#437 The Tycoons: Carnegie, Rockefeller, Gould & Morgan

What I learned from reading The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy by Charles R. Morris. Made possible by: Ramp: ⁠https://ramp.com⁠ AppLovin: ⁠https://applovin.com⁠ Vanta: ⁠https://vanta.com/founders⁠

• 0:00Speaker 00

  Andrew Carnegie, John D Rockefeller, Jay Gould, and JP Morgan were all in their late twenties or early thirties, all on the first rungs of their careers in the waning days of the Civil War. In an age of outsized business leaders, no others played so great a role in shaping and channeling the American boom. They forced the pace, drove the transition to ever larger scales, and imposed personal stamps on the national economy that persisted well into the 20th century. They were quite different people. Carnegie, Rockefeller, and Gold tapped into the national predilection for speed, the obsession with moving ahead, the tolerance for experimenting, to create one of history's purest laboratories of creative destruction.

• 0:45Speaker 00

  Most businessmen of the time believed in orderly markets and gentlemanly fair profits. But these three came with flaming swords. That's a great line. Morgan was the regulator, always on the side of reining in what he called "ruminous competition", most especially of the kind regularly unleashed by the other three. The American steel industry was settling into a comfortable cartel when Carnegie commenced his career of disruption. Carnegie's plants were always the biggest, the most automated, the most focused on pushing prices down. He had the simplest of business mantras: cut costs, take share, gain, scale. Profits would take care of themselves.

• 1:28Speaker 00

  Jay Gould was a provocateur, a master of public security markets as no one before him and few since, always attacking, always pushing the possible to precarious new heights. Gold's arena was railroads and the telegraph, the critical infrastructure of his period. Rockefeller may have been the greatest visionary and the supreme manager. He took over world oil markets so quickly that it was over before most people noticed. He taught the world its first lesson in the power of large-scale distribution. These four are the founding fathers of the American industrial superpower. That was an excerpt from the preface of the book that I'm going to talk to you about today,

• 2:11Speaker 00

  which is "The Tycoons: How Andrew Carnegie, John D Rockefeller, Jay Gould, and JP Morgan Invented the American Super Economy." And this book was written by Charles R. Morris. So originally, when I picked up this book, I thought I was going to read a biography about four tycoons. What the book is really about is using the life and career of these four tycoons to explain this massive expansion and growth in the American economy that occurred after the Civil War. And then the author makes the case that these four tycoons played a role in building out the economy on which all modern businesses actually rest. And so, I want to, he has a few good quotes here, right before Lincoln dies. And it really sets up the difference between, when I think about like where this story

• 2:56Speaker 00

  is, like the difference between like almost like a startup and like an incumbent. America at the time is obviously younger, hungrier, way less money than most of Europe. And Abraham Lincoln talks about the difference in the mindset that Americans had at this point. Obviously, all four of the people that we're going to talk about today had this mindset as well. And it really reminds me of this, one of my favorite maxims, which is that belief comes before ability. And so Abraham Lincoln says, "We here in America think we discover and invent and improve faster than any European nation." So they do a good job of contrasting throughout the book, the way that Americans were thinking about building their economy, creating and inventing new technology, building companies, compared to their counterparts in Europe. And so, what he does, what the author does here, is throughout this entire book, you

• 3:39Speaker 00

  know, he kind of weaves in these stories of, again, the young version. What I love is there's pictures of the book in here of like Carnegie, JP Morgan, Rockefeller, and Gold. And I always think about them as like the older pictures that you see that they're way more prevalent online, when they were maybe 50, 60, 70 years old. And there's actually pictures in there where they're like, no, this is Carnegie when he's 30, this is Rockefeller when he was 25. So I pulled out a couple, basically what I thought was most interesting is this description, these like short descriptions of who they were as people and how they ran their business. And then the author does a great job of comparing and contrasting. You know, Carnegie built one of the most successful companies of all time, Rockefeller built one of the most successful companies of all time.

• 4:23Speaker 00

  There's some ideas that they shared, but there's also vastly different approaches. I think that's one of the most valuable things of reading the book and hopefully you getting out this episode. So we're going to jump right into Carnegie. "When Lincoln died, Andrew Carnegie was turning 30 and was already wealthy, although he'd been a factory bobbin' boy hardly a decade and a half before, and had yet to even settle in on a career. John D Rockefeller was only 26, but his Cleveland Oil Refinery was one of the largest and most profitable in the country, and he may have already formed his design of taking over the entire industry. Jay Gould was 29 and was trying his hand as a railroad turnaround specialist. JP Morgan was 28, quietly learning his trade within his father's banking network. These four would become the greatest of a generation of outsized business leaders.

• 5:05Speaker 00

  By their sheer intelligence, their ambition, and their forcefulness, they laid down the channels that other people followed. They were never friends. Carnegie, Rockefeller, and Gold personified the unlimited entrepreneurial opportunities suddenly opened by America's vast resources and its freedom from constraints of class. For the man of fierce business ambition and massive talent, it was the one place, and perhaps the one time, where he could push as far as he could possibly go. Morgan stood apart from the others. He was not only born wealthy, but he defined his career in reaction to the great entrepreneurs." So it does a great job of contrasting the difference between the financiers and the entrepreneurs, building the products, building the businesses.

• 5:46Speaker 00

  Andrew Carnegie was the most irritating of tycoons, so this is going to come up a lot. I like reading about Carnegie. I've read his autobiography, I think, twice. There's this great biography of the partnership that he had with Henry Clay Frick that's called "Meet You in Hell." I've done an episode on that. This author definitely thinks that Carnegie, well, we just called him, he was most irritating. He also would make the case that Carnegie was a compulsive liar, which he'll bring up multiple times. But this is a great overview of Carnegie and where he's at when he's rather young. So he's the most irritating of tycoons. He was a petite, five foot three. He was a tireless bundle of bouncing energy. He was quick in apprehension of anything that would advance his interests. He was as relentless in self-improvement as in everything else.

• 6:31Speaker 00

  He talks about he would read voraciously, he'd spend all his free time when he's not working, learning new skills. When he is 17, he actually starts working for this guy, I think Tom Scott. Tom Scott was one of this time period's greatest railroad executives, and Tom Scott's going to change Carnegie's life. And this is where Carnegie is learning the technology of his day, the communication technology of his day, which is telegraph, which you have to learn how to program, right? "Since Scott did so much work by telegraph, he and Carnegie shared an office, and the flow of messages allowed Carnegie almost to inhale the essence of the railroad business." It is very fascinating to think about the different path that Carnegie could have taken. He definitely took the more ambitious path, but he was already entrenched, and he's being

• 7:14Speaker 00

  mentored by one of the most successful railroad executives of all time. He could have just been building railroads or even working for them. He's promoted to the, from a relatively young age, he's promoted to be the superintendent of the Western Division. And this is where he starts, and he's not just an assistant, he's also running one of the lines. And we see a trait of his, which is, and a trait, I would argue, a trait of all of them, maybe not Morgan, but their emphasis on speed and on essentially identifying the single most important thing in the business and spending all their time essentially removing bottlenecks for this. This sounds a lot like Elon. "The core challenge for the railroad was to keep traffic flowing. Shortly after his appointment, he shocked his fellow executives by burning stalled

• 7:58Speaker 00

  cars to clear lines. It was the classic Carnegie technique: focus on an objective, then cut brutally through any conventions, competitors, or ordinary people who stood in your way. Car burning was soon a standard method for clearing stalled trains." And this is something Carnegie would do over and over again. He wasn't really concerned about the opinions of other people. If he thought something was right, he would just act on it. And again, when they describe like his, one of his techniques, one of his MOs, "Focus on objective, then cut brutally through any conventions, competitors, or ordinary people who stood in your way." By the early 1860s, Carnegie was already a rich man. In an age when conflicts of interest were routine, Scott had carefully steered him to investments in companies doing business with the Pennsylvania Railroad, which is the

• 8:41Speaker 00

  one that they're running, like a sleeping car company and a railroad bridge builder, often advancing him the purchase money to buy the stock. The core fact about Carnegie was the drive to dominate at all costs. But for some reason, although Carnegie, this is again where he talks about, it's kind of like a bundle of contradictions. I mean, I would, I would just basically say the author thinks that Carnegie was unscrupulous and that would just lie if it was in his benefit. And here's an example, for some reason, although Carnegie was among the hardest of men, he always assisted on parading as a humanitarian idealist, as if his businesses were some kind of social welfare project. So when he was the world's greatest steel magnate, he loved to issue pro-labor manifestos, even as he steadily ratcheted up the demands on his workers and cut their pay.

• 9:26Speaker 00

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• 10:08Speaker 00

  So when you're running your business on Ramp and your competitors are not, you have a massive competitive advantage that compounds over time. Ramp is the only platform designed to make your finance team faster and happier. Many of the top founders and CEOs that I know run their business on Ramp. I run my business on Ramp, and you should too. Go to ramp.com today to learn how to connect your business, save time, save money, and grow revenue. That is ramp.com. Carnegie was often pointlessly cruel, even to his most loyal associates. There's a reason why one of the biographies written about Carnegie is called "Meet You in Hell." It's Henry Clay Frick that was his partner, that in many cases, I would argue, is actually the managerial genius behind Carnegie Steel.

• 10:51Speaker 00

  That "Meet You in Hell" is because Frick felt Carnegie screwed him over, and that's one of the last things he ever said to him. He manipulated his underlings shamelessly, harping obsessively on their smallest failures and taking the credits for their every success. When Henry Frick retired, Frick, who had contributed as much to anyone as building his empire, Carnegie applied all of his trademark energy and obsessiveness to cheat him of his stake. Over a long career, the only fellow tycoon who fully matched up with Carnegie in a business setting was the man that he liked to call Rockefeller. And so then we go into a short overview of the early days of Rockefeller's career. Obviously, I think he's one of the most important. If you could only study one person from business history, right? I'm talking 100, 200 years in the past, I would definitely pick Rockefeller.

• 11:35Speaker 00

  I've done, I don't know, 10 episodes on him. So it talks about Rockefeller running his first refinery. For the first time, Rockefeller could demonstrate his extraordinary ability to combine headlong expansion with fanatical attention to efficiency and cost. Under Rockefeller's management, still talking about the refinery, it was also the most consistently profitable. A few traits of Rockefeller pop out. He wanted to be in control. He's got these partners. He has an idea. He's like, hey, we're going to take on debt. We're going to rapidly expand. He wants to impose organization on this chaotic industry, which is the early days of the oil industry. And so it gives like this brief overview of Rockefeller essentially breaking up with his partners and then outmaneuvering them. As the frictions grew, the Clarks made frequent threats to dissolve the partnership.

• 12:17Speaker 00

  On what such occasion, Rockefeller disingenuously asked them if they really meant it, which they confirmed. The next day, to their shock, they read a notice of dissolution in the local newspaper. They were doubly shocked to find that Andrews had thrown in his lot with Rockefeller as one of their other partners. And then, after they had agreed to an auction to settle the ownership of the refinery, were again shocked to find themselves coolly outbid by the 25-year-old Rockefeller. So this is one of the craziest things. Bidding for this oil refinery hit $72,000. Once it hit that, they're like, this is too much money. Rockefeller is probably the greatest manager, business manager of all time. When I had dinner with Charlie Munger, I asked him who he thought was the greatest entrepreneur of all time. Obviously, it's a question near and dear to my heart. I think he knew more about business history than anybody else I've ever met. And he says, it was obviously Rockefeller. That's what Munger said.

• 13:01Speaker 00

  And here's a great example. So his partner's like, oh, it's $72,000. That's too much. I'm not a, like, here, you can have it. The next year, that refinery had total sales of $1.2 million. This is in the 1860s. This is insane. From the very start of his business career, he took enormous risks, but so calmly and matter-of-factly as to make them seem perfectly ordinary. Even during his first years in refining, the characteristic Rockefeller methods were on full display. Move with shocking speed and minimum fanfare. Act with total confidence, but turn on a dime if new facts warrant. March in service of a sweeping vision, but pay obsessive attention to details.

• 13:43Speaker 00

  Although he often played, this is just great writing. This next paragraph is excellent. And then it gives you really good insight into Rockefeller. Although he often played very rough, he was surprisingly free of vindictiveness. When he took over another man's business, he genuinely paid a fair price. Indeed, he often overpaid. A typical ploy was to open his books to the target. Any sensible man would understand that competition was hopeless and make a deal. If a target was especially stubborn, rejecting all reasonable offers, a switch would finally turn and Rockefeller would suddenly unleash total blazing warfare on every front. Price, supplies, access to transportation, land use permits, whatever created pain.

• 14:25Speaker 00

  When the target capitulated, and they always did, the fair price offer would still be available, often with an offer to join the Rockefeller team. It was industrial conquest on the efficiency principle. He was simply better at the business than anyone else. That is just incredible overview. And so then we go to Jay Gould. I've read, I think, two biographies of Jay Gould. I would say out of everybody, maybe everybody I studied on the podcast, he's the one that I understand the least on how he actually did what he did. And so here's a couple, like, other people that were working with him and against him, talking about him, says, of the robber barons, none had as a dark reputation as Jay Gould. One of his competitors said that Jay Gould's touch is of death.

• 15:07Speaker 00

  JP Morgan, who in his early career was also outmaneuvered by Gold, was always torn between keeping him at a wary distance and chasing after his business. And so I don't think, can't think of a single example where somebody else got a better, got the better end of Jay Gould. Talks about, he did this with Rockefeller, he did this with JP Morgan, he did this with Daniel Drew, it just happens over and over again. Oh, Gold had one of the supplest business minds of his, of his or any H. His career coincided with the great epoch of American railroads. This, why is that important? Because the, these businesses were the first large investor-finance publicly traded corporations ever. And why did that create an opportunity for financiers or for? He also operated businesses, maybe like a stock manipulator.

• 15:51Speaker 00

  I don't even know how you would describe him, because he's not a financier like a JP Morgan was, but finance was his weapon. And stock was his weapon. But the reason the railroads created this opportunity for him is, one, it's pretty wild how big railroads got. I think at one point, they were 80% of the entire market cap of the stock that one industry, that one industry was. But this sentence describes why. The railroad's thirst for capital was insatiable. This was the playing field Gold was born for. His subtle intelligence could flicker through every crevassing corner of the most convoluted financial constructions and divine exactly the points of leverage, the strategic positions that could make him, by a few purchases, master of the entire enterprise. This is why it's so confusing what he did. And then he'd also do what Rockefeller did.

• 16:33Speaker 00

  He would, like, hide his maneuvers, so you wouldn't know what he was buying. In many cases, he did the same thing Rockefeller did. He had this secret ownership of companies, which we'll get to later. It is very, very confusing, but also really surprising, because there's nobody else, no other robber baron came from where he came from. Because, you know, JP Morgan came from a very rich family, essentially inherited this giant merchant bank. But Jay Gould, you know, was essentially like abandoned by his dad. So the weapon he used to build his wealth was understanding financial markets, I guess is what I'm trying to tell you. Railroads became the center of Gold's interests early in his career, and more than anyone else, he created the national railroad map that prevails to this day. Gold had a strange streak of self-destructiveness.

• 17:15Speaker 00

  More than once, after a string of victories had left him in possession of the field, he would launch some new, seemingly pointless depredation that laid waste to everything he'd worked for, as if launching stock wars was simply what he did. He was a superb financial engineer, took a close interest in operational details, and usually outstrategized his competitors. Gold was barely five feet tall, even smaller than Carnegie. Burning ambition more than made up for Jay's lack of physical strength. He was essentially on his own from age 13, when his father registered him in a high school in a neighboring town and left him with a pile of clothes and 50 cents. And then we have another paragraph that just gives this great overview of how he worked.

• 17:59Speaker 00

  This event highlighted the characteristics Gold would display his entire career. The ability to tackle any endeavor, master any field, and despite his frail constitution to work all the time. The constant pushing against boundaries and restraints. The impulse to expand in every direction at once. That idea right there, the impulse to expand in every direction at once, is something that's repeated over and over again throughout the book, this book and the biographies of Jay Gold. It's very important to understand. Sometimes beyond all reason. The unfortunate habit of leaving a trail of dazed and battered partners in his wake and the sharp reading of legal documents. One scholar has called him probably the most successful litigant in American history.

• 18:40Speaker 00

  Most extraordinary was Gold's ability to sustain reverses that would crush another man than to pull himself off the floor and carry on. Learning more, working harder, never complaining, just looking for his next chance. And then we go into a brief overview of JP Morgan. On this page, there just happens to be these four pictures of these young tycoons when they were young. I have to say, out of all four of them, JP Morgan's the one that aged terribly. He was a handsome young man. I don't know what happened when he got older. Says, JP Morgan was already an experienced banker at the time of Lincoln's death. Few young men had been as carefully brought up for their trade. So I read this book, I think it's like a, probably a 600, 700-page history of the Morgan family. I think it's called The House of Morgan, if I remember correctly.

• 19:24Speaker 00

  And, you know, most people focus on JP Morgan, he's by far the most famous member of his family. But I actually thought his dad, Junius, was the, by far the more impressive man. And so when they say, you know, no one's ever been brought up, carefully brought up to their trade as JP Morgan, means the tutelage and the mentorship from his father, Junius. JP had Junius's flair for numbers and loved to spend his school vacations working in the counting house as bank, that's, counting house is just the back office of a bank. But he also had a raffish streak with an eye for the ladies and an appetite for risk that occasionally alarmed the very button-down Junius. JP was clearly well-prepared. He was endowed with a powerful intellect, great financial insight, and enormous personal forcefulness. In fact, they call him Jupiter.

• 20:08Speaker 00

  Later in his nickname was Jupiter because like the gravitational, essentially like the largest gravitational force in the entire finance industry. He was praised for conducting a first-rate business, and one of his mottos was that gentlemen pay their debts. Morgan's genius was that of the disciplinarian, not of the creator. He was the last of the great 18th and 19th century merchant bankers, rather than the pioneer of a new dispensation. He did what his father and other bankers had always done, but in broader strokes and on a bigger canvas. His fundamental drive was towards order and control, and he was appalled by the storm of creative destruction at the heart of this long American boom. He detested, and this is a direct quote from him, bitter destructive competition that

• 20:51Speaker 00

  always led to demoralization and ruin. Carnegie, Rockefeller, Gould, and Morgan would have risen to the top in any age, but in post-Soviet War America, business had acquired the sense of excitement and purpose that men had once associated with great feats of statecraft or conquest. And so then throughout the book, they also discuss a bunch of other businesses and entrepreneurs and inventors and engineers. I skipped, I'm gonna skip over most of them. I want to focus just on the main four to be like the center of our discussion. But I think this is really important because again, when I'm reading something about like the 1800s or the railroads, I'm not thinking about that. It's like, well, how does this echo the time that you and I are in?

• 21:31Speaker 00

  And so it makes a sense of like, if you were a classic nerd or a technology geek, okay? At this point, that means then you were then a machine geek, and your version of inventing new technology would usually try to automate some kind of like physical aspect of labor. So in one case, there's a guy who's growing up on a farm, says told to clear a field of stones. He was apt to mumble that it was a proper job for a machine and spent his time designing one instead of digging up stones. The most talented young men perceived that a flair for machinery could be a fast track to financial independence. So it's like really interesting. It's like, if I'm alive today, I'm a young man, young man or woman, I'm ambitious. What is that version for me? Like, what would I want to focus on?

• 22:14Speaker 00

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• 24:23Speaker 00

  And so again, it goes back to what was happening in Europe at the time and contrasting it with America, that America was embracing new technology, trying to invent new things, and Europe in large part was trying to stop the technological progress. Obviously, it's futile. And so then we have a quote from somebody that's now working in America that had previously worked in England. Alfred Hobbes had experienced manufacturing in England and was convinced that British workmen were a major productivity obstacle. Here's a direct quote from Alfred Hobbes. "In America, they might set to work to invent machines, and all the workmen in the establishment would, if possible, lend a helping hand. But in England, it was quite the reverse. If the workmen could do anything to make the machine go wrong, they would do it." There really does seem to have been a culture of invention in America.

• 25:07Speaker 00

  There were hundreds of water-powered sawmills in Massachusetts by the end of the 18th century, when they were still relatively rare in England. Why? In part, because of opposition from the sawyers, the British woodcutting trade. Sawyers, that's the people working in the woodcutting trade, that's what they're called, sawyers actually burnt down the new sawmills in 1825. And so then as the book progresses through time, the author does a great job of weaving in these little vignettes or anecdotes about all the four tycoons. So there's a great chapter, it's called Bandit Capitalism, which I thought was a funny line. It starts talking about what Jay Gould was doing, and it says, "The greedy moneyed classes were irresistibly drawn to Wall Street in the 1870s." That is where Jay is setting up shop.

• 25:50Speaker 00

  And this is an incredible line to think about Jay Gould. "And to a clever young trader like Gold, they looked like so many sheep lined up to the horizon, asking to be sheared." And so then it gives a brief overview of this war that Jay Gould is engaged in, him and his partner, Jim Fisk, with Cornelius Vanderbilt. Keep in mind, at this time, Jay's in his early 30s, Vanderbilt's probably in his 70s. Vanderbilt is probably the most famous and definitely the wealthiest person in America. And again, Jay Gould just never backed down from anybody. They're fighting over control of the Erie Railroad. And it says, "Golden Fisk had been forced to repair to the rigors of Jersey City Hotel because they were in the process of extracting one of the country's largest railroads and biggest companies from Cornelius Vanderbilt."

• 26:34Speaker 00

  So the reason they had to, one of the reasons they fled New York and were on the lam in Jersey, is because when Cornelius Vanderbilt would have a business dispute, he would not, you know, resort to just business tactics, he would not just sue you. He literally set hitmen. He put prices on Jay Gould and Jim Fisk's head. That is not an exaggeration. This is what he did. It says, "The episode was all the more shocking since it was masterminded by Jay Gould, still in his early 30s and a virtual unknown on Wall Street, while Vanderbilt was the richest and arguably the most powerful man in the country with long experience of financial markets. Still, it was Gold who would emerge with the prize. Of our four fledgling tycoons, Jay Gould and John D. Rockefeller were the first to make

• 27:17Speaker 00

  their presence felt in the years immediately after the war." And so I just want to give you an insight into this, like, they said the supple mind of Jay Gould. So basically, like, when they're competing, let's say Vanderbilt owns a railroad and Jay Gould owns a railroad, to steal traffic and to try to economically hurt one railroad, you drop the prices, right? And some people might drop by 10%, 50%. Cornelius Vanderbilt would drop it down to like a penny. And then you see Jay would like constantly respond to like what was actually going on on the board. And it says, "Once during an eerie and New York central price war on cattle shipping, Vanderbilt slashed rates to an absurd penny a head." So a penny for every piece of cattle, head of cattle, right? And he was laughing victoriously as his trains filled up with steers until he discovered

• 28:01Speaker 00

  that Jay Gould had cornered the cattle market and were making a fortune from his shipping losses. And so that's a great example of this like supple, dynamic mind that Jay Gould had. And also, another difference of him is a lot of people, there was like a lot of financial shenanigans in like financing railroads. They would water the stock, they would do hostile takeovers, but many of the people engaged in that kind of stuff did not actually want to run the business. Jay Gould wanted to run the railroads. So it says, "Jay Gould was actually interested in running the Erie. More importantly, he had a strategy. Even in its gravely wounded state, the Erie was the platform he needed to set about teaching the rest of the northeastern roads, including Vanderbilt's, what their business was really about. The economics of railroads are the same as for airlines, and Jay Gould grasped that more

• 28:46Speaker 00

  quickly and clearly than anyone else." Gold decided to go after all four western legs of the railroad at the same time. So it goes back to the idea that his MO was like, you know, such a total warfare in every direction, all at once, at the same time. And he's, what he understands is like, if I need to own more of this to have more control, to have more efficiency. You have all these like smaller jurisdictions, the ownership is broken up, they may only be able to serve like a tiny part of the country, and so he's going after every single thing. And it compares and contrasts that a strategy that might have worked a few years ago might be the exact wrong strategy you need to use today. This paragraph will hopefully make that clear. "Strikingly, although their western connections were crucial for both the Pennsylvania and

• 29:30Speaker 00

  the New York Central Railroad, neither had taken any steps to defend them." This is what Jay's going after. "The Pennsylvania had actually been divesting its ownership interest in its western connections. Gold's strategy is exactly the opposite. If I own all of them, I will be in a much more powerful position." And he thought it was the only way he would survive. Its executives prided themselves, still talking about the people, instead of owning what is going to be more valuable and going deeper, they're actually selling, which again, Jay's, you're going to prove is the exact wrong strategy at this point. And it talks about why the, the people outside had the wrong strategy. Its executives prided themselves on keeping debt low, extending lines cautiously and conserving cash. In the pre-J Gold days, this was the epitome of good management.

• 30:12Speaker 00

  The railroad bosses were like peacetime generals who would keep the troops fed and the equipment working. But they didn't have a clue about strategic maneuver or positional advantage like J Gold did. And then a few pages later, it shows how Rockefeller had a lot of these same ideas. Just, uh, hyper competence, ruthless efficiency and, and operational excellence is the way to think about this page. Rockefeller pressed on every front to reduce costs, cut waste and sell more byproducts. No opportunity to pick up a nickel of margin was overlooked. Creating his own hauling operation, building his own barrel plant, purchasing his own piping supplies. He was also obsessed with control. So that makes, it was a good economic decision, but it also was completely in line with his personality.

• 30:53Speaker 00

  Even the most anti-Rockefeller muckrakers conceded the high quality of operations at Standard Oil. Rockefeller also may have been unique among our executives for his understanding of distribution. Kerosene, again, this is what the oil industry is, is at the time in Rockefeller's career. This is before the, the invention of the mass-produced automobile. So kerosene is used for lighting at this point. Okay. Kerosene was arguably the first global consumer product. Rockefeller pursued tightly integrated marketing and distribution operations from the earliest days, rapidly moving from contractual relationships to outright purchase and merger. His network acquisitions from the late 1860s through the first half of the 1870s included pipelines, crude gathering facilities, tank storage farms, tank loading facilities,

• 31:38Speaker 00

  domestic and overseas wholesale shipping and distribution operations and coastal assemblage and ship loading facilities. This is just, I have a weird thought that came to mind when I was reading this. Okay. So have you ever seen the movie, The Aviator? The Aviator is about Howard Hughes, right? And in that he's trying to build this plane and it's like this beautiful silver plane. I don't remember what it's called, but it has like all these like rivets. And he was just pushing his team. He's like, we don't want, we want this to, the, the fuselage, I guess is the word, to be as smooth as possible. Right? And so he would, in the, in the movie, he is literally like putting his hands over the, the fuselage. It's like, it has to be like less, like just shave these down, eliminate this drag as much as possible.

• 32:20Speaker 00

  I read this book on, on Jeff Bezos where he said, he would give that advice inside of Amazon that you have to like, essentially do exactly what, what, um, what Howard Hughes is doing, played by Leonardo DiCaprio in The Aviator to the product. Like you just, you, you take care of every, you just look at every single thing. You try to shave everything down. Bezos obviously was a lot more eloquent than, than what I was just there, but I think he hopefully gets the point. That's what I feel, not that Rockefeller did it about his product, he did that about his entire company. His entire company is so rare. The Standard was therefore the only company positioned to balance refinery output, transportation and distribution, and squeeze marginal increments at every stage. That's why he's doing it. His super, this advantage is going to compound because he knew he was going to be in this business for the rest of his life. It's going to compound decade after decade.

• 33:04Speaker 00

  There's just no way you were going to catch him once he started doing this. Since the Standard's distribution services, uh, were used by other shippers, competing refineries also contributed to the burgeoning Standard cash coffers. The accumulation of minor efficiencies at so many points gradually mashed into a crushing profitability advantage. I, I double highlighted, or excuse me, double underlined that word, that sentence is so important. I'm going to read it to you again. The accumulation of minor efficiencies at so many points gradually amassed into a crushing profitability advantage. At one point, Rockefeller purchased a fleet of wide gauge tank cars from the cash strapped Erie Railroad. Naturally, the Standard got the first dibs on the cars, paid a lower freight rate for their use,

• 33:46Speaker 00

  and collected rent when the railroads used them for other refineries. His competitors are making him stronger and harder to compete with over time. That, gee, I would not want to compete with that dude. He did this thing called the Cleveland massacre. I've covered it in way more detail on other podcasts I did about Rockefeller. I'm going to give you like, uh, just really two sentences here, I think are most important. Essentially in, you know, span of, I think a few weeks. Cause I think he consolidated such 25 or 26 refineries in Cleveland does it rapidly. Emerges on the other side of this massacre, I think is the largest refiner in the world. He's, you know, is mid twenties, but I think this, this is an important part to, to convey. And this lesson, I think is, is easy to understand.

• 34:30Speaker 00

  Most of their newly acquired businesses that Rockefeller bought were sold for scrap. As a total of 24 refineries were consolidated into six large state-of-the-art installations, designed from the outset for efficient production of the full range of oil byproducts. See how that connects with the, the previous story on Rockefeller, right? From that point, Standard Oil was a money printing machine. And then a few pages later, this is again, a really smart idea. He would overpay for control and speed. Rockefeller regarded almost all of his acquisitions as highly inefficient and made no secret that he was going to shut them down. He thought it was gracious to pay anything at all. He did so primarily to save time, for he was marching to an incessant drummer.

• 35:13Speaker 00

  The quicker and cleaner the restructuring, the faster he could move on to the next arena. He was intolerant of slowness is the way I would think about that. And then this is a great description of Rockefeller on the next page. He won because he was faster in apprehension and more deadly in execution than any of his contemporaries. And then it goes into Carnegie, which we'll talk about more later as well. He really benefited from traveling around and constantly researching for the, the newest technology, the best methods of operating, the most efficient ways, uh, to run like, uh, any kind of manufacturing. But then he obviously applied those ideas to, to manufacturing of steel. And at this time, I think he's 30, he's around 30 years old. He's, you know, relatively rich, at least on paper, but he, he's like spread thin. He's got like, you know, a bridge company.

• 35:56Speaker 00

  He's got investments in working with the railroad and he's got some stock and some other stuff. And then, you know, he thought maybe he would retire and be a gentleman like of leisure. I don't know if that would ever be the case. He seems super ambitious to me. But it's one of these trips that he's like, oh, wait, I need to mass produce steel. And he found the technology to do so when he was in England. So it says Carnegie found his new religion during a bond selling trip to England in 1872. He had visited the giant new steelworks at Burningham, and here was an industrial scale that made his heart leap. Carnegie's life plan for the next 30 years was suddenly clear. And then here's that line that I already, uh, mentioned earlier that just blew my mind. This was a time when railroads accounted for about 80% of total stock market capitalization.

• 36:41Speaker 00

  And this is just a banger line describing Angel Carnegie, John D. Rockefeller and J Gold. It says, "Most businessmen reacted with fear at the violent disruptions of the 1870s. Top of the food chain feeders saw only a world ripe with opportunity." And then the author calls Carnegie, Rockefeller and J Gold apostles of progress. And then here's a brief description of why Carnegie decided to close off every other business and focus on steel. He thought it was the biggest opportunity of his age. He says, "If you believed in America, you believed in railroads. And if you believed in railroads, you believed in steel. It was insatiable demand for steel rails by American railroads that made steel a mass production business and led to its gradual supplanting of iron for most industrial purposes."

• 37:25Speaker 00

  So essentially you could think about this as every single business is going to convert from iron to steel. Kind of reminds me what's going on in today's age where you have essentially Jensen being the Carnegie of his day. Everything's going from CPU to GPUs. Well, who are you buying the GPUs from? You're buying it from Jensen's company. Who are you buying the steel from? You're buying it from Carnegie's company. And this was the economic picture of Carnegie at this time. On paper, Carnegie was a wealthy man. His personal balance sheet showed 2.1 million in assets and a net worth of 1.7 million, but it was almost all in stock. Most of it illiquid securities in his own companies with railroad-related shares, the next largest category. His cash balance was under $5,000.

• 38:07Speaker 00

  And so maybe up until this point, the author has presented kind of a negative view on Carnegie. He's definitely worth, obviously worthy of you and I studying. At the time that he sells his steel company, JP Morgan, I think this is like 1905. Uh, I think he has the world's largest liquid, uh, fortune. I think he had like 250 million in cash in like 1905. He was obviously very good operator, very good at, uh, investing in technology, very good at recruiting top talent. He essentially aquihired Henry Clay Frick. But the, now the authors are starting to give us like some overview of why Carnegie was such a formidable individual. And why he said at the very beginning, the only person that could match Carnegie at this era was Rockefeller. Its great capital resources enabled it to keep pressure on during good times and bad. It's talking about Carnegie's steel brand.

• 38:52Speaker 00

  He always had a huge war chest, just like Rockefeller. When demand slumped, the firm with the newest equipment, which was Carnegie's, again, he insisted on investing in the newest technology every single time. And a lot of the people he was competing with were older and they didn't understand why that was important. So Carnegie's, uh, company found that its losses were, were the least of its rivals. When it had to reduce its prices so it could run the factory fully occupied. With the purchase of the Frick Coke Company, Carnegie Steel enjoyed a dominant position in Coke. And its acquisitions of vast Lake Superior ore reserves gave it a near overwhelming advantage in high-quality ore, which again, he needed coke and ore, the raw materials for his product, right? He wanted to control those sources. The company's competitive advantage appears was mostly Carnegie.

• 39:34Speaker 00

  His relentless pressure, his hounding to reduce costs, his instinct to steal any deal to keep his plants full, his insistence on always plowing back earnings into ever bigger plants, the latest equipment and the best technologies. Other companies went through cycles of rise and decline as founders got comfortable. Shareholders demanded payouts or good times allowing workers and managers to accrue a bit, as almost the entire British steel industry did after the great rail boom of the 1880s. But for 25 years, Carnegie never let up.

• 40:06Speaker 00

  Carnegie also assisted on railroad-style cost accounting, so his competitors were actually ignorant of their costs. This is something that appears in every book that you'll read about Carnegie. So he insists on railroad-style cost accounting with impressive results. His monthly reports carefully spread labor costs over each product and process, tracked all raw material inputs and percentage of waste and scrap, as well as defective manufacturers and returns, uptimes, and idling of major plant components like furnaces and converters. His other competitors literally had no idea what was going on inside their own company. Carnegie also understood the subtle absorptions of fixed costs that improved margins as production is pushed further. As he put it, "Two courses are open for a business like ours. First, stand timidly back, afraid to break the market. Second, to make up our minds

• 40:51Speaker 00

  to offer certain large customers lots of figures, which will command orders. For my part, I would run the factory full next year, even if we made but $2 per ton." Since Carnegie traveled more than anyone else in the company, he was constantly on the lookout for new technologies. He was among the best-informed people within the company on technical developments. And then here's an interesting point that is related to the fact that he would work hands-on, and then he would disappear, and he'd come back and work. He's much more like a sprinter than a grinder. Carnegie always displayed an approach avoidance relationship with his enterprises. When he had to, he could throw himself into the work, but one suspects it was a massive exercise of will, for his instinct was always to recoil from the gritty reality and from ordinary workers. He usually stayed well removed from Pittsburgh, preferring

• 41:35Speaker 00

  to manage through written reports and correspondence. In many cases, he was sending written reports and correspondence from like Scotland. "It may have made him more effective," this is the interesting point. "This may have made him more effective. By staying clear of operating responsibilities, he was free to criticize and harass without worrying about possible shortfalls in his own performance. Had he been more involved, with more to account for, he may not have been so unreasonable, so unwilling to understand how there could be a defective shipment, or a budget overrun, or an unplanned furnace downtime. He might have been easier to live with, but he would have been a less successful tycoon." And then the book also talks about the development of a bunch of other businesses. This is not really related to any of the four tycoons that you and I are speaking about, but really

• 42:17Speaker 00

  goes to show, like, the building of this transcontinental road was like one of the greatest engineering feats in human history. So, listen to this paragraph on building, this is building the Union Pacific Railroad through these mountains. "This was one of the greatest and heroic engineering feats of the age. Mules fought through blizzards to haul rails up the rocky mountains. Tunnels of extraordinary length were blasted through solid rock, and bridges flung over nearly bottomless chasms. Workers were killed by Indians, were taken by grizzlies and cougars, and died from falls or from exposure after becoming separated from their party in this trackless wilderness." And then a few pages later, we have Jay Gould's MO. "His response had been to attack

• 43:01Speaker 00

  on every front against all his competitors, all at the same time." And then we get an overview of how Jay Gould was operating at this time, when he's trying to build his presence in railroads. You're gonna see the secret ownership, like Rockefeller did with Standard Oil, but before I get there, I have this great description of somebody that had to compete against Jay Gould. It says, "Gold is a one-man power. Consults no one, advises with no one, confides in no one, has no friends, and wants none. Gold is bold." Jay Gould did not think like most railroad men. Like Carnegie and Rockefeller, he regarded pools as refuges for the weak, although useful for masking his predatory intentions. The solution for the fragmented state of the railroads was to consolidate, not to negotiate

• 43:43Speaker 00

  elaborate paper compacts. Roads that were willing to join his network would find him a fair purchaser." This sounds like Rockefeller. "Holdouts would find themselves under attack in the securities market. Since railroad's enormous capital requirements could be met only by wide distribution of securities, even the strongest roads were vulnerable. Gold chose his battles with discretion, and never engaged in pointless warfare with men as capable and as determined as himself. By 1883, Gold had become the dominant owner of, or controlling shareholder in, of literally dozens of railroads. He moved so quickly and so silently that competitors who thought they had a truce with him would be shocked

• 44:23Speaker 00

  to find themselves under siege by Gold, discovering much too late that Gold was acting for the Kansas Pacific, or the Missouri Pacific, or any number of unnamed railroads." So that's comparing Jay Gould and John D. Rockefeller. This is comparing Jay Gould and JP Morgan. Unlike JP Morgan, who built an impressive staff of senior partners to work on his railroad restructuring in the 90s, Gold did most of the work himself. Gold did the heavy lifting on strategy and analytics were all his. At the same time, he somehow stayed actively involved in the strategic management of his primary roads, restructured their finances, launched major construction and extension programs, and reassured his investors. Like Rockefeller, Jay Gould never jeopardized a good deal by trying to squeeze out the

• 45:04Speaker 00

  last penny of advantage. And then a few pages later, it describes the business that Rockefeller's building as a machine. "Rockefeller's initial targets were the most powerful and technically advanced in the industry." So he's talking about the fact that when he would do, let's say he's moving into a new territory, and wants to buy up all of his competitors' refineries, he would start with the most competent, the best of his competitors. Because if you start taking out the top two, three, four, five, by the time you get down that list, everybody just falls in line. So it says, "The most powerful and technically advanced in the industry. Their executives had each won the top dog role in an important region of the country, and were not used to taking orders. Yet they all seemed to have bought into his quiet insistence that consolidation was the path to salvation, that the Standard Oil

• 45:46Speaker 00

  would be the only entity that survived the mergers, and that he was the man to lead them. One of his targets' sons recalled that his father was invited to examine the Standard Oil's books and was astonished at its profitability. And that guy agreed to be acquired for stock. The roll-up was also managed with great stealth. An express condition of the first round of acquisitions is that they were to be kept secret. All of the acquired companies retained their management teams and their names. Each of them pursued a regional acquisition strategy in its own name, with its own stock or cash. Once the first couple of deals were done, the momentum for joining became irresistible." And then the author asks, "Did this secrecy give the Standard an unfair advantage?" "Without

• 46:26Speaker 00

  question. To Rockefeller, speed was more important than price. He reported a deal almost every other day." And then this next section, I think, is again, the core value of reading this book, because you have this constant comparing and contrasting of all these different tycoons. "Carnegie's drive to the top of the steel industry feels almost hormonal. Boundless energy, aggression, and ambition fortunately channeled into something constructive. Rockefeller's seems much more of a matter of sheer intelligence in pursuit of an ever-large scale of elegance and order. Carnegie pushed and badgered, shamelessly playing executives against each other, and too frequently crushed his best men. Rockefeller's management style, by contrast, was quiet and reasonable, even though, unlike Carnegie, he never held a majority stake

• 47:10Speaker 00

  in the Standard. If he had the final word, it was because his very talented executives believed in their hearts that he was smarter than everyone else. He always reached out for the ablest executives he could find, gave them plenty of running room and support, and kept most of them bound to him for the rest of their careers. For such an aggressive company, the relative lack of vendetta in takeover battles, and the willingness to bring former enemies into the fold are further evidence of the consistently high order of intelligence at the company's center. Rockefeller's style was not to destroy good men or good companies, but to enlist them in his cause." And then one of the main points of the book that the author is making is that these people

• 47:51Speaker 00

  did not just build massive businesses, invented new technology. They essentially created platforms for which other businesses that without their inventions could not exist. So you could think about, like, I want to talk about this, this like, quick story on P&G, Procter and Gamble, right? This is a business that could not exist without the other technology that was invented by these other tycoons. This is very interesting. So it says, "There was a lucky accident," this is Procter and Gamble now, "that happened in 1879. A worker left a soap churn on for too long, and that produced a soap that floated, which they dubbed Ivory. After risking $11,000 on an advertising campaign, P&G found themselves as one of the first blowout national consumer brands. Within a decade, they were hawking

• 48:34Speaker 00

  more than 30 brands of soap, sales had quadrupled, and they were jockeying with Colgate and Palmolive for first place in the hearts and pocketbooks of Americans. None of the Morgans, or any of the other bankers they name, who shoveled billions," this is the whole point of this section, "who shoveled billions of dollars into American railroads, and telegraphs, and steel mills, and iron and coal mines, thought about selling wrapped and scented ladies' soap. But that, it emerged, was what all the infrastructure was for. P&G used tree resin instead of animal tallow for the fatty acids in their soap. So Ivory's booming sales entailed big logging operations, wood processing and transport, steel machinery

• 49:14Speaker 00

  for soap-making, coal-fed steam generators and heating plants, and increasingly mechanized cooling, cutting, wrapping, storing, and shipping operations." Again, you never can predict what the technologies you're building is going to, how it's going to be used by others, and how it can enable businesses that could not exist without you first inventing the technology. This is incredible. "Then there were small armies of drummers to fill the order books, and legions of clerks and bookkeepers to track orders, send invoices, register payments, and monitor production, delivering low prices, greater variety, and consistent quality, as Wanamaker was promising." So then it talks about P&G. Invented this, right, on the back of all these other inventions, right?

• 49:54Speaker 00

  Then the product gets more successful, then that causes an increased demand for the raw materials that they need for the product. And then who's going to sell the product? Then you have this new invention, which has had never been invented in history before, called these department stores. So that enables, because there's this proliferation of consumer goods now, you need a place to sell this in the most efficient manner. And that's what they're talking about here. So as Wallmaker was promising, with pleasing shopping environment to boot became possible only at scale. And big retail operations entailed even bigger scales all the way back through the line. And then this is one of my favorite paragraphs tying this entire section together. They're talking about these retail businesses that are now popping up because they're serving this exploding middle class.

• 50:38Speaker 00

  They didn't all, when you're building these giant companies, it didn't just, it wasn't that they just increased and enabled mass production. They enabled mass consumption, which in turn created even more businesses. All of these businesses, again, these are the retail businesses serving the exploding middle class at this point in American history. All of these businesses operated below the radar screen of mega capitalists like JP Morgan. Their primary capital expenses were for real estate and inventory, which could be financed by traditional mortgages and bank working capital lines. But that was true only because they could externalize the cost of all the shipping infrastructure that Morgan had already paid for. And then this is a great way to think about it. It's not just the average person had more money, but that technology creates entirely

• 51:22Speaker 00

  new classes of products while radically reducing the cost of products once available only to the elite. And that brings us to the final point in the book. Again, the subtitle is how Andrew Carnegie, John D. Rockefeller, Jay Gould, and JP Morgan invented the American super economy. Now, the size and the scale of businesses had never been this large. They are almost country level in size and therefore need new ways to finance the founding of and the growth of the company. So this is on financing these new companies at this point in history. And again, it's going to relate all the way back to why Morgan was able to be so powerful. For a long time, railroads had been virtually the only businesses that raised capital on semi-public markets. A new rail line, especially in the West, had to shell out millions for track and rolling

• 52:07Speaker 00

  stock before it earned a nickel. When Rockefeller went into oil refining, by contrast, he and a few friends could swing the cost of an oil refinery by themselves and get it online and churning out profits within a few months. Almost all of his growth from that point was financed internally. Rockefeller borrowed aggressively from banks, but these were mostly cash flow loans that were quickly repaid, not long-term capital investment. Bridges and coal mines were usually financed with bonds, but investors treated them reasonably enough as railroad financings. Carnegie sold bonds through Junius Morgan to finance some of his biggest plans, but that was the exception. For the most part, Carnegie guarded his independence from investment bankers and security markets as jealously as Rockefeller did.

• 52:49Speaker 00

  JP Morgan was among the first generation of bankers whose clients were primarily private corporations instead of governments. This is the scale at which they're operating. His mediations among the tycoons were very much in the tradition of the financial and diplomatic service operated by the Rothschilds and the Barings in mid-century Europe. Despite their occasional huge profits from war finance, the great banking houses detested war. The business disruptions were simply not worth it. The lead partners were in close touch with all the main ministries of the continent and regularly called upon the royal families. And while they never exercised their near dictatorial powers of legend, they could withhold finance from rulers and occasionally even brokered trades of port or railroads to head off a fight.

• 53:31Speaker 00

  Morgan played much the same role his entire career, with the difference that he was heading off warfare among competitive, private companies. Different players, same game. And that is where I'll leave it. Highly recommend reading the book. If you buy the book using the link that's in the show notes, you'll be supporting the podcast at the same time. That is 437 books down, 1,000 to go, and I'll talk to you again soon.