Chapter III: The Railroads and the Pipe Lines

The contract between the railroads and the South Improvement Company was signed, and armed with this deadly weapon, Mr. Rockefeller went round to all the rival refineries in Cleveland and explained to their respective proprietors, gently but firmly, that they were as good as dead men in the oil trade, and that the only way they could avoid utter ruin was to turn over their refineries to the South Improvement Company either for stock or cash at the latter’s valuation. It seems scarcely credible, but it is an historical fact that no less than twenty out of these five-and-twenty Cleveland refiners--who, by the way, were approached one by one and under pledge of secrecy--as soon as they learnt that they were thus morally dead, proceeded at once to order their coffins. That is, they sold up as requested. The Cleveland refiners fell at Mr. Rockefeller’s feet through sheer fright, and thus in less than three months’ time the Standard Oil group absorbed twenty other refineries and increased its capacity from 1,500 barrels a day to 10,000 barrels--from one-tenth to one-fifth the total capacity of the United States.

Of course, the murder was soon out, and the Oil Regions, which were interested in oil wells as distinct from refining, which was the Standard’s business, were aflame with indignation. A Petroleum Producers’ Union was formed in opposition. Mass meetings were held and Congress was petitioned. The Pennsylvania Legislature repealed the charter of the South Improvement Company, and on March 25th the peccant railroads signed a contract with the Petroleum Producers’ Union, of which the first and chief clause provided--

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.

On April 4th General McClellan (Atlantic and Great Western), Horace F. Clark (Lake Shore and Michigan Southern), Thomas A. Scott (Pennsylvania), and W. H. Vanderbilt (New York Central) all sent emphatic messages to the Petroleum Producers’ Union declaring that their roads had no understanding of any nature in regard to freights with the _Standard Oil Company_. On April 8th John D. Rockefeller telegraphed to the Petroleum Producers’ Union: “In answer to your telegram, this Company holds no contract with the railroad companies or any of them or with the South Improvement Company.” Yet we now know from a contract thoughtlessly exhibited by H. M. Flagler seven years later to a Commission of the Ohio State Legislature--a contract between his Company and the railroads--that a rate had been fixed “From April 1st until the middle of November, 1872, about seven months, $1.25.” Now the corresponding rate openly published and recorded in the contract between the roads and the Petroleum Producers’ Union just quoted, which was signed March 25th, was $1.50. A rebate of 16⅔ per cent.! Mr. Rockefeller had it all the time, in spite of his own assertions and those of the railroad officials to the contrary.

Mr. Rockefeller has committed very few indiscretions in his lifetime, but he did achieve one at this early date in his career. He talked under the smart of his rebuff, and so did others of his colleagues in the late South Improvement Company. He was reported in the _Oil City Derrick_ to have said to a prominent man of Oil City that the South Improvement Company could work under the charter of the Standard Oil Company, and to have added that in less than two months his auditor would be glad to join him. One of his colleagues simply said: “The business _now_ will be done by the Standard Oil Company.... We mean to show the world that the South Improvement Company was organised for business, and means business, in spite of opposition.” This went the round of the American Press a few days after the repeal of the charter, and since then to the present day the indiscreetly uttered threat has been stealthily fulfilled to the letter. The South Improvement Company was formally dissolved in order to calm the popular indignation, but the same men continued to operate through the Standard Oil Company of Cleveland, and, as we have seen, to receive similar rebates, which enabled them to build up the Standard Oil Trust. On May 3, 1910--to bring the matter well down to date by a concrete instance--the United States Court of Appeal confirmed a decree of the Circuit Court of the Western District of New York State fining the Standard Oil Company $20,000 (£4,000) “for accepting concessions from the published rate of the Pennsylvania, New York Central, and Rutland Railroads in violation of Inter-State Commercial Law.” But the fine, of course, is an ineffective flea-bite, and is only worth quoting to show that the iniquitous conspiracy of injustice and robbery entered into by the railroads and the Standard Oil Trust in 1872 still continues to baffle justice in America and to outrage the moral sense of the civilised world.

A noteworthy development of the conspiracy between the Standard Oil Company and the railroads was what became known as Standard control of the railroad “terminal facilities.” By terminal facilities is understood the unloading, storing, and handling of oil at the railroad termini, chiefly in the vicinity of New York harbour. The railroads handed over the entire control and management of their oil yards and wharves to this one favoured oil company, authorising it to collect the oil-yard charges from its rivals, and to handle its rivals’ oil consignments according to its own goodwill and pleasure. Fancy one of our British railway companies putting all its railway sidings in London under the control of a single firm of Newcastle coal merchants, and allowing this firm to load or unload, forward or delay the consignment of rival firms according to its own convenience or good pleasure! Fancy the outcry that would be raised against this privileged firm when it became known that the only check upon its dealing unjustly with its rivals was that, whatever charges it elected to make for loading, unloading, and storage at the railway company’s sidings, such charges were to be uniform in all cases! This last proviso was a mere mockery. The only authority appointed to see that no advantage was given to one competitor over another was the arch-competitor--the Standard Oil Company. The companies entering into this special conspiracy were the Erie, the New York Central and Hudson River, the Baltimore and Ohio, and the Pennsylvania railroads at the Atlantic seaboard. I have before me as I write copies of the contracts made by all these railroads, excepting the Pennsylvania, with the Standard Oil Company, and they make astounding reading.

This matter of the “terminal facilities” very naturally received attention in the United States Government prosecution of the Standard Oil Company of New Jersey, in the State of Missouri, when the Court found that the Company was identical with the Standard Oil Trust, which had previously been ordered by the Court to be dissolved as an illegal conspiracy in restraint of trade. The effect of the decision has been suspended by an appeal to the Supreme Court of the United States, which would have been decided last spring had it not been for the death of Judge Brewer, the presiding judge. The appeal is expected to be decided under his tardily appointed successor, Judge Hughes, this spring or early summer. In the meantime, the finding of the Missouri Circuit Court, before which the case was argued, is that of “Guilty.” When Mr. Rockefeller had, with the greatest difficulty, been haled before this court and asked to explain these contracts on oath, all he could urge in his favour was that “the Standard interests were handling very large quantities of oil, and were the _natural parties_ to have control of the warehousing, receiving, and shipping of oil.” Cross-examination could extract very little from him. He could not even say when the Standard Oil interests got possession of the terminals nor how long they retained them. He admitted that the Standard levied terminal charges on the oil of independents, but did not know the amount. He relapsed, in short, into that painfully afflicting condition of amnesia which seems to be constitutional with Standard Oil officials when subjected to the rude shock of public examination.

But, luckily, the written letter of the contracts is now to hand to supplement this lamentable want of memory. Take, for instance, that with the Erie Company dated April 17, 1874, in Section 7 of which the Standard agrees to pay 5 cents a barrel to the Erie Railroad for the use of its yards, and further agrees “to make the charges uniform to all parties who use the yards or for whom services are performed therein, and always as low as any other oil yard, affording proper facilities for the transfer, storage, preparation, and shipment of the oil at any terminus of any railway or other line competing with the Erie Railway at or adjacent to the port of New York.” There is something like humour in the phrase “as low as any other oil yard.” Every “other oil yard” was similarly controlled by the Standard. One of its directors, Mr. Jabez A. Bostwick, stated on oath before the Hepburn Committee on October 16, 1879, that the Standard at that time controlled the terminals of the Erie and the New York Central railroads, and that the New York Central had no other oil terminals at New York Harbour except those controlled by the Standard. At the time he was testifying he had charge of the New York Central yards, and declined to answer as to his relation with the Standard Oil Company in that connection. The usual atmosphere of mystery! It is dissipated, however, at the present date, for we have now the text of the contract between the New York Central and the Standard before us, signed January 1, 1876, and referring to a previous contract of July 22, 1875.

One more point and I have done with the “terminal facilities.” Section 8 of the Erie contract provides that the Standard Oil Company shall assume the collection of freights and charges on all oil received at the yard and render accounts weekly. “This provision,” observes the “Brief for the United States,” given to the Attorney-General in the Missouri case, “gave the Standard Company the power to collect the Erie’s freight charges for transportation of competitors’ oil, thereby giving the Standard the great advantage of knowledge of all competitive shipments and of the rates of freight, and enabling it to compel those parties to pay the full rate, while the Standard could obtain any rate it might arrange for with the railroad companies, and it will be shown that the Standard had rebates from all of them.” In the light of all this, what becomes of the Standard Oil claim to superior business acumen and cleverness? Under the conditions shown, a mere schoolboy could outstrip and ruin the most seasoned merchant in the race for commercial success. The claim to superior business methods is an absolutely unfounded one, and might as well be urged by a burglar who can make a fortune in a night; but, then, his avocation is not usually referred to as “business.”

By this time the pumping of crude oil from the wells through pipe lines had commenced, first for short distances to collecting points on the railroads, but later for long distances, largely superseding the railroads. The Standard’s pipe lines, called the United Pipe Lines, were under the management of the late Mr. Daniel O’Day, the big Irishman mentioned in the first chapter. At first the railroads and Standard pipe lines worked together to harass and delay the “independent” shipper and refiner. Here is evidence of how the Standard Oil Company’s secret agreements with the railroads made it the interest of the latter to decrease the shipments of independent oil by refusing to furnish adequate cars and by delaying delivery. In 1878 Mr. W. H. Nicholson, the representative of Mr. Ohlen, a New York shipper of petroleum, appeared before an investigation ordered by the Secretary of Internal Affairs of the State of Pennsylvania and gave evidence upon oath that he began to have a difficulty in getting cars in May of that year. One day, he stated, Mr. Ohlen telegraphed to the officials of the Erie road to know if he could get 100 cars to run east. The reply came back, “Yes.” About noon Mr. Nicholson saw Mr. O’Day, the manager of the United Pipe Lines (Standard Oil property), in which his oil was stored, and told him he was waiting to have his cars loaded. Mr. O’Day at once said he could not load the cars. “But I have an order from the Erie officials giving me the cars,” Mr. Nicholson objected. “That makes no difference,” O’Day replied; “I cannot load cars except upon an order from Pratt.” Nor would he do it. The cars were not loaded for Mr. Nicholson, though at the time he had 10,000 barrels of oil in the United Pipe Lines and an order for 100 cars from the officials of the Erie in his hand. “Pratt,” of course, was the late Mr. Charles Pratt, whose refinery was at this time merged in the Standard combine, and whose name is memorialised in this country by the well-known “Pratt’s motor spirit.”

High-handed proceedings of this sort by the Pennsylvania Railroad gradually created such a hubbub that the State of Pennsylvania instituted a suit against it. This is the evidence given by Mr. B. B. Campbell, President of the Producers’ Union, on the occasion:--

“I never heard of a scarcity of cars until the early part of June,
1878. I came to Parker (a town in Pennsylvania) about five o’clock
in the evening, and found the citizens in a state of terrible
excitement. The Pipe Lines would not run oil unless it was sold;
the only shippers we had in Parker of any account, viz., the agents
of the Standard Oil Company, would not buy oil, stating that they
could not get cars; hundreds of wells were stopped to their great
injury; thousands more, whose owners were afraid to stop them
for fear of damage by salt water, were pumping the oil on the
ground.... On Saturday morning I spoke very plainly to Mr. Shinn
(Vice-President of the Allegheny Valley Railroad Company, controlled
by the Pennsylvania), telling him that the idea of a scarcity of cars
on daily shipments of less than 30,000 barrels a day was such an
absurd, barefaced pretence that he could not expect men of ordinary
intelligence to accept it, as the preceding fall (_anglice_, autumn),
when business required, the railroads could carry day after day from
50,000 to 60,000 barrels of oil.... I requested him to be the vehicle
of communicating to the Pennsylvania Railroad officials my views on
the subject, telling him that I was convinced that, unless immediate
relief was furnished and cars afforded, there would be an outbreak
in the Oil Regions.... On the next Monday I returned to Parker.
After passing Redbank, where the low-grade road, the connecting-link
between the Valley Road and the Philadelphia and Erie Road, meets the
Valley Road--between that point and Parker--the express train was
delayed for over half an hour in passing through _hundreds of empty
oil cars_!”

In August, 1872, Mr. Rockefeller, as the result of much plotting and planning, succeeded in persuading about four-fifths of the refining interest in the United States to go into a National Refiners’ Association, with himself as president, the object being to checkmate the Petroleum Producers’ Union, which had just exposed the South Improvement Company. This refiners’ association was to operate on what was known as the “Pittsburg Plan”--so called from the place where the scheme was first organised--according to which all the refineries were subject to a central board. They were to refine only such an amount as the board allowed, not to undersell prices fixed by the board, and to leave their buying of crude oil and the arrangements for transportation entirely in the hands of the board. In the aggregate they would thus form a company, presided over by one central board; their participation in this company would be expressed in terms of stock, and each stockholder would receive dividends whether his plant operated or not. It was, in short, the germ of a “Trust,” with Mr. Rockefeller as trustee. The refiners had put their heads into the lion’s mouth with a vengeance.

The Petroleum Producers’ Union was up in arms at once to protect the price of crude, and made an heroic effort to do so by restricting output. They also set up a producers’ selling agency to cut out the Refiners’ Association by refusing to sell it oil except at their own price. They were no match in generalship, however, for Mr. Rockefeller, especially when aided, as he was, by the hand of Nature. Nature was unkind enough to send the producers “gushers” with floods of oil when they wanted it least, and they found restriction of output practically impossible. At the same time most of the producers were badly in want of ready cash, and the Refiners’ Association had the longer purse.

At the psychological moment Mr. Rockefeller struck the judicious blow of offering to throw in his lot with the producers and buy crude only from the Producers’ Selling Agency (and that at $4.75 a barrel, a clear dollar over the then current market price), if the producers on their part would undertake to maintain the price and sell to no one outside the Refiners’ Association. The coup succeeded, and, half tempted, half constrained by cash necessities, the producers were ill-advised enough to trust their enemy and sign what was known as “The Treaty of Titusville” on the lines proposed. They at once received an order from Mr. Rockefeller for 200,000 barrels of crude at $3.25, not quite as good a price as that first mentioned, but which, under the circumstances, they were glad to accept. The “treaty” was signed on December 19, 1872. The producers had shipped about 50,000 of the barrels ordered by Mr. Rockefeller, when, on January 14, 1873, they were suddenly electrified to hear that that gentleman _refused to take any more of the contract oil_!

When taken to task Mr. Rockefeller urged in his defence the pitiful plea that the producers had not kept their part of the contract by limiting the supply of oil. It was true that the Producers’ Union was pledged by its own internal organisation to limit the supply of crude, but no such stipulation appeared in the contract signed by it with the Refiners’ Association. It was its own domestic arrangement. Had the matter been taken to court it is difficult to see how an alleged verbal understanding could have prevailed against a written contract. But no such step was taken. The Producers’ Union collapsed in utter demoralisation and never made another united effort for the next five years. The Refiners’ Association also found itself unable to keep up the internal discipline it had imposed upon itself. It dissolved in June, 1873, and Mr. Rockefeller was left sole master of the situation. He had outgeneralled everybody.

In 1874 the Erie, Central, and Pennsylvania Railroads entered into a combination with certain of the pipe lines, to the effect that equal rates should be charged by both the railroads and the pipe lines in the combination. The railroads were to starve out the independent pipe lines by refusing them the advantages given to the United Pipe Lines. Both railway freights and pipage rates were to be raised simultaneously, and on such a schedule that henceforth the cost of transport would be equal to all refiners, on crude and refined, from all points! This combination was announced curtly by a private circular sent out by James H. Rutter, freight agent of the New York Central, containing the paragraph:

You will observe that under this system the rate is even and fair
to all parties, preventing one locality taking advantage of its
neighbour by reason of some alleged or real facility it may possess.
Oil refiners and shippers have asked the roads from time to time to
make all rates even, and they would be satisfied. This scheme does
it, and we trust will work satisfactorily to all.

The refiners and shippers referred to as complacently as if they formed the bulk of the refining and shipping interest were, of course, Mr. Rockefeller and his friends, assumed for the nonce, as in the case of the South Improvement Company, to be “the trade.”

This astounding circular, commonly referred to in American Trust history as the Rutter circular, introduces us to the second species of unjust discrimination enjoyed by Mr. Rockefeller, and perhaps--of late years, at any rate--with an even more disastrous effect than that of the secret rebate--namely, the “discriminatory rate.” In some cases the discriminatory rate was secret, in others published. The Rutter circular projected the idea into a sort of quasi-publicity as an ostensibly fair one. The brief for the Government in the pending appeal by the Standard Oil Company of New Jersey against the Missouri judgment characterises these discriminatory rates as follows:--

The testimony in this case will show that in the open published
rates, as well as in secret and unfiled rates, there was radical
discrimination against the independent shipping points and in
favour of the Standard shipping points.... It is impossible that
without connivance with the Standard Oil Company the railroads of
this country should have uniformly made a system of rates whereby
with scarcely an exception the independent shipping points were
discriminated against in favour of the Standard shipping points....
It is a well-known fact that this group of defendants is the most
influential in financial circles in the United States. This influence
has undoubtedly been used to obtain these preferential rates, because
it could not be possible that it merely happened in the ordinary
course of business that practically every Standard shipping point
would be favoured with advantageous rates as against competitors.

This contention has, of course, been already sustained by the finding of the Missouri Circuit Court, as it is sustained by the common sense of any one who takes the trouble to go through the schedules of rate charges made by the railroads recently brought to light. The Standard Oil Company’s main refinery is at Whiting, in Indiana, a trifle to the south-east of Chicago. To take a few instances, the rate from Whiting to Chattanooga, a distance of 849 miles, by the route actually used on the road, was fixed by the railroad at 25.9 cents per hundred gallons, while the rate from Pittsburg--an independent refining centre--to Chattanooga, a distance of only 651 miles, was as much as 47 cents per hundred. In other words, the Standard Oil Company paid 21 cents a hundred less for shipping 200 miles further. This difference amounts to over 1¼ cents per gallon, which is in itself a large profit on oil. The discrimination against Cleveland and Toledo--two other independent shipping centres--on shipments to Chattanooga was equally great. Again, take the destination of Birmingham, in the State of Alabama. The open rate from Pittsburg, a distance of 794 miles, was 51.5 cents; from Whiting, a distance of 820 miles, it was 29.5 cents, a difference of 22 cents. Similarly there was an equal discrimination against Cleveland and Toledo on shipments to Birmingham. And so on to the end of the chapter of conspiracy all over the States.

THE BIRTH OF THE TRUST

“The American Beauty rose can be produced in its splendour and
fragrance only by sacrificing the early buds which grow up around it.”

J. D. ROCKEFELLER, Jun.,
_to the students of Brown University_.