[From "A History of the Rise and Fall of the South Improvement Company," pages 76-96.]
WASHINGTON, D. C., April 5, 1872.
By Mr. Townsend.
Q. From such testimony as you have given this morning, am I correct in understanding that this whole arrangement was suspended before its completion and before anything was done under it?
A. Yes, sir.
Q. That no completion of contracts was consummated?
A . No, sir; the conditions of the original understanding about the contracts, on which alone they were to go into effect, had not been complied with.
Q. And a further arrangement was necessary to make it a complete contract?
A. Yes, sir, the South Improvement Company had to enter into a contract, such substantially as I have furnished a draft of here, to give the producers the full benefit of everything connected with the contract before the contract itself could go into effect.
Q. There are three principal interests connected with the oil trade?
A. There are, the producers, refiners and transporters; no injustice could be done to either interest without affecting, injuriously, the others. The object of the railroads in this matter was to promote the interests of the trade in order to promote their own interests.
By the Chairman.
Q. You say there were three interests, producers, refiners and shippers?
A. Yes, sir, connected with the trade.
Q. And that the object of all these arrangements was to protect these three interests?
A. To protect these three interests and incidentally, of course, protecting the general interest in doing that, for this is peculiarly an American traffic.
Q. It was in the direction of increasing to each of these parties, respectively the benefits and profits of the business?
A. Yes, sir, that each might receive a fair profit. The railroad companies had not been receiving cost for transportation, and it was to save them from loss, for they had been transporting at a loss during the whole of the year 1871.
Q. Well, that is to increase profits, is it not?
A. Yes, to save from loss.
Q. Did it look to increasing in any way the benefits of cheapness to the consumer?
A. Yes, sir.
Q. How?
A. By steadying the trade. You will notice what all those familiar with this trade know, that there are very rapid and excessive fluctuations in the oil market; that when these fluctuations take place the retail dealers are always quick to note a rise in price, but very slow to note a fall. Even if two dollars a barrel had been added to the price of oil, under a steady trade, I think the price of the retail purchaser would not have been increased. That increased price would only amount to one cent a quart, and I think the price would not have been increased to the retail dealer because the fluctuation would have been avoided. That was one object to be accomplished. Moreover, there is only one-sixth of the oil produced here consumed in this country — a very small proportion of the product. In discussing what compensating advantage would arise from an increase of price, the railroad companies considered, in the first place, that there was a very great compensation afforded by a steady trade.
Q. Will you state to the committee how, with your mode of arriving at these conclusions, that cheapness to the consumer is promoted by stability in trade — how that arrangement which gave $1.50 a barrel to the South Improvement Company benefited either the railroad company or the producer?
A. Well, sir, in the agreement you will observe that the maximum rebates and maximum rates are stated. These maximum rebates were exceptions to the rule, which is a cardinal principle in the contract. The actual rates were to be kept as near to net rates as possible. Moreover, this was a contract which, before it was to go into effect, would have been a contract with the producer as well as the refiner.
Q. Does this contract show that?
A. The draft of a contract which I have presented to the committee, and which was to have been entered into with the producers before the contracts with the railroad companies went into operation, shows that.
Q. Does this contract say that anything was to be done in behalf of the producer before it was to go into operation?
A. Not on the face of the contract; it was only a condition on which it was delivered to me.
Q. A written condition so that it would become a part of the contract?
A. It was a part of the contract.
Q. I asked you whether there was anything in writing?
A. I said there was nothing in writing on the face of the contract, but nevertheless it was an essential part of it.
Q. It seems to be essential now that it should be a part of the contract?
A. It was all the time so considered from the beginning.
By Mr. Hambleton.
Q. Was this draft of a contract with the producers drawn prior to the execution of the railroad contracts?
A. Yes, sir, the draft was drawn prior to that.
By the Chairman.
Q. What is the date of that pencilled draft of a contract?
A. I could not give you the date of it; it was written in the office of the Lake Shore Railroad Company.
Q. At what place?
A. New York.
Q. State as near as you can the date?
A. I should say it was probably in December; either late in December or in the beginning of January, probably in December; indeed, I am very confident it was before I went home at Christmas.
Q. Has any copy of this ever been printed?
A. No, sir.
Q. This is all there was of it?
A. Yes, except discussion; we discussed the matter.
Q. I mean all there was committed to writing?
A. Yes, sir, all there was then committed to writing.
Q. Is it all there was as far as making out a contract is concerned?
A. Yes, sir.
Q. Was this submitted to the producers as a body or individually?
A. We were very anxious to submit it to the producers, and I asked them to appoint a committee that we might do it, but they had got up such an excitement at the time that nothing was practicable.
Q. When was that?
A. Before the last of these contracts was signed.
Q. Can you give the dates at all?
A. I cannot give the dates, but the contract with the Lake Shore road had not been signed at the time.
Q. What producers did you ask to call a meeting?
A. Among others I addressed a communication to be delivered to a gentleman who was understood to be the chairman of a meeting about to be held.
Q. What was his name?
A. Foster W. Mitchell, of Franklin.
Q. You addressed a communication to him, of what purport?
A. Asking him to appoint a committee to meet a committee of the South Improvement Company, that they might know what the objects of the South Improvement Company were. I proposed to submit these contracts with the railroad companies to that committee and also the form of contract which the railroad companies required the South Improvement Company to enter into with the producers, before these contracts went into effect.
Q. Have you a copy of that communication or letter?
A. It was a telegram.
Q. Have you a copy of it here?
A. I have not at present.
Q. Have you it in your possession, anywhere, and can you lay it before the committee?
A. I may have it; am not sure.
Q. Did you receive a reply to that communication?
A. Yes, sir.
Q. Was it stated in your communication that you proposed to lay before the committee the form of contract to be entered into with the producers?
A . No, sir. I proposed to lay that before the committee if it should be appointed.
Q. If you are not able to furnish a copy of that communication I will ask you to state orally its contents.
A. I could not give you the words of it; it was in general terms asking that they appoint a committee to confer with a committee of the South Improvement Company.
Q. To confer in reference to what?
A. I do not know that I should be safe in undertaking to say; I know what my object was in writing it.
Q. That you have stated. If you received a reply from Mr. Mitchell, state whether it was by letter or telegram.
A. I received a reply by telegraph from Mr. Mitchell, stating that the meeting of the producers received the communication with scorn — as of course they would if read to them, as a mass-meeting is always called for a specific object.
Q. That was not in his reply?
A. No, sir, it was not. I replied to him that I had intended the communication to him to be for the purpose of laying it before a few of the principal producers; that to lay the proposition before the meeting was of course to insure its defeat, because the meeting had convened for a predetermined purpose, which was to denounce and treat with scorn the South Improvement Company, because the South Improvement Company had been represented to them as hostile to their interests. This last perhaps was not in the communication.
By Mr. Hambleton.
Q. Have you a copy of that paper which you addressed to Mr. Mitchell?
A. I am not sure whether I have or not. It was a telegram.
Q. Did that substantially close the written communications between you and the producers upon that subject?
A. No, sir. I had a great many communications with individual producers; I think with more than half the producers, estimating them by the quality of oil produced.
Q. State what occurred.
A. I have corresponded with them and in that correspondence they have expressed their belief that the proposed plan of the South Improvement Company would work greatly for the benefit of the producing interest; that there was something greatly needed for the producing interest, and that it could not thrive without something of this kind, because it could not pay fair, living rates, for transportation to the railroad companies at the price oil was bringing, and that there was no likelihood of oil increasing in price under the existing condition of things; that the railroad could not always, of course, continue carrying at a loss.
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Q. Will you give the names of the producers who proposed to join the South Improvement Company, or who expressed themselves favourable to the plan of that company, in addition to the name of Mr. Mitchell?
A. I could give you the names of several of them, but I do not think their lives and property would be safe. They requested me not to mention their names because they thought it would be an imprudent thing to do.
Q. You refuse, then, to give the names which you say you could state?
A. I refuse to give the names for the reason I have stated.
Q. Are there any of them you are willing to mention?
A. I will look over the letters and see whether there are any of them not marked confidential. If there are any not so marked, I will give you the names.
Q. Why do you state to this committee that you are not willing to give the names of the parties to whom you refer, when you state that a great many producers were in favour of this plan, and were consulted in regard to it?
A. I stated it because it was a fact.
By Mr. Sheldon.
Q. Did the danger to the lives of these parties arise from the excitement in the Oil Regions in consequence of these proceedings?
A. Yes, sir, one of the presidents of one of the committees representing the producers was in New York, a Mr. Patterson. He stated, as I understood, to one of the railroad officers, that he did not think my life would be safe if I were to go into the Oil Region, although he himself would not take it. I had received a number of threatening letters, but I did not attach any importance to them until Mr. Patterson made that statement.
By the Chairman.
Q. What was the reason given why your life would not be safe?
A. I do not know that the reason given, I think by Mr. Patterson, that there was such an unreasonable excitement among the people as to the nature and object of the South Improvement Company, which was represented to them to be a measure altogether hostile to them.
Q. Do you know what these misrepresentations were?
A. I only know by what I have seen stated in the papers and what persons have mentioned to me.
Q. Did you make an effort to correct the false impressions?
A. I did; the papers called for the other day by the committee, and which I have here to-day to produce, will show that.
Q. Were your efforts to correct these misrepresentations successful?
A. No, sir, they were not. I will read the despatches which I sent for the purpose of endeavouring to do that, and you will see from them the nature of the efforts I made.
Q. Sent to whom?
A. I sent a despatch to F. W. Mitchell through S. P. McCalmont of Franklin, which I have here.
The Chairman.— We will not stop to read them.
Witness.— It will answer your question in a great deal shorter period than I could answer it verbally.
The Chairman.— We will put the answers themselves in as testimony.
Witness.— Then I will read this as my answer, if you please, because it expresses as fully as I could express the facts you desire to know.
The Chairman.— Very well, you may hand the despatches to the reporter, and they will go in as a part of your testimony, and save the committee the time of reading them.
Witness.— You can hardly comprehend the answer without hearing the despatches. There were three despatches, showing the efforts I made to have the producers under stand that the whole arrangement was one which looked as much to their interest as to any other.
The Chairman.— Very well, you may furnish them to the committee; we will not stop to read them now.
Witness.— I then offer you first my despatch to S. P. McCalmont, dated New York, March 4, 1872. I next offer another despatch from myself to F. W. Mitchell, dated New York, March 5, 1872, and also a despatch from myself to the same party, dated New York, March 6, 1872.
The despatches referred to are as follows:
NEW YORK, March 4, 1872.
S. P. MCCALMONT,
Franklin, Pennsylvania.
Your telegram received. Please deliver the following communication to F. W. Mitchell, or, in his absence, to somebody else who will make its contents known to the principal producers attending the meeting to be held to-morrow at Franklin:
To F. W. MITCHELL:
Yesterday I received by mail from you or some other friend in Franklin several newspaper slips, one of which threatened the destruction of my oil at Franklin. At the same time I received an anonymous letter threatening injury to the Jamestown and Franklin Railroad. Disapproval of my connection with the South Improvement Company is alleged as the reason of both threats. This morning the telegraph informs me that the threat to destroy my oil has been executed by tapping the tank and letting it run to waste. While there may be some excuse for working up the present excitement to induce people to subscribe their money to new railroad schemes, there can be nothing but reprobation for the lawless destruction of property. You have sufficient character and influence, and sufficient information of the purposes of the company, to quell this excitement by a word, and I think it your duty to say that word. It seems to me that a great responsibility rests with somebody among you for stimulating the present causeless excitement, and the lawless destruction of property. On meeting you here on your return from the South, I explained to you, very briefly, that the whole plan of the South Improvement Company was founded upon the expectation of co-operation with the oil producers to maintain a good price for crude oil, as the only means of securing a fair remuneration to either the transporter, the refiner, or the merchant.
Unless the producers will co-operate with us, first, by limiting the production or the capacity of the markets of the world to absorb petroleum at a good price; and, secondly, by tanking a large part of the production for the next two or three months, that it may be withheld from the market until the present glut is exhausted and production reduced, it will be impossible, I am convinced from recent advices of the state of supply and demand in the principal markets of the world, to keep the price of crude oil up to $3.50, and of refined oil up to twenty-two cents, during the coming summer.
I stated to you in the strongest terms the desire of the South Improvement Company to enter into an arrangement for a series of years with the producers, whereby good prices for crude oil at the wells and fair and reasonable rates of transportation would at all times be assured. The desire still exists. You expressed to me your concurrence in these views, as others among the leading producers whom I have more recently seen have also done.
I then explained to you certain important business which I had postponed to await the organisation of the South Improvement Company. That business I have been engaged upon for the last ten days. As soon as I get through with it, which I hope will be in a few days, I should like to meet a committee of the principal producers to arrange the details of the plan of co-operation of which we spoke. I therefore request you to have such a committee appointed by the meeting noticed for to-morrow on the newspaper slip sent to me, and if possible have a plan prepared by which, among other things, we could extend to you large facilities of tankage and capital to take care of the surplus oil until the present production can be checked.
P. H. WATSON.
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.
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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.
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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.
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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 1-1/2 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 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.
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