The first week of a New Year is a good time for new beginnings. This applies to starting a business, too. On January 8, 1675, America's first official corporation was chartered - the New York Fishing Company. Two centuries later, the biggest corporate giant in modern America was also born at the start of the year, when John David Rockefeller incorporated Standard Oil on January 10, 1870. Very soon, this corporate giant started to grow - seemingly out of control - as shown by these events, a decade apart:
On January 2, 1882, Rockefeller formed the Standard Oil "trust," by linking production, refinement and marketing firms into one gigantic whole. Oops….that's beginning to sound like a monopoly, so: On January 2, 1892, the Ohio Supreme Court ruled in favor of splitting up Standard Oil's trust, although Rockefeller was able to maintain power by shifting some of his holdings to companies in other states.
Today, just one of the many descendants of Standard Oil, ExxonMobil (XOM), is the largest single company on the New York Stock Exchange, at $375 billion market cap. Going back 110 years, however, Rockefeller's riches were given a great boost on January 10, 1901, when Spindletop, a 100-foot drilling derrick in Beaumont, Texas, hit a gusher of crude oil that shot up over 100 feet and covered several acres, then several square miles. It took nine days to cap Spindletop, which grew more powerful each day.
The discovery of a major oil deposit in Texas convinced another tycoon, Henry Ford, to bet all of his company's future on the internal combustion engine, rather than on steam or electric power, the prevalent forms of automotive power then. (The word "automobile" was a new creation of the new century. The first official use of the word came on January 3, 1899, when The New York Times first called the horseless carriage an "automobile.") But automakers were being held hostage by a legal licensing barrier back then.
Ford Defies a Patent to Mass-Produce His Model T
year 1911 is most famous in corporate history for the Supreme Court finally breaking up Standard Oil on May 15, 1911. But another court case decided earlier that year had a similar impact on the history of competition in America. First, a little background on the invention and licensing of the car:
Back in 1895, George Selden was awarded a patent for the use of an internal-combustion engine in an automobile. This patent was granted even though Selden had never produced a working model of a car. To enforce his patent, Selden formed the Association of Licensed Automobile Manufacturers (ALAM) in order to gather royalties on his patent from all auto makers. Other inventors - such as Ransom Olds and the Duryea brothers - were already driving their home-built automobiles through the streets in 1895, but due to Selden's patent, manufacturing cars could not become a big business until Henry Ford incorporated in 1903 - and then fought George Selden's patent. Soon, every major automobile maker was paying royalties to ALAM (Selden) - except Henry Ford - so ALAM launched a series of lawsuits against Ford.
Even though other auto-makers paid the ransom (and stayed small), Ford refused to pay a dime, saying that his cars were far superior to Selden's non-working patent model. The court battles waged for nearly a decade until a century ago this week, on January 9, 1911, when the U.S. Court of Appeals ruled that Henry Ford did NOT have to pay royalties to George Selden for using an internal combustion engine.
The outflow of automobiles surged after that ruling. Soon the price of cars came down and Ford could afford to pay higher wages: On January 5, 1914, Ford shocked the world more than doubled his workers' pay to $5 for a shorter (8-hour) work day, but Ford treated his workers well for practical reasons, to keep good people, since car makers were popping up like mushrooms in the forest after the 1911 court ruling.
One vital lesson to learn from this 1911 ruling is that patents on intellectual property often work against the consumer by raising prices and erecting barriers to competition. For more on this counter-intuitive insight, check out the scholarly but entertaining 2008 book by Michelle Boldrin and David K. Levine, "Against Intellectual Monopoly." The first chapter alone shows how James Watt's vigorous enforcement of patents on his steam engine may have delayed the Industrial Revolution by decades.
Robber Barons Aren't All Bad...Are They?
Without the 1911 decision freeing up Ford to make lots of cars for less money, would the horseless carriage have come to dominate the American landscape as quickly as they did? That's hard to say, but Watt's vigorous prosecution of other engine makers from 1769 to 1800 seems to indicate that Selden's license could have delayed the advent of the car by decades, if the court ruling had gone the other way.
One thing we can learn from U.S. corporate history is that the freedom to compete on a level playing field is good for the consumer, the shareholder, the worker and the economy. Here's another example:
On January 4, 1877, Cornelius Vanderbilt died at age 82, with an estate valued at $100 million, making the Commodore the wealthiest man in America at the time and the first to fall under history's condemnation as a "Robber Baron." (The New York Times first applied this memorable phrase to describe Vanderbilt). In his will, Vanderbilt left most of his millions to charity, funding several libraries and the university in Nashville bearing his name, Vanderbilt. Most robber barons did the same thing, but one other thing they did during their lifetime was to make essential services a lot cheaper for most Americans.
In his new book, "The Rational Optimist" (which I'm happy to say quotes me, on page 295), Matt Ridley writes that robber barons of the late 1800s "usually got rich by making things cheaper." Ridley quotes Harper's Weekly in evaluating the effect of Vanderbilt's railways in 1859: "The results in every case of the establishment of opposition lines by Vanderbilt has been the permanent reduction of fares… This great boon - cheap travel - this community owes mainly to Cornelius Vanderbilt." Due in large part to Vanderbilt's aggressive and competitive practices, rail freight charges fell 90% from 1870 to 1900.
The same is true of oil and cars: John D. Rockefeller cut the price of oil by 80% and made heating oil affordable for the average family. Henry Ford also got rich by making cars more affordable. His first Model T cost $825, which was ultra-cheap at the time, but he soon cut that price down to $575 within four years. Although they had no particular interest in saving endangered species, Ford and Rockefeller may have saved the whales, which had been slaughtered for their oil. They also made our cities cleaner and better smelling. Perhaps some now-unknown entrepreneur will end our oil addiction by making an alternative-energy car as cheap a Model T. I certainly hope he or she becomes filthy rich in the process!
P.S. A Happy Ending for Ford...and a New Beginning for Automakers
This story has a happy ending for Ford. After a tough century in a very competitive business, Ford Motor Co (F) was the surprising star on Wall Street in 2009, gaining 337%, adding another 68% in 2010.
Ever since Ford's court victory a century ago, this week has been a good time to bring out new cars:
- On January 5, 1924, Walter Chrysler finished building his first car for the Maxwell Car Company, which he renamed the Chrysler Corporation the following year, 1925.
- On January 3, 1926: General Motors introduced the first Pontiac.
- On January 10, 1942: Ford agreed to build Jeeps on this date, a month after Pearl Harbor.
- On January 9, 1958: Toyota & Datsun made their U.S. debut at the L.A. Imported Car Show.
- On January 7, 1985, General Motors launched the now-defunct Saturn, a popular little car most noted for its non-aggressive sales staff working off sticker prices instead of commission.
- On January 7, 1989, Dodge introduced the Viper at the North American Auto Show. The first Viper had a V-10 plant that delivered 450 horsepower at 5200 rpm, capable of 190 mph.
Next Monday, the traditional Detroit Auto Show (now dubbed the North American International Auto Show) will display the latest in small and stylish horseless carriages. I hope somebody erects a placard to honor the centennial of Ford's courageous stand against George Selden's aborted monopoly on engines.
Who Will Win the 45th Super Bowl?
Enough on oil and cars: In a few weeks, I'll dissect the "Super Bowl indicator" for stock market success. But for now, let's guess who wins it. The four teams with a BYE this week have home-field advantage, an extra week's rest and one less chance to lose. Will a BYE team win, or a road warrior?