After the failure of salt market, Flagler found oil

(Con­tin­ued from last week)

With the end of the war, the salt mar­ket col­lapsed. Sup­plies became exces­sive and prices fell, hurt­ing all pro­duc­ers. Fla­gler was espe­cially hard hit because his firm was so large. What was more, salt pro­duc­ers began to form alliances and con­sol­i­date as they strug­gled to remain sol­vent. Fla­gler went bank­rupt in the chaos and returned to Belle­vue in 1866 in finan­cial ruin.

Flagler’s bit­ter salt expe­ri­ence taught him that unre­strained com­pe­ti­tion could lead to finan­cial ruin. Con­trol­ling com­pe­ti­tion on the other hand, actu­ally could ben­e­fit an indus­try. Fla­gler would not let unre­strained com­pe­ti­tion impede him again.

Fol­low­ing his Sag­i­naw deba­cle, Fla­gler and Mary moved to Cleve­land, where he renewed his acquain­tance with Rock­e­feller. By then, Rock­e­feller was no longer devoted to the grain busi­ness but to oil.

In the early 1860s, Rock­e­feller (who like Fla­gler, had bought his way out of mil­i­tary ser­vice) went into busi­ness with Samuel Andrews, an immi­grant Eng­lish­man with a prof­itable method for refin­ing kerosene from petro­leum. The two opened their first refin­ery in 1865 and had plans to open a sec­ond but lacked finan­cial back­ing. Fla­gler sug­gested Rock­e­feller talk to Stephen Hark­ness — by this time a banker — who agreed to invest $100,000.

Stephen Hark­ness’ invest­ment came with the con­di­tion he remain a silent part­ner in the ven­ture and that Henry have com­plete con­trol over his invest­ment. Thus, the oil refin­ing part­ner­ship of Rock­e­feller, Andrews and Fla­gler was formed.

Flagler’s first job was to nego­ti­ate rail­road rates, of vital impor­tance to refin­ers because they var­ied from rail­road to rail­road and from ship­per to ship­per. The refiner with the low­est trans­porta­tion rates could have a deci­sive edge over his competitors.

Flagler’s nego­ti­at­ing style was to deal first with one and then another rail­road, secretly play­ing one against the other to win the most favor­able rates. The oil company’s grow­ing pres­tige and pop­u­lar­ity among investors proved use­ful in win­ning favor­able rates. As an added induce­ment and as a pun­ish­ment if things didn’t go his way, Fla­gler could shift his busi­ness away from the rail­roads to the lake steam­ers and canal boats, whose lower rates made up for their longer deliv­ery times.

Fla­gler also showed con­sid­er­able genius when it came to pro­mot­ing his company’s growth. His biggest hur­dle was to attract new sources of money. The Rock­e­feller, Andrews and Fla­gler part­ner­ship worked well but only up to a point. To attract new money, more part­ners were needed. But new part­ners meant con­trol over the firm even­tu­ally would be lost.

In late 1869, Fla­gler found the solu­tion. Rock­e­feller, Andrews and Fla­gler would incor­po­rate and issue stock, which could be sold to new investors.

“I wish I had the brains to think of it,” Rock­e­feller said years later about the incor­po­ra­tion, at the time a bold and inno­v­a­tive busi­ness move. “It was Henry M. Fla­gler,” he added.

On Jan. 10, 1870, eight days after Flagler’s 40th birth­day, the Stan­dard Oil Com­pany of Ohio was incor­po­rated. Rock­e­feller was elected pres­i­dent, Fla­gler its sec­re­tary and treasurer.

By that time Henry and Mary seemed well assured of a com­fort­able future. The cou­ple had wed in 1853, when Mary was 20 and Henry was 23 and already on his way to becom­ing pros­per­ous through his Hark­ness fam­ily ties.

After their mar­riage, the cou­ple lived in Belle­vue where a daugh­ter, Jen­nie Louise, was born in March 1855. Three years later, Mary gave birth to a sec­ond daugh­ter, Car­rie, who died in 1861. In 1870, the same year of Stan­dard Oil’s incor­po­ra­tion, a son Harry (who went on to found the New York Phil­har­monic) was born.

By the time of Harry’s birth, the Fla­glers had a Euclid Avenue address and lived among Cleveland’s other mil­lion­aire industrialists.

(To be con­tin­ued next week)

———

Belle­vue His­to­rian Bill Oddo writes a weekly col­umn for The Belle­vue Gazette.

Posted by Becky Brooks on Nov 12 2011. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.