  Yes. Ah, so good. Bezos, student of history.

• 2:04:16Ben Gilbert?

  But yeah, Rockefeller is making the same point here. I think it's really interesting.

• 2:04:20David Rosenthal?

  Yeah. Well, again, counterfactual, impossible to know, but there is definitely a world where the kerosene industry doesn't develop in anywhere near the same scale or impact or size.

• 2:04:32Ben Gilbert?

  I'm going to throw this out there and say, I think the world would end up no different of a place. I think it would have been totally net even. And the only difference would be that the, you know, Rockefeller family foundation wouldn't be as large. I think, give or take a few years, I think the whole thing would have played out pretty similarly. We would have ended up in the same sort of major players in the oil world that we have today.

• 2:04:54David Rosenthal?

  Yep. And maybe.

• 2:04:57David Rosenthal?

  All of the, the Standard Oil children, the Exons, the Mobils, the Chevrons, et cetera, would have developed anyway.

• 2:05:05Ben Gilbert?

  That could have been independent Cleveland refiner, you know, growing on their own and not being a part of Standard Oil and then having to get spun out.

• 2:05:12David Rosenthal?

  That's a really good point. I mean, Rockefeller was a genius in so many levels. He brought the like Morris Chang level of thought and discipline to the business. But eventually other people would have done that, too.

• 2:05:25Ben Gilbert?

  Yep. I mean, it might've been a little more annoying where like you had to get those two types of kerosene sitting next to each other on the shelf and you had to go make sure to buy the compatible one for whatever apparatus lamp you had at home. And that would have been a slight bummer. I don't know. I think Rockefeller made a lot of arguments that served his purpose. And as fun as it is to sort of imagine and sort of theory craft why he was right and how that would have played out, I think net-net, we would have consumed about the same amount of oil between then and now. Consumers would have spent about the same amount of money on oil between then and now, and we would have about the same number of players we have today.

• 2:06:02David Rosenthal?

  So let's see if I can translate right. It sounds like you're arguing for like a grade of like a C, like a passing grade.

• 2:06:09Ben Gilbert?

  Oh, well, it depends what we're grading. Like in terms of creating a bunch of value and capturing as much as he possibly could, A plus.

• 2:06:17David Rosenthal?

  Right, right, right. In terms of the grade of like the development of this industry in America, as it did versus a non-standard oil path.

• 2:06:27Ben Gilbert?

  Yeah, I guess that is what I'm arguing. What do you think?

• 2:06:30David Rosenthal?

  I'm not feeling strongly any different way. I think that's a really good argument. You know, it's funny. I feel like if Peter Thiel were here as a guest with us, he would be vehemently arguing the opposite that, you know, it's the zero to ones. It's the like, yes, anybody could have done this. Yes, you know, other people might have, but like Rockefeller did it. And in the absence of somebody doing it, then it might not have happened.

• 2:06:56Ben Gilbert?

  And without all this standardization in the oil industry, then we wouldn't have had all the unbelievable lifestyle upgrades that we've all had over the last 150 years because of the advent of unified oil ecosystem.

• 2:07:11David Rosenthal?

  Yeah, like you like your electric cars and Teslas and the like. Well, you know, no kerosene back in the day, no gasoline thereafter, you know, we don't advance to the level of technology and development that we're at now.

• 2:07:25Ben Gilbert?

  Oh, like if the car was much more inconvenient to drive or that waited another 30 years to develop, I mean, then like there's a zillion knock on effects of America doesn't innovate in all sorts of other ways and people don't have a lot of other products that we all take for granted in our lives now.

• 2:07:43David Rosenthal?

  Yep. All right. So I think my answer, I don't have a strong point of view. I think I'm going to go a notch higher than you to a B, just because I really do see both sides here. One side being the argument that like this all would have happened the same way anyway. And the other side being, yeah, but like you need Rockefeller, like no Rockefeller doesn't happen. Mostly though, the other reason I'm going to go with B is I just really love telling this story.

• 2:08:10Ben Gilbert?

  Well, that, that I could tell, that I could tell.

• 2:08:14David Rosenthal?

  All right.

• 2:08:15Ben Gilbert?

  Carve outs?

• 2:08:16David Rosenthal?

  Carve outs. Let's do it.

• 2:08:18Ben Gilbert?

  Two for me, both are related. The first more related than the second. The first one is the movie There Will Be Blood with Daniel Day-Lewis. If you are jonesing for some good old fashioned, extremely violent, early oil days, I think it's like, I mean, I wasn't there, so I have no idea, but unbelievable articulation of what it would be like to go and prospect an oil field and the risks involved in that and the personalities involved in that and the deception and the, the way that rogue entrepreneurs were organizing labor and capital to make these things happen. I saw the movie maybe six months ago, but I, I thought about it so many times, especially in regards to like Titus Phil and some of those in.

• 2:08:59Ben Gilbert?

  In researching this. And my second is only tangentially related because it is actually about a gold rush, not the oil rush, but the TV show Deadwood with Timothy

• 2:09:09David Rosenthal?

  Ah, I've heard that that's very good.

• 2:09:12Ben Gilbert?

  It's excellent. I am one of three seasons in right now. I just finished the first season. It's so good. The characters are so compelling. The acting's great. I actually got tipped to it when I was doing the research for the Andreessen Horowitz episode. Mark, I think, mentioned that it was his favorite TV show. And so I was like, I should check that out if it's Mark Andreessen's favorite TV show. And sure enough, it's awesome.

• 2:09:34David Rosenthal?

  It used to be the halt and catch fire show.

• 2:09:37Ben Gilbert?

  Oh, really? Which is also great.

• 2:09:39David Rosenthal?

  Yeah, he talks. I've never seen it, but which, I mean, given what we do here, I need to watch it.

• 2:09:43Ben Gilbert?

  You do. So go watch Deadwood. It's awesome.

• 2:09:47David Rosenthal?

  Nice. Love it. And there will be blood. I've never seen it. I'm like so living under a rock.

• 2:09:52Ben Gilbert?

  Oh, man. You need to see that and Gangs of New York.

• 2:09:54David Rosenthal?

  Yeah, which I also have never seen. Huh. My carve out is completely unrelated. I'm sure I could think of some, the, the Standard Oil octopus tentacles reached so far that I probably could think of some connection, but I'm not going to, is the secret base YouTube channel, which is part of SB Nation, the sports news website. It's so good. And in particular, I've liked this, this channel, their work for a long time. These guys are so, they just do like irreverent histories of like sports moments and teams. In particular, they just did a seven part series on the Atlanta Falcons. It's probably like five or six hours in total.

• 2:10:38David Rosenthal?

  And it's so good. It's so funny and just like so, the whole like premise of the history is they do a lot of great graphics on the channel. So they take a visual representation of the win-loss differential for the team where like, you know, if the, the horizontal X axis is a 500 record and then going down below is losing and then going up above is a winning overall record. And basically, the whole history of the Atlanta Falcons, their wing, as they call it, because it's all losses down into the red, almost exactly mirrors the Falcons logo. And if you tilt it up on its side so that the X axis becomes vertical, it really looks like the Falcons logo.

• 2:11:23Ben Gilbert?

  Brutal.

• 2:11:23David Rosenthal?

  It's so funny, but yeah, very, very well done. Highly recommend.

• 2:11:27Ben Gilbert?

  Sorry to any Falcons fans out there.

• 2:11:29David Rosenthal?

  Oh, but it's like a love letter to Atlanta and the Falcons. Like, it's so fun. I don't think I made this my carve up, but they did one on the Mariners a year or two ago. That was equally, equally good. We'll link to that one, too. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:11:49Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:12:00David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:12:20Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:12:33David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:12:44Ben Gilbert?

  All right, well, listeners, thank you for joining us on part one of this epic journey. We are excited to take you on part two here. We are very interested in your feedback in between episodes, and I think we're going to leave ourselves enough time to make sure we have this out in the wild before recording the next one. So join us in the Slack to come talk about it. Acquired.fm/slash/Slack. Email us at [email protected] or tweet at us at @acquiredfm on Twitter. And listeners, we'll see you next time.

• 2:13:12David Rosenthal?

  We'll see you next time.

• 2:13:17Speaker 02

  Is it you, is it you, is it you? Who got the truth now? Huh?