THE RAILROADS AND THE PIPE LINES
The contract between the railroads and the South Improvement Company
was signed, and armed with this deadly weapon, Mr. Rockefeller went
round to all the rival refineries in Cleveland and explained to their
respective proprietors, gently but firmly, that they were as good as
dead men in the oil trade, and that the only way they could avoid
utter ruin was to turn over their refineries to the South Improvement
Company either for stock or cash at the latter’s valuation. It seems
scarcely credible, but it is an historical fact that no less than
twenty out of these five-and-twenty Cleveland refiners--who, by the
way, were approached one by one and under pledge of secrecy--as soon
as they learnt that they were thus morally dead, proceeded at once to
order their coffins. That is, they sold up as requested. The Cleveland
refiners fell at Mr. Rockefeller’s feet through sheer fright, and thus
in less than three months’ time the Standard Oil group absorbed twenty
other refineries and increased its capacity from 1,500 barrels a day to
10,000 barrels--from one-tenth to one-fifth the total capacity of the
United States.
Of course, the murder was soon out, and the Oil Regions, which
were interested in oil wells as distinct from refining, which was
the Standard’s business, were aflame with indignation. A Petroleum
Producers’ Union was formed in opposition. Mass meetings were held and
Congress was petitioned. The Pennsylvania Legislature repealed the
charter of the South Improvement Company, and on March 25th the peccant
railroads signed a contract with the Petroleum Producers’ Union, of
which the first and chief clause provided--
That all arrangements for the transportation of oil after this date
shall be upon a basis of perfect equality to all shippers, producers,
and refiners, and that no rebates, drawbacks, or other arrangements
of any character shall be made or allowed that will give any party
the slightest difference in rates or discrimination of any character
whatever.
On April 4th General McClellan (Atlantic and Great Western), Horace
F. Clark (Lake Shore and Michigan Southern), Thomas A. Scott
(Pennsylvania), and W. H. Vanderbilt (New York Central) all sent
emphatic messages to the Petroleum Producers’ Union declaring that
their roads had no understanding of any nature in regard to freights
with the _Standard Oil Company_. On April 8th John D. Rockefeller
telegraphed to the Petroleum Producers’ Union: “In answer to your
telegram, this Company holds no contract with the railroad companies
or any of them or with the South Improvement Company.” Yet we now know
from a contract thoughtlessly exhibited by H. M. Flagler seven years
later to a Commission of the Ohio State Legislature--a contract between
his Company and the railroads--that a rate had been fixed “From April
1st until the middle of November, 1872, about seven months, $1.25.” Now
the corresponding rate openly published and recorded in the contract
between the roads and the Petroleum Producers’ Union just quoted, which
was signed March 25th, was $1.50. A rebate of 16⅔ per cent.! Mr.
Rockefeller had it all the time, in spite of his own assertions and
those of the railroad officials to the contrary.
Mr. Rockefeller has committed very few indiscretions in his lifetime,
but he did achieve one at this early date in his career. He talked
under the smart of his rebuff, and so did others of his colleagues in
the late South Improvement Company. He was reported in the _Oil City
Derrick_ to have said to a prominent man of Oil City that the South
Improvement Company could work under the charter of the Standard Oil
Company, and to have added that in less than two months his auditor
would be glad to join him. One of his colleagues simply said: “The
business _now_ will be done by the Standard Oil Company.... We mean to
show the world that the South Improvement Company was organised for
business, and means business, in spite of opposition.” This went the
round of the American Press a few days after the repeal of the charter,
and since then to the present day the indiscreetly uttered threat has
been stealthily fulfilled to the letter. The South Improvement Company
was formally dissolved in order to calm the popular indignation, but
the same men continued to operate through the Standard Oil Company of
Cleveland, and, as we have seen, to receive similar rebates, which
enabled them to build up the Standard Oil Trust. On May 3, 1910--to
bring the matter well down to date by a concrete instance--the United
States Court of Appeal confirmed a decree of the Circuit Court of the
Western District of New York State fining the Standard Oil Company
$20,000 (£4,000) “for accepting concessions from the published rate
of the Pennsylvania, New York Central, and Rutland Railroads in
violation of Inter-State Commercial Law.” But the fine, of course, is
an ineffective flea-bite, and is only worth quoting to show that the
iniquitous conspiracy of injustice and robbery entered into by the
railroads and the Standard Oil Trust in 1872 still continues to baffle
justice in America and to outrage the moral sense of the civilised
world.
A noteworthy development of the conspiracy between the Standard Oil
Company and the railroads was what became known as Standard control
of the railroad “terminal facilities.” By terminal facilities is
understood the unloading, storing, and handling of oil at the railroad
termini, chiefly in the vicinity of New York harbour. The railroads
handed over the entire control and management of their oil yards and
wharves to this one favoured oil company, authorising it to collect
the oil-yard charges from its rivals, and to handle its rivals’ oil
consignments according to its own goodwill and pleasure. Fancy one of
our British railway companies putting all its railway sidings in London
under the control of a single firm of Newcastle coal merchants, and
allowing this firm to load or unload, forward or delay the consignment
of rival firms according to its own convenience or good pleasure! Fancy
the outcry that would be raised against this privileged firm when
it became known that the only check upon its dealing unjustly with
its rivals was that, whatever charges it elected to make for loading,
unloading, and storage at the railway company’s sidings, such charges
were to be uniform in all cases! This last proviso was a mere mockery.
The only authority appointed to see that no advantage was given to
one competitor over another was the arch-competitor--the Standard Oil
Company. The companies entering into this special conspiracy were the
Erie, the New York Central and Hudson River, the Baltimore and Ohio,
and the Pennsylvania railroads at the Atlantic seaboard. I have before
me as I write copies of the contracts made by all these railroads,
excepting the Pennsylvania, with the Standard Oil Company, and they
make astounding reading.
This matter of the “terminal facilities” very naturally received
attention in the United States Government prosecution of the Standard
Oil Company of New Jersey, in the State of Missouri, when the Court
found that the Company was identical with the Standard Oil Trust, which
had previously been ordered by the Court to be dissolved as an illegal
conspiracy in restraint of trade. The effect of the decision has been
suspended by an appeal to the Supreme Court of the United States, which
would have been decided last spring had it not been for the death of
Judge Brewer, the presiding judge. The appeal is expected to be decided
under his tardily appointed successor, Judge Hughes, this spring or
early summer. In the meantime, the finding of the Missouri Circuit
Court, before which the case was argued, is that of “Guilty.” When Mr.
Rockefeller had, with the greatest difficulty, been haled before this
court and asked to explain these contracts on oath, all he could urge
in his favour was that “the Standard interests were handling very large
quantities of oil, and were the _natural parties_ to have control of
the warehousing, receiving, and shipping of oil.” Cross-examination
could extract very little from him. He could not even say when the
Standard Oil interests got possession of the terminals nor how long
they retained them. He admitted that the Standard levied terminal
charges on the oil of independents, but did not know the amount. He
relapsed, in short, into that painfully afflicting condition of amnesia
which seems to be constitutional with Standard Oil officials when
subjected to the rude shock of public examination.
But, luckily, the written letter of the contracts is now to hand to
supplement this lamentable want of memory. Take, for instance, that
with the Erie Company dated April 17, 1874, in Section 7 of which the
Standard agrees to pay 5 cents a barrel to the Erie Railroad for the
use of its yards, and further agrees “to make the charges uniform
to all parties who use the yards or for whom services are performed
therein, and always as low as any other oil yard, affording proper
facilities for the transfer, storage, preparation, and shipment of
the oil at any terminus of any railway or other line competing with
the Erie Railway at or adjacent to the port of New York.” There is
something like humour in the phrase “as low as any other oil yard.”
Every “other oil yard” was similarly controlled by the Standard. One
of its directors, Mr. Jabez A. Bostwick, stated on oath before the
Hepburn Committee on October 16, 1879, that the Standard at that
time controlled the terminals of the Erie and the New York Central
railroads, and that the New York Central had no other oil terminals at
New York Harbour except those controlled by the Standard. At the time
he was testifying he had charge of the New York Central yards, and
declined to answer as to his relation with the Standard Oil Company
in that connection. The usual atmosphere of mystery! It is dissipated,
however, at the present date, for we have now the text of the contract
between the New York Central and the Standard before us, signed January
1, 1876, and referring to a previous contract of July 22, 1875.
One more point and I have done with the “terminal facilities.” Section
8 of the Erie contract provides that the Standard Oil Company shall
assume the collection of freights and charges on all oil received at
the yard and render accounts weekly. “This provision,” observes the
“Brief for the United States,” given to the Attorney-General in the
Missouri case, “gave the Standard Company the power to collect the
Erie’s freight charges for transportation of competitors’ oil, thereby
giving the Standard the great advantage of knowledge of all competitive
shipments and of the rates of freight, and enabling it to compel those
parties to pay the full rate, while the Standard could obtain any
rate it might arrange for with the railroad companies, and it will be
shown that the Standard had rebates from all of them.” In the light of
all this, what becomes of the Standard Oil claim to superior business
acumen and cleverness? Under the conditions shown, a mere schoolboy
could outstrip and ruin the most seasoned merchant in the race for
commercial success. The claim to superior business methods is an
absolutely unfounded one, and might as well be urged by a burglar who
can make a fortune in a night; but, then, his avocation is not usually
referred to as “business.”
By this time the pumping of crude oil from the wells through pipe
lines had commenced, first for short distances to collecting points
on the railroads, but later for long distances, largely superseding
the railroads. The Standard’s pipe lines, called the United Pipe
Lines, were under the management of the late Mr. Daniel O’Day, the
big Irishman mentioned in the first chapter. At first the railroads
and Standard pipe lines worked together to harass and delay the
“independent” shipper and refiner. Here is evidence of how the Standard
Oil Company’s secret agreements with the railroads made it the interest
of the latter to decrease the shipments of independent oil by refusing
to furnish adequate cars and by delaying delivery. In 1878 Mr. W. H.
Nicholson, the representative of Mr. Ohlen, a New York shipper of
petroleum, appeared before an investigation ordered by the Secretary of
Internal Affairs of the State of Pennsylvania and gave evidence upon
oath that he began to have a difficulty in getting cars in May of that
year. One day, he stated, Mr. Ohlen telegraphed to the officials of
the Erie road to know if he could get 100 cars to run east. The reply
came back, “Yes.” About noon Mr. Nicholson saw Mr. O’Day, the manager
of the United Pipe Lines (Standard Oil property), in which his oil was
stored, and told him he was waiting to have his cars loaded. Mr. O’Day
at once said he could not load the cars. “But I have an order from
the Erie officials giving me the cars,” Mr. Nicholson objected. “That
makes no difference,” O’Day replied; “I cannot load cars except upon
an order from Pratt.” Nor would he do it. The cars were not loaded for
Mr. Nicholson, though at the time he had 10,000 barrels of oil in the
United Pipe Lines and an order for 100 cars from the officials of the
Erie in his hand. “Pratt,” of course, was the late Mr. Charles Pratt,
whose refinery was at this time merged in the Standard combine, and
whose name is memorialised in this country by the well-known “Pratt’s
motor spirit.”
High-handed proceedings of this sort by the Pennsylvania Railroad
gradually created such a hubbub that the State of Pennsylvania
instituted a suit against it. This is the evidence given by Mr. B. B.
Campbell, President of the Producers’ Union, on the occasion:--
“I never heard of a scarcity of cars until the early part of June,
1878. I came to Parker (a town in Pennsylvania) about five o’clock
in the evening, and found the citizens in a state of terrible
excitement. The Pipe Lines would not run oil unless it was sold;
the only shippers we had in Parker of any account, viz., the agents
of the Standard Oil Company, would not buy oil, stating that they
could not get cars; hundreds of wells were stopped to their great
injury; thousands more, whose owners were afraid to stop them
for fear of damage by salt water, were pumping the oil on the
ground.... On Saturday morning I spoke very plainly to Mr. Shinn
(Vice-President of the Allegheny Valley Railroad Company, controlled
by the Pennsylvania), telling him that the idea of a scarcity of cars
on daily shipments of less than 30,000 barrels a day was such an
absurd, barefaced pretence that he could not expect men of ordinary
intelligence to accept it, as the preceding fall (_anglice_, autumn),
when business required, the railroads could carry day after day from
50,000 to 60,000 barrels of oil.... I requested him to be the vehicle
of communicating to the Pennsylvania Railroad officials my views on
the subject, telling him that I was convinced that, unless immediate
relief was furnished and cars afforded, there would be an outbreak
in the Oil Regions.... On the next Monday I returned to Parker.
After passing Redbank, where the low-grade road, the connecting-link
between the Valley Road and the Philadelphia and Erie Road, meets the
Valley Road--between that point and Parker--the express train was
delayed for over half an hour in passing through _hundreds of empty
oil cars_!”
In August, 1872, Mr. Rockefeller, as the result of much plotting and
planning, succeeded in persuading about four-fifths of the refining
interest in the United States to go into a National Refiners’
Association, with himself as president, the object being to checkmate
the Petroleum Producers’ Union, which had just exposed the South
Improvement Company. This refiners’ association was to operate on what
was known as the “Pittsburg Plan”--so called from the place where the
scheme was first organised--according to which all the refineries were
subject to a central board. They were to refine only such an amount as
the board allowed, not to undersell prices fixed by the board, and to
leave their buying of crude oil and the arrangements for transportation
entirely in the hands of the board. In the aggregate they would thus
form a company, presided over by one central board; their participation
in this company would be expressed in terms of stock, and each
stockholder would receive dividends whether his plant operated or
not. It was, in short, the germ of a “Trust,” with Mr. Rockefeller as
trustee. The refiners had put their heads into the lion’s mouth with a
vengeance.
The Petroleum Producers’ Union was up in arms at once to protect the
price of crude, and made an heroic effort to do so by restricting
output. They also set up a producers’ selling agency to cut out the
Refiners’ Association by refusing to sell it oil except at their
own price. They were no match in generalship, however, for Mr.
Rockefeller, especially when aided, as he was, by the hand of Nature.
Nature was unkind enough to send the producers “gushers” with floods
of oil when they wanted it least, and they found restriction of output
practically impossible. At the same time most of the producers were
badly in want of ready cash, and the Refiners’ Association had the
longer purse.
At the psychological moment Mr. Rockefeller struck the judicious blow
of offering to throw in his lot with the producers and buy crude only
from the Producers’ Selling Agency (and that at $4.75 a barrel, a
clear dollar over the then current market price), if the producers
on their part would undertake to maintain the price and sell to no
one outside the Refiners’ Association. The coup succeeded, and, half
tempted, half constrained by cash necessities, the producers were
ill-advised enough to trust their enemy and sign what was known as “The
Treaty of Titusville” on the lines proposed. They at once received
an order from Mr. Rockefeller for 200,000 barrels of crude at $3.25,
not quite as good a price as that first mentioned, but which, under
the circumstances, they were glad to accept. The “treaty” was signed
on December 19, 1872. The producers had shipped about 50,000 of the
barrels ordered by Mr. Rockefeller, when, on January 14, 1873, they
were suddenly electrified to hear that that gentleman _refused to take
any more of the contract oil_!
When taken to task Mr. Rockefeller urged in his defence the pitiful
plea that the producers had not kept their part of the contract by
limiting the supply of oil. It was true that the Producers’ Union was
pledged by its own internal organisation to limit the supply of crude,
but no such stipulation appeared in the contract signed by it with
the Refiners’ Association. It was its own domestic arrangement. Had
the matter been taken to court it is difficult to see how an alleged
verbal understanding could have prevailed against a written contract.
But no such step was taken. The Producers’ Union collapsed in utter
demoralisation and never made another united effort for the next five
years. The Refiners’ Association also found itself unable to keep up
the internal discipline it had imposed upon itself. It dissolved in
June, 1873, and Mr. Rockefeller was left sole master of the situation.
He had outgeneralled everybody.
In 1874 the Erie, Central, and Pennsylvania Railroads entered into a
combination with certain of the pipe lines, to the effect that equal
rates should be charged by both the railroads and the pipe lines in
the combination. The railroads were to starve out the independent
pipe lines by refusing them the advantages given to the United Pipe
Lines. Both railway freights and pipage rates were to be raised
simultaneously, and on such a schedule that henceforth the cost of
transport would be equal to all refiners, on crude and refined, from
all points! This combination was announced curtly by a private circular
sent out by James H. Rutter, freight agent of the New York Central,
containing the paragraph:
You will observe that under this system the rate is even and fair
to all parties, preventing one locality taking advantage of its
neighbour by reason of some alleged or real facility it may possess.
Oil refiners and shippers have asked the roads from time to time to
make all rates even, and they would be satisfied. This scheme does
it, and we trust will work satisfactorily to all.
The refiners and shippers referred to as complacently as if they formed
the bulk of the refining and shipping interest were, of course, Mr.
Rockefeller and his friends, assumed for the nonce, as in the case of
the South Improvement Company, to be “the trade.”
This astounding circular, commonly referred to in American Trust
history as the Rutter circular, introduces us to the second species
of unjust discrimination enjoyed by Mr. Rockefeller, and perhaps--of
late years, at any rate--with an even more disastrous effect than
that of the secret rebate--namely, the “discriminatory rate.” In some
cases the discriminatory rate was secret, in others published. The
Rutter circular projected the idea into a sort of quasi-publicity as an
ostensibly fair one. The brief for the Government in the pending appeal
by the Standard Oil Company of New Jersey against the Missouri judgment
characterises these discriminatory rates as follows:--
The testimony in this case will show that in the open published
rates, as well as in secret and unfiled rates, there was radical
discrimination against the independent shipping points and in
favour of the Standard shipping points.... It is impossible that
without connivance with the Standard Oil Company the railroads of
this country should have uniformly made a system of rates whereby
with scarcely an exception the independent shipping points were
discriminated against in favour of the Standard shipping points....
It is a well-known fact that this group of defendants is the most
influential in financial circles in the United States. This influence
has undoubtedly been used to obtain these preferential rates, because
it could not be possible that it merely happened in the ordinary
course of business that practically every Standard shipping point
would be favoured with advantageous rates as against competitors.
This contention has, of course, been already sustained by the finding
of the Missouri Circuit Court, as it is sustained by the common sense
of any one who takes the trouble to go through the schedules of rate
charges made by the railroads recently brought to light. The Standard
Oil Company’s main refinery is at Whiting, in Indiana, a trifle to the
south-east of Chicago. To take a few instances, the rate from Whiting
to Chattanooga, a distance of 849 miles, by the route actually used on
the road, was fixed by the railroad at 25.9 cents per hundred gallons,
while the rate from Pittsburg--an independent refining centre--to
Chattanooga, a distance of only 651 miles, was as much as 47 cents
per hundred. In other words, the Standard Oil Company paid 21 cents a
hundred less for shipping 200 miles further. This difference amounts to
over 1¼ cents per gallon, which is in itself a large profit on oil.
The discrimination against Cleveland and Toledo--two other independent
shipping centres--on shipments to Chattanooga was equally great. Again,
take the destination of Birmingham, in the State of Alabama. The open
rate from Pittsburg, a distance of 794 miles, was 51.5 cents; from
Whiting, a distance of 820 miles, it was 29.5 cents, a difference of 22
cents. Similarly there was an equal discrimination against Cleveland
and Toledo on shipments to Birmingham. And so on to the end of the
chapter of conspiracy all over the States.
THE BIRTH OF THE TRUST
“The American Beauty rose can be produced in its splendour and
fragrance only by sacrificing the early buds which grow up around it.”
J. D. ROCKEFELLER, Jun.,
_to the students of Brown University_.