SECTION 1. _Be it enacted by the Senate and House of Representatives

of the Commonwealth of Pennsylvania in General Assembly met, and it

is hereby enacted by the authority of the same_, That Andrew Howard,

J. S. Swartz, G. B. Edwards, J. D. Welsto, and J. P. Malin, their

associates, successors, and assigns, or a majority of them, be and

they are hereby authorised to form and be a body corporate, to be

known as the Pennsylvania Company, and by that name, style, and

title shall have perpetual succession, and all the privileges,

franchises and immunities incident to a corporation; may sue and be

sued, implead and be impleaded, complain and defend in all courts of

law and equity, of record and otherwise; may purchase, receive,

hold, and enjoy, to them, their successors, and assigns, all such

lands, tenements, leasehold estates and hereditaments, goods and

chattels, securities and estates, real, personal and mixed, of what

kind and quality soever, as may be necessary to erect depots, engine

houses, tracks, shops, and other purposes of the said corporation,

as hereafter defined by the second section of this act, and the same

from time to time may sell, convey, mortgage, encumber, charge,

pledge, grant, lease, sub-lease, alien, and dispose of, and also

make and have a common seal, and the same to alter and renew at

pleasure, and ordain, establish, and put in execution such by-laws

or ordinances, rules, and regulations as may be necessary or

convenient for the government of the said corporation, not being

contrary to the constitution and laws of this commonwealth, and

generally may do all and singular the matters and things which to

them shall appertain to do for the well-being of the said

corporation, and the management and ordering of the affairs and

business of the same:

_Provided_, That nothing herein contained shall be so construed as

to give to the said corporation any banking privileges or

franchises, or the privilege of issuing their obligations as money.

SEC. 2. That the corporation hereby created shall have power to

contract with any person or persons, firms, corporations or any

other party, howsoever formed, existing or that may hereafter exist,

in any way that said parties or any of them may have authority to

do, to build, construct, maintain or manage any work or works,

public or private, which may tend or be designed to improve,

increase, facilitate, or develop trade, travel, or the

transportation and conveyance of freight, live stock, passengers,

and any other traffic, by land or water, from or to any part of the

United States or the territories thereof; and the said company shall

also have power and authority to supply or furnish all needful

material, labour, implements, instruments, and fixtures of any and

every kind whatsoever, on such terms and conditions as may be agreed

upon between the parties respectively; and also to purchase, erect,

construct, maintain, or conduct, in its own name and for its own

benefit, or otherwise, any such work, public or private, as they may

by law be authorised to do (including also herein lines for

telegraphic communication), and to aid, co-operate, and unite with

any other company, person or firm in so doing.

SEC. 3. The company hereby created shall also have the power to make

purchases and sales of or investments in the bonds and securities of

other companies, and to make advances of money and of credit to

other companies, and to aid in like manner contractors and

manufacturers; and to receive and hold, on deposit or as collateral,

or otherwise, any estate or property, real or personal, including

the notes, obligations, and accounts of individuals and companies,

and the same to purchase, collect, adjust, and settle, and also to

pledge, sell, and dispose thereof, on such terms as may be agreed on

between them and the parties contracting with them; and also to

indorse and guarantee the payment of the bonds and the performance

of the obligations of the other corporations, firms, and

individuals, and to assume, become responsible for, execute, and

carry out any contracts, leases, or sub-leases made by any company

to or with any other company or companies, individuals or firms

whatsoever.

SEC. 4. The company hereby created shall also have power to enter

upon and occupy the lands of individuals or of companies, on making

payment therefor or giving security according to law, for the

purpose of erecting, constructing, maintaining, or managing any

public work, such as is provided for or mentioned in the second

section of this act, and to construct and erect such works thereon,

and also such buildings, improvements, structures, roads, or

fixtures as may be necessary or convenient for the purposes of the

said company, under the powers herein granted; and to purchase,

make, use, and maintain any works or improvements connecting or

intended to be connected with the works of the said company; and to

merge or consolidate, or unite with the said company the

improvements, property, and franchises of any other company or

companies, on such terms and conditions as the said company may

agree upon; and to fix and regulate the tolls or charges to be

charged or demanded for any freight, property, or passengers

travelling or passing over any improvement erected, managed, or

owned by the said company, or on any merchandise or property

transported over any road whatever by the said company, and to make,

from time to time dividends from the profits made by said company;

the several railroads managed by said company shall continue

taxable, as heretofore, in proportion to their length within this

state respectively; and the said Pennsylvania Company shall be

taxable only on the proportion of dividends on its capital stock and

upon net earnings or income, only in proportion to the amount

actually carried by it within the state of Pennsylvania, and all its

earnings or income derived from its business beyond the limits of

this Commonwealth shall not be liable for taxation.

SEC. 5. The capital stock of said company shall consist of 2,000

shares, of the value of fifty dollars each, being $100,000, and with

the privilege of increasing the same by a vote of the holders of the

majority of the stock present at any annual or special meeting, to

such an amount as they may from time to time deem needful; and the

corporators, or a majority of them, named in the first section of

this act, shall have power to open books for subscriptions at such

times and places as they may deem expedient; and when not less than

1,000 shares shall have been subscribed, and twenty per cent.

thereon shall have been paid in, the shareholders may elect not less

than three nor more than nine directors to serve until the next

annual election, or until their successors shall be duly elected and

qualified; and the directors so elected may, and they are hereby

authorised and empowered to have and to exercise, in the name and in

behalf of the company, all the rights and privileges which are

intended to be hereby given, subject only to such liabilities as

other shareholders are subject to, which liabilities are no more

than for the payment to the company of the sums due or to become due

on the shares held by them; and should the capital stock at any time

be increased, the stockholders, at the time of such increase, shall

be entitled to a _pro rata_ share of such increase, upon the payment

of the instalments thereon duly called for; and whenever an increase

of capital stock is made, a certificate thereof, duly executed under

the corporate seal of the company, and signed by the president and

secretary, shall be filed with the auditor-general before the same

shall be deemed to be valid.

SEC. 6. The principal office of the said company shall be in the

City of Pittsburg, but the directors, under such rules and

regulations as they may prescribe, may establish branches or

agencies in other parts of the state, or elsewhere; all of the

directors of said company shall be citizens of the United States,

and reside therein.

SEC. 7. The directors shall be elected annually by the stockholders,

on the first Tuesday of June of each year; and they shall elect from

their number, at the first meeting of the board after their

election, a president, and shall also have power to elect from their

number, or otherwise, a vice-president, a treasurer, and secretary,

and such other officers, clerks, and agents as the business of the

company may require; all elections for directors shall be by ballot,

and every stockholder shall be entitled to one vote for each share

of stock held by him; but no person shall be eligible as director

who is not a stockholder to the amount of ten shares; at the annual

or special meetings a quorum shall consist of stockholders owning at

least one-half of the capital stock.

SEC. 8. Ten days’ notice shall be given, by publication, in two

newspapers published in the City of Pittsburg, of the time and place

of the annual election; which election shall be conducted by three

stockholders, one of whom shall act as judge, and the other two as

inspectors.

SEC. 9. The board of directors shall make all by-laws necessary for

conducting the business of the company; which by-laws shall at all

times be accessible to persons transacting business with them; the

said directors shall have power, by a vote of a majority of their

number at any meeting of the board, to change the name of the said

corporation; and by any new name, thus adopted, upon filing with the

secretary of the Commonwealth and the auditor-general a truly

certified certificate, the said company shall have, hold, and enjoy

all the rights, powers, privileges, and immunities hereby granted;

the directors shall have power to require payment of the amount

remaining unpaid on the stock of said company, at such times and in

such proportions as they shall think proper; the said assessment to

be made as the by-laws of said company shall direct.

ELISHA W. DAVIS,

_Speaker of the House of Representatives_.

CHARLES H. STINSON,

_Speaker of the Senate_.

Approved—The seventh day of April, Anno Domini, one thousand eight

hundred and seventy.

JOHN W. GEARY.

NUMBER 10 (See page 1080)

DRAFT OF CONTRACT BETWEEN THE SOUTH IMPROVEMENT COMPANY AND PRODUCERS OF

PETROLEUM IN THE VALLEY OF THE ALLEGHENY AND ITS TRIBUTARIES. DATED

JANUARY, 1872[84]

[From “A History of the Rise and Fall of the South Improvement

Company,” pages 121–122.]

Agreement made and entered into this day of January, A.D. 1872, by

and between the South Improvement Company, a corporation under the

laws of Pennsylvania, and embracing among its stockholders more than

two-thirds (reckoned by their refining capacity) of the refineries

of petroleum in the United States, parties hereto of the first part;

and the Associated Producers of Petroleum, a corporation also

organised under the laws of Pennsylvania, and embracing among its

stockholders more than two-thirds (reckoned by the actual production

of the crude petroleum at their wells) of the producers of petroleum

in the Valley of the Allegheny and its tributaries, party hereto of

the second part. WITNESSETH.

_That whereas_, The party of the first part has entered into certain

contracts, viz.: The _first_ with the Pennsylvania Railroad Company;

the _second_ with the Erie Railway Company; the _third_ with the

Atlantic and Great Western Railway Company; and the _fourth_ with

the New York Central and Hudson River Railroad, and the Lake Shore

and Michigan Southern Railway Company, which contracts secure

certain advantages in relation to the transportation of petroleum

and its products, which it is the purpose of the contracting parties

to use for the promotion of the common interests of the producers,

refiners, and transporters of petroleum.

To the end that the said object may be more fully attained the said

parties hereto have covenanted and agreed, each with the other, as

follows, viz.:

I. The party of the first part, that it will appoint five of its

members to form, with a like number of the party of the second part,

a joint executive committee, who shall choose some competent and

discreet person not of their number who shall serve as the chairman

and the eleventh member of the joint committee.

II. The party of the first part, that it will submit all questions,

arising under said railroad contracts, which affect the interests of

both producers and refiners, to the decision of the joint committee

provided for in Article I of the agreement.

III. The party of the second part, that it will appoint five of its

members to constitute, with the five members of the party of the

first part, the joint executive committee provided for in Article I

of this agreement; and will submit to said committee all the

questions mentioned in Article II.

IV. The said parties mutually, that the decisions of said joint

committee on all questions, affecting the joint interests of

producers and refiners, which shall be submitted to them, shall be

final and conclusive upon both the parties hereto. That upon the

questions which shall at all times be held to affect the joint

interests of both producers and refiners are the following, viz.:

1st. The rates of transportation of both crude and refined oil.

2nd. The price of crude oil at the wells and in the market.

3rd. The price of refined oil in the market.

4th. The amount of rebate and drawback which from time to time

it may be necessary for the interests of the trade to ask from

the railroads.

V. The said parties mutually, that the joint committee shall meet

once a month, and at any intermediate time, or times, at which a

meeting shall be called by the chairman, or by any four of its

members, to consider such questions as shall affect the joint

interests of the parties hereto.

VI. The party of the second part that it will agree to increase and

lessen the aggregate production of crude petroleum, as the said

joint committee shall direct, to adapt as nearly as practicable the

supply of the same to the capacity of the markets of the world to

absorb at a price remunerative to the producer, the refiner and the

transporter.

VII. The parties hereto mutually, that the said joint committee

shall, at the beginning of each year, fix the minimum average price

at which crude petroleum can be produced and delivered on board

railway cars, which price shall be called the minimum cost of

production—that at the same periods the said committee shall also

fix the minimum average price at which crude oil can be refined, put

up in packages and sold, which price shall be called the minimum

cost of manufacture.

VIII. The parties hereto mutually, that after paying the minimum

cost of production of crude petroleum, the minimum cost of its

manufacture, and the cost of transportation and storage, and

shipping also, in the case of exported oil, the profits shall be

apportioned between the producers and refiners, in the ratio of ...

per cent. to the former, and ... per cent. to the latter.

IX. The said parties, that in case of a temporary over-production of

crude petroleum, the excess shall as far as practicable be taken and

withheld from market, and an advance of three-fourths of the minimum

cost of production advanced thereon by the party of the first part

at eight per cent., intrust the party of the second part keeping the

tanked petroleum insured in good and responsible companies to the

full amount of the advance, one year’s interest added.

X. The said parties mutually, that the party of the first part shall

only be bound to pay the prices and make the advances aforesaid, in

case the producers shall in good faith obey the instructions of the

joint committee, to limit production by stopping the drilling of new

wells.

XI. The party of the second part that it will keep a register of the

date of the commencement of all new wells, the date at which the

same shall be finished, the character of the well and the monthly

production, and the date at which it may be abandoned, and that it

will make it a condition, precedent to the holding of stock in its

company, that the date aforesaid shall be finished by its

stockholders.

XII. Both parties, that it is the especial object of this agreement

to bring the producers and refiners of petroleum into harmony and

co-operation, by reciprocal, fair, and just dealing, for the

promotion of their mutual interests, and everything in this

agreement is to be construed liberally for the carrying into effect

of this object.

NUMBER 11 (See page 1082)

EXTRACTS FROM THE TESTIMONY OF W. G. WARDEN

[From “A History of the Rise and Fall of the South Improvement

Company,” pages 30–41.]

WASHINGTON, D. C., March 30, 1872.

William G. Warden affirmed and examined.

By Mr. C. Heydrick (Counsel).

_Q._ Are you an officer of the South Improvement Company?

_A._ Yes, sir; or rather, I was.

_Q._ What office did you hold?

_A._ I held the office of secretary during all the previous

meetings, and was a director of the company.

_Q._ When was the company organised?

_A._ Our minutes will show that, if you will allow me to refer to

them, and I desire to put them in as evidence. On referring to the

minutes I find that the corporators’ meeting was held January 2,

1872. As I understand that these minutes are to go in as a part of

the evidence, they will furnish you all the information you desire

in regard to the organisation and proceedings of the company.

[The chairman stated that the witness could refer to the minutes as

memoranda, and that the committee would determine hereafter as to

whether they should be received as evidence.]

By Mr. Heydrick.

_Q._ For what object or business was the company organised?

_A._ For refining oil.

_Q._ That meeting was under the charter which has been presented?

_A._ That was the first meeting held after we got the charter.

_Q._ The gentlemen who attended that meeting on the second of

January were those named in the act of the incorporation?

_A._ Yes, sir; they met and transferred the company under the

charter over to the stockholders.

_Q._ Did the incorporators named in the act transfer their interest

to the stockholders, as you have stated on that occasion?

_A._ Yes, sir.

_Q._ What refining capacity does this company possess? State the

amount of capital and stock subscribed and put in?

_A._ At that time 1,100 shares, at $100 per share, was subscribed,

and twenty per cent. thereon paid into the treasury.

* * * * *

_Q._ Where did that company intend to refine oil?

_A._ Their calculation was to get all the refineries in the country

into the company.

_Q._ Was it the design of the stockholders to include all the oil

refineries in this country?

_A._ Yes, sir; every one of them.

* * * * *

_Q._ Can you give us a list of the stockholders?

_A._ I can give you them from the minutes. They are as follows:

William Frew 10 shares

W. P. Logan 10 〃

John P. Logan 10 〃

Charles Lockhart 10 〃

Richard S. Waring 10 〃

W. G. Warden 475 〃

O. F. Waring 475 〃

P. H. Watson 100 〃

H. M. Flagler 180 〃

O. H. Payne 180 〃

William Rockefeller 180 〃

J. A. Bostwick 180 〃

John D. Rockefeller 180 〃

—————

2,000

By Mr. Sheldon.

_Q._ What was the idea of getting all the refineries of the country

into one organisation?

_A._ The idea when the company started was this: 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 want of the consumers in Europe and America; the capacity of

the oil refineries in the country is, I think, 45,000 or 50,000

barrels a day; we completed our organisation, and when we met

together it was discovered that the parties present represented, in

one way or another, a large portion of the refining interest in the

country; of course all of us had our friends in the matter, who must

be taken care of if any arrangement at all was made; and after

discussing the matter at considerable length, it was decided to

include within our company every refinery we could possibly get into

it. We also had considerable discussion with the railroads in regard

to the matter of rebate on their charges for freight; they did not

want to give us a rebate unless it was with the understanding that

all the refineries should be brought into the arrangement and placed

upon the same level; there was no difference made as far as we were

concerned, in favour of or against any refinery; they were all to

come in alike; that was the understanding from the first to the

last.

_Q._ Where are the refineries situated?

_A._ Situated in New York, Philadelphia, Baltimore, Boston, on the

seaboard, and in the Oil Region, Pittsburg, and Cleveland.

_Q._ You say you made propositions to railroad companies, which they

agreed to accept upon the condition that you could include all the

refineries?

_A._ No, sir; I did not say that; I said that was the understanding

when we discussed this matter with them; it was no proposition on

our part; they discussed it not in the form of a proposition that

the refineries should be all taken in, but it was the intention and

resolution of the company from the first that that should be the

result; we never had any other purpose in the matter.

_Q._ In case you could take the refineries all in, the railroads

proposed to give you a rebate upon their freight charges?

_A._ No, sir; it was not put in that form; we were to put the

refineries all in, upon the same terms; it was the understanding

with the railroad companies that we were to have a rebate; there was

no rebate given in consideration of our putting the companies all

in, but we told them we would do it; the contract with the railroad

companies was with us.

_Q._ But if you did form a company composed of the proprietors of

all these refineries, you were to have a rebate upon your freight

charges?

_A._ No; we were to have the rebate anyhow; but were to give all the

refineries the privilege of coming in.

_Q._ You were to have the rebate whether they came in or not?

_A._ Yes, sir.

_Q._ Were you to have a rebate upon the same freight charges that

had been in existence before?

_A._ No; the whole object of the railroad authorities was to get

better freight prices.

* * * * *

_Q._ What effect was this arrangement to have upon the producer or

upon the refineries that did not go into your combination?

_A._ According to our opinion of it that is the way we have got into

this trouble; we have been misconstrued and misrepresented as to our

purposes all over the country; the whole object was, and our whole

talk was, as far as any of my friends came into the matter, or as

far as I myself was concerned, that the producers should receive a

better price for their oil; we calculated to get five or six dollars

a barrel for crude oil; that was from the beginning of our talk

until the end of it; we had not our company organised, or at least

the organisation was not completed, nor the contract signed, until

all these disturbances commenced to be gotten up; we thought the

matter would quiet down and we would get a chance to explain our

position and put ourselves right; we asked for the opportunity to do

so; we have evidence of that in the telegrams we sent, and I can

say, under oath, that they were sent in good faith; there was never

an idea in my mind that they were not.... I will state further that

this matter was discussed with Mr. Scott by myself, personally, and

in very great length, and also with Mr. Potts, who never has had any

interest and never any part in this contract, and who spoke of this

very matter from the start, expressing the opinion that it could not

succeed unless the producers were taken care of. That was understood

by us all from the start in every discussion we had, and by the

railroad people as far as I heard from them. I can only answer for

the railroad people from the conversation I had personally with Mr.

Scott and Mr. Potts, in which it was perfectly understood that we

could not succeed in carrying out these measures for our own benefit

and the benefit of the railroads without the co-operation of the

producers, and the only point we discussed was whether it should be

a combination or co-operation. I took the ground personally against

forming a combination inasmuch as the interests of the producers

were in one sense antagonistic to ours, one as the seller and the

other as the buyer. We held in argument that the producers were

abundantly able to take care of their own branch of the business if

they took care of the quantity produced. They were only liable to

depression from our production, therefore they had in their own

hands directly the power of holding the market at six or eight

dollars a barrel.

_Q._ You did not take into consideration the good of the consumers

of the country, which is by far the larger part of the population of

the country?

_A._ Yes, we did.

_Q._ You wanted to put up the price of oil?

_A._ In answer to that I will state that the producers and refiners

were both suffering under the depression that existed. The refiners

were not getting enough to pay their expenses. All we asked was a

fair refiner’s profit.

_Q._ What effect were these arrangements to have upon those who did

not come into the combination or co-operation, as you have termed

it, as to the price to be charged for transporting their oil, both

refiners and producers?

_A._ I do not think we ever took that question up.

_Q._ Were the railroad companies to charge the same increase of

freights to those who did not come into the combination that they

did to you without giving them a rebate?

_A._ Yes, sir.

_Q._ Now in case you could control the oil produced by these people

in any combination that you made, were you not to have a rebate upon

the oil?

_A._ We were not to have a rebate, we were to have a drawback.

_Q._ What is the difference between a rebate and a drawback?

_A._ There is not much difference in one sense. A rebate is made at

the time we pay our freight; a drawback is made afterward.

_Q._ That is a technical, rather than a real, difference, is it not?

_A._ I want to state it as you will find it in the contract.

_Q._ The effect was that those who did not go into the combination

could not get their oil as cheaply as you could?

_A._ No, sir; they could not; I want to explain in what relation

that occurred and why this arrangement was made. I may say that it

never entered into my head that the refineries would not all be

brought in; a fair manufacturer’s profit was all we wanted. They

were all to be brought in on equal terms, and the object of the

drawback was not to cover all the oil to be refined in this country,

but only the oil that was to be exported.

_Q._ If all had gone into the combination, then the result would not

have been to injure the producers and refiners, but to injure the

consumers of the country?

_A._ No, sir; the purpose was not to injure them.

_Q._ Would it not have been to increase the price of oil, if you had

increased the cost of freight?

_A._ Yes, sir.

* * * * *

_Q._ You say the railroad companies were going to increase the rate

of freight anyhow; they had the right to do that if they were

carrying too low, but would that justify them in increasing the

rates of freight to such an extent that they could afford to give

you a sum of money for it?

_A._ I will tell you how that was done. The men in our trade are a

very hard kind of men to hold. Those of us who deal in oil know that

when we have purchased a lot, they would deliver it in New York for

less than anybody could afford to deliver it. That has been the fact

almost continuously ever since 1869. Oil has been delivered in the

East for less money than was apparent from any rates known to the

market; less than even we who refined it could deliver it for. The

railroads were kept constantly besieged by one or another, and they

were continually cutting under other routes for New York or for

Cleveland, so that nobody knew what the rates were. They have been

paying rebates, more or less, for the last two years.

_Q._ And you contemplated an increase of rates for the simple

purpose of having the railroads divide with you?

_A._ There was no divide.

_Q._ A rebate is a divide to a certain extent, is it not? The

proposition was that there should be taken out of the producers and

consumers of this country a certain percentage of the freight for

you?

_A._ It was done to prevent this cutting of roads one under another,

and to prevent speculation.

_Q._ Was it not done for the purpose of oppressing the producers and

consumers of this country?

_A._ I can only deny that such was the object, or that such would

have been the effect.

* * * * *

_Q._ Has it been the practice of both the producer and refiner to

make combinations from time to time by storing oils, and by large

shipments abroad to affect the general price in the market?

_A._ The producers have made such combinations on the creek, and a

few of the refiners and merchants made two combinations in 1868,

which was known as the Deboe combination, and in 1869 and 1870 the

Bull Ring, as they called it; but there was no combination that I

knew of on the part of the producers, except among themselves; they

have several times combined among themselves.

_Q._ Have there not been combinations of producers, refiners, and

merchants to affect the price of oil?

_A._ There have been all kinds of combinations.

_Q._ Is there not at this time, if not invalidated by a change of

directors of the Erie Railroad Company, a combination between

officers of that road and certain parties in New York by which they

control the price of coal?

_A._ If I were allowed to say what I think, I should reply in the

affirmative and to say that one great reason why we went into this

arrangement was to stop that Erie combination, which was a great

source of difficulty; we could not get hold of the matter; we would

ship a cargo of oil at a fair price to-day, and would be compelled

to sell it to-morrow at a much less price; this arrangement did

break up that combination entirely, so that there is no combination

of that sort to-day.

By the Chairman.

_Q._ I understand that your larger combinations swallowed up the

Erie combination.

_A._ It destroyed it at the time.

_Q._ Yours was somewhat in the direction of the Erie combination,

but larger?

_A._ No, sir; it was not; the Erie was with some merchants, ours

embraces the whole refining interest in the country; that was

different; I will state that since I came into this Capitol I have

been told that the very men engaged in prosecuting this

investigation have a combination by which they intend to run up the

price of their oil; I hope they will; I do not care what means are

used, so that we can carry on our business, and pay just what others

have to pay.

* * * * *

_Q._ I understand you to say that under your arrangement the cost of

crude oil might be increased $1.25 a barrel, and that there is

produced about 18,000 barrels daily in the Oil Regions of

Pennsylvania, but not that on an average; can you state from memory

about the amount of annual production?

_A._ I have a circular here which gives the statement as 5,775,000

barrels.

_Q._ So that the production in round numbers for last year was

6,000,000 barrels; now, of this $1.25, how much were you to get as

your drawback if you had carried out your arrangement?

_A._ The maximum we would have been entitled to receive is one

dollar a barrel.

_Q._ Then on this production you would have received $6,000,000 a

year, and the railroad companies an additional sum of $1,500,000; in

other words, under your arrangement the public would have been put

to an additional expense of $7,500,000 a year.

_A._ What public do you refer to? They would have had to pay it in

Europe.

By Mr. Negley.

_Q._ Were there not at the same time combinations upon the part of

producers to affect the price of oil in the market?

_A._ There were not at the time we started this matter; I do not

know of any just at that moment; there have been over and over

again. I want to state that a large portion of our oil product goes

to Europe—of this very crude oil which Mr. Sheldon talks about; I

have here a circular to which I call the attention of the committee,

which bears out our position in this matter; I desire to put it in

evidence because it gives the general opinion of merchants connected

with the exportation of crude oil. It has been the impression of

everybody in the trade that the oil exported should pay us an

additional amount in this country, to be divided between those

interested in the handling of it and the producing of it, to the

extent of eight or ten millions a year; I have had that figured out

three, or four, or five successive years. We have shown over and

over again that that amount ought to be retained in this country. I

have been engaged for several years in the oil business, and I have

yet to sell one barrel to bear the market. I have always been upon

the bull side of the market; I believe there ought to be in this

country a better price for oil to every one engaged in it. In 1868,

1869, and 1870, there were movements in oil which brought to this

country millions of dollars; and if the producers had refrained from

sending forward their oil beyond the requirements of the market, the

price would have been sustained. That has been the trouble always in

making movements for a higher price. There is no man in this country

who would not quietly and calmly say that we ought to have a better

price for these goods.

By the Chairman.

_Q._ Do you mean a better price here, or a better price for that

exported?

_A._ You could not get a better price for that exported without

having a better price here.

_Q._ That is what the committee wants to know, whether it is

necessary, in order to keep up the price abroad, to keep up the

price at home?

NUMBER 12 (See page 1082)

EXTRACTS FROM THE TESTIMONY OF PETER H. WATSON

[From “A History of the Rise and Fall of the South Improvement

Company,” pages 76–96.]

WASHINGTON, D. C., April 5, 1872.

By Mr. Townsend.

_Q._ From such testimony as you have given this morning, am I

correct in understanding that this whole arrangement was suspended

before its completion and before anything was done under it?

_A._ Yes, sir.

_Q._ That no completion of contracts was consummated?

_A._ No, sir; the conditions of the original understanding about the

contracts, on which alone they were to go into effect, had not been

complied with.

_Q._ And a further arrangement was necessary to make it a complete

contract?

_A._ Yes, sir, the South Improvement Company had to enter into a

contract, such substantially as I have furnished a draft of here, to

give the producers the full benefit of everything connected with the

contract before the contract itself could go into effect.

_Q._ There are three principal interests connected with the oil

trade?

_A._ There are, the producers, refiners and transporters; no

injustice could be done to either interest without affecting,

injuriously, the others. The object of the railroads in this matter

was to promote the interests of the trade in order to promote their

own interests.

By the Chairman.

_Q._ You say there were three interests, producers, refiners and

shippers?

_A._ Yes, sir, connected with the trade.

_Q._ And that the object of all these arrangements was to protect

these three interests?

_A._ To protect these three interests and incidentally, of course,

protecting the general interest in doing that, for this is

peculiarly an American traffic.

_Q._ It was in the direction of increasing to each of these parties,

respectively the benefits and profits of the business?

_A._ Yes, sir, that each might receive a fair profit. The railroad

companies had not been receiving cost for transportation, and it was

to save them from loss, for they had been transporting at a loss

during the whole of the year 1871.

_Q._ Well, that is to increase profits, is it not?

_A._ Yes, to save from loss.

_Q._ Did it look to increasing in any way the benefits of cheapness

to the consumer?

_A._ Yes, sir.

_Q._ How?

_A._ By steadying the trade. You will notice what all those familiar

with this trade know, that there are very rapid and excessive

fluctuations in the oil market; that when these fluctuations take

place the retail dealers are always quick to note a rise in price,

but very slow to note a fall. Even if two dollars a barrel had been

added to the price of oil, under a steady trade, I think the price

of the retail purchaser would not have been increased. That

increased price would only amount to one cent a quart, and I think

the price would not have been increased to the retail dealer because

the fluctuation would have been avoided. That was one object to be

accomplished. Moreover, there is only one-sixth of the oil produced

here consumed in this country—a very small proportion of the

product. In discussing what compensating advantage would arise from

an increase of price, the railroad companies considered, in the

first place, that there was a very great compensation afforded by a

steady trade.

_Q._ Will you state to the committee how, with your mode of arriving

at these conclusions, that cheapness to the consumer is promoted by

stability in trade—how that arrangement which gave $1.50 a barrel to

the South Improvement Company benefited either the railroad company

or the producer?

_A._ Well, sir, in the agreement you will observe that the maximum

rebates and maximum rates are stated. These maximum rebates were

exceptions to the rule, which is a cardinal principle in the

contract. The actual rates were to be kept as near to net rates as

possible. Moreover, this was a contract which, before it was to go

into effect, would have been a contract with the producer as well as

the refiner.

_Q._ Does this contract show that?

_A._ The draft of a contract which I have presented to the

committee, and which was to have been entered into with the

producers before the contracts with the railroad companies went into

operation, shows that.

_Q._ Does this contract say that anything was to be done in behalf

of the producer before it was to go into operation?

_A._ Not on the face of the contract; it was only a condition on

which it was delivered to me.

_Q._ A written condition so that it would become a part of the

contract?

_A._ It was a part of the contract.

_Q._ I asked you whether there was anything in writing?

_A._ I said there was nothing in writing on the face of the

contract, but nevertheless it was an essential part of it.

_Q._ It seems to be essential now that it should be a part of the

contract?

_A._ It was all the time so considered from the beginning.

By Mr. Hambleton.

_Q._ Was this draft of a contract with the producers drawn prior to

the execution of the railroad contracts?

_A._ Yes, sir, the draft was drawn prior to that.

By the Chairman.

_Q._ What is the date of that pencilled draft of a contract?

_A._ I could not give you the date of it; it was written in the

office of the Lake Shore Railroad Company.

_Q._ At what place?

_A._ New York.

_Q._ State as near as you can the date?

_A._ I should say it was probably in December; either late in

December or in the beginning of January, probably in December;

indeed, I am very confident it was before I went home at Christmas.

_Q._ Has any copy of this ever been printed?

_A._ No, sir.

_Q._ This is all there was of it?

_A._ Yes, except discussion; we discussed the matter.

_Q._ I mean all there was committed to writing?

_A._ Yes, sir, all there was then committed to writing.

_Q._ Is it all there was as far as making out a contract is

concerned?

_A._ Yes, sir.

_Q._ Was this submitted to the producers as a body or individually?

_A._ We were very anxious to submit it to the producers, and I asked

them to appoint a committee that we might do it, but they had got up

such an excitement at the time that nothing was practicable.

_Q._ When was that?

_A._ Before the last of these contracts was signed.

_Q._ Can you give the dates at all?

_A._ I cannot give the dates, but the contract with the Lake Shore

road had not been signed at the time.

_Q._ What producers did you ask to call a meeting?

_A._ Among others I addressed a communication to be delivered to a

gentleman who was understood to be the chairman of a meeting about

to be held.

_Q._ What was his name?

_A._ Foster W. Mitchell, of Franklin.

_Q._ You addressed a communication to him, of what purport?

_A._ Asking him to appoint a committee to meet a committee of the

South Improvement Company, that they might know what the objects of

the South Improvement Company were. I proposed to submit these

contracts with the railroad companies to that committee and also the

form of contract which the railroad companies required the South

Improvement Company to enter into with the producers, before these

contracts went into effect.

_Q._ Have you a copy of that communication or letter?

_A._ It was a telegram.

_Q._ Have you a copy of it here?

_A._ I have not at present.

_Q._ Have you it in your possession, anywhere, and can you lay it

before the committee?

_A._ I may have it; am not sure.

_Q._ Did you receive a reply to that communication?

_A._ Yes, sir.

_Q._ Was it stated in your communication that you proposed to lay

before the committee the form of contract to be entered into with

the producers?

_A._ No, sir. I proposed to lay that before the committee if it

should be appointed.

_Q._ If you are not able to furnish a copy of that communication I

will ask you to state orally its contents.

_A._ I could not give you the words of it; it was in general terms

asking that they appoint a committee to confer with a committee of

the South Improvement Company.

_Q._ To confer in reference to what?

_A._ I do not know that I should be safe in undertaking to say; I

know what my object was in writing it.

_Q._ That you have stated. If you received a reply from Mr.

Mitchell, state whether it was by letter or telegram.

_A._ I received a reply by telegraph from Mr. Mitchell, stating that

the meeting of the producers received the communication with

scorn—as of course they would if read to them, as a mass-meeting is

always called for a specific object.

_Q._ That was not in his reply?

_A._ No, sir, it was not. I replied to him that I had intended the

communication to him to be for the purpose of laying it before a few

of the principal producers; that to lay the proposition before the

meeting was of course to insure its defeat, because the meeting had

convened for a predetermined purpose, which was to denounce and

treat with scorn the South Improvement Company, because the South

Improvement Company had been represented to them as hostile to their

interests. This last perhaps was not in the communication.

By Mr. Hambleton.

_Q._ Have you a copy of that paper which you addressed to Mr.

Mitchell?

_A._ I am not sure whether I have or not. It was a telegram.

_Q._ Did that substantially close the written communications between

you and the producers upon that subject?

_A._ No, sir. I had a great many communications with individual

producers; I think with more than half the producers, estimating

them by the quality of oil produced.

_Q._ State what occurred.

_A._ I have corresponded with them and in that correspondence they

have expressed their belief that the proposed plan of the South

Improvement Company would work greatly for the benefit of the

producing interest; that there was something greatly needed for the

producing interest, and that it could not thrive without something

of this kind, because it could not pay fair, living rates, for

transportation to the railroad companies at the price oil was

bringing, and that there was no likelihood of oil increasing in

price under the existing condition of things; that the railroad

could not always, of course, continue carrying at a loss.

* * * * *

_Q._ Will you give the names of the producers who proposed to join

the South Improvement Company, or who expressed themselves

favourable to the plan of that company, in addition to the name of

Mr. Mitchell?

_A._ I could give you the names of several of them, but I do not

think their lives and property would be safe. They requested me not

to mention their names because they thought it would be an imprudent

thing to do.

_Q._ You refuse, then, to give the names which you say you could

state?

_A._ I refuse to give the names for the reason I have stated.

_Q._ Are there any of them you are willing to mention?

_A._ I will look over the letters and see whether there are any of

them not marked confidential. If there are any not so marked, I will

give you the names.

_Q._ Why do you state to this committee that you are not willing to

give the names of the parties to whom you refer, when you state that

a great many producers were in favour of this plan, and were

consulted in regard to it?

_A._ I stated it because it was a fact.

By Mr. Sheldon.

_Q._ Did the danger to the lives of these parties arise from the

excitement in the Oil Regions in consequence of these proceedings?

_A._ Yes, sir, one of the presidents of one of the committees

representing the producers was in New York, a Mr. Patterson. He

stated, as I understood, to one of the railroad officers, that he

did not think my life would be safe if I were to go into the Oil

Region, although he himself would not take it. I had received a

number of threatening letters, but I did not attach any importance

to them until Mr. Patterson made that statement.

By the Chairman.

_Q._ What was the reason given why your life would not be safe?

_A._ I do not know that the reason given, I think by Mr. Patterson,

that there was such an unreasonable excitement among the people as

to the nature and object of the South Improvement Company, which was

represented to them to be a measure altogether hostile to them.

_Q._ Do you know what these misrepresentations were?

_A._ I only know by what I have seen stated in the papers and what

persons have mentioned to me.

_Q._ Did you make an effort to correct the false impressions?

_A._ I did; the papers called for the other day by the committee,

and which I have here to-day to produce, will show that.

_Q._ Were your efforts to correct these misrepresentations

successful?

_A._ No, sir, they were not. I will read the despatches which I sent

for the purpose of endeavouring to do that, and you will see from

them the nature of the efforts I made.

_Q._ Sent to whom?

_A._ I sent a despatch to F. W. Mitchell through S. P. McCalmont of

Franklin, which I have here.

_The Chairman._—We will not stop to read them.

_Witness._—It will answer your question in a great deal shorter

period than I could answer it verbally.

_The Chairman._—We will put the answers themselves in as testimony.

_Witness._—Then I will read this as my answer, if you please,

because it expresses as fully as I could express the facts you

desire to know.

_The Chairman._—Very well, you may hand the despatches to the

reporter, and they will go in as a part of your testimony, and save

the committee the time of reading them.

_Witness._—You can hardly comprehend the answer without hearing the

despatches. There were three despatches, showing the efforts I made

to have the producers understand that the whole arrangement was one

which looked as much to their interest as to any other.

_The Chairman._—Very well, you may furnish them to the committee; we

will not stop to read them now.

_Witness._—I then offer you first my despatch to S. P. McCalmont,

dated New York, March 4, 1872. I next offer another despatch from

myself to F. W. Mitchell, dated New York, March 5, 1872, and also a

despatch from myself to the same party, dated New York, March 6,

1872.

The despatches referred to are as follows:

NEW YORK, March 4, 1872.

S. P. MCCALMONT,

Franklin, Pennsylvania.

Your telegram received. Please deliver the following

communication to F. W. Mitchell, or, in his absence, to somebody

else who will make its contents known to the principal producers

attending the meeting to be held to-morrow at Franklin:

To F. W. MITCHELL:

Yesterday I received by mail from you or some other friend in

Franklin several newspaper slips, one of which threatened the

destruction of my oil at Franklin. At the same time I received an

anonymous letter threatening injury to the Jamestown and Franklin

Railroad. Disapproval of my connection with the South Improvement

Company is alleged as the reason of both threats. This morning the

telegraph informs me that the threat to destroy my oil has been

executed by tapping the tank and letting it run to waste. While

there may be some excuse for working up the present excitement to

induce people to subscribe their money to new railroad schemes,

there can be nothing but reprobation for the lawless destruction of

property. You have sufficient character and influence, and

sufficient information of the purposes of the company, to quell this

excitement by a word, and I think it your duty to say that word. It

seems to me that a great responsibility rests with somebody among

you for stimulating the present causeless excitement, and the

lawless destruction of property. On meeting you here on your return

from the South, I explained to you, very briefly, that the whole

plan of the South Improvement Company was founded upon the

expectation of co-operation with the oil producers to maintain a

good price for crude oil, as the only means of securing a fair

remuneration to either the transporter, the refiner, or the

merchant.

Unless the producers will co-operate with us, first, by limiting the

production or the capacity of the markets of the world to absorb

petroleum at a good price; and, secondly, by tanking a large part of

the production for the next two or three months, that it may be

withheld from the market until the present glut is exhausted and

production reduced, it will be impossible, I am convinced from

recent advices of the state of supply and demand in the principal

markets of the world, to keep the price of crude oil up to $3.50,

and of refined oil up to twenty-two cents, during the coming summer.

I stated to you in the strongest terms the desire of the South

Improvement Company to enter into an arrangement for a series of

years with the producers, whereby good prices for crude oil at the

wells and fair and reasonable rates of transportation would at all

times be assured. The desire still exists. You expressed to me your

concurrence in these views, as others among the leading producers

whom I have more recently seen have also done.

I then explained to you certain important business which I had

postponed to await the organisation of the South Improvement

Company. That business I have been engaged upon for the last ten

days. As soon as I get through with it, which I hope will be in a

few days, I should like to meet a committee of the principal

producers to arrange the details of the plan of co-operation of

which we spoke. I therefore request you to have such a committee

appointed by the meeting noticed for to-morrow on the newspaper slip

sent to me, and if possible have a plan prepared by which, among

other things, we could extend to you large facilities of tankage and

capital to take care of the surplus oil until the present production

can be checked.

P. H. WATSON.

* * * * *

NEW YORK, March 5, 1872.

To F. W. MITCHELL,

Franklin, Pennsylvania.

Just received another batch of newspaper slips giving proceedings of

Oil City meeting.

The meeting acted in ignorance and under a radical misconception of

the actual facts, and with far more earnestness and zeal than

judgment.

If you will take the trouble to appoint a committee of producers to

investigate, we will show that the contracts with the railroads are

as favourable to the producing as to any other interests; that the

much-denounced rebate will enhance the price of oil at the wells,

and that our entire plan in operation and effect will promote every

legitimate American interest in the oil trade.

You patiently test a well before deciding upon its merits, like

rational men. You examine other subjects before acting upon them. Is

not this a subject of sufficient importance to be worthy of rational

investigation?

P. H. WATSON.

* * * * *

NEW YORK, March 6, 1872.

To F. W. MITCHELL,

Franklin, Pennsylvania.

Your telegrams received.

My telegrams were not addressed to the mass-meeting, but to you as a

friend, as is also this, to be read at your discretion to some of

the principal producers attending the meeting, simply to induce them

to investigate the subject about which they are excited before

acting upon it.

A mass-meeting is not a deliberative body; it always acts under the

feeling of impulse or passions, and meets for predetermined

purposes, one of which in this case, as appears in the articles of

the newspapers calling the meeting, was to denounce and show its

scorn for anything and everything connected with the South

Improvement Company. Hence it required no prophet to tell beforehand

in what spirit my telegrams to you would be listened to. You ask me

to go to Franklin to consult my true friends. I will most gladly

meet you and your friends at any place favourable to calm

investigation and deliberation, and therefore outside of the

atmosphere of excitement by which you are surrounded, say at Albany

or New York.

I can well understand that, however, the excited people of your

region may misjudge, they have no other purpose than to promote the

public interest, and knowing that you deservedly enjoy their

confidence, I am strongly convinced that a free and frank

interchange of views at the conference suggested would result in

satisfying you and the people that there exists no cause for

regarding us as enemies. I therefore hope you will name an early day

for the meeting.

P. H. WATSON.

* * * * *

Mr. Gilfillan.

I would like to suggest a question that would throw a little light

upon this subject, and which I know Mr. Watson will be entirely

satisfied to answer. I wish the chairman would ask if the objects of

the South Improvement Company, in connection with railroads, were

presented to the public through any statement in writing or by

telegraph to the public, explaining the objects.

_The Chairman._—I am coming to that, but first I want to know of the

witness, whether he received any replies to these despatches?

_A._ Yes, sir, to one of them.

_Q._ Have you a copy of that?

_A._ I have not, but I have stated the purport of the answer. To the

first I did not receive any answer; there was not time to receive

any, and I did not expect it. I sent the second shortly after, and

the answer was to the first and second together. To the third I

received no telegraphic answer.

_Q._ You say you have no copy of these answers you received?

_A._ I have not. I gave the purport of the answer I received at the

last meeting.

_Q._ Were there any other letters or statements published by your

authority to the public or to parties in interest among the

producers?

_A._ These were not published by my authority.

_Q._ Was there any other matter published by your authority, giving

explanation to the people?

_A._ I made similar statements to a great many of the producers.

_Q._ I mean documentary evidence; was there anything published over

your signature?

_A._ Oh, I did not publish any document at all; I did not publish

this.

_Q._ Did you authorise it?

_A._ I neither published it nor authorised it, because I considered

it useless; the people were so excited that they could not be

reasoned with at all. Every one who informed me about it said so.

_Q._ Did you offer to any of the producers, or any parties in

interest to show them these contracts?

_A._ Yes, I wanted that committee appointed for that purpose; I told

them so substantially in my despatch.

_Q._ Did you make the offer otherwise?

_A._ I told them that I would, if that can be considered as an

offer. I said I would, and I should have done it if they had come to

meet us; but they were afraid.

_Q._ Would you have published it, do you mean?

_A._ I should have been perfectly willing to publish the contract; I

should have been glad to have published everything in connection

with the matter.

_Q._ If you would have been glad to have published it, why did you

not? You had the power.

_A._ I would have been very glad to have done it, with the assent of

these men.

_Q._ With the assent of what men?

_A._ The producers. I said to some of the producers that if they

would go and examine the whole plan, and after they had examined

into it they were not satisfied that it was for their interest, I

would be perfectly willing to abandon the whole thing. That was the

feeling we had in regard to the matter.

_Q._ What producers did you say that to?

_A._ Several of them.

_Q._ Mention their names.

_A._ Men with whom I had been in correspondence with on this

subject, and whose lives and property I believe would not be safe if

I were to mention their names, because they have told me so. I have

promised not to expose them, and I feel in honour bound not to give

their names.

_Q._ You have so promised in regard to all of them?

_A._ Most of those with whom I have had correspondence.

_Q._ Was there any opportunity offered to explain this matter, to

show the contracts and let them know what were the objects of your

company? Are there no names you can mention in that connection?

_A._ I shall have to look over the letters in order to see if there

are any not marked confidential. I should like to give you the names

if I am at liberty to do so.

Mr. Gilfillan.

I should like to make a suggestion which would throw a little light

on this subject. If the chairman will allow me, I will ask the

witness if he saw the proceedings of the meeting at Franklin, to

which he refers, and if so, whether a resolution was not passed at

that meeting asking for the production of these contracts that the

public might know what the objects of this company were?

_A._ I have seen no such resolution; I do not think I have seen the

published proceedings of that meeting; I only saw such parts as were

sent to me in slips. There was certainly no such resolution as that

which came to me. Mr. Mitchell telegraphed to me that my telegrams

were received with scorn; that they did not want to know anything

about the matter.

* * * * *

_Q._ Do you remember whether, about the first of March, the railroad

companies, with which you made these contracts, or some of them,

raised their rates of transportation?

_A._ I think about that time they did.

* * * * *

_Q._ Was it for a short time raised to that amount, and a printed

schedule published?

_A._ I never saw the published schedule; I understood that through a

mistake between William Vanderbilt, vice-president of the New York

Central Railroad Company and freight agent of the Lake Shore road,

it was supposed by the freight agent of the Lake Shore road that the

rate had been raised by an agreement among the railroads to the

maximum rates mentioned in their contracts with the South

Improvement Company. A day or two after that mistake, being in Mr.

Vanderbilt’s office, a telegram came in respect to it, and Mr.

Vanderbilt at once directed the correction to be made. Mr. Devereux,

the general manager of the Lake Shore Railroad, happened to come in

at the time, and he also gave directions to the officers of his road

to have the correction promptly made.

_Q._ Were you present?

_A._ Yes, sir, I was present. When I said “being in Mr. Vanderbilt’s

office,” I meant that I myself was present.

_Q._ Was the correction made at your instance, or request, or

suggestion?

_A._ It was not.

By Mr. Hambleton.

_Q._ Why was it made?

_A._ Because it was a mistake, a misapprehension, a

misunderstanding, as I understood. I had not heard anything of it

before that moment, and it was accidental, as I said, that I heard

it.

By the Chairman.

_Q._ Then the rates were raised by the freight agents of the roads

to correspond with the rates mentioned in these contracts?

_A._ I do not know the facts any further than having heard it as I

have stated.

_Q._ And you think they were raised to correspond with these

contracts by mistake?

_A._ I stated I so understood at the time.

_Q._ You stated the circumstances so minutely as to its being a

mistake between Mr. Vanderbilt and the Lake Shore agent, that I

inferred you knew the facts?

_A._ I only know it was so represented at the time.

_Q._ Did you take any part in that conversation by which the error

you speak of was corrected?

_A._ Only in this sense: Mr. Vanderbilt mentioned the fact to me

that a mistake of that kind had been made, that he had just received

a despatch in relation to it, and he was about to correct it, and he

asked me, I think, if I knew whether Mr. Devereux had given any

orders respecting the matter. I told him I did not know anything

about it.

_Q._ If I understand you, the time had not come for raising the

freights under these contracts then?

_A._ I do not know anything about the time; I did not intend to make

any such statement.

By Mr. Hambleton.

_Q._ At that time, as president of the South Improvement Company,

was it not the understanding, and was it not your expectation, that

the rates would go up at that time as they did go up to the maximum

rates named in these contracts?

_A._ I do not know that as president I had any knowledge of the

matter; and as an individual I took no part in the transaction.

_Q._ The president is an officer supposed to know more about such

details than any of the directors or members of the company; and as

president of that company I ask you if it was not the general

understanding that the rates would go up about that time?

_A._ I answer distinctly that it was not, and that as president of

that company I had nothing to do with the rates then, because the

South Improvement Company’s contracts had not gone into operation,

and neither the South Improvement Company nor any of its officers

had any control of the question in any way.

_Q._ Had not the contracts at that time been signed?

_A._ The contracts had been signed, but they were held by me

personally in escrow and they had not gone into effect.

_Q._ They had been signed?

_A._ Yes, but had not gone into effect.

_Q._ Were not these contracts so signed and held by you as president

of the South Improvement Company, and did you not expect that the

rates would advance to the maximum named therein at that time?

_A._ Certainly I did not; and in regard to the premises stated in

the first part of your question I do not want to admit the

statements you made. I do not suppose the object was to entrap me

into an admission of a statement that is not true.

_Mr. Hambleton._—I do not wish to entrap you into anything.

_Witness._—I say that when you remark that I hold these contracts as

president of the South Improvement Company, you mistake; they were

not in my hands as president.

_Q._ I supposed that as president they passed into your hands?

_A._ They were passed into my hands as a person, and as such, in

execution of the trust, I should hold them as much against the South

Improvement Company as against anybody else.

_Q._ You answer my question then that you did not expect them to

raise these rates?

_A._ Certainly I did not; I had no such idea at all.

_Q._ State how that mistake, or misunderstanding, or error, happened

to occur, and what was the cause of it?

_A._ I really do not know; it was suggested at the time by Mr.

Devereux that Mr. Hills, the freight agent of the Lake Shore

Railroad, had a son on his death-bed, that he had to leave the

office in charge of subordinates, and that he had not his wits about

him as usual, because his mind was so pre-occupied with the sickness

of his son, who was a favourite son.

_Q._ If he had not his wits about him, had he the contracts?

_A._ I do not wish to use that expression in any offensive sense; I

mean he had not the full use of his mind. I do not know whether he

had the contracts or not. I think it is probable from the

conversation there that all the freight agents had the rates

mentioned in these contracts; I have no doubt that the officers of

the roads had consulted him; indeed some of them stated that they

had been consulted, and that the freight agents knew what rates were

provided for in these contracts.

* * * * *

_Q._ I want an answer to my question. By your contracts with the

railroad companies you were to purchase all the refineries in the

main cities of this country. You had it in your power to furnish

more transportation than anybody else?

_A._ The refineries were not purchased; they have not been

purchased.

_Q._ Was not that contemplated?

_A._ The company contemplated purchasing if it had gone into

operation.

_Q._ I am getting at the point now; if your scheme had been

successful do you suppose anybody in the world could have furnished

an equal amount of transportation with your company?

_A._ If our plan had been carried out it included everybody; there

would have been nobody left, and no hostile interest.

_Q._ You would have had the matter perfectly under your control?

_A._ Yes, because there would have been nobody left.

_Q._ Then I am correct in saying that nobody else could have shipped

oil under any circumstances, because you were to have an additional

rebate in case any rebate was allowed to any other person?

_A._ But if all interest was drawn into the plan, there would have

been no hostile party and no injustice done to anybody.

_Q._ That is a different matter; now we agree that your advantages

of rebate from the leading roads gave you the power of paying larger

prices to the oil producers than anybody else?

_A._ It was expected that these rebates would enable the refiners

and producers to maintain a fair price for crude oil at the wells.

_Q._ Will you answer my question? Could you not have purchased oil

and shipped it with these rebates, on terms that nobody else could

compete with?

_A._ If everything had been successful, if the South Improvement

Company had gone into successful operation, combining all these

various interests, of course we could have paid a higher price than

anybody else.

_Q._ Do you not see then that you had the producers of the Oil

Regions absolutely in your control?

_A._ No, sir.

_Mr. Sheldon._—I do.

_Witness._—I do not, and will tell you why; you asked me a question

that is a good deal like attempting to make the Bible prove that it

says itself “that there is no God.”

_The Chairman._—All our time is being expended in this way. Will you

answer the direct question put to you?

_Witness._—I want to answer it truly. It is an essential part of

this contract that the producers should be joined in it; therefore

it was not hostile to the producers in any of its intents or

purposes; it never would have gone into effect unless the producers

had joined.

By Mr. Sheldon.

_Q._ That may be the fact, but if the producers had refused to join,

could you not have forced them into the arrangement on your own

terms?

_A._ No, sir; because the South Improvement Company had no contract.

_Q._ You have a contract?

_A._ No, sir; it has no contract.

_Q._ Did it never have?

_A._ No, sir; they are placed in escrow with me. It has never had

any, that is, there is not to-day and has not at any time been a

contract in existence, in activity, or in force between the

railroads and the South Improvement Company.

By Mr. Hambleton.

_Q._ Is not that entirely due to the excitement produced in

consequence of the contracts having been entered into?

_A._ If the purchasers had entered into the contract which was

contemplated by the South Improvement Company, it would have been

entirely satisfactory to all parties, and both contracts would have

gone into operation.

_Q._ And if a party of the producers had joined, you could have

forced the balance to have gone into the arrangement?

_A._ Two-thirds were required.

_Q._ You could have forced the balance to have gone in?

_A._ The majority rules in most kinds of business; unless two-thirds

had joined, no arrangement would have been made.

_Q._ Let us see whether you have not power to force the producers;

by your contract with the railroads you had the advantage of forty

cents a barrel to Cleveland and Pittsburg, and $1.06 to New York,

Philadelphia, Baltimore or Boston on crude petroleum; while on

refined petroleum you had the advantage to these cities of fifty

cents a barrel, and from any other point to New York, Philadelphia,

Baltimore and Boston of thirty-two cents a barrel; it seems to me at

that advantage you could have compelled the producers to do exactly

what you wanted them to do?

_A._ The South Improvement Company never could have had that

advantage, because the condition on which the main contract with the

railroads was to be enforced was that the producers should join with

them and participate in the benefits.

_Q._ Is that embodied in the different contracts?

_A._ The condition is not embodied upon the face of the contract; it

is a condition upon which I held the contracts.

_Q._ Now Mr. Watson, as a lawyer, if you are such, are verbal

conditions made with a third party to change the terms of a written

contract executed in all respects?

_A._ Let me give you an illustration within my experience that is

exactly parallel to this: I had a note executed, sealed, and

complete in every way, put into my possession to be delivered upon

the production of a deed.

_The Chairman._—Wait a moment, there must be some kind of order in

this proceeding. I wish you to answer the question which has been

asked you, whether as a lawyer the conditions stated would change

the terms of a written contract. If you are able to give an answer

to that legal question you may do so.

_Witness._—Let me hear the question and I will endeavour to answer

it fully, if you will allow me to answer it in my own way.

By Mr. Sheldon.

_Q._ The question is, whether a verbal understanding to be performed

by other parties not embraced in the written contract can be made

effective to modify the terms of that contract as between the

parties to it.

_A._ An agreement between the parties to a contract, whether verbal

or written, fixing the terms upon which the contract shall go into

effect, is perfectly competent and would be binding.

_Q._ That is your opinion as a lawyer?

_A._ That is my opinion.

_Q._ Now, sir, these contracts contemplated a considerable increase

in the freight charges, both upon crude and refined petroleum?

_A._ They contemplate an increase almost up to the price for coal

and lumber, as they are ordinarily carried, amounting to about 1½

cents a pound.

_Q._ Did it contemplate an increase upon both crude petroleum and

refined oil?

_A._ Certainly; the railroads had been carrying these articles at a

loss of nearly a million dollars; they carried for less than cost,

and one object of these contracts was to increase the price of

freight to the railroads.

_The Chairman._—Let me suggest the propriety of first answering the

question and then giving your explanation. That is the regular

course, and I am sorry to say that during your whole examination

there has not been a direct answer given to a question.

_Witness._—Well, sir, where a question is such that it would give a

false impression unless answered fully and fairly, I do not want to

convey that false impression by my testimony.

Mr. Sheldon.

_Q._ Very well, I am satisfied with your explanation; now could not

these railroad companies have raised the price of freight without

the intervention of the South Improvement Company?

_A._ There were a good many difficulties in the way.

_Q._ Could they not have done it, and had they not the power to do

it?

_A._ The laws of the State of New York forbid the Erie and New York

Central Railroads from combining to raise the rates of freight;

whether they could have done it I do not know. They tried very hard

to agree to raise the freights but did not succeed.

_Q._ If that is the law of New York, is there an exception to that

law so that they could combine with the South Improvement Company?

_A._ I think it was the opinion of lawyers that this arrangement was

perfectly legal and proper; they could not combine, but they could

make an independent agreement.

_Q._ They could raise the rates in your behalf, but they could not

in the behalf of anybody else?

_A._ Not in behalf of anybody, but they could make this transaction.

For two or three years they had been cutting under for the purpose

of drawing the business away from each other.

_Q._ What effect would this increase of freight have upon the

consumers of oil?

_A._ I think it would not be to the prejudice of the consumers in

this country at all.

_Q._ Would it not have increased the price?

_A._ I think it would not have increased the price to the retail

consumers in this country. If there had been no countervailing

advantage to the retail consumers, of course it would have increased

the price.

_Q._ You mean to say that there was such a margin upon the traffic

of oil that to increase the freight charges fifty or 100 per cent.

would not affect the retail price?

_A._ No, sir; I do not mean to say that is the reason.

_Q._ Is that not the effect of your answer?

_A._ No, sir, I think not. My explanation of it is this: that the

oil trade, unless it is steadied by some artificial process, is

subject to violent and rapid fluctuation. The retailers are very

quick to note a rise in price, as I explained the other day, but

very slow to notice a fall, so that the average price of a retail

purchaser is very much above the average wholesale price. Now it was

expected that the price under this arrangement would be a steady

price, and that with a steady, regular price it would not cause the

retailer to raise the price at which he sold at all.

_Q._ Do you know what profit is made on a barrel of oil sold by

retailers to consumers in Northern Ohio?

_A._ It varies.

_Q._ Does it ever reach over $1.75 a barrel?

_A._ I can answer your question with a little calculation. (After

computation.) I have known it to be sold at as low a profit as forty

cents a barrel. About six or eight cents a gallon is a fair profit.

_Q._ We gentlemen are supposed to be acting for the public good;

will you tell us what public interest you are advancing, or thought

you were advancing in making the arrangements that are foreshadowed

in these contracts?

_A._ We were advancing the interests of the railroads, the

transporting interest, the interest of the producers, those who mine

oil, the interest of the refiners, those who manufacture it, and the

interests of the American trade and business generally, for

five-sixths of the oil produced is exported, and an increase in the

price of crude oil at the mines is essential to the payment of a

fair business profit to the refiners; it is essential to the payment

of a fair rate of transportation, because without a higher price of

transportation more profit to the refiners could not be paid long

and allow the producer pay for his labour at the average price of

oil last year.

_Q._ Do you not think the interests of trade in this country are

better promoted by leaving everybody to attend to their own matters

and protect their own rights rather than by forming a combination as

you did?

_A._ It is essential in many cases beyond individual means to form

combinations. Railroads cannot be built without the co-operation of

a great many individuals. There are a great many other operations

that cannot be managed successfully without co-operation, and this

is one of them.

_Q._ Did the producers ask you to go into this operation?

_A._ The most intelligent producers did, and to-day, my judgment is,

that they are all satisfied that something of that kind is necessary

for the protection of American industry.

_Q._ Did the consumers ask you to go into it?

_A._ Not any considerable number of consumers; we ourselves are all

consumers. The body of them did not.

_Q._ How much money would the railroad companies have made under

these contracts if they had shipped oil at these advanced rates?

_A._ They would have made about the same profits on that business

that they do on coal and lumber, even if the maximum rates had been

paid without any rebate; not so much if the net rates only had been

charged.

By the Chairman.

_Q._ State whether in your judgment it was necessary, in order to

make provision for these people for the South Improvement Company to

receive this million dollars a year for the benefit of American

interest, as you have suggested.

_A._ There was no such provision made, as I understand it.

_Q._ The testimony is that about six million barrels a year are

shipped; the provisions of this contract are that a rebate to that

company, supposing the maximum to have been charged, should be over

a dollar a barrel.

_A._ No such thing as charging maximum rates was ever contemplated.

The contract on its face says it is a cardinal principle that the

gross rates shall be kept as near the net rates as possible.

_Q._ Suppose it had been kept at the gross rates, your company would

then have received over six million?

_A._ That would be altogether different from the principles on which

the contract was based.

_Q._ If the gross rates which the contract allows had been paid,

however, the South Improvement Company would have received a rebate

of over six million dollars?

_A._ Certainly, supposing such an absurdity.

_Q._ Why did you put such an absurdity in the contract?

_A._ It is not in the contract, as I stated.

By Mr. Hambleton.

_Q._ It is in the contract as a maximum?

_A._ But it is also expressly stated that the rates shall be kept as

near to net rates as possible.

NUMBER 13 (See page 1093)

CONTRACT OF MARCH 25, 1872

[From “A History of the Rise and Fall of the South Improvement

Company,” pages 27–28.]

I. 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.

II. That the present rates from Oil City, Union, Corry, Irvineton,

Pittsburg, Cleveland and other competing points, shall be and remain

in full force at following rates:

ON REFINED OIL, BENZINE, ETC.

Per barrel

From Oil City, Union, Corry and Irvineton to Boston $1.65

From Oil City, Union, Corry and Irvineton to New York 1.50

From Oil City, Union, Corry and Irvineton to Philadelphia 1.35

From Oil City, Union, Corry and Irvineton to Baltimore 1.35

From Cleveland to Boston 1.65

From Cleveland to New York 1.50

From Cleveland to Philadelphia 1.35

From Cleveland to Baltimore 1.35

From Pittsburg to New York 1.50

From Pittsburg to Philadelphia 1.35

From Pittsburg to Baltimore 1.35

ON CRUDE OIL

From Oil City, Union, Corry and Irvineton to Boston $1.50

From Oil City, Union, Corry and Irvineton to New York 1.35

From Oil City, Union, Corry and Irvineton to Philadelphia 1.20

From Oil City, Union, Corry and Irvineton to Baltimore 1.20

From Oil City, Union, Corry and Irvineton to Cleveland .50

From Oil City, Union, Corry and Irvineton to Pittsburg .50

And said rates shall not be liable to any change either for increase

or decrease without first giving to William Hasson, president of the

Producers’ Union at Oil City, at least ninety days’ notice in

writing of such contemplated change.

III. In the distribution of cars for shipments, it shall be done

without discrimination.

IV. On the basis as hereinbefore stated, the parties respectively

agree to carry out the arrangements in good faith and work for the

mutual interests of each other.

In witness whereof the parties have hereunto affixed their

signatures, this twenty-fifth day of March, A.D. 1872:

For the Lake Shore and Michigan Southern Railroad Company: H. F.

CLARK, _President_.

For the Erie Railway Company: O. H. P. ARCHER, _Vice-President_.

For the New York Central and Hudson River Railroad Company: WILLIAM

H. VANDERBILT, _Vice-President_.

For the Atlantic and Great Western Railroad Company: GEORGE B.

MCCLELLAN, _President_.

For the Pennsylvania Railroad Company: THOMAS A. SCOTT,

_Vice-President_.

On behalf of the Producers and Refiners: G. SHAMBURG, E. G.

PATTERSON, WILLIAM HASSON, HENRY BYROM, WILLIAM PARKER, JOHN J.

FISHER, _Oil Creek Producers and Refiners_.

J. J. VANDERGRIFT, A. P. BENNETT, WILLIAM M. IRISH, WILLIAM T.

SCHEIDE, _Oil City Producers and Refiners_.

HENRY H. ROGERS, F. C. FLEMING, JOSIAH LOMBARD, JR., _New York

Refiners_.

B. VAUGHAN, _Boston Refiners_.

NUMBER 14 (See page 1100)

TESTIMONY OF HENRY M. FLAGLER

[Before a committee appointed by the Legislature of Ohio, March,

1879.]

Henry M. Flagler; residence, Cleveland, Ohio; occupation, secretary

Standard Oil Company; sworn and examined.

By Mr. Norton.

_Q._ Mr. Flagler, I suppose you understand that this investigation

is brought under what is known as House Resolution Number 162?

_A._ I understand that it is.

_Q._ How long have you been secretary of the Standard Oil Company?

_A._ Since its organisation, some time in January, 1870.

_Q._ Are the articles manufactured or the oil refined by your

company shipped over the line of any railroad in the State of Ohio,

and if so, state whether or not any rate of freight is contracted

for by you or whether your company pays the freight?

_A._ To the first question, yes, sir; more or less of the product of

our refineries is shipped over the railroads of the state. As a rule

all of the freight contracts have been made by me.

_Q._ Please state as near as you can what proportion of your product

is shipped out of the state?

_A._ Well, I should say from sixty-five to seventy per cent.

_Q._ Now, has your corporation any contracts, written or verbal,

with any of the railroads of the State of Ohio for carrying your

freight?

_A._ Yes, sir.

_Q._ You may state whether these contracts are written or verbal.

_A._ They are written.

_Q._ Have you heretofore, prior to this time, any contracts written

or verbal?

_A._ We have.

_Q._ You may state, Mr. Flagler, whether by virtue of these

contracts it has been agreed or allowed by the railroad companies to

pay you any drawbacks or rebates on freights.

_A._ No, sir, it has not.

_Q._ You may state whether or not you are allowed special rates, or

what is known as special privileges.

_A._ I can’t answer that question from the fact that I do not know

what other people get, so I do not know whether they are special

rates or general.

_Q._ I believe, Mr. Flagler, that in your subpœna it was requested

of you that if any such contracts were in existence relative to

freight matters, you would bring them before the committee. Did you

do so?

_A._ I have never seen the subpœna, so I do not know what the demand

was. I have, however, contracts made with our company as far back as

the first one ever made.

_Q._ Can you produce these contracts before this committee?

_A._ Yes, sir, I can; I am willing to do so, provided they may be

used by the committee—if it is proper to ask, to be used in the

nature of a confidential communication. None of these contracts

provides for any discrimination whatever, but they may contain some

business secret of the Standard Oil Company, whose interests I am

bound to protect. I do not see how the submission of those contracts

as evidence in this case will do other than bear out the statement I

have made under oath. I do not see how they will do anything more

than sustain the statements I have made. I would be very glad to

have our company set right before the public in these matters, but I

do not care enough about it, however, to have our business contracts

made public. I should be very glad to submit them to you under such

circumstances.

_Q._ Mr. Flagler, do you know anything about the rates of freight

from the Southern portions of the state, well, say from Marietta and

from Wheeling to the City of Columbus?

_A._ I do not.

_Q._ Did you have anything to do, or has the Standard Oil Company

anything to do with the making of the rates of freight for the

company known as the Camden Consolidated?

_A._ None whatever.

_Q._ Have you anything to do with the making of the rate, or the

arranging of the freights for the company known as the Marietta Oil

Refining Company?

_A._ None whatever.

_Q._ Testimony introduced here shows, I think, Mr. Flagler, that

about one year ago the rates of freight were raised nearly one-half

from the points I have mentioned and from Parkersburg and other

places to points in this direction. Had the Standard Oil Company any

understanding by and between the railroad companies in regard to

this rise in the rates of freight?

_A._ I should say, to my own knowledge, positively no; I never heard

of it before. I do not know what the rates were and I did not know

that the raise had been made.

_Q._ Do you in your capacity, or does the Standard Oil Company

through its agents, control the rates of freight or make the rates

of any of the oil companies in Cleveland, outside of your own

corporation?

_A._ No, sir.

_Q._ Mr. Flagler, what is your rate of freight from the seaboard, or

to the seaboard from Cleveland?

_A._ At the present time?

_Q._ Yes, sir, at the present time.

_A._ Do you mean per carload or by the barrel?

_Q._ Well, we’ll put it by the barrel, as there is some testimony

before the committee relating to that.

_A._ I do not know that I could answer the question and I do not

know but that I would be betraying the business interests of other

people. The custom for several years, in fact, for more than five

years, has been that the rates of freight on shipments to the

seaboard and export oil have been made by what is called trunk

lines, the New York Central, the Erie, now New York, Lake Erie and

Western, the Pennsylvania, and Baltimore and Ohio. The general

freight agents are the officers who make those rates, and their

Western connections share in them. I do not know how the freight

which is paid for services rendered is divided between their Western

connections, having no means of knowing that at all. We do not make

any contracts with the Lake Shore for the rates of freight, and the

same is equally true of the Atlantic and Great Western. These are

the only two roads we ever ship by—I may be wrong; we ship some by

way of Pittsburg, over the Cleveland and Pittsburg or over the

Baltimore and Ohio.

_Q._ Do you know what the open rate, the published rate is to the

seaboard by the barrel?

_A._ To Boston and New York, $1.54½; to Philadelphia and Baltimore,

$1.29½.

_Q._ Now, Mr. Flagler, you have used your pencil to arrive at that

conclusion, why was it necessary to figure out that matter if there

is a published rate?

_A._ Simply because I do not keep that thing in my mind and had to

call upon my memory for the way the thing is got at. I got at that

by deducting what is called the crude rebate. Nobody pays the crude

rebate which is 45½ cents. Whether that form is kept up by the

railroad companies I do not know, but my impression is it is not.

_Q._ It is a fact, isn’t it, that you do get a lower rate and pay

less freight than the published rate? I believe it is in evidence

that the open rate of freight to the seaboard will average about

$1.65.

_A._ I have never seen the freight tariff, if you mean that which is

known as the schedule rate published for the public. I have not seen

anything of the kind and do not know anything about it.

_Q._ What inducement does your company offer to the railroads or

what propositions are made by the railroads to your company? Now, I

refer to the testimony given by Mr. Hills in regard to the carrying

of oils, etc., what inducements do the railroad companies give

whereby they lower your rate of freight?

_A._ They do not give us lower rates of freight for any

consideration of that kind. They pay us for the use of our property,

if we furnish them with terminal facilities, cars in which to haul

the goods, they pay us a compensation for the use of the property.

Perhaps I can give it so you can understand it; we keep a separate

account with each refinery and if we spend $50,000, or $100,000 to

create what we term terminal facilities, warehouses, loading places,

etc., we make an arrangement whereby they pay us a fair compensation

for the property that is created by our money. That consideration is

credited to that investment and has nothing whatever to do with the

freight. The refinery making the oil is charged with the rate of

freight just as anybody else pays, and the compensation for the use

of tank cars and terminal facilities at the shipping and receiving

ends of the line is given for the use of these ends. I will say that

in the contracts we have made, the railroad companies have expressly

reserved the right to give to other parties the same privileges if

they furnish the same conveniences.

_Q._ Does the Standard Oil Company own and control the Camden

Consolidated Company at Parkersburg?

_A._ Well, I would like to ask a question in reply, and that is,

whether that question and answer comes within the scope of this

resolution?

_Q._ I will give you my reason for asking the question. It has been

charged here by witnesses that there is a collusion by and between

the railroads in the Southern part of the state and the Camden

Consolidated Oil Company or the Standard Oil Company, as they term

it, for discriminations in the rates of freight. Now, to find out

whether or not there is anything for which to blame the Standard Oil

Company, I ask this question.

_A._ Well, it is a business secret of our company, but considering

the circumstance, I will answer the question. The Standard Oil

Company doesn’t own or control the Camden Oil Company, and I would

say to every man explicitly and fully that the Standard Oil Company

doesn’t own a share of stock in the Camden Consolidated Company. I

say this so I may be understood and I hope I have done so. I do not

own a share in it myself.

_Q._ Coming back to this question of the contracts, have you any of

the written contracts that have been or are now in force, that you

can give this committee; contracts between the railroad companies

traversing this state and your company?