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.
| 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 |