NUMBER 14 (See page [1100])
TESTIMONY OF HENRY M. FLAGLER
[Before a committee appointed by the Legislature of Ohio, March, 1879.]
Henry M. Flagler; residence, Cleveland, Ohio; occupation, secretary Standard Oil Company; sworn and examined.
By Mr. Norton.
Q. Mr. Flagler, I suppose you understand that this investigation is brought under what is known as House Resolution Number 162?
A. I understand that it is.
Q. How long have you been secretary of the Standard Oil Company?
A. Since its organisation, some time in January, 1870.
Q. Are the articles manufactured or the oil refined by your company shipped over the line of any railroad in the State of Ohio, and if so, state whether or not any rate of freight is contracted for by you or whether your company pays the freight?
A. To the first question, yes, sir; more or less of the product of our refineries is shipped over the railroads of the state. As a rule all of the freight contracts have been made by me.
Q. Please state as near as you can what proportion of your product is shipped out of the state?
A. Well, I should say from sixty-five to seventy per cent.
Q. Now, has your corporation any contracts, written or verbal, with any of the railroads of the State of Ohio for carrying your freight?
A. Yes, sir.
Q. You may state whether these contracts are written or verbal.
A. They are written.
Q. Have you heretofore, prior to this time, any contracts written or verbal?
A. We have.
Q. You may state, Mr. Flagler, whether by virtue of these contracts it has been agreed or allowed by the railroad companies to pay you any drawbacks or rebates on freights.
A. No, sir, it has not.
Q. You may state whether or not you are allowed special rates, or what is known as special privileges.
A. I can’t answer that question from the fact that I do not know what other people get, so I do not know whether they are special rates or general.
Q. I believe, Mr. Flagler, that in your subpœna it was requested of you that if any such contracts were in existence relative to freight matters, you would bring them before the committee. Did you do so?
A. I have never seen the subpœna, so I do not know what the demand was. I have, however, contracts made with our company as far back as the first one ever made.
Q. Can you produce these contracts before this committee?
A. Yes, sir, I can; I am willing to do so, provided they may be used by the committee—if it is proper to ask, to be used in the nature of a confidential communication. None of these contracts provides for any discrimination whatever, but they may contain some business secret of the Standard Oil Company, whose interests I am bound to protect. I do not see how the submission of those contracts as evidence in this case will do other than bear out the statement I have made under oath. I do not see how they will do anything more than sustain the statements I have made. I would be very glad to have our company set right before the public in these matters, but I do not care enough about it, however, to have our business contracts made public. I should be very glad to submit them to you under such circumstances.
Q. Mr. Flagler, do you know anything about the rates of freight from the Southern portions of the state, well, say from Marietta and from Wheeling to the City of Columbus?
A. I do not.
Q. Did you have anything to do, or has the Standard Oil Company anything to do with the making of the rates of freight for the company known as the Camden Consolidated?
A. None whatever.
Q. Have you anything to do with the making of the rate, or the arranging of the freights for the company known as the Marietta Oil Refining Company?
A. None whatever.
Q. Testimony introduced here shows, I think, Mr. Flagler, that about one year ago the rates of freight were raised nearly one-half from the points I have mentioned and from Parkersburg and other places to points in this direction. Had the Standard Oil Company any understanding by and between the railroad companies in regard to this rise in the rates of freight?
A. I should say, to my own knowledge, positively no; I never heard of it before. I do not know what the rates were and I did not know that the raise had been made.
Q. Do you in your capacity, or does the Standard Oil Company through its agents, control the rates of freight or make the rates of any of the oil companies in Cleveland, outside of your own corporation?
A. No, sir.
Q. Mr. Flagler, what is your rate of freight from the seaboard, or to the seaboard from Cleveland?
A. At the present time?
Q. Yes, sir, at the present time.
A. Do you mean per carload or by the barrel?
Q. Well, we’ll put it by the barrel, as there is some testimony before the committee relating to that.
A. I do not know that I could answer the question and I do not know but that I would be betraying the business interests of other people. The custom for several years, in fact, for more than five years, has been that the rates of freight on shipments to the seaboard and export oil have been made by what is called trunk lines, the New York Central, the Erie, now New York, Lake Erie and Western, the Pennsylvania, and Baltimore and Ohio. The general freight agents are the officers who make those rates, and their Western connections share in them. I do not know how the freight which is paid for services rendered is divided between their Western connections, having no means of knowing that at all. We do not make any contracts with the Lake Shore for the rates of freight, and the same is equally true of the Atlantic and Great Western. These are the only two roads we ever ship by—I may be wrong; we ship some by way of Pittsburg, over the Cleveland and Pittsburg or over the Baltimore and Ohio.
Q. Do you know what the open rate, the published rate is to the seaboard by the barrel?
A. To Boston and New York, $1.54½; to Philadelphia and Baltimore, $1.29½.
Q. Now, Mr. Flagler, you have used your pencil to arrive at that conclusion, why was it necessary to figure out that matter if there is a published rate?
A. Simply because I do not keep that thing in my mind and had to call upon my memory for the way the thing is got at. I got at that by deducting what is called the crude rebate. Nobody pays the crude rebate which is 45½ cents. Whether that form is kept up by the railroad companies I do not know, but my impression is it is not.
Q. It is a fact, isn’t it, that you do get a lower rate and pay less freight than the published rate? I believe it is in evidence that the open rate of freight to the seaboard will average about $1.65.
A. I have never seen the freight tariff, if you mean that which is known as the schedule rate published for the public. I have not seen anything of the kind and do not know anything about it.
Q. What inducement does your company offer to the railroads or what propositions are made by the railroads to your company? Now, I refer to the testimony given by Mr. Hills in regard to the carrying of oils, etc., what inducements do the railroad companies give whereby they lower your rate of freight?
A. They do not give us lower rates of freight for any consideration of that kind. They pay us for the use of our property, if we furnish them with terminal facilities, cars in which to haul the goods, they pay us a compensation for the use of the property. Perhaps I can give it so you can understand it; we keep a separate account with each refinery and if we spend $50,000, or $100,000 to create what we term terminal facilities, warehouses, loading places, etc., we make an arrangement whereby they pay us a fair compensation for the property that is created by our money. That consideration is credited to that investment and has nothing whatever to do with the freight. The refinery making the oil is charged with the rate of freight just as anybody else pays, and the compensation for the use of tank cars and terminal facilities at the shipping and receiving ends of the line is given for the use of these ends. I will say that in the contracts we have made, the railroad companies have expressly reserved the right to give to other parties the same privileges if they furnish the same conveniences.
Q. Does the Standard Oil Company own and control the Camden Consolidated Company at Parkersburg?
A. Well, I would like to ask a question in reply, and that is, whether that question and answer comes within the scope of this resolution?
Q. I will give you my reason for asking the question. It has been charged here by witnesses that there is a collusion by and between the railroads in the Southern part of the state and the Camden Consolidated Oil Company or the Standard Oil Company, as they term it, for discriminations in the rates of freight. Now, to find out whether or not there is anything for which to blame the Standard Oil Company, I ask this question.
A. Well, it is a business secret of our company, but considering the circumstance, I will answer the question. The Standard Oil Company doesn’t own or control the Camden Oil Company, and I would say to every man explicitly and fully that the Standard Oil Company doesn’t own a share of stock in the Camden Consolidated Company. I say this so I may be understood and I hope I have done so. I do not own a share in it myself.
Q. Coming back to this question of the contracts, have you any of the written contracts that have been or are now in force, that you can give this committee; contracts between the railroad companies traversing this state and your company?
A. Yes, sir. (Contracts produced.) The price for the shipment of oil per barrel as given in the first contract for the year 1870 was as follows: From the first of February to the first of June, 1870, $1.40; from the first of June to the first of November, 1870, $1.20; this was during the season of navigation. From the first of November until the expiration of the contract, April 1, $1.60.
Q. Is there a line or clause in that contract whereby there is an agreement for rebates or drawbacks?
A. None whatever.
Second contract read: In this contract the rates were as follows: From the first of April until the middle of November, 1872, about seven months, $1.25. For the remainder of November, December, January, February and March of 1873, $1.40. These were rates per barrel.
Q. Were there no rebates, drawbacks, or special privileges given outside of what is written in the contract?
A. None whatever. (Third contract introduced.)
Mr. Flagler: I want to say something of this matter and I want to tell the whole truth. Our business was at the time about 4,000 barrels a day and we had contracted this oil for delivery at once, and we had to pay from $50 to $150 gold per day if we kept it an hour longer than the time specified in the contract, so it was very important for us that the railroads put these on board as rapidly as possible.
Q. Mr. Flagler, from the reading of that contract I see that you might, instead of being benefited, sustain damages by the failure on the part of the railroad company to get your oil in there. Did you ever have to pay any demurrage to them?
A. Yes, sir, we had to pay some years as high as $30,000.
Q. Have you ever received any benefits by reason of these contracts that any other shipper might not have received?
A. No, sir. Not in the slightest. All the way through these contracts you will observe that we have undertaken those risks which the law imposes on the common carrier and which no railroad can divest itself of except by written agreement. The handling of these quantities of oil was a very serious matter; there was a constant tendency on the part of the railroad companies to put cars used in this trade to some other purpose, whenever it would pay them better. They used a rack car, such as they could carry cattle in and we have had a great deal of trouble with these roads in the use of those cars, because if they could get cattle to haul from Chicago to St. Louis for something more than they were getting from us they would do it. I want to say what the facts are under the contract just read. You will remember that during seven months of the year we were to give them 4,000 barrels of oil per day or 100,000 barrels a month, and the smallest of the shipments in those months was 108,000. We gave them during the rest of the time more oil and paid them the contract on it when we could have shipped by canal for forty cents less. On the first day of December, a competing line of railway lowered the rate to $1.05 per barrel. I went to Mr. Vanderbilt and told him that the rate should be maintained at the agreed price or else we would not have made the contract with him. I said to Mr. Vanderbilt that if he insisted in the fulfillment of the contract basis and exacted the payment of the contract price, it would result in our being compelled to close our refineries, for we could not afford to pay $1.25, when other people were only paying $1.05. I called his attention to the fact that during the season of canal navigation we had given the maximum shipments of oil, 180,000 barrels a month, and some in excess of it, and paid $1.25. I said, if you will reduce these rates to the rate made by the Pennsylvania Company, in my judgment thirty days will not elapse before they will be willing to restore their rates, and all we ask is to be put on a parity with other shippers. After a moment’s hesitation he asked if I thought he ought to stand all of this twenty cents. I told him if he should stand any part of it he should stand it all. I said, it is a transportation fight and not a fight of the manufacturers. When it comes to competition of the manufacturers we would take care of ourselves. I said that we would not have made this contract except on their assurance that the contract price of $1.25 was to be maintained. He said: “I will make your rate $1.05,” and this was after we had done more than we had agreed to do under the contract. The next day we sold between 50,000 and 60,000 on the basis of $1.05 per barrel. Mr. Vanderbilt allowed that rate of payment for one month and then said he would exact the contract price, $1.25. I said all right, and we shall ship just the amount of oil we are compelled to ship to fulfill our contract and then we shall stop. We paid him $1.25 for all over the month and then we did not run a barrel of oil from the City of Cleveland more than that until the expiration of this contract for three months. That is the good that the contract worked on us. You might consider it a baby act to plead the equities of the case, but we could not place our oil on the market and compete with other refineries.
(Fourth contract introduced.)
Q. This is the only contract you have now in existence whereby you carry your freight?
A. Yes, sir.
Q. Do you know anything of the suits brought by Teagle and Company against the Lake Shore road for discriminations in freight?
A. Nothing whatever.
Q. Have you had since the organisation of your company any understanding outside of these contracts whereby discriminations are made in favour of your company as against any of the smaller refineries of the state?
A. No, sir.
Q. Has your company or corporation in conjunction with the railroads ever operated so to “squeeze out” as they term it, or injure any other refining company of the state, outside of the Standard Oil Company?
A. No, sir, never. I would like to enlarge upon that question. I suppose it would be fair to the mind of every member of this committee present. A very large business with other mechanical contrivances and an experience which grows up with and comes along with business and always doing a very large business, in the nature and order of things should make its presence felt by the parties doing a comparatively small business. In 1873 and 1874, when we stipulated for those 4,000 per day, if anybody has followed the progress of the Standard Oil Company they would know and I feel justified in saying that we have done a very large business, and aimed to do it with economy and give the purchaser the very best oil manufactured, consistent with a good and safe kind of oil—to manufacture at one point under the eye of one man. With an aggregation of capital and a business experience, and hold upon the channels of trade such as we have, it is idle to say that the small manufacturer can compete with us, and, although it is an offensive term, “squeezing out,” yet it has never been done by the conjunction of any railroads with us or by the carrying out of freights.
NUMBER 15 (See page [1106])
THE PITTSBURG PLAN
[From the Oil City Derrick, May 17, 1872.]
1. Refiners to lease to the company for five years their superstructure with sufficient real estate to carry on the business of the works.
2. That the rental be eight per cent. per annum on the appraised value of the superstructure, and the company to assume all risks and pay all ordinary taxes.
3. Lessors to pay into the treasury of the company for a working capital one-half of the appraised value of the superstructure in cash or the equivalent in refiner’s stock.
4. Said lessors to receive for money paid in as above the bonds of the company, in amount equal to cash paid in, and stocks of the company for an equal amount; said bonds payable in five years or at the option of the company after one year, said bonds to be denominational coupon bonds to bear interest at the rate of eight per cent. per annum, payable semi-annually.
5. The company shall not pay annually more than ten per cent. on the stock as dividends until the said bonds are redeemed.
6. After the bonds are paid, then the company shall have the right and shall be obliged to purchase all said superstructure at the full appraised value first made, and shall give in exchange for the same stock of the company for the full amount.
7. Each district shall appoint a local committee of three persons to make appraisals, and when any appraisements are being made, the chairman of each local committee shall be required to be present to take part in the appraisement.
There shall be a board of appeal which shall be composed of the chairman of each local committee. All presidents of the company shall be presidents ex officio of the board.
The committee shall place a cash valuation on the superstructure and shall be instructed as to the manner in which the valuation shall be obtained.
NUMBER 16 (See page [1117])
“THE AGENCY”
[From the Oil City Derrick.]
I. There shall be established, under the auspices of the Council of the Petroleum Producers’ Association of Pennsylvania, an organisation under sanction of the laws of Pennsylvania, which shall be known as “THE PETROLEUM PRODUCERS’ AGENCY.”
II. The capital stock shall be not less than one million dollars, and shall be divided into shares of one hundred dollars each, which shall be subscribed only by members of the Petroleum Producers’ Association, or by such other persons as may be approved by the Council.
III. No transfers of the shares of the capital stock shall be made on the books of the Agency, except upon such conditions as the directors may prescribe, subject to the approval of the Council.
IV. The business of the Agency shall be managed by a board of thirteen directors, who shall be elected annually by the stockholders.
V. There shall be an advisory board to consist of one member elected by each local association and approved by the Council. The members of the advisory board shall be admitted to the meetings of the board of directors and shall be entitled to all the privileges of directors, except that of voting. Any member of the advisory board may be removed for any abuse of his trust, or for official misconduct, by a vote of three-fourths of the Council at a regular meeting.
VI. The local associations may appoint committees to solicit and receive subscriptions to the capital stock; they may also appoint responsible trustees to receive payments on account of such subscriptions, to whom the subscribers shall pay at least ten per cent. upon their subscriptions at the time of subscribing. The committees of the local associations shall advise the president of the Council, from day to day, of the amount of subscriptions received by them, and whenever the sum of at least one million dollars shall have been subscribed in good faith, and approved by the Council, and the organisation of the Agency legally completed, subscribers shall be notified to hold an election of directors. The directors shall, as soon as practicable after their election, proceed to elect a president, secretary and treasurer. The trustees, appointed by the local associations to receive subscriptions, shall thereupon be required to pay over to the Agency the amounts received by them on account of subscriptions to the capital stock. The Agency shall not be responsible for any subscriptions paid to the trustees appointed by the local associations until the same shall have been paid over to the Agency or its authorised representatives.
Subscriptions to the capital stock may be received, payable in oil at five dollars per barrel, delivered on the cars or in the tanks of the Agency at any sub-agency on the line of the railways; provided, however, that no certificate of stock shall be issued in any case in which payment is made in pipe-line receipts until the oil shall have actually been received upon the order by the Agency or its agents. But a special guaranty of the order shall be required from the subscriber with an agreement that the stock shall be retained as security for the delivery of the oil on demand, and the demand shall be made within thirty days after the order for the oil is received by the Agency.
VII. Members of the Petroleum Producers’ Association shall sell their oil only to the Agency. The Agency shall purchase all the oil offered by members of the Association and shall pay therefor at least five dollars per barrel for oil of standard grade, and for the heavy oil of the fifth district. Payment for oil purchased shall be made as follows: If the market will take the entire supply as fast as offered, the full market price shall be paid in cash on delivery; but if the board of directors, or the Council, shall determine that the oil daily offered to the Agency is in excess of the demand, the Agency shall pay three dollars in cash and give the seller a certificate entitling him to the net proceeds of the oil when sold, less the amount advanced thereon.
VIII. The Agency shall sell no oil for a less price than five dollars in cash, on delivery per barrel without the consent of the Council of the Petroleum Producers’ Association.
IX. To the redemption of the certificates, on and after the tenth of the month succeeding that in which they were issued, shall be applied the proceeds of all the oil sold and delivered during that month, less the amount advanced and the amount required to tank the surplus oil. For the unpaid balance of the certificate the holder shall, upon the surrender of the same, be entitled to a tank receipt representing his interest in the amount of surplus oil in store and tankage.
X. The Agency shall be entitled to receive for buying and selling the oil such commissions per barrel as the Council may allow, applicable first to the payment of expenses, second to the payment of dividends on the capital stock, which shall be six per cent. semi-annually, free of taxes.
XI. All the net proceeds of surplus oil sold shall be applied specifically to the redemption of the tank receipts at their value, the surrender of which shall be at the option of the holder.
XII. The Agency shall establish sub-agencies at such points within the oil-producing district for the receipt, storage, and shipment of oil as may be necessary to facilitate the convenient and economical transaction of the business of the region, subject to the approval of the Council.
XIII. The Agency shall provide all storage necessary to hold the oil on sale and the surplus oil in store.
XIV. The price on the cars of oil of the standard grade shall be uniform at all the sub-agencies on the line of the railways within the oil-producing district, provided it be practicable to so arrange with the railroads.
XV. A barrel shall be uniformly forty-two gallons.
XVI. Whenever the production of petroleum shall be permanently in excess of the demand the Council of the Petroleum Producers’ Association shall determine at what time the production shall be restrained and shall take such measures as may be practicable, necessary, and lawful to prevent the drilling of oil wells, but it shall confine its orders, so far as practicable to preventing the starting of new wells, allowing those already in process of drilling to be completed.
XVII. Whenever in the opinion of the board of directors it may be advisable they may, subject to the approval of the Council, provide such refining capacity as may be required to maintain the highest price for crude petroleum consistent with the consumptive demand.
XVIII. The Agency shall not at any time sell to, or contract with, or make any arrangement whatever, with any individual, organisation, combination, or association, by which they may have a monopoly, inside rate, advantage or preference over, or to the prejudice of, any present or future competitor for the purchase of the crude oil coming into, or passing through its hands; provided, that nothing in this section shall be so construed as to prevent the Agency, with the sanction of the Council, from making such temporary discrimination as may be necessary for the purpose of protecting or promoting the interests of producers by securing higher prices for crude oil, increased consumption of refined oil, or decreased margins between the price of crude and refined oil.
XIX. The Agency, with the approval of the Council, may take such measures as may be expedient to increase the consumption of petroleum by securing its application to new uses.
XX. The Agency shall publish daily a correct statement showing the amount of oil purchased, the oil sold, and oil placed in store during the day; also showing the points at which the same was done and the amounts at the time in store at the various sub-agencies; also the destination of the oil sold.
XXI. The Agency shall publish tri-monthly, full and complete reports of all its transactions and showing its condition at the date of the report; the correctness of the report shall be verified in such manner as may be prescribed by the Council.
XXII. A committee may be appointed by the board of directors, or by the Council of the Petroleum Producers’ Association, at any meeting, for the purpose of investigating the condition and management of the affairs of the Agency; and it shall be the right and duty of such committee, duly appointed, to thoroughly investigate everything affecting the interest of the Agency, to examine its books, accounts and vouchers; its safes, vaults and tanks; and to make a true and faithful report of the condition and management of the affairs of the Agency as they may be found, which report shall be published at the expense of the organisation which appointed the committee. It shall be the duty of the Council to see that such committee is appointed and such examination and report made and published at least once in every year.
XXIII. The Agency shall establish a bureau of statistics and information, which shall carefully collect and publish facts, relating to the business of producing, refining, marketing and the consumption of oil. The rooms of the bureau shall at all times be open to the members of the Petroleum Producers’ Association, and the Agency shall hold itself open for daily communications by telegraph with local associations.