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Harvest Rock Advisors, LLC

Gilded Age II

It took a pandemic to find the time to finish Rockefeller, another one of Ron Chernow’s excellent tomes about the most successful businessman in human history - and an especially strange dude.  Chernow’s thick biographies also make for a good doorstop.

John D. Rockefeller is the face of the Gilded Age, the period in US history from the end of the Civil War until the early twentieth century.  This period is marked by vast fortunes built by “robber barons” who forged great monopoly businesses during the Industrial Revolution often using unscrupulous practices and abetted by corrupt politicians.  “Gilded” was a facetious reference coined by Mark Twain to highlight the stark wealth excesses and wide economic inequality permeating US society at the time.

Rockefeller’s astonishing business success was most improbable.  He was born abjectly poor in upstate New York and moved to Cleveland as an adolescent in part so his swindler / bigamist father could create more physical separation from his wives.  Rockefeller was a devout Baptist his entire life, active in his church and vociferously opposed to drink, tobacco and cards.

To help support his family, Rockefeller started his career bookkeeping in a commodities business as a teenager and quickly found his calling as an entrepreneur.  He dodged the Civil War (hiring a substitute) and capitalized on his proximity to the newly discovered oil fields in Northwest Pennsylvania to enter the kerosene refinery business near Cleveland.

As an aside, Pithole Pennsylvania was an early source of crude oil for Rockefeller and is Pennsylvania’s Tombstone.  It was the first oil boomtown with the discovery of crude oil in 1865.  It quickly became a ghost town a year later once the oil fields were drained.  It is a fascinating place to visit along with the Drake museum in nearby Titusville, the site of the world’s first oil well.  

Rockefeller founded Standard Oil Company in 1870 to refine oil into kerosene.  Before electricity, kerosene was the primary source of home illumination, but it was a highly volatile, dangerous fuel.  Rockefeller’s key innovation was an improved kerosene refining process to make it safer for consumer use. 

He applied his drive, ruthlessness, acumen, muscular management style and even questionable business practices to eventually dominate the US oil industry and create the world’s greatest personal fortune.   

Rockefeller stepped away from running Standard Oil in 1897 while still in his mid-50s.  At the time, the company controlled nearly 90% of US oil refining / distribution industries and Rockefeller was reviled by many as the “most hated robber baron in America”.

Standard Oil was eventually dismantled as part of government anti-trust actions upheld by the US Supreme Court in 1911.  Rockefeller got the last laugh as the parts of Standard Oil proved much more valuable than the whole.  The company was broken up into 34 separate entities, some of which tripled in value in the ensuing years and geometrically grew Rockefeller’s net worth.  ExxonMobil, Chevron, Conoco and Amoco all were progeny of Standard Oil.

Rockefeller’s net worth - before philanthropy – would be $400 billion in today’s dollars.   Jeff Bezos should be so well off.  

America’s first billionaire, Rockefeller lived to the ripe age of 97, falling short of his fervent goal to see age 100.  

Rockefeller’s alter ego is the world’s greatest philanthropist.  Over his last forty years, Rockefeller donated a mind-boggling amount of his personal wealth to his favorite causes in the fields of religion, education, medicine and science.  He created the University of Chicago, Rockefeller University and endowed Spelman College.  He also seeded the Rockefeller Foundation, still one of the largest foundations in the US and the first one dedicated to public health causes.

He and son Junior created the modern charitable foundation model.  Junior was not a good businessman but did become a capable philanthropist.  His passion was bankrolling the creation of Colonial Williamsburg.

By the time of his death in 1937, Rockefeller had used charitable and family giving to whittle his estate down to “only” $26 billion.  By that time, his reputation among the American public had been fully rehabilitated.

After reading the book I can’t help but note similarities between the Gilded Age and today.

You can substitute the names of the robber barons – Rockefeller, Vanderbilt, Morgan and Carnegie of the Gilded Age with current mega-billionaires Bezos, Zuckerberg, Gates and Musk.  

The common theme is these men all amassed great personal fortunes through innovative new technologies in unregulated industries while aggressively snuffing out their competition.  Moreover, instead of outright bribes that were common in the 19th century, the new barons use lobbyists to bend the government to their side.

Like today, the average American did not participate proportionally in the growing prosperity.  Indeed, acute wealth inequality led to the rise of political populism.  William Jennings Bryant ran a populist presidential campaign in 1896 that Donald Trump’s supporters would recognize.

The excesses of the Gilded Age led to increased government regulations, anti-trust actions to break up industrial monopolies and the introduction of the federal income tax.

The Gilded Age even had its own financial crisis – the Panic of 1907 – after which JP Morgan financially bailed out the US government and led to the creation of the Federal Reserve in 1913.   

They say history doesn’t repeat but does rhyme and the parallels with the US economy now and during the Gilded Age seem more than coincidental.  We’re living in a new age of wealth inequality and a concentration of corporate power that may tilt again in the future.

For example, there is a growing movement for new government regulation of big tech; there is even talk about breaking up mega tech companies.  Moreover, what will the investment world look like once the Fed Reserve is done printing cash to rescue us from the Panic of ’20?   Finally, materially higher income tax rates are now a matter of when, not if.

These “Gilded Age II” factors pose investment risks and opportunities to be considered in your portfolio management.

Until next time, be well….Tim

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