Wall Street History

---

Wall Street History

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.’”

---

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

---