Wise Economic Decisions Part 3

This is the 3rd part in a 4 part series which discusses the ideas of recessions and there devastating effects.  It points out that well most people are destroyed in  these terrible recessions some people actually thrive and become exceedingly wealthy.  This paper tries to look at similarities between these entrepreneurs and hope to gain some insight from the past.  My hope is that the reader will find this series interesting and helpful.  If you have question, comments, or even suggestions on future topics please feel free to comment on the blog or email me on my Contact Me page. The works cited page will be included on the 4th part in this series:

John Davison Rockefeller was born on July 8, 1839, in Richford, NY.  His father “Big Bill” Williams Rockefeller always instilled in his children the importance of saving, investing, and tithing.  Big Bill would loan his kids money if they needed it but he would charge them ten percent interest, and then he would borrow money from his kid and give them ten percent interest (Segall, 11-13).  When John D. Rockefeller was only ten years old he had already saved fifty dollars he had earned from hoeing potatoes from a farmer for 34 cents a day (Traub, 67).  He then proceeded to loan the money to the farmer when he needed it and charged him seven percent interest.  When the farmer paid Rockefeller back a year later he had earned $3.50 in interest which was more than ten days worth of work.  He loved business and could not wait to make his fortune even when he was young.  Rockefeller was very good at math and although he did not like school, he realized that it would help him do well in business.  He graduated school at the age of sixteen and then proceeded to call every business in Cleveland for a job (Segall, 21).  He ended up getting a job at a commission house where he would receive training and valuable business experience that he would use later in life (Traub, 69).  John D. Rockefeller started his own commission business with his friend Clark.  The skills that his father had taught him served him well.  Rockefeller would borrow money when he saw a really good deal so that he could fully take advantage of the deal.  This was kind of a novel concept at the time and his partner sometimes worried that he was too risky.  In their first year of business, they ended up making $4,000 and the following year their profit was $17,000 (Segall, 28-31).

 

During this time the oil industry was just starting to get kicked off.  Before people started making kerosene out of crude oil, people had to use wax or whale oil that was really smelly and burned a lot dirtier.  In fact crude oil became so valuable that it started to be called “black gold.”  Rockefeller and his partner decided that they we going to get into the oil business (Traub, 71).  Actually finding the oil at this time was a risky business because people were not sure where all the oil was, so a person would have to blindly dig for it.  Because of all this, Rockefeller decided that he was going to get into the oil refining business.  John D Rockefeller started with a refinery factory, a barreling company, and shipping company (Segall, 35).   This was relatively small compared to some of the businesses out there at the time when he started out.  Oil was absolutely booming in the market at this time.  The capital structure was being built up extremely fast since it was so profitable for people.  This led to an overproduction of oil.  In 1863, the US economy needed about 5 million barrels of oil and the economy produced about 12 million barrels of oil.  There was a huge price fluctuation for oil and it would drop ridiculously low when there was too much oil. When the prices got really low, Rockefeller would buy a lot of oil and store it in his warehouse.  Rockefeller wanted to take over the oil industry but his base was in Cleveland and it was expensive to ship to the east. The railroads were sick of having such inconsistent loads on their trains, so Rockefeller told them he would give them steady business if they gave him a cheaper price on shipping and they did (Segall, 64).  This gave him a huge advantage over all of his competition and he was able to buy out all the businesses as they started to go under.  This let the market start to adjust the capital structure to the needed size.  By 1878, he owned over 90% of the oil refineries in Cleveland, and by 1880 his company Standard Oil refined 95% of the oil used in the United States (Traub, 77).   By the time Rockefeller retired, he had become the first billionaire in American history.

 

Several things made John D. Rockefeller a good businessman.  First, his father had taught him to save well.  At the age of ten he had already saved fifty dollars.  In order to make money, one must have money, and the more money one has the easier it is to make lots of money.   One of the signs of a good entrepreneur is not that they miser away all their money, but that they save all there extra money so that when there is a really good opportunity they can pour all their resources into it.  Second, Rockefeller took risks. With every risk there is a chance of failure but in business you have to take risks to have the opportunity to make money.  It is important to evaluate the difference between good risk and bad risk (Traub, 79).  When the oil started to be over-produced, Rockefeller was able to take advantage of this and buy it cheaply and store and save it for when he needed it.   He was also able to see through the mud of the boom bust cycle and see what was truly profitable so when the bust came he was still profitable.  When the bust was really hurting everyone whose oil refinery had grown too big Rockefeller was fine because his company was legitimately profitable.   This is easier said than done but this is one of the most important qualities that can be learned from Rockefeller.  Rockefeller looked past the excitement of the boom and saw if there was really a need for a business that will last when times are hard (Segall, 35).  The railroad companies should have asked themselves if their lines of railroad would actually be worth it without the government subsidies.  Investors should have asked themselves if the dot-com businesses that they were investing in were actually good with sound business practices that were making enough profits to stay in business(Segall, 28-31).   If investors would have taken these precautions in either of these cases, then when the times of bust came, they would have to tighten their belts for a time, but in the end they would survive and be stronger as their competition goes out of business.

 

Another example of a great entrepreneur was Cecil Rhodes.  He was born on July 5, 1853 in Bishop Stortford, England.  He was born into a large family and had always dreamed of going to Oxford like his older brothers, but when he reached that age his family no longer had the money to support him (Traub, 35).  He had very bad health issues, so he was forced to move to South Africa to make money for tuition at Oxford.  The warm climate was thought to be good for his health.  He went to work at his brother’s cotton farm.  Cotton at this time was over produced and the conditions in South Africa were not ideal for growing cotton.  Consequently his brother’s farm was failing.  During this time an African worker on another farm found a giant “shiny stone” and decided to sell it to a man who collected “shiny stones.”  He received his asking price of 500 Sheep, 10 oxen, and a horse. The “shiny stone” ended up being one of the world’s largest diamonds ever found, an amazing 83 carrots called the star of Africa.  It was eventually sold in England for 25,000 thousand pounds or 120,000 dollars.  Soon after this other farmers and natives discovered more diamonds on large farms and in the river bed.  This led to a diamond rush or boom in the mining area (Rotberg, 98).  People went crazy with trying to mine the diamond. Rhodes and his brother were no exception.  The lure of getting rich quick lured thousands of people to South Africa.   First his brother left for the diamond fields leaving Rhodes in charge of the farm.  After another year of people supposedly getting rich and the cotton crop failing, Rhodes left his brother’s farm and headed for the diamond field (Traub, 41). The scenes of diamond fields were similar to that of the gold mines in America during the gold rush. People would buy very small plots of land, set up quick poor shelters to live in, dig through the loose earth for diamonds, and hope to get rich quick and leave.  Conditions were dirty and chaotic and there was little or no law in these parts.  Trade was not regulated and there was not a standard so the price would fluctuate majorly, without predictability. This made actually making money extremely hard and the average diamond prospector just ended up losing the money they came over with or leaving when they broke even.

 

When Rhodes arrived he felt like mining for diamonds was just a gamble, but he soon saw all these problems. He realized that if they could be taken away it would not be a gamble but a profitable business.  He founded a partnership with his friend Charles Dunell (Traub, 41). They tried to buy as many stakes as they could that were together so that could bring some stability to their business.  They eventually started to make some profit.   When Rhodes had made enough money he returned to Oxford to get his degree.  He got about half way through his college career but a stroke sent him back to Africa to recover.  He rejoined his partner and there continued to make modest profits.  It wasn’t until miners started getting to about eighty feet deep and the ground started to get extremely hard that people started packing up and going home.  Rhodes was able to now buy up land for relatively cheap prices (Traub, 43).  Soon his company, De Beers Mining Company owned almost the entire diamond field.   Rhodes’ company became an extremely powerful company and he and his partner became extremely rich.  When Gold was discovered in Transvaal they started to focus their attention on the gold mines in Transvaal and made even more money.    Rhodes became one of the richest men of his time and at one time his company controlled 90% of the diamonds in the world (Rotberg, 245-250).

 

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