The recent rise in oil prices, way up to approximately 50% of what they were in real dollars three decades ago, has led to the standard chorus of the rich corporations exploiting the poor. Production Based Prosperity: A Challenge for the Millennial Generation is devoted to this subject, the inane notion that in a production based economy, the corporations get rich by destroying the very consumers who keep them in business, and it specifically addresses the history of oil, and the part its pricing structure, a system devised by the genius, John D. Rockefeller, Sr to overcome the production based booms and busts that marked the replacement of feudal serfdom, a system of food distribution based on contribution, with a system of paychecks produced by the fruits of production based on contribution, played in our prosperity. Perhaps the only statement that carries as much anathema as contradicting the Newtonian congeries constituting Celestial Mechanics, is to present Rockefeller Sr. as he really was, a man who spent his entire life laying the groundwork for our own prosperity. Full Disclose: I have connections with the remnants of the Standard Oil Empire through my ownership of a high mileage motor vehicle that requires the use of gasoline.
This column should be considered in context with column 14-05, Making a Difference.
The nickname for John D. Rockefeller within the resource empire he created was Senior. We can understand the relationship of money to production based prosperity if we look at the problems facing a production based society as Senior saw them.
Senior grew up in Western New York in the years prior to the Civil War. Britain was the dominant world empire. She operated on the basis of mercantilism.
Mercantilism, a misapplication of the feudalistic rule of gold to production, required that Britain's trade with other nations always put more store of wealth in Britain's pocket than was left over for her trading partners. Because gold and silver were the store of wealth and were at the basis of international trade, mercantilism meant that Britain's pile of gold and silver always had to increase.
When Britain's trade is viewed in the light of her plunder-based empire, we can see why the goal of British trade would be gold and silver. Trade is the sum of the source of raw materials, the factories that produce the products of production, the markets for the products of production and the paths the raw materials take to the factories and the products take to market. While gold and silver paid for the military might that protected British trade, their control limited the military might of Britain's trading partners.
Britain ran into trouble imposing her mercantile system of trade with China. China had two consumer products, tea and silk, that the British desperately wanted. The tea that the 19th century British steeped was rich, aromatic and highly addictive. The slavish observance to teatime only hinted at Britain's national tea addiction. The British demand for tea was insatiable and the British Isle could have easily consumed all the tea in China.
England had a problem obtaining tea from China, however, and the problem lay in Chinese silk. While the British also had an insatiable desire for silk, the Chinese had already become accustomed to its luxury and had absolutely no need for the rough Manchester linen with which the British merchants stocked their ships to trade for the world's resources.
The Chinese therefore had two products, tea and silk, that the British desperately wanted, but the British didn't have anything the Chinese wanted. British merchants didn't have anything to trade for Chinese tea and silk.
As a result, British merchants had to obtain the tea and silk they needed to meet British demand with silver. Because the Chinese had no faith and thus no interest in the partially backed silver notes issued by the Bank of England, British silver, the actual metal, began to flow into Chinese coffers.
Britain was a mercantile empire because her reserve money system was based on silver. Her reserve money system supported her production based prosperity by providing consumers with a medium of exchange, the payrolls that distributed the products of production throughout society. In addition, silver backed currency outfitted the navy and army that insured British factories would be able to obtain the raw materials that supported their production and protected the markets for their products.
As British matrons sipped their morning and afternoon tea, the silver Britain's factories crafted into tea sets and Britain used to back the pound notes upon which her Empire rested was disappearing into the vast, unchartered Asian landscape. As the British merchants watched their mercantile empire disappear behind the inscrutable borders of the Chinese mainland, they began to explore ways to recapture the silver.
The 19th century British were no different than we are today. Our minds turn wants into necessities and drive us to organize our lives to supply ourselves with the necessities to which we have become accustomed. A representative British parliament, increasingly responsive to an observant public, had to find a solution to the British silver drain to maintain Britain's prosperity. The solution required finding a product that the British merchants could use to compete in the Chinese marketplace so Britain could balance the trade for tea and silk with something other than silver.
One product that was already popular in the Orient was the opium grown from poppy crops. Opium was more addictive than the tea that was the cause of the British silver drain.
While existing poppy crops were already processed into opium for sale into existing markets by oriental traders, British merchants felt that they could use the western farming methods developed during the Agricultural Revolution to create poppy farms on which they could produce a better product at a cheaper price. They could then use the efficiently produced opium to compete in the Chinese opium market to regain the silver lost in the trade for tea and silk.
British entrepreneurs established vast poppy farms in India, processed the poppy into opium in efficient British plants and shipped the opium in swift clipper ships to Chinese ports. With a cheaper and more potent product, British merchants reversed the flow of silver to favor the Empire.
The Chinese, however, used silver as a store of wealth to support their own national trade. Silver was a significant factor in the internal Chinese balance of power. The Chinese power structure naturally objected to the outflow of silver, setting off the famous Opium Wars. With the first shots fired in the 1820s, this series of conflicts ended in a British victory with the storming of the Chinese summer palace in 1860, five years after the importance of oil was discovered in the United States.
There were many similarities between the British opium trade and the marketing of oil, the equally addictive product around which Senor chose to organize his life. He lived near the Oil Creek area of Pennsylvania, the focal point of the Yale University assay of 1855, which concluded that oil could be commercially used as a source of light, and that it could compete with the whale oil that had become the commercial mainstay. This realization occurred when Senior was still a teenager, and the oil frenzy began in the United States as Senior entered adulthood.
There were two aspects of the opium trade that set it apart from the coming trade in oil. The first feature that set the opium trade apart from oil was demand. Establishing demand for opium was difficult, but once established, it was irreversible. However, the demand for light and heat did not have to be established. It was universal.
Next, opium addiction could consume all of a person's resources. Being capable of producing addiction makes any product objectionable to other producers because the cost of addiction takes away a consumer's freedom of choice. Producers want to increase the consumer's choices, not limit them. However, the demand for heat and light was finite. Once satisfied, it did not increase on an individual basis and thus the consumption of oil would never take up more than a small portion of a consumer's resources.
Other factors the opium trade had in common with the coming trade in oil also favored the trade in oil. Transportable in bulk, easily stored and consumable in dribbles, oil, like opium, could be converted by individual sales into pennies which, when combined, would amount to significant sums.
Like opium, and for that matter, the tea that almost destroyed an empire, oil disappeared with its use.
Most significant, however, was the analogy of opium production to kerosene, the product of oil used in lamps and heaters. Poppies had to be refined into opium and oil had to be refined into kerosene. A product whose raw material is plentiful, whose refined product is easily transported and stored, which can be consumed in small amounts on a regular basis and for which there is a constant demand can be controlled at the refinery level, the level at which it is processed from a raw material into a consumable product.
The ability to control a commodity such as oil at some point in its mining, processing and marketing raised the Marxist manufactured concept of monopoly that haunted Senior his entire life and is used today to blacken his accomplishments. Held up in the popular imagination as the demon that enslaves the world and produces the poverty that covers the face of the Earth, the idea of monopoly presents a formidable obstacle to production based prosperity because it distorts the basis of the greater allocation the contribution of those involved in successful production warrants and it exploits the private ownership of the wealth that production produced during the period when that ownership was concentrated in the successful producers of production.
The concept of monopoly misplaces the feudal practice of hoarding scarce resources in order to increase their value in production based societies where hoarding resources defeats the purpose of efficient production, which is to increase the number of products available to the most number of consumers. Marxists paint producers as monopolists in an effort to paint production based society as no different from feudal plunder and producers as no different than the feudal elites.
Before production was invented, the world did operate in accordance with a model in which wealth perpetuated itself with plunder. Marx saw the wealth created by factory owners, labeled that wealth capital, and concluded that capital was out to perpetuate itself by plundering the world.
However, the Marxist concept of capital as money that holds a store of wealth like gold does not create production.
Money, created as loans, brings together ingenuity, resources and labor to create a production based society that does not plunder our resources but rather produces the resources that create our prosperity.
Because producers were clearly not the plunders of yore, the evil nobility of feudal history, Marx had to provide his capitalist producers with evil intent. Marx analogized the fact that hoarding scarce resources in feudal society increases the cost of those resources to the fact that the wealth of production was concentrated in the producers and claimed that this concentration was by design and its purpose was to raise prices.
By monopolizing production, producers could raise prices without reference to costs and therefore steal the paychecks of all whose wellbeing depended on the production.
If producers actually sought to monopolize production in order to raise prices, then their goal would be to defeat themselves because hoarding, absurd in a production based society where the goal of efficient production is to increase resources, is designed to limit resources.
Marx, however, was intent on carrying feudalism into the world of production and therefore claimed that the goal of his creation, the capitalist, was to hoard resources by creating production monopolies that priced production at levels that would enslave consumers.
Marxists, in seeking to transfer the power of gold in feudal societies to production based prosperity, discovered that the easiest way to paint a picture of the monopolistic goals of their creation, the capitalists, in a production based society was to paint an imaginary picture of a commodity monopoly because gold is a commodity.
The absurd concept of a commodity monopoly in a production based society is illustrated in modern Marxist fairy tales like the saga of Ivar Kreuger, the Match King. Kreuger was supposedly a mogul bent on controlling the market for the newly invented phosphorous head match, a match that we can still see actors light by a jaunty flick of their thumb in movies as old as The Match King, the 1932 rendition of the myth. Marxists believe that if you can control the production of something, then you can raise the price to the point that you can take over the world. Therefore, according to the Marxist version of monopoly, if Kreuger had been allowed to gain control of phosphorus, he would be able to charge anything he wished for his matches and therefore he could have plundered a world dependent on fire for warmth of all its gold.
Of course, Kreuger didn't control fire, he merely sought to profit from a new type of match, but to Marxists, the possibility of control is actual control. While the Marxist myth of monopoly is rooted in feudal scarcity where the control of gold leads to power, the myth doesn't explain how the monopolists will be able to support production if they price their products so high that consumers cannot afford to buy them.
The Marxist myth of monopoly does not take into consideration the basis of production, that it is the creation of resources for consumers and therefore depends on consumers for its existence.
Product pricing is a marketplace agreement between consumers and producers that fixes prices at levels that will allow the largest number of consumers to purchase the product while providing the producer with sufficient resources to maintain and increase production. Senior faced the Marxist charge of monopoly because he sought to control the marketing of oil by providing oil at the lowest cost to the largest number of consumers. He was demonized by Marxists as the very epitome of a monopolistic capitalist because he established by example the philosophical foundation for our production based prosperity and devised the money system that supports it. Had he not succeeded in controlling oil, America would have conformed to the British model using gold rather than consumption as the source of power, projecting a past based on plunder into the future.
While electricity provides an excellent example of how a production based society controls a consumable commodity, electricity was not available in the 1860s, the decade the need for the control of oil became apparent. Oil had been lying in pools around the Pennsylvania countryside before the Yale Assay of 1855. Its common use was medicinal, the snake oil that was a complimentary product to the opium based laudanum sold town to town from the backs of wagons.
After the Yale Assay concluded that oil was a viable source of affordable energy, the Pennsylvania countryside became the target of a black gold rush as speculators began buying and selling prospective tracts around an area known as Oil Creek.
Entrepreneurs requested the Yale Assay after they discovered that the oil floating on the surface of ponds and creeks came from underground reservoirs that could be tapped by the same drilling technology that produced water wells for farmers. Before long, drilling rigs were crowding the sky and the black oil was staining the verdant countryside. By heating oil in a process similar to that of distilling whisky, refineries grew up that would process the oil of producers into kerosene for shipment to the vast New York market. Because kerosene only needed simple whale oil lamps, its acceptance was immediate, and with acceptance came demand.
Just as children learn early that strength defeats weakness, numbers defeat strength and resources control numbers, they know from having to deal with the discomforts created by wanting what they don't have that demand creates value. It is demand, our wants, that gives gold its store of value, and it is the scarcity of gold that allows gold to maintain its store of value.
When our wants are satisfied, there is no more demand and the focal point of our wants loses value. If gold were as common as sand, its value would diminish to the value of sand. The scarcity of gold is what gives it the intrinsic value that makes it the basis of plunder when scare resources need to be allocated.
Intrinsic value is unnecessary, and even destructive, when money is used to represent value in a production based society because it is the production that is valuable and the money that is just a tool to distribute production. Gold, scarce, is used to allocate resources in feudal societies organized around scarce resources while paper money, plentiful, is used to distribute production based resources.
Consumables are a form of money that fit between gold, which is a personal and permanent want and paper, which has no value at all other than the value of what's printed on it. Oil is a consumable that is pumped out of the ground, refined, and then shipped to market where it is consumed on an individual basis by everyone.
Gold is hoarded, paper circulates, while oil moves from the ground to the consumer where it disappears with use. Although there is oil in plenty beneath the surface of the Earth with evidence that it is a replaceable resource growing stronger as depleted wells are found to contain new oil, it has to be pumped, refined, and transported before it can be sold.
Because the price of a commodity is a reflection of the number of people that want the commodity, the demand, and the amount of the commodity available, the supply, supply and demand determine price in the classic economic formula.
However, unless the price of oil is based on the cost of production rather than on supply and demand, price fluctuations will disrupt the marketplace because oil can be both scarce and plentiful.
Senior was already adept at the oil business in the 1860s when widely fluctuating prices were creating alternating cycles of prosperity and depression. The ability to consume oil easily led to an explosive demand that outstripped supply, causing prices to rise in the New York market. The rapidly rising oil prices created a speculative bubble in Oil Creek that was accompanied by a frenzy to pump oil out of the ground, refine it and move it to market. Because the price of oil, influenced by unsatisfied demand, was high, it supported the investment in the drilling rigs, the refinery equipment and the barrels needed to supply the demand. Because oil was easy to bring to market and thus investment brought immediate results, supply quickly outdistanced demand.
The result, an oil glutted New York market, led to a crash in prices.
When prices crashed, the oil rig operators, the refiners and the barrel makers all went bankrupt and the oil landowners, the producers, were stuck with oil they had no way of getting to market. Many wells had to be abandoned, their flowing oil creating dark lakes in the Pennsylvania countryside.
With demand in the marketplace steady and rising and the flow of oil reduced to a trickle because of the depression in the oil fields brought about by the burst bubble, the price of oil began once again to rise to stratospheric heights. As it did so, drilling rigs were brought out of bankruptcy, refineries brought back on line and barrel makers reemployed. Unsatisfied demand had already pushed prices to the sky and by the time the oil was flowing, its easy marketing had already led to overproduction which resulted in another price collapse and widespread bankruptcy in the oil fields.
The boom and bust oil cycle that prevailed before Senior gained control of oil presented the classic example of what happens when production goes unregulated. When the oil flowed, prosperity stretched from the producers down the entire marketing chain to the consumers, whose nights were warm and bright. When the oil ceased flowing, everyone from the producers to the corner store suffered and consumers paid more or went without, their prosperity reduced accordingly, discomforted as a result of their wants going unsatisfied.
The price of oil had to be controlled if the boom and bust cycle were to be eliminated so that the prosperity that oil brought could be normalized and become the part of everyday existence it is today. The only way to control the price of oil was to control the amount pumped out of the ground. There were only two points at which the amount of oil pumped out of the ground could be controlled, at the level of the producers who pumped it out of the ground and at the level of the refiners who turned it into a consumable product.
The producers attempted to band together to control production, putting a floor on the amount of oil that could be pumped out of the ground. Unfortunately, they were faced with a problem unique to the pumping of oil. A producing well had to keep producing or it had to be capped. Closing a producing well was more expensive than drilling new wells, so keeping producing wells in production forced producers to keep pumping, no matter how willing they might be to put a ceiling on production, and sell their oil for whatever it would bring.
Refiners had as little success attempting to control the amount of oil produced because of the pressure of producing wells. The resources brought together to refine oil are expensive and need a continuous flow of product to support them. When oil prices dropped below the refinery's costs of operation, the refineries went bankrupt, stranding oil producers whose pumping wells had nowhere to go but into the growing lakes of oil dotting the Pennsylvania countryside.
The boom and bust oil price cycle that existed when Senior entered the business was caused by supply and demand imbalances, the type of situation around which Marxists directed their monopoly myth. To Marxist theoreticians, if someone were able to control the amount of oil produced, he would be able to limit the supply and thus increase demand and prices.
But price monopolies are impossible in a non-Marxist world because consumers can't buy what they can't pay for.
Anticompetitive practices, combinations of producers whose goal is to construct barriers to other producers marketing activities are the monopoly problem a production based society faces. A society whose prosperity is based on production abhors anticompetitive practices because production requires innovation and efficiency.
We can easily see the consequences of eliminating competition in the production of the defunct Marxist countries such as the Soviet Union and the People's Republic of China where all products were standardized to eliminate choice and thus marketing costs. Without competition, innovation and efficiency disappear and the costs of production make usable products scarce, creating a society based on plunder, the social order that existed with the collapse of the Soviet Union whose nomenclature, the landed gentry, had to scramble to protect its prerogatives.
Production based prosperity is founded on competition and anticompetitive practices are quickly eliminated in the face of the need for innovation and efficiency.
The combinations that result in anticompetitive practices can never be confused with production monopolies that address the need to control supply so that the satisfaction of demand does not affect price.
Senior learned this the hard way when public opinion trashed his anticompetitive South Improvement Company, which, seeking to control the amount of oil produced through the use of shipping kickbacks, was Senior's first attempt to organize the refiners into a combination that would be able to stabilize the amount of oil reaching the marketplace. The South Improvement Company was designed to drive all operating refineries into a consortium with his Standard Oil Company of Ohio.
Because Senior controlled such a high percentage of the oil shipped to market, he demanded and received volume discounts from the railroads. The South Improvement Company was set up to extend those discounts to all refineries as an inducement to combining together to limit the amount of oil refined and thus prevent the price collapses that resulted from overproduction.
Because the scheme was a combination of refineries that was operating an exclusionary rebate scheme that placed marketing barriers in front of other refiners, it was anticompetitive. Independent oil producers, upon discovery of the kickback scheme, began attacking the refineries that had not yet joined Senior in an attempt to disrupt Senior's efforts to consolidate the refinery industry. Vigilantes like the bankrupted independent producer Franklin Tarbell joined gangs that raided Senior's oil cars and burned out fellow independents who broke ranks to join with Senior.
Legislative oversight brought the South Improvement Company to an end, yet Senior was able to consolidate the oil industry under the Standard banner during the following decade through an innovative legal structure, the trust. The dominant refiner of oil by the 1870s through his ownership of the Standard Oil Company of Ohio, Senior approached all other major refinery companies and outlined the working of the Standard Oil Trust which became known as the Standard.
A trust is basically a private agreement with a trustee to hold assets for the benefit of those granting the assets to the trust. In the case of the Standard Oil Trust, the agreement required owners to transfer their refineries in trust and receive in return a beneficial interest that was proportional to the market share of their refined products. If Senior had 40% of the market, with Companies "A" and "B" having 30% each, then the beneficial owners of the Standard Oil Trust would be 40-30-30 for the three refineries.
Once the Standard controlled the refinery process, it could control the amount of oil brought to market and end the boom and bust cycle that was disrupting the orderly expansion of production based prosperity.
The trust concept alone was not sufficient to place Senior in the position of leadership he held in the oil industry. The source of the power that gave Senior the ability to attract successful producers into aligning their fortunes with the Standard was not, and is not today, a part of public awareness. This knowledge vacuum allowed the writer who has done the most to perpetuate the Marxist myth of the monopolistic capitalist, the vigilante Franklin's daughter Ida Tarbell, to paint Senior as the leader of a gang who raided the independent producer's oil cars and burned out their refineries.
Ida Tarbell's picture of Senior as a greedy monopolist plundering the countryside, destroying competition in order to squeeze the blood from the innocent consumer is used to color the drive for price stability to foster production based prosperity today as the use of cartelism, price gouging and profiteering to effect the general enslavement of oppressed humanity. Close to her father, who died as a result of his participation in the conflicts in the oil fields, Ida attributed her father's unscrupulous actions to Senior because she did not understand the source of Senior's power, Senior's ability to successfully consolidate the oil industry around the Standard. Not knowing the real basis for the Standard's power, Tarbell had to adopt the Marxist view of wealth as plunder in order to explain her father's failure and Senior's success.
Tarbell was not alone because Senior had kept the source of his power, an income that in the 1870s rivaled the income of the United States itself, a secret. Looking to the success of the British opium trade, he reasoned as a young man in the early 1860s that the same kerosene that consolidated the pennies of consumers in the tenements of New York could be used to light the lamps of China. Working through his brother William, who set up offices in the Port of New York, Senior began transshipping Standard of Ohio Company oil directly to Chinese ports.
The sudden demise in 1861 of Rhode Island's Pacific whaling operations operated out of Narragansett Bay is traceable to the massive fleet of clipper ships William began operating out of New York. Senior's business model was the essence of simplicity. Every crossroad in China would have an agent with an oil drum out of which to sell dribbles and dabs of kerosene, the predecessor of the modern gas station. Unlike opium whose use would expand to consume an entire family's wealth, a kerosene lamp allowed a family to work long into the night, increasing its wealth and making the small amount the kerosene cost an effective investment.
Kerosene was a uniquely America product. Because Senior wisely sought to avoid possible British interference, he and his brother William developed the world market for petroleum products under great secrecy, operating out of sight through Standard Oil of Ohio.
The British, preoccupied with mercantilism and the opium trade with China, did not fully comprehend the significance of oil as the currency of production based prosperity until a decade into the 20th century when Churchill finally convinced the Admiralty to convert the British fleet from coal to oil. By that time, America's dominance in controlling oil had placed its economy on an equal footing with Britain's empire.
Senior was able to keep his growing worldwide oil empire a secret because William was able to keep his vast fleet of clipper ships, operating throughout the 1860s, the carts that off-loaded the oil in foreign countries and the barrels that stored it at every crossroad out of sight of British financial agents. Operating with the cash obtained from foreign operations, Senior did not need to tip his hand to the pervasive British banking establishment that used its mortgage banking system to uncover and take over new enterprises. Senior operated clipper ships long after they had become obsolete, and because the British did not understand the magnitude of his operations, and because he operated with cash, his growing dominance in the world of finance passed undetected.
By the time the bits and pieces of silver received in exchange for Senior's oil reached New York, they amounted to tens of millions of dollars in income. But more important to Senior's evolving marketplace philosophy, there was no boom or bust cycle in the Chinese marketplace because Senior absolutely controlled the price the consumer paid for the kerosene. Because it was to Senior's benefit to have everyone in China using his oil, Senior priced the product as low as the cost of delivery would permit, and he worked tirelessly to lower the price even further. His presence in the marketing chain was legendary, the most famous example being his demand that barrel staves be measured exactly before production rather than having their edges cut evenly after production, a minor efficiency that saved millions which were passed on to consumers in the form of penny savings.
Because Senior had a steady market for his refinery products whether the local market in the United States was undergoing boom or bust, he remained in business while those around him went though cycles of bankruptcy. He could compare the uninterrupted flow of oil products to the Chinese market whose prosperity steadily increased with the boom and bust disruption of the American market and see that for oil to provide a basis of prosperity in America, it had to be controlled. Because of the steady income from the Chinese market that flowed through his Standard Oil of Ohio, Senior could have seized control of the American oil industry through traditional financial methods.
He could have, had he wished, simply weathered the business cycles, gradually consolidating the refineries as they went out of business in down cycles.
But the Standard consolidation represented another principle that Senior realized is necessary to the successful expansion of production based prosperity, a principle whose importance we have difficulty recognizing even today. Senior realized that production required success, that it took a certain type of person to successfully create and market the products that were at the basis of society's prosperity.
Marxists fail when they take over production because they believe production is easy.
Senior knew successful producers were the exception rather than the rule. He understood that expanding production based prosperity would take many talented minds working to solve the problems involved in obtaining, maintaining, improving and increasing production, and thus expanding prosperity.
Senior did not want to take over bankrupt refineries because he would be incorporating failure into an enterprise that, in the public interest, required success. He realized that to accelerate the expansion of production based prosperity, he needed to ally himself with those who were already successful rather than the Franklin Tarbells whose failure turned to destruction rather than production. As 9/11 stands witness, destruction is always easy.
Production is not easy, it is hard.
Expanding the wealth of society through production is analogous to pumping water uphill. Producers are not plunderers, damming the river so that the innocent consumers downstream die of thirst. Producers have to find a way to pump the water to the consumers upstream so that they don't die of thirst, and once consumers have become accustomed to plentiful water, producers have to find a way to keep the pumps going against the irrational attempts of others to seize the pumps with the promise that the pumps will operate themselves.
Senior was the first businessman to realize that production takes talent and because talent is rare, production has to take talent wherever it can be found. He extended the Standard Oil umbrella to the successful refiners who all came together to develop a system of production based prosperity that has the opportunity of benefiting the entire world. The Standard Oil Trust, begun when one of Senior's partners purchased the Long Island Oil Company in 1872 and continued as the Standard absorbed competitor after competitor until 1882, when the original Standard Oil Corporation of Ohio was incorporated into the widespread trusts that finally made up Tarbell's target, was a consolidation of successful production talent.
The Standard's goal was to provide oil to as many people as possible at the lowest possible price. The only way that this goal could be accomplished was through the Standard's control of the refinery process. Because oil that could not be refined was useless, control at the refinery level actually controlled the amount of oil that came out of the ground and eliminated price wars among producers. Because producers no longer pumped oil that could not be sold, the gross gashes of tar that dotted the Pennsylvania countryside soon disappeared.
When Senior entered the business, oil fluctuated between $25 and $66 dollars a barrel. By the late 1870s, after he had established the control of oil, oil sank to under $15 a barrel in real dollars, where it pretty much stayed until the mid-east upheavals of the 1970s, a century later, when the control of oil was temporarily lost.
Standard's operation transcended personal gain as Senior struggled with forging an institution that reflected the needs of production based prosperity rather than personal plunder. Senior was creating a new world based on production to replace the existing world based on plunder.
Britain had been unable to convert its own society from one based on plunder to one based on production after the Industrial Revolution produced widespread economic misery, but America was a new society created on principles designed to protect us from the very plunder that ruled the world, and we were therefore uniquely susceptible to pioneering efforts aimed at conforming our model of production to the freedom that was at the basis of our Constitution.
Coming up with the right price for oil, the price that allows the largest number of people to benefit from its many uses while at the same time covering the cost of its production has been one of the most challenging tasks of production based prosperity over the last century and will continue to be as long as oil is the pillar of production based prosperity. Contrary to the Marxist myth of monopoly, controlling oil production has not led to poverty. Not only has it led to production based prosperity, it has kept prices low. We need only visit the catastrophic upheavals of the 1970s when the control of oil was temporarily disrupted by unforeseen warfare to see what happens when prices are set too high, pricing consumers out of the marketplace.
The first phase of our production based prosperity was represented by the flurry of consumer goods that occurred during the first three decades of the 20th century, the result of applying Senior's principles of control to the burgeoning electrical industry. Although Joseph Henry discovered induction, the basis for electricity, in the late 1820s, it took an additional sixty years for cities to begin electrifying, a trend marked by Edison's lighting of Wall Street from the Pearl Street Generating Plant in 1882.
During the next twenty years, America's cities granted charters to any company promising to provide electricity with the notion that increasing the number of companies in competition to sell electricity would lower prices. The electrical industry became mired in the classic boom and bust cycle of uncontrolled supply and demand that had plagued the early oil industry. As a result, it was never able to expand past stringing electric lights and running streetcars.
In 1898, Samuel Insull, Edison's former administrative genius and the president of Chicago Edison, told a meeting of electric company executives in Alabama that competition in the electrical industry was economically wrong, that electricity was a natural monopoly that required exclusive franchises in order for the best service to be provided at the lowest possible price. He continued, in both the letter and the spirit of Senior's market control principles, by stating that the only way exclusive franchises could be effective was by controlling the price of electricity and the standards of its delivery.
Our uniform system of electrical delivery is a direct result of adopting
Senior's monopolistic model of energy distribution. Only by creating a uniform system of electrical distribution could the electric motor form the basis of the nation's current prosperity. With uniform electrical delivery, washing machines and dryers, vacuum cleaners, refrigerators and stoves began to appear, freeing up incalculable amounts of time.
The consolidation of the control of oil and the creation of a uniform system of electrical delivery occurred in the United States during the decades after the Civil War that witnessed a war of another sort, one more important to the future of production based prosperity than the control of oil. During the last four decades of the 19th century, the expansion of prosperity was rampant. Production based societies, the so-called industrial nations, were bumping into each other as they expanded markets all over the world, markets that in turn raised the level of prosperity within the producing countries. The British Empire, operating for centuries under the mercantile system, with a money system based on gold and silver and a colonial system upon which the sun never set operated on the model that used plunder to control gold to obtain power.
The United States, philosophically virgin territory when it came to controlling production based prosperity, saw that prosperity was a product of production rather than gold, and that the goal of society was to expand production, not attempt to limit it.
A society's view of prosperity is reflected in its money system. England, still obsessed with allocating scarce resources, sought to control the world with a money system based on scarce gold and silver. The United States, seeing production outstrip money supplies based on gold and silver, sought to base money on something less restrictive, something flexible enough to reflect expanding production and allow prosperity to expand accordingly. If production were the basis of prosperity and the goal was to expand prosperity, then the only limit to the money supply should be the production its prosperity was able to create.
Senior saw the problem of money as being identical to the problem of pricing oil. When Senior was in his formative twenties, Abraham Lincoln turned to the printing presses to produce money to support his war effort. Flooding the country with greenbacks, the "back" referring to the fact that the only thing backing the currency was the green color printed on the paper as opposed to the silver that backed the British Pound Sterling, Senior analogized printing unreserved currencies to pumping oil.
Pump too much oil out of the ground and it becomes worthless, incapable of supporting the cost of processing it to market.
After the Civil War, a conflict that created significant wealth in the United States in addition to the British controlled wealth that had survived from the days of the revolution a hundred years before, the British continued their attempt to control and expand their financial interests in the United States. Britain's mortgage based model for financial control was represented by the House of Morgan, which sought to control America's prosperity by mortgaging the capital improvements that produced its prosperity, its railroads and factories.
If British financial interests could limit U. S. currency to gold backed dollars, Britain could control the growth of America with its control of gold.
Senior viewed gold backed currency as analogous to the bust cycle of oil production. When there is not enough oil, prosperity disappeared. When currency is based on gold, limiting gold limits the available currency, crippling what it can purchase, the products of production, and thus limits production.
While Senior clearly didn't agree with the unlimited creation of money, he viewed the artificial limitation of money by requiring that the dollar be backed by gold as unacceptable. Just as too much oil was as bad as too little, too much money was as bad as too little.
As long as gold was used as a part of the money system, it could exert its influence to limit the amount of money available, allowing the money system to be used as a basis for plunder. On the other hand, unless there was some way to limit the amount of money available, unreserved currency could become so plentiful that it would be useless as a medium of exchange.
Controlling the supply of money is a problem even more basic to obtaining, maintaining, improving and increasing production based prosperity than the control of oil.
Price oil too high and we price ourselves, the users out of the marketplace.
Price oil too low and we destroy production, and with it our access as consumers to oil.
Price money too high by requiring that it be backed by a scarce resource and we won't have enough money to produce the products wanted by consumers.
Price money too low by placing no restriction on its availability and we destroy production because, being worthless, we can't, as consumers, use it to purchase production. The cost of printing the money becomes higher than the cost of the products it can purchase.
We can't create prosperity if products are scarce, the situation that results when oil or money is scarce, and we can't create prosperity if there is a glut of unsold products, if there is so much oil that its price doesn't cover its cost of production, or there is so much money that products become scarce in relation to it.
Senior saw that the amount of money had to be controlled in the same way that the amount of oil was controlled. Failure to do so would allow the boom and bust cycle that dominated the American economy during the final four decades of the 19th century to be perpetuated into the 20th, with the expansion and contraction of the money supply dependent on the availability of gold and silver as backing.
Senior's vision for a reserve currency flexible enough to reflect the current production demands took half a century to become a reality, an event that occurred with the passage of the Federal Reserve Act of 1913. In the meantime, he had to deal with British attempts to hijack the production based prosperity his control of oil was creating.
British financial interests had seized upon Senior's trust model used to control oil and actively attempted to hijack whole American industries. Morgan's creation of the Steel Trust with the Scot Andrew Carnegie as a front man stood as the most notorious example.
Having made the largest investment in recorded history to consolidate steel production in the United States, Morgan found that the only supply of iron oar for U.S. Steel was from the great Missabe range in Northern Minnesota, an oar range controlled by Senior. The purchase of the Missabe range stretched Morgan's resources to the utmost, setting him up for a financial storm that would end his constant financial attacks on American prosperity.
Having failed to understand the significance of oil as a basis for expanding prosperity, British financial interests operating through Morgan sought to gain control of the railroads over which the oil moved to market. Using a mortgage based system that operated independently of the money supply, the British played havoc with railroad establishment and ownership. Senior maneuvered the financially extended House of Morgan, operating behind Hill and the Great Northern, into a stock battle with Rockefeller's National City Bank financed Harriman and his Union Pacific that closed Wall street at the beginning of the 20th century. The peace treaty signed by the parties gave Morgan credit for saving Wall Street, but, putting him in the spotlight, limited his activities to financing American interests rather than promoting the interests of the British Empire, bringing sufficient reprise for America to adopt a unique reserve currency system that became the model for the world.
In looking at the marketing of oil to formulate a money system that would be flexible enough to reflect the current state of production and yet be capable of control, Senior realized that existing reserve systems could control the amount of money by controlling the percentage of the reserves banks needed to back the money just as he was able to control the amount of oil produced by controlling the refinery process.
The primary reason Senior could control oil, however, was that it was not reusable. Oil was destroyed by its consumption.
This was not the case with money. The whole purpose of money was recirculation. It was a medium of exchange based on reusability.
While Senior could use reserves to control money creation, he needed a way to control its destruction so that the money supply could always be tuned to reflect the orderly expansion and temporary setbacks of production.
At the beginning of the 20th century, Senior controlled the National City Bank financial complex in New York and his son's father-in-law, Nelson Aldrich, was among the most powerful Senators in the United States. Both the bank and the Senator represented Republican interests whose financial roots were embedded in the safety that gold and silver backing gave money.
Embracing the Wilson Democrats and William Jennings Bryan, whose ringing Cross of Gold speech had set the tone for a more flexible money supply, Senior brought Paul Warburg, a mortgage banker with innovative ideas about reserve banking, from Germany to fashion a reserve act that would meet Senior's dictates for flexibility. Warburg produced a plan that allowed the central bank to expand or contract the money supply through the purchase and sale of United States Government backed securities. To address the issue of controlling the actual amount of currency in circulation, Warburg forged a system of interest rates and taxes that allowed the proposed Federal Reserve System to drain circulating money.
Both the Federal Reserve Act and the Federal Income Tax became law in 1913, with the Democrat Wilson in office and the popular William Jennings Bryan, the author of the ringing Cross of Gold speech, at the influential post of Secretary of State. Republican Senator Aldrich, Senior's National City Bank President Charles Norton and Benjamin Strong, Senior's liaison with the House of Morgan all were publicly devastated that the system provided for Federal Reserve Notes backed only by obligations of the United States rather than gold or silver and in deference to these Republican interests, silver backed notes were allowed to be issued and circulated. Not until Roosevelt confiscated gold in the early 1930s, Kennedy removed silver backing in the 1960s and Nixon prohibited foreign dollar holders from redeeming dollars for gold in the early 1970s did the full faith and credit of the United States Government, our ability as a society to produce wealth, become the sole backing for our currency.
Senior's goal of establishing a flexible currency that represented the production capability of the United States took over a century to realize against the endless Marxist drumbeat of monopoly capitalists plundering the poor to enrich the wealthy, a cacophony that will continue so long as we attempt to expand our production based prosperity to help those less fortunate than ourselves because the prosperity that production based currency creates eliminates the misery upon which feudal Marxism thrives.
A hundred years ago, hoarding gold provided a store of wealth that guarded against the uncertain future. As a result, gold was used as a medium of exchange. Because it provided the basis of power, it produced a system based on plunder.
Today, hoarding dollars gets us moldy dollars.
Gold only works as a store of wealth, dollars only work if they are buying production.
Consumer dollars have to be spent to be useful. They have no store of wealth that gives the holder protection against an uncertain future. Our protection against an uncertain future is the continued production a flexible currency allows.
Investor dollars are also useless if they are stored in sacks buried in vaults. The only value of an investment dollar is its ability to obtain, maintain, improve and increase production because production is the only way an investment dollar can obtain a return.
But the primary return of the investment dollar is not more investment dollars. The primary return of the investment dollar is the production that increases the prosperity of a production based society, the increase in production increasing the value of the invested dollar.
And of course, continued production is our only protection against an uncertain future.
Society has not organized itself so that the wealthy few are using gold to steal land and food. Society has organized itself so that wealth is used to obtain, maintain, improve and increase production for all.
The majority of the world's people may still operate on the gold standard. Armed conflict over the control of resources may well be the model that holds the majority of people on the face of the Earth in its hopeless vise. The freedom of choice afforded by production based prosperity is scarcely three hundred years old and the slavery and plunder of gold the eternity before.
We can not risk snuffing out the possibility that the freedom of choice afforded by production based prosperity can be extended to the world by allowing attacks on our production based prosperity. Our natural reaction when we observe from our prospect of prosperity those who do not yet benefit from production based prosperity is shock. Our minds operate by comparing recall with reality, and when we see a reality that appalls us, we create a recall of ourselves in that reality and we feel horrible. Our reaction is to rush out and help, give those less fortunate what we have.
But to do so without planning would be to destroy our own production based prosperity and eliminate the possibility of extending what we have to those less fortunate.
We are in unchartered territory. We don't know what works and what doesn't work.
In addition, production is not easy, it is hard, and expanding production to benefit those less fortunate is even harder because not only do we have to deal with a reality that causes us discomfort, we have to deal with the charge that, by not immediately placing the prosperity we have with those less fortunate than ourselves, we are selfish.
We have to insure that our sons and daughters, instead of taking the easy path and attacking production based prosperity as selfish, embrace prosperity as they attempt to expand it. Instead of accusing us of plunder and, pointing to the lack of prosperity of the very people we are tying to bring prosperity to as proof of our selfishness, demanding that we return the prosperity we have stolen to the impoverished we are oppressing, they will have to direct their education and the free time afforded them by prosperity to the hard course of devising ways to effectively obtain, maintain, improve and increase production based prosperity to benefit everyone, both those less fortunate and those who already have prosperity so that prosperity might perpetuate itself, expanding to benefit the world.
Driven to do something, and not constrained by knowledge about the complexities of obtaining, maintaining, improving and increasing production based prosperity, the enemies of production based prosperity point to the absence of prosperity in the world and use it as an excuse to destroy the production based prosperity that we have been able to carve out of nothing.
Marxism, the idea that prosperity is obtained at the expense of those without prosperity, springs up wherever prosperity encounters the world because the natural state of the world is not prosperity. Production merely discloses poverty. Marxism is the expression of rage that arises when those without see those with what they don't have.
And it's a rage that touches us because of our empathy.
But it is a rage we have to resist if we are to extend production based prosperity to the world.
The rage can only be eliminated in one of two ways, by expanding production to extend prosperity to the impoverished of the world or by eliminating the appearance of prosperity by returning the world to a society based on plunder.
We have to choose prosperity, the production that produces it, the reserve banking system that distributes it and the salaries that allocate it.
We have to choose ourselves first.
We have to protect the production that produces our prosperity before we can expand our prosperity to benefit the world.
Peter Bros is the author of the 9 volume Copernican Series and is President of The Far Museum of Dallas, an actual history museum, which will house its collection of 50,000 rare Eastern Mediterranean manuscripts and artifacts together with actual history displays and tours in a full-sized replica of the Egyptian Temple at Dendera to be built in the Dallas Ft. Worth area. Email:peterbros@therealskeptic.com