SOME EXPERIENCES IN THE OIL BUSINESS
During the years when I was just coming to man's estate, the produce
business of Clark & Rockefeller went on prosperously, and in the early
sixties we organized a firm to refine and deal in oil. It was composed
of Messrs. James and Richard Clark, Mr. Samuel Andrews, and the firm
of Clark & Rockefeller, who were the company. It was my first direct
connection with the oil trade. As the new concern grew the firm of
Clark & Rockefeller was called upon to supply a large special capital.
Mr. Samuel Andrews was the manufacturing man of the concern, and he
had learned the process of cleansing the crude oil by the use of
sulphuric acid.
In 1865 the partnership was dissolved; it was decided that the cash
assets should be collected and the debts paid, but this left the plant
and the good-will to be disposed of. It was suggested that they should
go to the highest bidder among ourselves. This seemed a just
settlement to me, and the question came up as to when the sale should
be held and who would conduct it. My partners had a lawyer in the room
to represent them, though I had not considered having a legal
representative; I thought I could take care of so simple a
transaction. The lawyer acted as the auctioneer, and it was suggested
that we should go on with the sale then and there. All agreed, and so
the auction began.
I had made up my mind that I wanted to go into the oil trade, not as a
special partner, but actively on a larger scale, and with Mr. Andrews
wished to buy that business. I thought that I saw great opportunities
in refining oil, and did not realize at that time that the whole oil
industry would soon be swamped by so many men rushing into it. But I
was full of hope, and I had already arranged to get financial
accommodation to an amount that I supposed would easily pay for the
plant and good-will. I was willing to give up the other firm of Clark
& Rockefeller, and readily settled that later--my old partner, Mr.
Clark, taking over the business.
The bidding began, I think, at $500 premium. I bid a thousand; they
bid two thousand; and so on, little by little, the price went up.
Neither side was willing to stop bidding, and the amount gradually
rose until it reached $50,000, which was much more than we supposed
the concern to be worth. Finally, it advanced to $60,000, and by slow
stages to $70,000, and I almost feared for my ability to buy the
business and have the money to pay for it. At last the other side bid
$72,000. Without hesitation I said $72,500. Mr. Clark then said:
"I'll go no higher, John; the business is yours."
"Shall I give you a check for it now?" I suggested.
"No," Mr. Clark said, "I'm glad to trust you for it; settle at your
convenience."
The firm of Rockefeller & Andrews was then established, and this was
really my start in the oil trade. It was my most important business
for about forty years until, at the age of about fifty-six, I retired.
The story of the early history of the oil trade is too well known to
bear repeating in detail. The cleansing of crude petroleum was a
simple and easy process, and at first the profits were very large.
Naturally, all sorts of people went into it: the butcher, the baker,
and the candlestick-maker began to refine oil, and it was only a short
time before more of the finished product was put on the market than
could possibly be consumed. The price went down and down until the
trade was threatened with ruin. It seemed absolutely necessary to
extend the market for oil by exporting to foreign countries, which
required a long and most difficult development; and also to greatly
improve the processes of refining so that oil could be made and sold
cheaply, yet with a profit, and to use as by-products all of the
materials which in the less-efficient plants were lost or thrown away.
These were the problems which confronted us almost at the outset, and
this great depression led to consultations with our neighbors and
friends in the business in the effort to bring some order out of what
was rapidly becoming a state of chaos. To accomplish all these tasks
of enlarging the market and improving the methods of manufacture in a
large way was beyond the power or ability of any concern as then
constituted. It could only be done, we reasoned, by increasing our
capital and availing ourselves of the best talent and experience.
It was with this idea that we proceeded to buy the largest and best
refining concerns and centralize the administration of them with a
view to securing greater economy and efficiency. The business grew
faster than we had anticipated.
This enterprise, conducted by men of application and ability working
hard together, soon built up unusual facilities in manufacture, in
transportation, in finance, and in extending markets. We had our
troubles and set-backs; we suffered from some severe fires; and the
supply of crude oil was most uncertain. Our plans were constantly
changed by changed conditions. We developed great facilities in an oil
centre, erected storage tanks, and connected pipe-lines; then the oil
failed and our work was thrown away. At best it was a speculative
trade, and I wonder that we managed to pull through so often; but we
were gradually learning how to conduct a most difficult business.
FOREIGN MARKETS
Several years ago, when asked how our business grew to such large
proportions I explained that our first organization was a partnership
and afterward a corporation in Ohio. That was sufficient for a local
refining business. But, had we been dependent solely upon local
business, we should have failed long since. We were forced to extend
our markets into every part of the world. This made the sea-board
cities a necessary place of business, and we soon discovered that
manufacturing for export could be more economically carried on there;
hence refineries were established at Brooklyn, at Bayonne, at
Philadelphia, at Baltimore, and necessary corporations were organized
in the different states.
We soon discovered, as the business grew, that the primary method of
transporting oil in barrels could not last. The package often cost
more than the contents, and the forests of the country were not
sufficient to supply cheaply the necessary material for an extended
time. Hence we devoted attention to other methods of transportation,
adopted the pipe-line system, and found capital for pipe-line
construction equal to the necessities of the business.
To operate pipe-lines required franchises from the states in which
they were located--and consequently corporations in those states--just
as railroads running through different states are forced to operate
under separate state charters. To perfect the pipe-line system of
transportation required many millions of capital. The entire oil
business is dependent upon the pipe-line. Without it every well would
be less valuable and every market at home and abroad would be more
difficult to serve or retain, because of the additional cost to the
consumer. The expansion of the whole industry would have been retarded
without this method of transportation.
Then the pipe-line system required other improvements, such as
tank-cars upon railroads, and finally the tank-steamer. Capital had to
be furnished for them and corporations created to own and operate
them.
Everyone of the steps taken was necessary if the business was to be
properly developed, and only through such successive steps and by a
great aggregation of capital is America to-day enabled to utilize the
bounty which its land pours forth, and to furnish the world with
light.
THE START OF THE STANDARD OIL COMPANY
In the year 1867 the firms of William Rockefeller & Co., Rockefeller &
Andrews, Rockefeller & Co., and S.V. Harkness and H.M. Flagler united
in forming the firm of Rockefeller, Andrews & Flagler.
The cause leading to the formation of this firm was the desire to
unite our skill and capital in order to carry on a business of greater
magnitude with economy and efficiency in place of the smaller
business that each had heretofore conducted separately. As time went
on and the possibilities became apparent, we found further capital to
be necessary; then we interested others and organized the Standard Oil
Company, with a capital of $1,000,000. Later we saw that more money
could be utilized, found persons who were willing to invest with us,
and increased our capital to $2,500,000, in 1872, and afterward in
1874 to $3,500,000. As the business grew, and markets were obtained at
home and abroad, more persons and capital were added to the business,
and new corporate agencies were obtained or organized, the object
being always the same--to extend our operations by furnishing the best
and cheapest products.
I ascribe the success of the Standard Oil Company to its consistent
policy of making the volume of its business large through the merit
and cheapness of its products. It has spared no expense in utilizing
the best and most efficient method of manufacture. It has sought for
the best superintendents and workmen and paid the best wages. It has
not hesitated to sacrifice old machinery and old plants for new and
better ones. It has placed its manufactories at the points where they
could supply markets at the least expense. It has not only sought
markets for its principal products, but for all possible by-products,
sparing no expense in introducing them to the public in every nook and
corner of the world. It has not hesitated to invest millions of
dollars in methods for cheapening the gathering and distribution of
oils by pipe-lines, special cars, tank-steamers, and tank-wagons. It
has erected tank-stations at railroad centres in every part of the
country to cheapen the storage and delivery of oil. It has had faith
in American oil and has brought together vast sums of money for the
purpose of making it what it is, and for holding its market against
the competition of Russia and all the countries which are producers of
oil and competitors against American products.
THE INSURANCE PLANS
Here is an example of one of the ways in which we achieved certain
economies and gained real advantage. Fires are always to be reckoned
with in oil refining and storage, as we learned by dear experience,
but in having our plants distributed all over the country the unit of
risk and possible loss was minimized. No one fire could ruin us, and
we were able thus to establish a system of insuring ourselves. Our
reserve fund which provided for this insurance could not be wiped out
all at once, as might be the case with a concern having its plants
together or near each other. Then we studied and perfected our
organization to prevent fires, improving our appliances and plans year
after year until the profit on this insurance feature became a very
considerable item in the Standard earnings.
It can easily be seen that this saving in insurance, and minimizing
the loss by fire affected the profits, not only in refining, but
touched many other associated enterprises: the manufacture of
by-products, the tanks and steamers, the pumping-stations, etc.
We devoted ourselves exclusively to the oil business and its products.
The company never went into outside ventures, but kept to the enormous
task of perfecting its own organization. We educated our own men; we
trained many of them from boyhood; we strove to keep them loyal by
providing them full scope for their ability; they were given
opportunities to buy stock, and the company itself helped them to
finance their purchases. Not only here in America, but all over the
world, our young men were given chances to advance themselves, and the
sons of the old partners were welcomed to the councils and
responsibilities of the administration. I may say that the company
has been in all its history, and I am sure it is at present, a most
happy association of busy people.
I have been asked if my advice is not often sought by the present
managers. I can say that if it were sought it would be gladly given.
But the fact is that since I retired it has been very little required.
I am still a large stockholder, indeed I have increased my holdings in
the company's stock since I relinquished any part in its management.
WHY THE STANDARD PAYS LARGE DIVIDENDS
Let me explain what many people, perhaps, fully appreciate, but some,
I am sure, do not. The Standard pays four dividends a year: the first
in March, which is the result of the busiest season of the whole
twelvemonth, because more oil is consumed in winter than at other
seasons, and three other dividends later, at about evenly divided
periods. Now, these dividends run up to 40 per cent. on the capital
stock of $100,000,000, but that does not mean that the profit is 40
per cent. on the capital invested. As a matter of fact, it represents
the results of the savings and surplus gained through all the
thirty-five or forty years of the workings of the companies. The
capital stock could be raised several hundred per cent. without a
penny of over-capitalization or "water"; the actual value is there. If
this increase had been made, the rate would represent a moderate
dividend-paying power of about 6 to 8 per cent.
A NORMAL GROWTH
Study for a moment the result of what has been a natural and
absolutely normal increase in the value of the company's possessions.
Many of the pipe-lines were constructed during a period when costs
were about 50 per cent. of what they are now. Great fields of oil
lands were purchased as virgin soil, which later yielded an immense
output. Quantities of low-grade crude oil which had been bought by the
company when it was believed to be of little value, but which the
company hoped eventually to utilize, were greatly increased in value
by inventions for refining it and for using the residues formerly
considered almost worthless. Dock property was secured at low prices
and made valuable by buildings and development. Large unimproved
tracts of land near the important business centres were acquired. We
brought our industries to these places, made the land useful, and
increased the value, not only of our own property, but of the land
adjacent to it to many times the original worth. Wherever we have
established businesses in this and other countries we have bought
largely of property. I remember a case where we paid only $1,000 or so
an acre for some rough land to be used for such purposes, and, through
the improvements we created, the value has gone up 40 or 50 times as
much in 35 or 40 years.
Others have had similar increases in the value of their properties,
but have enlarged their capitalization correspondingly. They have
escaped the criticism which has been directed against us, who with our
old-fashioned and conservative notions have continued without such
expansion of capitalization.
There is nothing strange or miraculous in all this; it was all done
through this natural law of trade development. It is what the Astors
and many other large landholders did.
If a man starts in business with $1,000 capital and gradually
increases his property and investment by retaining in his concern much
of his earnings, instead of spending them, and thus accumulates values
until his investment is, say, $10,000, it would be folly to base the
percentage of his actual profits only on the original $1,000 with
which he started. Here, again, I think the managers of the Standard
should be praised, and not blamed. They have set an example for
upbuilding on the most conservative lines, and in a business which has
always been, to say the least, hazardous, and to a large degree
unavoidably speculative. Yet no one who has relied upon the ownership
of this stock to pay a yearly income has been disappointed, and the
stock is held by an increasing number of small holders the country
over.
THE MANAGEMENT OF CAPITAL
We never attempted, as I have already said, to sell the Standard Oil
stock on the market through the Stock Exchange. In the early days the
risks of the business were great, and if the stock had been dealt in
on the Exchange its fluctuations would no doubt have been violent. We
preferred to have the attention of the owners and administrators of
the business directed wholly to the legitimate development of the
enterprise rather than to speculation in its shares. The interests of
the company have been carefully conserved. We have been criticized for
paying large dividends on a capitalization which represents but a
small part of the actual property owned by the company. If we had
increased the capitalization to bring it up to the real value, and
listed the shares on the Exchange, we might have been criticized then
for promoting a project to induce the public to invest. As I have
indicated, the foundations of the company were so thoroughly
established, and its affairs so conservatively managed, that, after
the earlier period of struggle to secure adequate capital and in view
of the trying experiences through which we then passed, we decided to
pursue the policy of relying upon our own resources. Since then we
have never been obliged to lean very heavily upon the financial
public, but have sought rather to hold ourselves in position not only
to protect our own large and important interests, but to be prepared
in times of stress to lend a helping hand to others. The company has
suffered from the statements of people who, I am convinced, are not
familiar with all the facts. As I long ago ceased to have any active
part in the management of its affairs perhaps I may venture the
opinion that men who devote themselves to building up the sale of
American products all over the world, in competition with foreign
manufacturers should be appreciated and encouraged.
There have been so many tales told about the so-called speculations of
the Standard Oil Company that I may say a word about that subject.
This company is interested only in oil products and such
manufacturing affairs as are legitimately connected therewith. It has
plants for the making of barrels and tanks; and building pumps for
pumping oil; it owns vessels for carrying oil, tank-cars, pipes for
transporting oil, etc., etc.--but it is not concerned in speculative
interests. The oil business itself is speculative enough, and its
successful administration requires a firm hand and a cool head.
The company pays dividends to its stockholders which it earns in
carrying on this oil trade. This money the stockholders can and do use
as they think fit, but the company is in no way responsible for the
disposition that the stockholders make of their dividends. The
Standard Oil Company does not own or control "a chain of banks," nor
has it any interest directly or indirectly in any bank. Its relations
are confined to the functions of ordinary banking, such as other
depositors have. It buys and sells its own exchange; and these
dealings, extending over many years, have made its bills of exchange
acceptable all over the world.
CHARACTER THE ESSENTIAL THING
In speaking of the real beginning of the Standard Oil Company, it
should be remembered that it was not so much the consolidation of the
firms in which we had a personal interest, but the coming together of
the men who had the combined brain power to do the work, which was the
actual starting-point. Perhaps it is worth while to emphasize again
the fact that it is not merely capital and "plants" and the strictly
material things which make up a business, but the character of the men
behind these things, their personalities, and their abilities; these
are the essentials to be reckoned with.
Late in 1871, we began the purchase of some of the more important of
the refinery interests of Cleveland. The conditions were so chaotic
and uncertain that most of the refiners were very desirous to get out
of the business. We invariably offered those who wanted to sell the
option of taking cash or stock in the company. We very much preferred
to have them take the stock, because a dollar in those days looked as
large as a cart-wheel, but as a matter of business policy we found it
desirable to offer them the option, and in most cases they were even
precipitate in their choice of the cash. They knew what a dollar would
buy, but they were very sceptical in regard to the possibilities of
resurrecting the oil business and giving any permanent value to these
shares.
These purchases continued over a period of years, during which many
of the more important refineries at Cleveland were bought by the
Standard Oil Company. Some of the smaller concerns, however, continued
in the business for many years, although they had the same opportunity
as others to sell. There were always, at other refining points which
were regarded as more favourably located than Cleveland, many
refineries in successful operation.
THE BACKUS PURCHASE
All these purchases of refineries were conducted with the utmost
fairness and good faith on our part, yet in many quarters the stories
of certain of these transactions have been told in such form as to
give the impression that the sales were made most unwillingly and only
because the sellers were forced to make them by the most ruthless
exertion of superior power. There was one transaction, viz., the
purchase of the property of the Backus Oil Company, which has been
variously exploited, and I am made to appear as having personally
robbed a defenceless widow of an extremely valuable property, paying
her therefor only a mere fraction of its worth. The story as told is
one which makes the strongest appeal to the sympathy and, if it were
true, would represent a shocking instance of cruelty in crushing a
defenceless woman. It is probable that its wide circulation and its
acceptance as true by those who know nothing of the facts has awakened
more hostility against the Standard Oil Company and against me
personally than any charge which has been made.
This is my reason for entering so much into detail in this particular
case, which I am exceedingly reluctant to do, and for many years have
refrained from doing.
Mr. F.M. Backus, a highly respected citizen of Cleveland and an old
and personal friend of mine, had for several years prior to his death
in 1874 been engaged in the lubricating oil business which was carried
on after his death as a corporation known as the Backus Oil Company.
In the latter part of 1878, our company purchased certain portions of
the property of this company. The negotiations which led to this
purchase extended over several weeks, being conducted on behalf of
Mrs. Backus, as the principal stockholder, by Mr. Charles H. Marr, and
on behalf of our company by Mr. Peter S. Jennings. I personally had
nothing to do with the negotiations except that, when the matter first
came up, Mrs. Backus requested me to call at her house, which I did,
when she spoke of selling the property to our company and requested me
to personally conduct the negotiations with her with reference to it.
This I was obliged to decline to do, because, as I then explained to
her, I was not familiar with the details of the business. In that
conversation I advised her not to take any hasty action, and when she
expressed fears about the future of the business, stating, for
example, that she could not get cars to transport sufficient oil, I
said to her that, though we were using our cars and required them in
our business, yet we would loan her any number she needed, and do
anything else in reason to assist her, and I did not see why she could
not successfully prosecute her business in the future as in the past.
I told her, however, that if after reflection she desired to pursue
negotiations for the sale of her property some of our people, familiar
with the lubricating oil business, would take up the question with
her. As she still expressed a desire to have our company buy her
property, negotiations were taken up by Mr. Jennings, and the only
other thing that I had to do with the matter was that when our experts
reported that in their judgment the value of the works, good will, and
successorship which we had decided to buy were worth a certain sum, I
asked them to add $10,000, in order to make doubly sure that she
received full value. The sale was consummated, as we supposed, to the
entire satisfaction of Mrs. Backus, and the purchase price which had
been agreed upon was paid.
To my profound astonishment, a day or two after the transaction had
been closed, I received from her a very unkind letter complaining that
she had been unjustly treated. After investigating the matter I wrote
her the following letter:
November 13, 1878.
DEAR MADAM:
I have held your note of the 11th inst., received yesterday, until
to-day, as I wished to thoroughly review every point connected with
the negotiations for the purchase of the stock of the Backus Oil
Company, to satisfy myself as to whether I had unwittingly done
anything whereby you could have any right to feel injured. It is
true that in the interview I had with you I suggested that if you
desired to do so, you could retain an interest in the business of
the Backus Oil Company, by keeping some number of its shares, and
then I understood you to say that if you sold out you wished to go
entirely out of the business. That being my understanding, our
arrangements were made in case you concluded to make the sale that
precluded any other interests being represented, and therefore,
when you did make the inquiry as to your taking some of the stock,
our answer was given in accordance with the facts noted above, but
not at all in the spirit in which you refer to the refusal in your
note. In regard to the reference that you make as to my permitting
the business of the Backus Oil Company to _be taken_ from you, I
say that in this as in all else you have written in your letter of
the 11th inst., you do me most grievous wrong. It was but of little
moment to the interests represented by me whether the business of
the Backus Oil Company was purchased or not. I believe that it was
for your interest to make the sale, and am entirely candid in this
statement, and beg to call your attention to the time, some two
years ago, when you consulted Mr. Flagler and myself as to selling
out your interests to Mr. Rose, at which time you were desirous of
selling at _considerably less price_, and upon time, than you have
now received in cash, and which sale you would have been glad to
have closed if you could have obtained satisfactory security for
the deferred payments. As to the price paid for the property, it is
certainly three times greater than the cost at which we could now
construct equal or better facilities; but wishing to take a liberal
view of it, I urged the proposal of paying $60,000, which was
thought much too high by some of our parties. I believe that if you
would reconsider what you have written in your letter, to which
this is a reply, you must admit having done me great injustice, and
I am satisfied to await upon your innate sense of right for such
admission. However, in view of what seems to be your present
feeling, I now offer to restore to you the purchase made by us, you
simply returning the amount of money which we have invested, and
leaving us as though no purchase has been made.
Should you not desire to accept this proposal, I offer to you 100,
200 or 300 shares of the stock at the same price that we paid for
the same, with this addition, that if we keep the property we are
under engagement to pay into the treasury of the Backus Oil Company
any amount which added to the amount already paid would make a
total of $100,000 and thereby make the shares $100 each.
That you may not be compelled to hastily come to a conclusion, I
will leave open for three days these propositions for your
acceptance or declination, and in the meantime believe me,
Yours very truly,
JOHN D. ROCKEFELLER.
Neither of these offers was accepted. In order that this may not rest
on my unsupported assertion, I submit the following documents: The
first is a letter from Mr. H.M. Backus, a brother of Mrs. Backus's
deceased husband, who had been associated with the business and had
remained with the company after his death. The letter was written
without any solicitation whatever on my part, but I have since
received permission from Mr. Backus to print it. It is followed by
extracts from affidavits made by the gentleman who conducted the
negotiations on behalf of Mrs. Backus. I have no wish to reprint the
complimentary allusion to myself in Mr. Backus's letter, but have
feared to omit a word of it lest some misunderstanding ensue:
BOWLING GREEN, OHIO, September 18, '03.
MR. JOHN D. ROCKEFELLER,
Cleveland, Ohio.
I do not know whether you will ever receive this letter or not,
whether your secretary will throw it into the waste-basket or not,
but I will do my part and get it off my mind, and it will not be my
fault if you do not receive or read it. Ever since the day that my
deceased brother's wife, Mrs. F.N. Backus, wrote you the unjust and
unreasonable letter in reference to the sale of the property of the
old Backus Oil Company, in which I had a small interest, I have
wanted to write you and record my disapproval of that letter. I
lived with my brother's family, was at the house the day you called
to talk the matter of the then proposed purchase of the property
with Mrs. Backus by her request, as she told Mr. Jennings that she
wanted to deal through you. I was in favour of the sale from the
first.
I was with Mrs. Backus all through the trouble with Mr. Rose and
with Mr. Maloney, did what I could to encourage her, and to prevent
Mr. Rose from getting the best of her. Mrs. Backus, in my opinion,
is an exceptionally good financier, but she does not know and no
one can convince her that the best thing that ever happened to her
financially was the sale of her interest in the Backus Oil Company
to your people. She does not know that five more years of the then
increasing desperate competition would have bankrupted the company,
and that with the big debt that she was carrying on the lot on
Euclid Avenue, near Sheriff Street, she would have been swamped,
and that the only thing that ever saved her and the oil business
generally was the plan of John D. Rockefeller. She thinks that you
literally robbed her of millions, and feeds her children on that
diet three times a day more or less, principally more, until it has
become a mania with her, and no argument that any one else can
suggest will have any effect upon her. She is wise and good in many
ways, but on that one subject she is one-sided, I think. Of course,
if we could have been assured of continued dividends, I would have
been opposed to selling the business, but that was out of the
question. I know of the ten thousand dollars that was added to the
purchase price of the property at your request, and I know that you
paid three times the value of the property, and I know that all
that ever saved our company from ruin was the sale of its property
to you, and I simply want to ease my mind by doing justice to you
by saying so. After the sale to your company I was simple enough to
go to Buffalo and try it again, but soon met with defeat and
retired with my flag in the dust. I then went to Duluth, and was on
the top wave, till the real-estate bubble broke, and I broke with
it. I have had my ups and downs, but I have tried to take my
medicine and look pleasant instead of sitting down under a juniper
tree and blaming my losses to John D. Rockefeller.
I suppose I would have put off writing this letter for another year
or more as I have done so long, had it not been for a little chat
that I had with Mr. Hanafin, Superintendent of the Buckeye Pipe
Line Company, a day or two since when I was relating the sale,
etc., of the old B.O. Co.'s business, and in that way revived the
intention that had lain dormant since the last good resolution in
regard to writing it was made. But it's done now, and off my mind.
With much respect and admiration to John D. Rockefeller I remain,
Yours truly,
H.M. BACKUS.
It appears from the affidavits that the negotiations were conducted on
behalf of Mrs. Backus and her company by Charles H. Marr, who had been
in the employ of the Backus Company for some time, and by Mr. Maloney,
who was the superintendent of the company from the time of its
organization and was also a stockholder; and on behalf of the Standard
Oil Company by Mr. Peter S. Jennings.
There has been an impression that the Standard Oil Company purchased
for $79,000 property which was reasonably worth much more, and that
this sacrifice was occasioned by threats and compulsion. Mr. Jennings
requested Mr. Marr to submit a written proposition giving the price
put by the Backus Company upon the several items of property and
assets which it desired to sell. This statement was furnished and was
annexed to Mr. Jennings's affidavit. The Standard Oil Company finally
decided not to purchase all of the assets of the company, but only the
oil on hand, for which it paid the full market price, amounting to
about $19,000, and the item "works, good-will, and successorship,"
which were offered by Mr. Marr at $71,000, and for which the Standard
offered $60,000, which was promptly accepted. Mr. Marr made affidavit
as follows:
"Charles H. Marr, being duly sworn, says that, in behalf of the
Backus Oil Company, he conducted the negotiations which led to the
sale of its works, good-will, and stock of oils and during same
when said company had offered to sell its entire stock for a gross
sum, to wit, the sum of one hundred and fifty thousand dollars
($150,000), which was to include cash on hand, accrued dividends,
accounts, etc., said Jennings requested said company to submit an
itemized proposition fixing values upon different articles proposed
to be sold, and that he, after full consideration with Mrs. Backus
and with her knowledge and consent, submitted the written
proposition attached to said Jennings's affidavit; that the same is
in his handwriting, and was copied at the office of the American
Lubricating Oil Company from the original by himself at the request
of said Jennings, and said original was submitted by affiant to
Mrs. Backus.
"That she was fully cognizant of all the details of said
negotiations and the items and values attached thereto in said
proposition, consulted with at every step thereof, none of which
were taken without her advice, as she was by far the largest
stockholder in said Backus Oil Company, owning about seven-tenths
(7/10) of said company's stock, and she fully approved of said
proposition, and accepted the offer of said Jennings to pay sixty
thousand dollars ($60,000) for the item works, good-will, and
successorship without any opposition, so far as affiant knows. And
affiant says that the amount realized from the assets of the Backus
Oil Company, including purchase price, has been about one hundred
and thirty-three thousand dollars ($133,000), and a part of its
assets have not yet been converted into money as affiant is
informed."
Mr. Marr, who was, it will be remembered, the widow's representative,
refers to the negotiations leading up to the purchase and says:
"But affiant says that nothing that was said by Mr. Jennings or
anybody else during their progress could be construed into a
threat, nor did anything that was said or done by said Jennings
hasten or push forward said trade."
He also says:
"Affiant says that the negotiations extended over a period of from
two to three weeks ... and during their pendency that Mrs. Backus
frequently urged affiant to bring the same to a conclusion as she
was anxious to dispose of said business and relieve herself from
further care and responsibility therewith. And when the said offer
of purchase by said Jennings upon the terms aforesaid was conveyed
to her by affiant, she expressed herself as entirely satisfied
therewith."
Mr. Maloney made an affidavit that he was superintendent of the Backus
Oil Company from the time of its organization, and also a stockholder
in the company, and had been associated in business with Mr. Backus
for many years previous to his death; that he took part in the
negotiations for the sale, representing Mrs. Backus in the matter.
After speaking of the negotiations, he says:
"Finally, after consultation, the proposition was made by her to
dispose of the works, good-will, and successorship for $71,000. A
few days after the proposal was made to her to pay the sum of
$60,000 for works and good-will, and to take the oil on hand at its
market price, which proposition she accepted, and the sale was
concluded.
"During these negotiations Mrs. Backus was anxious to sell, and was
entirely satisfied with the sale after it was concluded. I know of
the fact that about a year and a half previous she had offered to
sell out the stock of the Backus Oil Company at from 30 to 33 per
cent. less than she received in the sale referred to, and the value
of the works and property sold had not increased in the meantime. I
was well acquainted with the works of the Backus Oil Company and
their value. I could at the time of the sale have built the works
new for $25,000. There were no threats nor intimidations, nor
anything of the kind used to force the sale. The negotiations were
pleasant and fair, and the price paid in excess of the value, and
satisfactory to Mrs. Backus and all concerned for her."
So far as I can see, after more than 30 years have elapsed, there was
nothing but the most kindly and considerate treatment of Mrs. Backus
on the part of the Standard Oil Company. I regret that Mrs. Backus did
not take at least part of her pay in Standard certificates, as we
suggested she should do.
THE QUESTION OF REBATES
Of all the subjects which seem to have attracted the attention of the
public to the affairs of the Standard Oil Company, the matter of
rebates from railroads has perhaps been uppermost. The Standard Oil
Company of Ohio, of which I was president, did receive rebates from
the railroads prior to 1880, but received no advantages for which it
did not give full compensation. The reason for rebates was that such
was the railroads' method of business. A public rate was made and
collected by the railroad companies, but, so far as my knowledge
extends, was seldom retained in full; a portion of it was repaid to
the shippers as a rebate. By this method the real rate of freight
which any shipper paid was not known by his competitors nor by other
railroad companies, the amount being a matter of bargain with the
carrying company. Each shipper made the best bargain that he could,
but whether he was doing better than his competitor was only a matter
of conjecture. Much depended upon whether the shipper had the
advantage of competition of carriers.
The Standard Oil Company of Ohio, being situated at Cleveland, had the
advantage of different carrying lines, as well as of water
transportation in the summer; taking advantage of those facilities, it
made the best bargains possible for its freights. Other companies
sought to do the same. The Standard gave advantages to the railroads
for the purpose of reducing the cost of transportation of freight. It
offered freights in large quantity, car-loads and train-loads. It
furnished loading facilities and discharging facilities at great cost.
It provided regular traffic, so that a railroad could conduct its
transportation to the best advantage and use its equipment to the full
extent of its hauling capacity without waiting for the refiner's
convenience. It exempted railroads from liability for fire and carried
its own insurance. It provided at its own expense terminal facilities
which permitted economies in handling. For these services it obtained
contracts for special allowances on freights.
But notwithstanding these special allowances, this traffic from the
Standard Oil Company was far more profitable to the railroad companies
than the smaller and irregular traffic, which might have paid a higher
rate.
To understand the situation which affected the giving and taking of
rebates it must be remembered that the railroads were all eager to
enlarge their freight traffic. They were competing with the facilities
and rates offered by the boats on lake and canal and by the
pipe-lines. All these means of transporting oil cut into the business
of the railroads, and they were desperately anxious to successfully
meet this competition. As I have stated we provided means for loading
and unloading cars expeditiously, agreed to furnish a regular fixed
number of car-loads to transport each day, and arranged with them for
all the other things that I have mentioned, the final result being to
reduce the cost of transportation for both the railroads and
ourselves. All this was following in the natural laws of trade.
PIPE-LINES VS. RAILROADS
The building of the pipe-lines introduced another formidable
competitor to the railroads, but as oil could be transported by
pumping through pipes at a much less cost than by hauling in tank-cars
in a railroad train the development of the pipe-line was inevitable.
The question was simply whether the oil traffic was sufficient in
volume to make the investment profitable. When pipe-lines had been
built to oil fields where the wells had ceased to yield, as often
happened, they were about the most useless property imaginable.
An interesting feature developed through the relations which grew up
between the railroads and the pipe-lines. In many cases it was
necessary to combine the facilities of both, because the pipes reached
only part of the way, and from the place where they ended the railroad
carried the oil to its final destination. In some instances a railroad
had formerly carried the oil the entire distance upon an agreed rate,
but now that this oil was partly pumped by pipe-lines and partly
carried by rail, the freight payment was divided between the two. But,
as a through rate had been provided, the owners of the pipe-line
agreed to remit a part of its charges to the railroad, so we had cases
where the Standard paid a rebate to the railroad instead of the
reverse--but I do not remember having heard any complaint of this
coming from the students of these complicated subjects.
The profits of the Standard Oil Company did not come from advantages
given by railroads. The railroads, rather, were the ones who profited
by the traffic of the Standard Oil Company, and whatever advantage it
received in its constant efforts to reduce rates of freight was only
one of the many elements of lessening cost to the consumer which
enabled us to increase our volume of business the world over because
we could reduce the selling price.
How general was the complicated bargaining for rates can hardly be
imagined; everyone got the best rate that he could. After the passage
of the Interstate Commerce Act, it was learned that many small
companies which shipped limited quantities had received lower rates
than we had been able to secure, notwithstanding the fact that we had
made large investments to provide for terminal facilities, regular
shipments, and other economies. I well remember a bright man from
Boston who had much to say about rebates and drawbacks. He was an old
and experienced merchant, and looked after his affairs with a cautious
and watchful eye. He feared that some of his competitors were doing
better than he in bargaining for rates, and he delivered himself of
this conviction:
"I am opposed on principle to the whole system of rebates and
drawbacks--unless I am in it."