|
Monopoly,
Part II
Brian
Trumbore
President/Editor, StocksandNews.com
[Note: The following won't make much
sense unless you read
part I.]
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
|
