CHAPTER VI

"NOT TO EXCEED HALF"

Notwithstanding the ceremonial treaty of equal rights on the railroads to all, which had been secured by the uprising of the people against the South Improvement Company in 1872, the independents, one after the other, continued to be side-tracked by an unseen power. Four years later, on the 20th of July, 1876, their only two important survivors in Cleveland, frightened by the high death-rate of the business, and by a deepening pressure on themselves, answered a summons to come to the palace of the President of the Light of the World. The contract which was then made was afterwards produced in court.[87] It was called an "Agreement for an Adventure," in something like "the merry sport" in which the good Antonio gave a bond for a pound of his flesh.

A few years after this "adventure" with his competitors and his efforts to have them closed by the courts, the President was asked if his trust had sought in any way to diminish the production of refineries in competition with it.

"Oh no, sir," he replied.

"Nothing of the kind?"

"Oh no, sir."[88]

He was asked the question again, and again the denial was repeated.

"Done nothing of the sort?"

"Not at all."

But now he said, You must bind yourselves for ten years to refine only 85,000 barrels of oil a year.[89]

They had refined 120,000 barrels the year before, and could have done 180,000, and were growing up with the country. "The prospects were much better for the future."[90]

But they agreed.

You must give me and my associates all the profits you make during this period above $35,000 a year, until we too have got $35,000 a year out of your business, and we will guarantee you $35,000 a year, if we let you run.

They had made $41,000 the year before, but they agreed.

You must divide with "us," after each has got $35,000 a year, all the additional profits.

They had to put into this "adventure" all their buildings and machinery, valued at $61,760.42, all their time and attention, and $10,000 in cash, while their conquerors put in only $10,000 cash and no plant and no time. But they agreed to this demand for "half."

You must stop refining altogether, and let us take out our $10,000 whenever we send you notice that through competition, or a decrease or change in the production of petroleum, Cleveland can "barely compete" with other places. You must sell the kerosene you manufacture, and buy the petroleum you make it of at the prices we fix.

The combination could make the business unprofitable whenever it chose, and under the previous stipulation could close them up at its own pleasure, until the ten years had rolled by. But they agreed.

You must resume again after any such suspension, and let us take half the profits whenever we give you notice. You must let us enter or withdraw, throw our $10,000 in or out, suspend or resume, again and again, as we choose! They agreed.

You must make us monthly reports of all your transactions. You must not enlarge nor contract your works without our consent. They agreed.

You must not go into the manufacture of petroleum, nor any other new business anywhere else in the world during this adventure! You must ship your products by such routes as we direct! They agreed.

You must keep this adventure secret. Our name must not appear, and even if you all die, you must agree that we may continue the business in your name, or any other name we choose.

"The firm name," as their counsel pointed out, "was to be kept up even when the members were mouldering in their graves. But the public were to understand that the business of that firm, as it had been conducted in the lifetime of those men, was still being carried on."

You are to be thus tied up for ten years, limited at the best to half the profit on half your capacity, with a right in us to close you up altogether, or to close and resume whenever we choose, with no right in you to start or stop or withdraw. But we are to be left free, in our own refineries, to refine all the oil the market will take, and keep all the profit, and enlarge our works and extend our business.

And, finally, you must put your hand and seal to a statement that you do this to "reconcile interests that have seemed to conflict" and "equalize the business," and that this agreement gives you your "due proportion thereof."

This "free contract" two of the three men who were to make it knew nothing of until their consent was demanded.

One of the partners had secretly been won over. Through him all preliminary negotiations had been conducted.

"I was not consulted," testified one of the other two, until after the contract was "all drawn and prepared," and at first he refused to sign it. The plan was concocted "secretly and unknown to me."

"I was at first opposed to the arrangement," declared the other.[91]

But this was not all the contract. The President, who, as he testified, "conducted most of the negotiations," and "had been familiar with the dealings thereunder," supplemented the written documents with oral instructions:[92]

You must not seem to be prosperous. You must not put on style,[93] he cautioned them; above all, you must not drive fast horses or have fine rigs; you must not even let your wives know of this arrangement.[94]

A false account was opened on the books to conceal the nature and origin of this transaction from their own book-keepers. In the name of that account false and fictitious checks were drawn, bills made out, balances struck. A box was taken out at the Cleveland post-office--box 125--in the name of an imaginary "Mr. G.A. Mason," and through this box the correspondence of the "adventure" was carried on. Each of the three parties to the "adventure" continued to march and fight under its own flag as before. All possible pains were taken to conceal the fact that they had ceased competition with each other. They kept up every appearance to the public of being actively engaged in competitive business. The inevitable spy appears in this scene as in every other in the play. The "reconciler," to enforce the provisions that the "reconcilees" should not engage in business elsewhere, extended a system of espionage over them, and followed their movements, and kept watch what they did with their money, and made oath to the courts of the results of these "inquiries and investigations." The espionage continued after this.

A year or two after this contract had been broken by the help of the courts, the then secretary of the great oil company, through an intermediary, approached the book-keeper of the firm which had been freed from the trust.

"Would you not like to make some money?"

"He inclined to let him believe he did want to make some money," his employer afterwards told Congress. "He came and told me about it. I requested that he continue and find out what information they wanted. He was to have had so much per year, but he was to have been paid a down payment; he got $25."

"What service was he to render for that?"

"I have a memorandum. There were so many things he was to do that I cannot carry it in my head."

"One of the questions was, 'What was the result of last year's business?' The other was, 'A transcript of the daily shipments, with net prices received from the same; what is the cost for manufacturing outside of the crude; the kind of gasoline and naphtha made, and the net prices received for the same; what they do with tar and the percentages of the same; what per cent. of water white and what per cent. of Michigan water white; how much oil exported last year?' This information, as fast as received, to be mailed to Box 164, Cleveland post-office.... He (the book-keeper) made an affidavit of it, and I took the money back myself personally."[95]

When orders came in for more oil than the limit put upon them, the "reconcilees," asserting their commercial manhood, went on refining to supply the demands of the public instead of the commands of the clique. They contended that they were not bound by the limitation, and in this were afterwards upheld by the court; but, meanwhile, they were called to account and frightened into another "reconciliation." He was present, the chief reconciler told the court, at the interview in which they "agreed to diminish their manufacture ... to bring the entire amount within the terms" of the contract.

But again they began to refine to supply the needs of the people evidenced by the market demand. Then their supply of crude was shut off. Their suzerain owned the pipe line to Cleveland. When its escaping victims got around that difficulty, it took its "contract" to the courts.

To shut these competitors down to half their capacity, and to reconcile and equalize interests by taking half of all they made on that was merely an incident, collateral to the grander plan, the vaster "adventure," of getting all the profits of that greater field out of which these competitors were barred altogether. Such contracts as these, its counsel said, were made with refiners all over the country. The chief profit of the adventure lay, not in the divided profits of the picayune business it let the vassals do, but in the undivided profits of the empire kept for itself. Why should the reconciler hurry with expensive lawyers into court for a summary injunction to prevent a "reconcilee" from making more oil, when the reconciler, who toiled not nor spun, was to get half of the gain of $2.05 on every barrel of it? Why, but that every "co-operative" barrel so made would displace in the markets a barrel, all the profits of which went to it.

The "reconcilees" were called into court. A judge was asked to issue an injunction forbidding them to depart from the strict letter of the contract.

They have been refining more than 85,000 barrels of oil a year, was the complaint.

They "threaten to distil crude petroleum without regard to quantity."[96] They are "parties in rebellion," said the lawyers. The judge said, No. This is a contract in restraint of trade, and released those who were in its toils.

The immediate effect of this "equalization" was an advance in the rates of profit. The year before the independent refiners had made a profit of only 34 cents a barrel.[97]

The first year of the "adventure" the profits jumped up to $2.52 a barrel. The dividends rose from $41,000 to $222,047, while the production fell from 120,000 to 88,085 barrels. For the four years the average profit was $2.05 a barrel, or 500 per cent. advance. The lowest profit was $1.37.

"Refined oil advanced to an average of $8 per barrel for that year" (1876), says the counsel of the trust.[98]

These great winnings were made in the depth of the depression following the panic of 1873.

While a world-compelling decline not only of prices but of profits, was in progress, the authors of this arrangement kept up kerosene to a point at which $630,691 was made in four years out of an investment of $81,000, half of which went to those who put in $10,000 and their power over freight agents.

This "adventure," as was said by the Hon. Stanley Matthews, who appeared as counsel for the victimized refiners, was better than a gold-mine. It was a mint. Without giving any personal supervision or any time, without any expenditure except the insignificant investment of $10,000, made as a mere stalking-horse, these men took a share of the profits of "the party of the second part," which is not to be calculated by ordinary percentage, but by multiplications, over and over again, every year, of the money they put in it.

By reducing the volume of business one-half, by increasing the profit from 34 cents a barrel to $2.05, the reconcilers pocketed $315,345.58 in four years, on an investment of $10,000, with no work. This was the fact. The theory with which the fact was hidden from the people is given to the New York Legislature in 1888. The principle on which the trust did business, its president said, was:

"At a limited profit; a very small profit on an extremely large volume of business."[99]

When its secretary was before Congress, he was asked about the operations of himself and his associates in these years, 1876, 1877, of wonderful profits. He had been participating during that time in not only this profit of $2.05 a barrel, but in divided profits rising to $3,000,000 in a year on $3,000,000 of capital, and in undivided profits which rolled up $3,500,000 of capital into $70,000,000 in five years. But he said:

"The business during those years was so very close as to leave scarcely any margin of profit under the most advantageous circumstances."[100]

The effect on the consumer appears from the statement in this case of one of the best-known producers and refiners in the oil regions, one intimately associated with the members of the combination. He showed that oil which was selling at twenty cents a gallon retail could be sold at a large profit at twelve cents a gallon.

As to the effect on the working-man, the demand for labor declined, wages went down, and the number of unemployed increased.

When there was competition in Cleveland the great company could not afford to have its skilled workmen idle, because they would seek employment with the other refineries; but now, having the refining business all in its own hands, when it was temporarily to its advantage to refine oil in Pittsburg, Oil City, or other points, in preference to Cleveland, it could with impunity let its hands remain idle in Cleveland, knowing that when it wanted them it could easily secure them, as there are no other refineries in Cleveland to employ them, and "that has been a very serious injury to working-men."[101]

There was no pretence that the design of this contract was not to make oil scarce--_i.e._, dear.

In the affidavit which was made in support of the injunction the principal reconciler showed that his company had restricted itself as much as it restricted these competitors. He urged as the reason why the contract had been made and why the courts should sustain it, that "the capacity of all the refineries in the United States is more than sufficient to supply the markets of the world, and if all the refineries were run to their full capacity they would refine at least twice as much oil as the markets of the world require; that this difference between the capacity of refineries and the demands of the market has existed for at least seven years past, and during that period the refineries" of his company "have not been run to ... exceed one-half of their capacity."

When these surviving independents of Cleveland were forced into this adventure, in 1876, the source of the power which could compel "free" citizens in this age of individualism to execute such a bond was not known. The appalling mortality among the independents showed that something was seriously wrong. There was something, however, in this "Agreement for an Adventure" which pointed straight to it. That was a clause which guaranteed those who became vassals that they should have the same freight rates and get back the same rebates as the monopoly.[102] "Had the monopoly the power," said the Hon. Stanley Matthews, "to procure freights on better and more advantageous terms than the rest of the public engaged in the same business?... And if they had such power, how did it get it?... If this or any other corporation is allowed to exalt itself in this way and by these means above competition, it is also exalted above the law."

The great lawyer, who soon afterwards became a justice of the Supreme Court of the United States, could not answer the questions he raised. The facts were hidden in secret contracts with the railroads. As regards Cleveland, they did not come out until five years later, in 1885. It then became an adjudicated fact that in 1875, the year before this "Agreement for an Adventure," the Lake Shore Railroad had made a contract with the oil combination to drive these very competitors and all others out of business, just as the same road had done for the South Improvement Company in 1872. When they escaped from their "reconciler," they brought this railroad and the contract into court. The case was fought up to the Supreme Court.

That tribunal found that the Lake Shore road had contracted with this company to carry its products ten cents per barrel cheaper than for any other customers. It showed that this made a difference to the victims of the "Adventure" equal to more than 21 per cent. a year on their capital.

"The understanding," the court said, "was to keep the price _down_ for the favored customers, but _up_ for all the others, and the inevitable tendency and effect of this contract was to enable the Standard Oil Company to establish and maintain an overshadowing monopoly, to ruin all other operators, and drive them out of business." The course of the railroad the court declared to be one of "active participation in the unlawful purposes" of the oil company. The Lake Shore was to have all its business out of Cleveland, but, a competing railroad being built, the Lake Shore made a contract to give this new line a part of the plum, to induce it to unite in the policy of keeping freights _down_ for the favored customer, and _up_ for all others. When the President of the trust was asked afterwards by the New York Legislature if there had been no arrangement by which it got its transportation cheaper than others could, he replied, "No, sir." And later he reiterated that in their arrangements for freight there was "nothing peculiar."[103]

But the Supreme Court of Ohio, in describing this arrangement, diversify the staid rhetoric of their legal deliverance with the unaffected exclamation:

"How peculiar!"

They declared the contract between the two railroads "void," and "not only contrary to a sound public policy, but to the lax demands of the commercial honesty and ordinary methods of business." They also pronounced the contract between the railroad and the oil company as "made to build up a monopoly," and as "unlawful."[104]

The great lawyer, we have said, could not answer the questions he asked. The facts, we have said, were hidden in a secret contract. And yet the answers to the questions, the facts, had been all brought to the verge of disclosure by the investigation by Congress early in the same year, 1876.

Although the investigation, in consequence of the "I object" of the Hon. Henry B. Payne, of Cleveland,[105] had been referred to the Committee of Commerce, and though the railroad and oil clique men would not answer, and the committee would not press them, there was a volunteer witness from Cleveland, who began to upset all the plans to smother. This willing witness was a Cleveland refiner, a shrewd man, as would easily be believed by those who knew that he was the brother of an organizer of the oil combination. He, too, had been a member of it, but for some reasons was now "out," and was one of the swimmers who felt themselves being drawn down. He betook himself for relief to Congress. He dodged no subpoenas, but, going before the Committee of Commerce, he began to tell more fully than any other witness had ever done, or had ever been able to do, the story of the relations between the combination and the railroads, which he knew of his personal knowledge. When he began talking in this free way to the public authorities, his former associates saw that they had underestimated his abilities as a refiner. They began to feel that it might be well to make some concessions to this particular brother, though not to the Brotherhood of Man.

The investigation was summarily suspended,[106] and his testimony was spirited away. With the only power that could have interfered thus silenced, the surviving independents were corralled as we have described. This was done two short months after the first move was made, May 16th, for the investigation which might have saved the independents at Cleveland and elsewhere from the duress which drove men to death or adventures of reconciliation.

All over the oil regions the combination has followed this policy of "not to exceed half."[107]

Nineteen pages of the testimony of a member in the suit begun by the Commonwealth of Pennsylvania are taken up with the operations of one of its constituent companies in the purchase or leasing of competing refineries, many of which were shut down or pulled down.

This witness could name only one refinery out of the score of independent concerns once flourishing in Pittsburg, which was not under its control.[108]

"Dismantled," was the monotonous refrain of many of his answers to the questions as to what had been done with the refineries thus got under control. Asked why these works had been thus dismantled or shut down, he explained it variously as due to unfavorable location or worn-out machinery or some such disadvantage.

If these works were so badly situated and so illy fitted for the business and so old, why did it purchase them? "Can you give good commercial reasons why it would buy all unprofitable junk?" he was asked.[109]

"I cannot give any reason why they bought the works," was the helpless answer.

From the beginning to the end the language used by the founders of the combination proves scarcity to have been their object. "There is a large number of refineries in the country--a great deal larger than is required for the manufacture of the oil produced in the country, or for the wants of the consumers in Europe and America," said one of the principal members in 1872.[110]

This is almost identical with the language used in 1880 in the effort to enjoin Cleveland refiners who "threatened to distil."

In 1887 we will see the same power putting its hand and seal to an agreement to enforce the doctrine that there was too much oil in the earth.

In 1872 there were more refineries than were needed for the oil; in 1887 there was too much oil. The progression is significant. And down to the present pool with the Scotch refiners we will see the same men enforcing abroad, year by year, the same gospel of want.[111]

"The producers in America are quite alive to the wisdom of not producing too much paraffine, and are already adopting measures to restrict it," said the chairman at the annual meeting of one of the principal Scotch companies.[112]