The Evolution of Modern Capitalism: A Study of Machine Production

by J. A. Hobson

§ 9. It is, however, the economic character and powers of the Trust, and not its legal position, which concern us here.

The following short history of the origin and modus operandi of the Standard Oil Trust, the largest and in some respects the strongest of these organisations, will serve to give distinctiveness to the idea of the Trust:—

Petroleum began to be an article of extensive commerce about the year 1862. The wells from which the crude petroleum oil was drawn were in Pennsylvania, and the work of boring the wells with machinery and extracting the oil grew to be a considerable business. The crude oil was sold to various refiners, who set up factories in Cleveland (Ohio), in Pittsburg, and in several other cities. By 1865 these factories had become pretty numerous, and in that year a private refinery at Cleveland, owned by a few partners, obtained a charter forming it into a corporation entitled the Standard Oil Company, with a capital of $100,000. Until 1870 the progress of the company was comparatively slow. In order to increase their hold upon the sources of production in Pennsylvania, and to expand their trade, they began to purchase stock in corporations already existing in that State, and succeeded in establishing others, with which they worked in close alliance. A Standard Oil Company was organised at Pittsburg, the stock of which passed into the hands of the owners of the Cleveland Company. They then proceeded to establish agencies in other States, primarily for the sale of their goods, but when these businesses were firmly planted they obtained for them from the several States charters incorporating them as companies for refining oil. In 1872 the shareholders of the Standard Oil Companies at Cleveland, Pittsburg, and Philadelphia organised another corporation called the South Improvement Company, obtaining a charter from the State of Pennsylvania. This corporation, which was in fact though not in legal form the "Standard Oil Companies," then entered into contracts with the New York Central and Hudson River Railroad Company, the Erie Railway Company, and several other lines which traversed the oil-producing country, for the shipment of petroleum. The South Improvement Company agreed to ship over these railways all the petroleum products. In return the railway companies agreed to carry their goods, not upon the terms open to other customers, but with a system of rebates, paid not only upon the oil shipped by the company, but upon that shipped by any other competing companies. "In one locality the railroad companies were to charge oil shippers as freight not exceeding $1.50 per barrel, and pay a rebate to the South Improvement Company of $1.06 per barrel, whether it was the shipper of the oil or not, so that under these contracts the Standard Oil Company members would pay no more than 44 cents per barrel as freight to the carrier, while their competitors would pay $1.50, and of this last sum the railways were to pay back to the combination $1.06 per barrel."[131]

Though this monstrous conspiracy was quickly unmasked, and the South Improvement Company lost its charter, secret negotiations with the railway companies enabled the Standard Oil Companies to strengthen themselves by this system of rebates paid out of the pockets of their business rivals. Chiefly by means of these and other discriminating contracts they were enabled to enlarge their sphere of activity, and making full use of their growing capital, succeeded in destroying or absorbing their competitors, until, as early as 1875, they held a practical monopoly of the refineries of the interior. No fewer than seventy-four refineries are stated to have been bought up, leased, or bankrupted by the Standard Oil Company in Pennsylvania alone in the course of its career.

Until about 1878 the chief source of power of the company seems to have been the alliance with the railroads and the local monopolies obtained by buying up or crushing rival businesses. But the president, Mr. Rockefeller, and his associates were men of keen business ability, who understood how to make use of the inventive genius of the abler employees who passed into their service, and of the improvements in method of production and distribution of oil which were suggested. In the next few years the company were enabled to effect enormous economies in the storage and conveyance of oil. Pipe lines were laid down connecting New York, Philadelphia, Baltimore, Buffalo, Pittsburg, Cleveland, and Chicago, and a network of feeding lines joining the sources of supply. Thousands of huge tanks were erected for holding surplus stores; a large number of agencies were established along the sea-shore with storage attached. Further considerable economies were effected by the undertaking of the manufacture of barrels and cans and other subsidiary articles required in the trade. At the close of 1881 the owners of the entire capital of fifteen corporations and parts of the stock of a number of others, the latter chiefly trading companies, established the Trust. The number of shareholders thus associated was forty, and they placed their stocks in the hands of nine of their number as trustees, who continued to administer the whole business, paying interest upon the certificates which represented the stock of the several shareholders until March 1892, when the Trust was legally dissolved. The legal dissolution of the Trust has not, however, materially impaired its economic unity and power; on the contrary, it has extended in the United States its monopolic control of the market, and has already established a strong control over several European markets for the sale of oil, and over the chief natural sources of supply. Although a practical monopoly in many parts of the interior had been acquired at a tolerably early date, there continued to be active competition in all branches of the petroleum business until 1884, when the war of rates, which had been waged for some time with a formidable Canadian competitor, the Tidewater Company, ceased, an alliance being formed between the rivals. From that time the Standard Oil Trust has held a practical monopoly over the greater part of the country. It has introduced new economies in the machinery of refining, has found profitable uses for naphtha and other waste products, and has vastly increased its output and the machinery of distribution. Not content with controlling the market for crude oil, it has during the last few years obtained the possession of larger and larger portions of the oil-producing country, forming companies to acquire mining rights, sink wells, and oust the private producers from whom it had previously been content to purchase the raw material at their own prices.

Bearing in mind the fact that the actual unification of businesses took place a good many years before the formation of the Trust, there is nothing in the account given above inherently inconsistent with the following explanation afforded by the Standard Oil Trust of their proceedings:—

"The Standard Oil Trust offers to prove by various witnesses that the disastrous condition of the refining business, and the numerous failures of refiners prior to 1875, arose from imperfect methods of refining, want of co-operation among refiners, the prevalence of speculative methods in the purchase and sale of both crude and refined petroleum, sudden and great reductions in price of crude, and excessive rates of freight; that these disasters led to co-operation and association among the refiners, and that such association and co-operation, resulting eventually in the Standard Oil Trust, has enabled the refiners so co-operating to reduce the price of petroleum products, and thus benefit the public to a very marked degree."[132]

So far as this furnishes an explanation of the motives leading to the earlier growth of the Company, the consolidation of rival companies, no doubt it contains a considerable element of truth. The Standard Oil Trust, however, differs from most others in that it was not directly formed by the union of a number of leading rival businesses, but was merely a reorganisation upon a firmer basis of a single complex business. The motive of self-protection, though it might be operative in the early history of the Company, cannot be adduced as the true motive of the formation of the Trust.

Since the claim of the Standard Oil Trust to be a public benefit rests upon the fall of price to the customer, resulting from the various economies and improvements adopted by the Trust, it may be well to append a diagram showing the actual fall of prices during the twenty years 1870 to 1890.

In this diagram we note that from 1870 to 1875 there was a rapid reduction of price in consequence of the fact that these were years of keen competition with other Pennsylvanian businesses. 1875, which marks the establishment of a monopoly of the interior trade in the hands of the Standard Oil Trust, also marks a sharp rise of prices. The expansion of their business brought them into contact with new and more distant competitors, and a fall of price continued until 1879, while prices continued to oscillate until 1881, the year of the formation of the Trust. From the time of the formation of the Trust the fall of price has been only half a cent. The moral is obvious. So long as there is competition, in spite of the expense of conducting the strife, prices fall; when the competition is suspended, and there is a saving of friction, the public gains no further reduction.