Standard Oil and Yukos in the Context of Early Capitalism in the United States and Russia

Demokratizatsiya, Summer 2008 by Volkov, Vadim

Mark Twain captured the contradiction between the powerful external appeal and dynamism of America's early capitalism and its dark, seamy side in his famous novel The Gilded Age, which gave the period its historical name.5 The monopolies and power politics that resulted from unregulated market competition threatened the fabric of society. By the early 1900s, the new economic order caused mass alienation and the loss of individual agency. Society's reaction to the market's destructive forces culminated in the Progressive movement, which demanded that the socially destructive private pursuit of wealth end and government play an increased state role in the economy. The beginning of the twentieth century saw the federal government initiate several important trust-busting cases, and the Standard Oil case was the biggest. The government's prosecution of these companies reflected early capitalism's evolution, which eventually resulted in a new model, represented by the New Deal. The structural features constituting America's early capitalism included: high but unstable growth; sharp inequalities and disproportions; the domination of acquisitive interest; weak constraints on the means of advancing this interest; no institutional divide between economic and political undertakings; and economic and political spheres driven by "strong actors."

Economic Structures and the Robber Barons

In the first comprehensive study of causes and forms of concentration in U.S. industry during the Gilded Age, published in 1912, Charles Van Hise suggested that most contemporary leading industries had an inherent tendency toward monopolization. Infrastructure and the utilities sector, which included railroads, electricity, telephones, and so on ("natural monopolies"), could be run more efficiently as monopolies. Competing parallel lines would be a clear waste of resources. Businesses dependent on limited and localized natural resources (coal, oil, ore) were similarly disposed to monopoly, as were industries producing highly standardized goods distributed over a wide territory, such as tobacco, sugar, or steel.6

The key technological inventions' industrial potential, such as that of the steam locomotive, the use of coke in steel production, and the development of oil-refining technologies, pipeline transportation, and electricity necessitated large capital investments, which, in turn, required new forms of economic organization. Limited-liability joint-stock companies, which were introduced as early as 1848 but developed only in the 1860s, proved to be the solution. Corporations in which every stockholder's liability was limited to his or her investment in the stock allowed thousands of people to mobilize their savings, increasing capitalization to millions of dollars and creating large enterprises capable of big and often adventurous projects.7

Joint-stock companies created opportunities for quick personal enrichment through purposeful overcapitalization ("watered stock," or stocks issued at a higher value than the enterprise's real value) and speculation. Corporate ownership made enterprises vulnerable to hostile takeovers and fraudulent manipulations of stock. Ownership in such corporations was highly dispersed, but a small team of managers who controlled the enterprise was quick to invent multiple self-enrichment schemes at the expense of minority shareholders. Managers also discovered that combination allowed them to eliminate competition, making it possible to control sales and "fix" prices. The revolutionary managerial innovation of the time was to integrate all cycles, from mining raw materials to production to distributing finished products, into one corporation. This effectively removed the most repetitive and vulnerable transactions from the market's realm and placed them under direct administrative control, increasing predictability and efficiency.8 This produced horizontally and vertically integrated trusts. At first, the trusts existed as informal agreements among several industry leaders or as networks of stock cross-ownership. In the 1890s, they evolved into large holding companies whose sole function was to own stock and control a vast network of other companies and subsidiaries across the country. In such a system, tracing ownership was difficult; many companies posed as independent, although they were actually part of large monopolies.