"NOT TO EXCEED HALF"
Notwithstanding the ceremonial treaty of equal rights on the railroads
to all, which had been secured by the uprising of the people against
the South Improvement Company in 1872, the independents, one after the
other, continued to be side-tracked by an unseen power. Four years
later, on the 20th of July, 1876, their only two important survivors in
Cleveland, frightened by the high death-rate of the business, and by
a deepening pressure on themselves, answered a summons to come to the
palace of the President of the Light of the World. The contract which
was then made was afterwards produced in court.[87] It was called an
"Agreement for an Adventure," in something like "the merry sport" in
which the good Antonio gave a bond for a pound of his flesh.
A few years after this "adventure" with his competitors and his efforts
to have them closed by the courts, the President was asked if his trust
had sought in any way to diminish the production of refineries in
competition with it.
"Oh no, sir," he replied.
"Nothing of the kind?"
"Oh no, sir."[88]
He was asked the question again, and again the denial was repeated.
"Done nothing of the sort?"
"Not at all."
But now he said, You must bind yourselves for ten years to refine only
85,000 barrels of oil a year.[89]
They had refined 120,000 barrels the year before, and could have done
180,000, and were growing up with the country. "The prospects were much
better for the future."[90]
But they agreed.
You must give me and my associates all the profits you make during this
period above $35,000 a year, until we too have got $35,000 a year out
of your business, and we will guarantee you $35,000 a year, if we let
you run.
They had made $41,000 the year before, but they agreed.
You must divide with "us," after each has got $35,000 a year, all the
additional profits.
They had to put into this "adventure" all their buildings and
machinery, valued at $61,760.42, all their time and attention, and
$10,000 in cash, while their conquerors put in only $10,000 cash and no
plant and no time. But they agreed to this demand for "half."
You must stop refining altogether, and let us take out our $10,000
whenever we send you notice that through competition, or a decrease or
change in the production of petroleum, Cleveland can "barely compete"
with other places. You must sell the kerosene you manufacture, and buy
the petroleum you make it of at the prices we fix.
The combination could make the business unprofitable whenever it chose,
and under the previous stipulation could close them up at its own
pleasure, until the ten years had rolled by. But they agreed.
You must resume again after any such suspension, and let us take half
the profits whenever we give you notice. You must let us enter or
withdraw, throw our $10,000 in or out, suspend or resume, again and
again, as we choose! They agreed.
You must make us monthly reports of all your transactions. You must not
enlarge nor contract your works without our consent. They agreed.
You must not go into the manufacture of petroleum, nor any other new
business anywhere else in the world during this adventure! You must
ship your products by such routes as we direct! They agreed.
You must keep this adventure secret. Our name must not appear, and even
if you all die, you must agree that we may continue the business in
your name, or any other name we choose.
"The firm name," as their counsel pointed out, "was to be kept up even
when the members were mouldering in their graves. But the public were
to understand that the business of that firm, as it had been conducted
in the lifetime of those men, was still being carried on."
You are to be thus tied up for ten years, limited at the best to half
the profit on half your capacity, with a right in us to close you up
altogether, or to close and resume whenever we choose, with no right in
you to start or stop or withdraw. But we are to be left free, in our
own refineries, to refine all the oil the market will take, and keep
all the profit, and enlarge our works and extend our business.
And, finally, you must put your hand and seal to a statement that you
do this to "reconcile interests that have seemed to conflict" and
"equalize the business," and that this agreement gives you your "due
proportion thereof."
This "free contract" two of the three men who were to make it knew
nothing of until their consent was demanded.
One of the partners had secretly been won over. Through him all
preliminary negotiations had been conducted.
"I was not consulted," testified one of the other two, until after the
contract was "all drawn and prepared," and at first he refused to sign
it. The plan was concocted "secretly and unknown to me."
"I was at first opposed to the arrangement," declared the other.[91]
But this was not all the contract. The President, who, as he
testified, "conducted most of the negotiations," and "had been familiar
with the dealings thereunder," supplemented the written documents with
oral instructions:[92]
You must not seem to be prosperous. You must not put on style,[93] he
cautioned them; above all, you must not drive fast horses or have fine
rigs; you must not even let your wives know of this arrangement.[94]
A false account was opened on the books to conceal the nature and
origin of this transaction from their own book-keepers. In the name of
that account false and fictitious checks were drawn, bills made out,
balances struck. A box was taken out at the Cleveland post-office--box
125--in the name of an imaginary "Mr. G.A. Mason," and through this
box the correspondence of the "adventure" was carried on. Each of the
three parties to the "adventure" continued to march and fight under
its own flag as before. All possible pains were taken to conceal the
fact that they had ceased competition with each other. They kept up
every appearance to the public of being actively engaged in competitive
business. The inevitable spy appears in this scene as in every other
in the play. The "reconciler," to enforce the provisions that the
"reconcilees" should not engage in business elsewhere, extended a
system of espionage over them, and followed their movements, and kept
watch what they did with their money, and made oath to the courts of
the results of these "inquiries and investigations." The espionage
continued after this.
A year or two after this contract had been broken by the help of
the courts, the then secretary of the great oil company, through an
intermediary, approached the book-keeper of the firm which had been
freed from the trust.
"Would you not like to make some money?"
"He inclined to let him believe he did want to make some money," his
employer afterwards told Congress. "He came and told me about it. I
requested that he continue and find out what information they wanted.
He was to have had so much per year, but he was to have been paid a
down payment; he got $25."
"What service was he to render for that?"
"I have a memorandum. There were so many things he was to do that I
cannot carry it in my head."
"One of the questions was, 'What was the result of last year's
business?' The other was, 'A transcript of the daily shipments, with
net prices received from the same; what is the cost for manufacturing
outside of the crude; the kind of gasoline and naphtha made, and
the net prices received for the same; what they do with tar and the
percentages of the same; what per cent. of water white and what per
cent. of Michigan water white; how much oil exported last year?' This
information, as fast as received, to be mailed to Box 164, Cleveland
post-office.... He (the book-keeper) made an affidavit of it, and I
took the money back myself personally."[95]
When orders came in for more oil than the limit put upon them, the
"reconcilees," asserting their commercial manhood, went on refining
to supply the demands of the public instead of the commands of the
clique. They contended that they were not bound by the limitation, and
in this were afterwards upheld by the court; but, meanwhile, they were
called to account and frightened into another "reconciliation." He was
present, the chief reconciler told the court, at the interview in which
they "agreed to diminish their manufacture ... to bring the entire
amount within the terms" of the contract.
But again they began to refine to supply the needs of the people
evidenced by the market demand. Then their supply of crude was shut
off. Their suzerain owned the pipe line to Cleveland. When its escaping
victims got around that difficulty, it took its "contract" to the
courts.
To shut these competitors down to half their capacity, and to reconcile
and equalize interests by taking half of all they made on that was
merely an incident, collateral to the grander plan, the vaster
"adventure," of getting all the profits of that greater field out
of which these competitors were barred altogether. Such contracts as
these, its counsel said, were made with refiners all over the country.
The chief profit of the adventure lay, not in the divided profits of
the picayune business it let the vassals do, but in the undivided
profits of the empire kept for itself. Why should the reconciler hurry
with expensive lawyers into court for a summary injunction to prevent a
"reconcilee" from making more oil, when the reconciler, who toiled not
nor spun, was to get half of the gain of $2.05 on every barrel of it?
Why, but that every "co-operative" barrel so made would displace in the
markets a barrel, all the profits of which went to it.
The "reconcilees" were called into court. A judge was asked to issue
an injunction forbidding them to depart from the strict letter of the
contract.
They have been refining more than 85,000 barrels of oil a year, was the
complaint.
They "threaten to distil crude petroleum without regard to
quantity."[96] They are "parties in rebellion," said the lawyers. The
judge said, No. This is a contract in restraint of trade, and released
those who were in its toils.
The immediate effect of this "equalization" was an advance in the rates
of profit. The year before the independent refiners had made a profit
of only 34 cents a barrel.[97]
The first year of the "adventure" the profits jumped up to $2.52
a barrel. The dividends rose from $41,000 to $222,047, while the
production fell from 120,000 to 88,085 barrels. For the four years the
average profit was $2.05 a barrel, or 500 per cent. advance. The lowest
profit was $1.37.
"Refined oil advanced to an average of $8 per barrel for that year"
(1876), says the counsel of the trust.[98]
These great winnings were made in the depth of the depression following
the panic of 1873.
While a world-compelling decline not only of prices but of profits,
was in progress, the authors of this arrangement kept up kerosene to a
point at which $630,691 was made in four years out of an investment of
$81,000, half of which went to those who put in $10,000 and their power
over freight agents.
This "adventure," as was said by the Hon. Stanley Matthews, who
appeared as counsel for the victimized refiners, was better than a
gold-mine. It was a mint. Without giving any personal supervision or
any time, without any expenditure except the insignificant investment
of $10,000, made as a mere stalking-horse, these men took a share of
the profits of "the party of the second part," which is not to be
calculated by ordinary percentage, but by multiplications, over and
over again, every year, of the money they put in it.
By reducing the volume of business one-half, by increasing the profit
from 34 cents a barrel to $2.05, the reconcilers pocketed $315,345.58
in four years, on an investment of $10,000, with no work. This was the
fact. The theory with which the fact was hidden from the people is
given to the New York Legislature in 1888. The principle on which the
trust did business, its president said, was:
"At a limited profit; a very small profit on an extremely large volume
of business."[99]
When its secretary was before Congress, he was asked about the
operations of himself and his associates in these years, 1876, 1877, of
wonderful profits. He had been participating during that time in not
only this profit of $2.05 a barrel, but in divided profits rising to
$3,000,000 in a year on $3,000,000 of capital, and in undivided profits
which rolled up $3,500,000 of capital into $70,000,000 in five years.
But he said:
"The business during those years was so very close as to leave scarcely
any margin of profit under the most advantageous circumstances."[100]
The effect on the consumer appears from the statement in this case of
one of the best-known producers and refiners in the oil regions, one
intimately associated with the members of the combination. He showed
that oil which was selling at twenty cents a gallon retail could be
sold at a large profit at twelve cents a gallon.
As to the effect on the working-man, the demand for labor declined,
wages went down, and the number of unemployed increased.
When there was competition in Cleveland the great company could not
afford to have its skilled workmen idle, because they would seek
employment with the other refineries; but now, having the refining
business all in its own hands, when it was temporarily to its advantage
to refine oil in Pittsburg, Oil City, or other points, in preference
to Cleveland, it could with impunity let its hands remain idle in
Cleveland, knowing that when it wanted them it could easily secure
them, as there are no other refineries in Cleveland to employ them, and
"that has been a very serious injury to working-men."[101]
There was no pretence that the design of this contract was not to make
oil scarce--_i.e._, dear.
In the affidavit which was made in support of the injunction the
principal reconciler showed that his company had restricted itself
as much as it restricted these competitors. He urged as the reason
why the contract had been made and why the courts should sustain it,
that "the capacity of all the refineries in the United States is
more than sufficient to supply the markets of the world, and if all
the refineries were run to their full capacity they would refine at
least twice as much oil as the markets of the world require; that
this difference between the capacity of refineries and the demands of
the market has existed for at least seven years past, and during that
period the refineries" of his company "have not been run to ... exceed
one-half of their capacity."
When these surviving independents of Cleveland were forced into this
adventure, in 1876, the source of the power which could compel "free"
citizens in this age of individualism to execute such a bond was not
known. The appalling mortality among the independents showed that
something was seriously wrong. There was something, however, in this
"Agreement for an Adventure" which pointed straight to it. That was
a clause which guaranteed those who became vassals that they should
have the same freight rates and get back the same rebates as the
monopoly.[102] "Had the monopoly the power," said the Hon. Stanley
Matthews, "to procure freights on better and more advantageous terms
than the rest of the public engaged in the same business?... And
if they had such power, how did it get it?... If this or any other
corporation is allowed to exalt itself in this way and by these means
above competition, it is also exalted above the law."
The great lawyer, who soon afterwards became a justice of the Supreme
Court of the United States, could not answer the questions he raised.
The facts were hidden in secret contracts with the railroads. As
regards Cleveland, they did not come out until five years later, in
1885. It then became an adjudicated fact that in 1875, the year before
this "Agreement for an Adventure," the Lake Shore Railroad had made
a contract with the oil combination to drive these very competitors
and all others out of business, just as the same road had done for
the South Improvement Company in 1872. When they escaped from their
"reconciler," they brought this railroad and the contract into court.
The case was fought up to the Supreme Court.
That tribunal found that the Lake Shore road had contracted with this
company to carry its products ten cents per barrel cheaper than for any
other customers. It showed that this made a difference to the victims
of the "Adventure" equal to more than 21 per cent. a year on their
capital.
"The understanding," the court said, "was to keep the price _down_ for
the favored customers, but _up_ for all the others, and the inevitable
tendency and effect of this contract was to enable the Standard Oil
Company to establish and maintain an overshadowing monopoly, to ruin
all other operators, and drive them out of business." The course of the
railroad the court declared to be one of "active participation in the
unlawful purposes" of the oil company. The Lake Shore was to have all
its business out of Cleveland, but, a competing railroad being built,
the Lake Shore made a contract to give this new line a part of the
plum, to induce it to unite in the policy of keeping freights _down_
for the favored customer, and _up_ for all others. When the President
of the trust was asked afterwards by the New York Legislature if there
had been no arrangement by which it got its transportation cheaper than
others could, he replied, "No, sir." And later he reiterated that in
their arrangements for freight there was "nothing peculiar."[103]
But the Supreme Court of Ohio, in describing this arrangement,
diversify the staid rhetoric of their legal deliverance with the
unaffected exclamation:
"How peculiar!"
They declared the contract between the two railroads "void," and "not
only contrary to a sound public policy, but to the lax demands of
the commercial honesty and ordinary methods of business." They also
pronounced the contract between the railroad and the oil company as
"made to build up a monopoly," and as "unlawful."[104]
The great lawyer, we have said, could not answer the questions he
asked. The facts, we have said, were hidden in a secret contract. And
yet the answers to the questions, the facts, had been all brought to
the verge of disclosure by the investigation by Congress early in the
same year, 1876.
Although the investigation, in consequence of the "I object" of the
Hon. Henry B. Payne, of Cleveland,[105] had been referred to the
Committee of Commerce, and though the railroad and oil clique men
would not answer, and the committee would not press them, there was a
volunteer witness from Cleveland, who began to upset all the plans to
smother. This willing witness was a Cleveland refiner, a shrewd man,
as would easily be believed by those who knew that he was the brother
of an organizer of the oil combination. He, too, had been a member of
it, but for some reasons was now "out," and was one of the swimmers
who felt themselves being drawn down. He betook himself for relief to
Congress. He dodged no subpoenas, but, going before the Committee of
Commerce, he began to tell more fully than any other witness had ever
done, or had ever been able to do, the story of the relations between
the combination and the railroads, which he knew of his personal
knowledge. When he began talking in this free way to the public
authorities, his former associates saw that they had underestimated
his abilities as a refiner. They began to feel that it might be well
to make some concessions to this particular brother, though not to the
Brotherhood of Man.
The investigation was summarily suspended,[106] and his testimony
was spirited away. With the only power that could have interfered
thus silenced, the surviving independents were corralled as we have
described. This was done two short months after the first move was
made, May 16th, for the investigation which might have saved the
independents at Cleveland and elsewhere from the duress which drove men
to death or adventures of reconciliation.
All over the oil regions the combination has followed this policy of
"not to exceed half."[107]
Nineteen pages of the testimony of a member in the suit begun by the
Commonwealth of Pennsylvania are taken up with the operations of one
of its constituent companies in the purchase or leasing of competing
refineries, many of which were shut down or pulled down.
This witness could name only one refinery out of the score of
independent concerns once flourishing in Pittsburg, which was not under
its control.[108]
"Dismantled," was the monotonous refrain of many of his answers to the
questions as to what had been done with the refineries thus got under
control. Asked why these works had been thus dismantled or shut down,
he explained it variously as due to unfavorable location or worn-out
machinery or some such disadvantage.
If these works were so badly situated and so illy fitted for the
business and so old, why did it purchase them? "Can you give good
commercial reasons why it would buy all unprofitable junk?" he was
asked.[109]
"I cannot give any reason why they bought the works," was the helpless
answer.
From the beginning to the end the language used by the founders of
the combination proves scarcity to have been their object. "There is
a large number of refineries in the country--a great deal larger than
is required for the manufacture of the oil produced in the country, or
for the wants of the consumers in Europe and America," said one of the
principal members in 1872.[110]
This is almost identical with the language used in 1880 in the effort
to enjoin Cleveland refiners who "threatened to distil."
In 1887 we will see the same power putting its hand and seal to an
agreement to enforce the doctrine that there was too much oil in the
earth.
In 1872 there were more refineries than were needed for the oil; in
1887 there was too much oil. The progression is significant. And down
to the present pool with the Scotch refiners we will see the same men
enforcing abroad, year by year, the same gospel of want.[111]
"The producers in America are quite alive to the wisdom of not
producing too much paraffine, and are already adopting measures to
restrict it," said the chairman at the annual meeting of one of the
principal Scotch companies.[112]