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Wall Street History
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04/21/2006
Monopoly, Part II
[Note: The following won’t make much sense unless you read part I .see archive link below.]
Continuing with our story of John D. Rockefeller and the monopoly on transportation related to his Standard Oil Company, from historians George Brown Tindall and David E. Shi and their book “America: A Narrative History”:
”Much of Rockefeller’s success was based on his determination to ‘pay nobody a profit.’ Instead of depending on the products or services of other firms, Standard undertook to make its own barrels, cans, staves, and whatever else it needed. In economic terms this is called vertical integration. The company also kept large amounts of cash reserves to make it independent of banks in case of a crisis. In line with this policy, Rockefeller set out also to control his transportation needs. With Standard owning most of the pipelines leading to railroads, plus the tank cars and the oil-storage facilities, it was able to dissuade the railroads from servicing eastern competitors. Those rivals who insisted on holding out then faced a giant marketing organization capable of driving them to the wall with price wars.”
From John Steele Gordon’s “An Empire of Wealth”:
“The image of Standard Oil is a somewhat misleading one. For one thing, as the grip of Standard Oil relentlessly tightened on the oil industry, prices for petroleum products declined steadily, dropping by two-thirds over the course of the last three decades of the nineteenth century. It is simply a myth that monopolies will raise prices once they have the power to do so. Monopolies, like everyone else, want to maximize their profits, not their prices. Lower prices, which increase demand, and increased efficiency, which cuts costs, is usually the best way to achieve the highest possible profits. What makes monopolies (and most of them today are government agencies, from motor vehicle bureaus to public schools) so economically evil is the fact that, without competitive pressure, they become highly risk-aversive – and therefore shy away from innovation – and notably indifferent to their customers’ convenience.
“Further, Standard Oil used its position as the country’s largest refiner not only to extract the largest rebates from the railroads but also to induce them to deny rebates to refiners that Standard Oil wanted to acquire. It even sometimes forced railroads to give it secret rebates not only on its own oil, but on that shipped by its competitors as well, essentially a tax on competing with Standard Oil .It thus effectively presented these refiners with Hobson’s choice: they could agree to be acquired, at a price set by Standard Oil, or they could be driven into bankruptcy by high transportation costs.”
So against this backdrop, in 1881 muckraker Henry Demarest Lloyd wrote an extensive piece titled “Story of a Great Monopoly” for The Atlantic Monthly. A few excerpts follow, just to give you a sense of the debate taking place 125 years ago.
“When Commodore Vanderbilt began the world he had nothing, and there were no steamboats or railroads. He was thirty-five years old when the first locomotive was put into use in America. When he died, railroads had become the greatest force in modern industry, and Vanderbilt was the richest man in Europe or America, and the largest owner of railroads in the world. He used the finest business brain of his day and the franchise of the state to build up a kingdom within the republic .The history is not yet finished, but the railroads owe on stocks and bonds $4,600,000,000, more than twice our national debt of $2,220,000,000, and tax the people annually $490,000,000, one and a half times more than the government’s revenue last year of $274,000,000. More than any other class, our railroad men have developed the country, and tried its institutions .
“(The) veto by the Standard Oil Company of the enactment of a law by the Pennsylvania legislature to carry out the provision of the constitution of the State that every one should have equal rights on the railroads, (is) one of many things that have happened to kill the confidence of our citizens in the laws and the administration of justice. No other system of taxation has borne as heavily on the people as those extortions and inequalities of railroad charges which caused the granger outburst in the West, and the recent uprising in New York. In the actual physical violence with which railroads have taken their rights of way through more than one American city, and in the railroad strikes of 1876 and 1877 with the anarchy that came with them, there are social disorders we hoped never to see in America.”
Of the strike of 1877, which spread nationwide, Lloyd writes:
“The feeling of the railroad employees all over the country was expressed by the address of those of the Pennsylvania Railroad to its stockholders. The stockholders were reminded that ‘many of the railroad’s men did not average wages of more than seventy- five cents a day;’ that ‘the influence of the road had been used to destroy the business of its best customers, the oil producers, for the purpose of building up individual interests.’”
Lloyd writes of the shipment of kerosene.
“Kerosene has become, by its cheapness, the people’s light the world over. In the United States we used 220,000,000 gallons of petroleum last year. It has come into such demand abroad that our exports of it increased from 79,458,888 gallons in 1868, to 417,648,544 in 1879. It goes all over Europe, and to the far East. The Oriental demand for it is increasing faster than any other. We are assured by the eloquent petroleum editor of the New York Shipping List that ‘it blazes across the ruins of Babylon and waste Polynesia, and Far Cathay, in Burmah (sic), in Siam, in Java, the bronzed denizens toil and dream, smoke opium and swallow hasheesh, woo and win, love and hate, and sicken and die under the rays of this wonderful product of our fruitful caverns.’
“However that may be, it is statistically true that China and the East Indies took over 10,000,000 gallons in 1877, and nearly 25,000,000 gallons in 1878. After articles of food, this country has but one export, cotton, more valuable than petroleum. It was worth $61,789,438 in our foreign trade in 1877; $46,574,974 in 1878; and $18,546,642 in the five months ending November 30, 1879. In the United States, in the cities as well as the country, petroleum is the general illuminator. We use more kerosene lamps than Bibles. The raw material of this world’s light is produced in a territory beginning with Cattaraugus County in New York, and extending southwesterly through eight or nine counties of Pennsylvania, making a belt about one hundred and fifty miles long .and then running into West Virginia, Kentucky, and Tennessee, where the yield is unimportant. The bulk of the oil comes from two counties (in New York and Pennsylvania). There are a few places elsewhere that produce rock oil, such as the shales of England, Wales and Scotland, but the oil is so poor that American kerosene, after being carried thousands of miles, can undersell it. Very few of the forty millions of people in the United States who burn kerosene know that its production, manufacture, and export, its price at home and abroad, have been controlled for years by a single corporation – the Standard Oil Company.
“This company began in a partnership, in the early years of the civil war, between Samuel Andrews and John Rockefeller in Cleveland. Rockefeller had been a bookkeeper in some interior town in Ohio, and had afterwards made a few thousand dollars by keeping a flour store in Cleveland. Andrews had been a day laborer in refineries, and so poor that his wife took in sewing. He found a way of refining by which more kerosene could be got out of a barrel of petroleum than by any other method, and set up for himself a ten-barrel still in Cleveland, by which he cleared $500 in six months. Andrews’ still and Rockefeller’s savings have grown into the Standard Oil Company .It has refineries at Cleveland, Baltimore, and New York. Its own acid works, glue factories, hardware stores, and barrel shops supply it with all the accessories it needs in its business. It has bought land at Indianapolis on which to erect the largest barrel factory in the country. It has drawn its check for $1,000,000 to suppress a rival. It buys 30,000 to 40,000 barrels of crude oil a day, at a price fixed by itself, and makes special contracts with the railroads for the transportation of 13,000,000 to 14,000,000 barrels of oil a year. The four quarters of the globe are partitioned among the members of the Standard combinations. One has the control of the China trade; another that of some country of Europe; another that of the United States. In New York, you cannot buy oil for East Indian export from the house that has been given the European trade; reciprocally, the East Indian house is not allowed to sell for export to Europe.
“The Standard produces not only one fiftieth or sixtieth of our petroleum, but dictates the price of all, and refines nine tenths. Circulars are issued at intervals by which the price of oil is fixed for all the cities of the country, except New York, where a little competition survives. Such is the indifference of the Standard Oil Company to railroad charges that the price is made the same for points so far apart as Terre Haute, Chicago and Keokuk. There is not today a merchant in Chicago, or in any other city in the New England, Western, or Southern States, dealing in kerosene, whose prices are not fixed for him by the Standard. In all cases these prices are graded so that a merchant in one city cannot export to another. Chicago, Cincinnati, or Cleveland is not allowed to supply the tributary towns. That is done by the Standard itself, which runs oil in its own tank cars to all the principal points of distribution. This corporation has driven into bankruptcy, or out of business, or into union with itself, all the petroleum refineries of the country except five in New York, and a few of little consequence in Western Pennsylvania. Nobody knows how many millions Rockefeller is worth. Current gossip among his business acquaintances in Cleveland puts his income last year at a figure second only, if second at all, to that of Vanderbilt. His partner, Samuel Andrews, the poor English day laborer, retired years ago with millions. Just who the Standard Oil Company are, exactly what their capital is, and what are their relations to the railroads, nobody knows except in part.”
[On the issue of the controversial rebates]
“Mr. Vanderbilt, Mr. Jewett, and Mr. Scott contracted with the oil producers in writing, March 25, 1872, ‘not to give any party the slightest difference in rates or discrimination of any character whatever’ and ‘to make no change in rates without ninety day’s notice in writing to the producers.’ Among other features of the systematic and chronic violations of this compact, which began almost immediately, was a special allowance by the Pennsylvania road of twenty-two and a half cents a barrel to the Standard on all oil shipped by its competitors or itself .(But with this special allowance, Mr. E.G. Patterson of Titusville, said before the New York Investigating Committee, the Standard was able to sell refined oil at less than the cost of manufacture, and put its buyings of oil into the field, and crush out the business of any rival, by bidding this twenty-two and a half cents, or part of it, above the price any one not getting this rebate could pay. In the end the rebate came out of the unfortunate producer. After the Standard had used the rebate to crush out the other refiners, who were its competitors in the purchase of petroleum at the wells, it became the only buyer, and dictated the price. It began by paying more than cost for crude oil, and selling refined oil for less than cost. It has ended by making us pay what it pleases for kerosene, and compelling the owner of the well to take what he can get for his product. For the producer of petroleum, as for the producer of grain, the railroad fixes the price the producer receives.
[An officer of the Pennsylvania Railroad, Mr. Cassatt, was compelled to testify as to the rebates granted the Standard.]
“He testified as to the rebate of twenty-two and a half cents, already referred to, and similar rebates of thirty-five cents a barrel from the New York Central, and twenty to thirty cents a barrel from the Erie. He showed that, while the open rate to the public was $1.90 to New York for carrying a barrel of refined oil, the Standard had the work done for $1.10 and $1.20 a barrel less, and that out of the seventy to eighty cents the Pennsylvania received it paid ten cents for storage and six cents for lighterage for the Standard. The public rate for transporting crude oil was $1.40 a barrel, but the Standard paid only eighty-eight and a half cents, and finally but ten cents. While the Pennsylvania was giving all these special allowances, carrying oil at one time for less than nothing, it charged shippers like George W. Cachaan, who were not in with the officers of the road, the extreme rate of $2.00 a barrel. The effect of these discriminations was well expressed by Mr. B.B. Campbell, a witness for the State of Pennsylvania, who when asked what profit there was in refining replied, ‘To any one paying the open rate of freight there would be a heavy loss, but with a $1.10 rebate on every barrel there would be a heavy profit.’ The New York Central, the Pennsylvania, and the Erie railroads and their connections lost between January and October, 1879, about $13,000,000 of freight earnings they would have had but for their alliance with the Standard. The latest annual report of the Reading company gives a great deal of space to these heavy losses. The president of the Baltimore and Ohio Railroad called the attention of the trunk line presidents to its statements. They could not, he said, fail to embarrass the railroads before Congress, and to do them ‘most serious damage’ before the bar of public opinion. He appealed to the trunk line presidents at their meeting on January 21, 1880, to reform ‘the wasteful and absurd rates on oil,’ which virtually for the Standard amounted to free transportation. His appeal was without effect. The presidents decided at that meeting not to alter their rates. The rebates given the Standard extend to nearly every State in the Union. These rebates are about equal to the average value of the oil at the wells. The railroads of the United States virtually give the Standard its raw material free. The Western railroads favor the Standard in the same way that the Eastern ones do. They refused competing shippers, in the days before these had been killed off, equal rates with the Standard, unless they did an equal business. The railroads create the monopoly, and then make the monopoly their excuse. When the Lake Shore charged nominally eighty cents a barrel and thirty cents a hundred pounds to carry oil from Cleveland to Chicago, it did the business for the Standard at seventy cents a barrel and twenty-five cents a hundred.
“It seems incredible that Americans should have been willing to do what the Standard, by means of these special privileges from the railroads, did to its competitors. The refineries at New York had often to lie idle while the oil was running on the ground at the wells, because they could not get transportation. The monopoly of the pipe lines which the railroads gave it made the Standard the master of the exits of oil from the producing districts. Producing themselves but one fiftieth of the oil yield they stood between the producers of the other forty-nine fiftieths and the world. There was apparently no trick the Standard would not play. It delivered its competitors inferior oils when they had ordered the high-priced article, out of which alone they could manufacture the fancy brands their customers called for. The Standard received as a common carrier from E.W. Coddington oil for transportation through its United Pipe Line, but, when he sold it to a New York dealer outside the Standard combination, refused to deliver it, at the same time shipping oil to one of this dealer’s competitors in New York. The Standard controlled the pipes by which alone Mr. Coddington and all other producers could get to market. When the flow from his wells had filled his tanks, and he had to have them emptied, his application to the Standard’s United Pipe Line, a common carrier, was met by refusal to move his oil unless he sold it to the Standard. The following extract from the stenographic report tells the story plainly enough.
Q: Upon what conditions would they run it?
A: Upon condition it was sold to certain parties, - J.A. Bostwick & Co., members of the Standard.
Q: At what price compared with the market price?
A: Below the market price.
Q: Always below the market price?
A: Always below it.
H.L. Taylor & Co., of Petrolia, had wells producing 1600 barrels of oil a day. Their tanks at the wells were full. They owned their tanks, to which they could get their oil only through the pipes which the Standard owned and operated as a common carrier. They applied to it for transportation, and were refused. The wells could not be shut down for fear of water, and so thousands of barrels of oil ran into the ground. The Standard carried its point, for after that the firm sold all their oil to it, always twenty- two to twenty-five cents a barrel below the market price. H. Caldwell was another producer who had flowing wells and empty tanks, which the Standard refused to connect, and who had to sell his oil to it at prices ranging from twelve and one fourth to eighteen and one half cents a barrel below the lowest market rate. Lewis Emery, Jr., a producer of oil, was an owner in six different companies, all of which were denied transportation by the Standard, and forced to sell to it at its price. He said, ‘We go down to the office, and stand in a line, sometimes half a day; people in a line, reaching out into the street, sixty and seventy of us. When our turn comes, we go in and ask them to buy, and they graciously will take it.’ This was known in the trade as the ‘immediate shipment swindle.’ Sometimes the Standard, after buying the oil this way, would take away a small part of it, and refuse to pay for the rest till it was shipped, months later. As an immediate result of these manipulations, the price of oil began a steady decline from $1.30 to eighty cents a barrel, in the face of an increased demand unequaled in the history of the trade. In 1878 oil went down to seventy-eight and three fourths cents a barrel at the very time the shipments from the wells were 56,000 barrels a day, the largest ever made till that time. All this, as one of the largest producers testified, was because ‘we take our commodity to one buyer and accept the price he chooses to give us, without redress, with no right of appeal.’”
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Reminder, Henry Demarest Lloyd was a muckraker and had a political agenda, but it was pieces such as this that led to the breakup of Standard Oil years later. I’ll wrap this up next week with more from Mr. Lloyd.
Brian Trumbore
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