Chapter XVIII: Section 1: Be it enacted by the Senate and House of Representatives (2)

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?

_A._ Yes, sir. (Contracts produced.) The price for the shipment of
oil per barrel as given in the first contract for the year 1870 was
as follows: From the first of February to the first of June, 1870,
$1.40; from the first of June to the first of November, 1870, $1.20;
this was during the season of navigation. From the first of November
until the expiration of the contract, April 1, $1.60.

_Q._ Is there a line or clause in that contract whereby there is an
agreement for rebates or drawbacks?

_A._ None whatever.

Second contract read: In this contract the rates were as follows:
From the first of April until the middle of November, 1872, about
seven months, $1.25. For the remainder of November, December,
January, February and March of 1873, $1.40. These were rates per
barrel.

_Q._ Were there no rebates, drawbacks, or special privileges given
outside of what is written in the contract?

_A._ None whatever. (Third contract introduced.)

_Mr. Flagler_: I want to say something of this matter and I want to
tell the whole truth. Our business was at the time about 4,000
barrels a day and we had contracted this oil for delivery at once,
and we had to pay from $50 to $150 gold per day if we kept it an
hour longer than the time specified in the contract, so it was very
important for us that the railroads put these on board as rapidly as
possible.

_Q._ Mr. Flagler, from the reading of that contract I see that you
might, instead of being benefited, sustain damages by the failure on
the part of the railroad company to get your oil in there. Did you
ever have to pay any demurrage to them?

_A._ Yes, sir, we had to pay some years as high as $30,000.

_Q._ Have you ever received any benefits by reason of these
contracts that any other shipper might not have received?

_A._ No, sir. Not in the slightest. All the way through these
contracts you will observe that we have undertaken those risks which
the law imposes on the common carrier and which no railroad can
divest itself of except by written agreement. The handling of these
quantities of oil was a very serious matter; there was a constant
tendency on the part of the railroad companies to put cars used in
this trade to some other purpose, whenever it would pay them better.
They used a rack car, such as they could carry cattle in and we have
had a great deal of trouble with these roads in the use of those
cars, because if they could get cattle to haul from Chicago to St.
Louis for something more than they were getting from us they would
do it. I want to say what the facts are under the contract just
read. You will remember that during seven months of the year we were
to give them 4,000 barrels of oil per day or 100,000 barrels a
month, and the smallest of the shipments in those months was
108,000. We gave them during the rest of the time more oil and paid
them the contract on it when we could have shipped by canal for
forty cents less. On the first day of December, a competing line of
railway lowered the rate to $1.05 per barrel. I went to Mr.
Vanderbilt and told him that the rate should be maintained at the
agreed price or else we would not have made the contract with him. I
said to Mr. Vanderbilt that if he insisted in the fulfillment of the
contract basis and exacted the payment of the contract price, it
would result in our being compelled to close our refineries, for we
could not afford to pay $1.25, when other people were only paying
$1.05. I called his attention to the fact that during the season of
canal navigation we had given the maximum shipments of oil, 180,000
barrels a month, and some in excess of it, and paid $1.25. I said,
if you will reduce these rates to the rate made by the Pennsylvania
Company, in my judgment thirty days will not elapse before they will
be willing to restore their rates, and all we ask is to be put on a
parity with other shippers. After a moment’s hesitation he asked if
I thought he ought to stand all of this twenty cents. I told him if
he should stand any part of it he should stand it all. I said, it is
a transportation fight and not a fight of the manufacturers. When it
comes to competition of the manufacturers we would take care of
ourselves. I said that we would not have made this contract except
on their assurance that the contract price of $1.25 was to be
maintained. He said: “I will make your rate $1.05,” and this was
after we had done more than we had agreed to do under the contract.
The next day we sold between 50,000 and 60,000 on the basis of $1.05
per barrel. Mr. Vanderbilt allowed that rate of payment for one
month and then said he would exact the contract price, $1.25. I said
all right, and we shall ship just the amount of oil we are compelled
to ship to fulfill our contract and then we shall stop. We paid him
$1.25 for all over the month and then we did not run a barrel of oil
from the City of Cleveland more than that until the expiration of
this contract for three months. That is the good that the contract
worked on us. You might consider it a baby act to plead the equities
of the case, but we could not place our oil on the market and
compete with other refineries.

(Fourth contract introduced.)

_Q._ This is the only contract you have now in existence whereby you
carry your freight?

_A._ Yes, sir.

* * * * *

_Q._ Do you know anything of the suits brought by Teagle and Company
against the Lake Shore road for discriminations in freight?

_A._ Nothing whatever.

_Q._ Have you had since the organisation of your company any
understanding outside of these contracts whereby discriminations are
made in favour of your company as against any of the smaller
refineries of the state?

_A._ No, sir.

_Q._ Has your company or corporation in conjunction with the
railroads ever operated so to “squeeze out” as they term it, or
injure any other refining company of the state, outside of the
Standard Oil Company?

_A._ No, sir, never. I would like to enlarge upon that question. I
suppose it would be fair to the mind of every member of this
committee present. A very large business with other mechanical
contrivances and an experience which grows up with and comes along
with business and always doing a very large business, in the nature
and order of things should make its presence felt by the parties
doing a comparatively small business. In 1873 and 1874, when we
stipulated for those 4,000 per day, if anybody has followed the
progress of the Standard Oil Company they would know and I feel
justified in saying that we have done a very large business, and
aimed to do it with economy and give the purchaser the very best oil
manufactured, consistent with a good and safe kind of oil—to
manufacture at one point under the eye of one man. With an
aggregation of capital and a business experience, and hold upon the
channels of trade such as we have, it is idle to say that the small
manufacturer can compete with us, and, although it is an offensive
term, “squeezing out,” yet it has never been done by the conjunction
of any railroads with us or by the carrying out of freights.

NUMBER 15 (See page 1106)
THE PITTSBURG PLAN

[From the Oil City Derrick, May 17, 1872.]

1. Refiners to lease to the company for five years their
superstructure with sufficient real estate to carry on the business
of the works.

2. That the rental be eight per cent. per annum on the appraised
value of the superstructure, and the company to assume all risks and
pay all ordinary taxes.

3. Lessors to pay into the treasury of the company for a working
capital one-half of the appraised value of the superstructure in
cash or the equivalent in refiner’s stock.

4. Said lessors to receive for money paid in as above the bonds of
the company, in amount equal to cash paid in, and stocks of the
company for an equal amount; said bonds payable in five years or at
the option of the company after one year, said bonds to be
denominational coupon bonds to bear interest at the rate of eight
per cent. per annum, payable semi-annually.

5. The company shall not pay annually more than ten per cent. on the
stock as dividends until the said bonds are redeemed.

6. After the bonds are paid, then the company shall have the right
and shall be obliged to purchase all said superstructure at the full
appraised value first made, and shall give in exchange for the same
stock of the company for the full amount.

7. Each district shall appoint a local committee of three persons to
make appraisals, and when any appraisements are being made, the
chairman of each local committee shall be required to be present to
take part in the appraisement.

There shall be a board of appeal which shall be composed of the
chairman of each local committee. All presidents of the company
shall be presidents ex officio of the board.

The committee shall place a cash valuation on the superstructure and
shall be instructed as to the manner in which the valuation shall be
obtained.

NUMBER 16 (See page 1117)
“THE AGENCY”

[From the Oil City Derrick.]

I. There shall be established, under the auspices of the Council of
the Petroleum Producers’ Association of Pennsylvania, an
organisation under sanction of the laws of Pennsylvania, which shall
be known as “THE PETROLEUM PRODUCERS’ AGENCY.”

II. The capital stock shall be not less than one million dollars,
and shall be divided into shares of one hundred dollars each, which
shall be subscribed only by members of the Petroleum Producers’
Association, or by such other persons as may be approved by the
Council.

III. No transfers of the shares of the capital stock shall be made
on the books of the Agency, except upon such conditions as the
directors may prescribe, subject to the approval of the Council.

IV. The business of the Agency shall be managed by a board of
thirteen directors, who shall be elected annually by the
stockholders.