Random Reminiscences of Men and Events Part 5

Everyone of the steps taken was necessary if the business was to be properly developed, and only through such successive steps and by a great aggregation of capital is America to-day enabled to utilize the bounty which its land pours forth, and to furnish the world with light.

THE START OF THE STANDARD OIL COMPANY

In the year 1867 the firms of William Rockefeller & Co., Rockefeller & Andrews, Rockefeller & Co., and S.V. Harkness and H.M. Flagler united in forming the firm of Rockefeller, Andrews & Flagler.

The cause leading to the formation of this firm was the desire to unite our skill and capital in order to carry on a business of greater magnitude with economy and efficiency in place of the smaller business that each had heretofore conducted separately. As time went on and the possibilities became apparent, we found further capital to be necessary; then we interested others and organized the Standard Oil Company, with a capital of $1,000,000. Later we saw that more money could be utilized, found persons who were willing to invest with us, and increased our capital to $2,500,000, in 1872, and afterward in 1874 to $3,500,000. As the business grew, and markets were obtained at home and abroad, more persons and capital were added to the business, and new corporate agencies were obtained or organized, the object being always the same--to extend our operations by furnishing the best and cheapest products.

I ascribe the success of the Standard Oil Company to its consistent policy of making the volume of its business large through the merit and cheapness of its products. It has spared no expense in utilizing the best and most efficient method of manufacture. It has sought for the best superintendents and workmen and paid the best wages. It has not hesitated to sacrifice old machinery and old plants for new and better ones. It has placed its manufactories at the points where they could supply markets at the least expense. It has not only sought markets for its princ.i.p.al products, but for all possible by-products, sparing no expense in introducing them to the public in every nook and corner of the world. It has not hesitated to invest millions of dollars in methods for cheapening the gathering and distribution of oils by pipe-lines, special cars, tank-steamers, and tank-wagons. It has erected tank-stations at railroad centres in every part of the country to cheapen the storage and delivery of oil. It has had faith in American oil and has brought together vast sums of money for the purpose of making it what it is, and for holding its market against the compet.i.tion of Russia and all the countries which are producers of oil and compet.i.tors against American products.

THE INSURANCE PLANS

Here is an example of one of the ways in which we achieved certain economies and gained real advantage. Fires are always to be reckoned with in oil refining and storage, as we learned by dear experience, but in having our plants distributed all over the country the unit of risk and possible loss was minimized. No one fire could ruin us, and we were able thus to establish a system of insuring ourselves. Our reserve fund which provided for this insurance could not be wiped out all at once, as might be the case with a concern having its plants together or near each other. Then we studied and perfected our organization to prevent fires, improving our appliances and plans year after year until the profit on this insurance feature became a very considerable item in the Standard earnings.

It can easily be seen that this saving in insurance, and minimizing the loss by fire affected the profits, not only in refining, but touched many other a.s.sociated enterprises: the manufacture of by-products, the tanks and steamers, the pumping-stations, etc.

We devoted ourselves exclusively to the oil business and its products.

The company never went into outside ventures, but kept to the enormous task of perfecting its own organization. We educated our own men; we trained many of them from boyhood; we strove to keep them loyal by providing them full scope for their ability; they were given opportunities to buy stock, and the company itself helped them to finance their purchases. Not only here in America, but all over the world, our young men were given chances to advance themselves, and the sons of the old partners were welcomed to the councils and responsibilities of the administration. I may say that the company has been in all its history, and I am sure it is at present, a most happy a.s.sociation of busy people.

I have been asked if my advice is not often sought by the present managers. I can say that if it were sought it would be gladly given.

But the fact is that since I retired it has been very little required.

I am still a large stockholder, indeed I have increased my holdings in the company's stock since I relinquished any part in its management.

WHY THE STANDARD PAYS LARGE DIVIDENDS

Let me explain what many people, perhaps, fully appreciate, but some, I am sure, do not. The Standard pays four dividends a year: the first in March, which is the result of the busiest season of the whole twelvemonth, because more oil is consumed in winter than at other seasons, and three other dividends later, at about evenly divided periods. Now, these dividends run up to 40 per cent. on the capital stock of $100,000,000, but that does not mean that the profit is 40 per cent. on the capital invested. As a matter of fact, it represents the results of the savings and surplus gained through all the thirty-five or forty years of the workings of the companies. The capital stock could be raised several hundred per cent. without a penny of over-capitalization or "water"; the actual value is there. If this increase had been made, the rate would represent a moderate dividend-paying power of about 6 to 8 per cent.

A NORMAL GROWTH

Study for a moment the result of what has been a natural and absolutely normal increase in the value of the company's possessions.

Many of the pipe-lines were constructed during a period when costs were about 50 per cent. of what they are now. Great fields of oil lands were purchased as virgin soil, which later yielded an immense output. Quant.i.ties of low-grade crude oil which had been bought by the company when it was believed to be of little value, but which the company hoped eventually to utilize, were greatly increased in value by inventions for refining it and for using the residues formerly considered almost worthless. Dock property was secured at low prices and made valuable by buildings and development. Large unimproved tracts of land near the important business centres were acquired. We brought our industries to these places, made the land useful, and increased the value, not only of our own property, but of the land adjacent to it to many times the original worth. Wherever we have established businesses in this and other countries we have bought largely of property. I remember a case where we paid only $1,000 or so an acre for some rough land to be used for such purposes, and, through the improvements we created, the value has gone up 40 or 50 times as much in 35 or 40 years.

Others have had similar increases in the value of their properties, but have enlarged their capitalization correspondingly. They have escaped the criticism which has been directed against us, who with our old-fashioned and conservative notions have continued without such expansion of capitalization.

There is nothing strange or miraculous in all this; it was all done through this natural law of trade development. It is what the Astors and many other large landholders did.

If a man starts in business with $1,000 capital and gradually increases his property and investment by retaining in his concern much of his earnings, instead of spending them, and thus acc.u.mulates values until his investment is, say, $10,000, it would be folly to base the percentage of his actual profits only on the original $1,000 with which he started. Here, again, I think the managers of the Standard should be praised, and not blamed. They have set an example for upbuilding on the most conservative lines, and in a business which has always been, to say the least, hazardous, and to a large degree unavoidably speculative. Yet no one who has relied upon the ownership of this stock to pay a yearly income has been disappointed, and the stock is held by an increasing number of small holders the country over.

THE MANAGEMENT OF CAPITAL

We never attempted, as I have already said, to sell the Standard Oil stock on the market through the Stock Exchange. In the early days the risks of the business were great, and if the stock had been dealt in on the Exchange its fluctuations would no doubt have been violent. We preferred to have the attention of the owners and administrators of the business directed wholly to the legitimate development of the enterprise rather than to speculation in its shares. The interests of the company have been carefully conserved. We have been criticized for paying large dividends on a capitalization which represents but a small part of the actual property owned by the company. If we had increased the capitalization to bring it up to the real value, and listed the shares on the Exchange, we might have been criticized then for promoting a project to induce the public to invest. As I have indicated, the foundations of the company were so thoroughly established, and its affairs so conservatively managed, that, after the earlier period of struggle to secure adequate capital and in view of the trying experiences through which we then pa.s.sed, we decided to pursue the policy of relying upon our own resources. Since then we have never been obliged to lean very heavily upon the financial public, but have sought rather to hold ourselves in position not only to protect our own large and important interests, but to be prepared in times of stress to lend a helping hand to others. The company has suffered from the statements of people who, I am convinced, are not familiar with all the facts. As I long ago ceased to have any active part in the management of its affairs perhaps I may venture the opinion that men who devote themselves to building up the sale of American products all over the world, in compet.i.tion with foreign manufacturers should be appreciated and encouraged.

There have been so many tales told about the so-called speculations of the Standard Oil Company that I may say a word about that subject.

This company is interested only in oil products and such manufacturing affairs as are legitimately connected therewith. It has plants for the making of barrels and tanks; and building pumps for pumping oil; it owns vessels for carrying oil, tank-cars, pipes for transporting oil, etc., etc.--but it is not concerned in speculative interests. The oil business itself is speculative enough, and its successful administration requires a firm hand and a cool head.

The company pays dividends to its stockholders which it earns in carrying on this oil trade. This money the stockholders can and do use as they think fit, but the company is in no way responsible for the disposition that the stockholders make of their dividends. The Standard Oil Company does not own or control "a chain of banks," nor has it any interest directly or indirectly in any bank. Its relations are confined to the functions of ordinary banking, such as other depositors have. It buys and sells its own exchange; and these dealings, extending over many years, have made its bills of exchange acceptable all over the world.

CHARACTER THE ESSENTIAL THING

In speaking of the real beginning of the Standard Oil Company, it should be remembered that it was not so much the consolidation of the firms in which we had a personal interest, but the coming together of the men who had the combined brain power to do the work, which was the actual starting-point. Perhaps it is worth while to emphasize again the fact that it is not merely capital and "plants" and the strictly material things which make up a business, but the character of the men behind these things, their personalities, and their abilities; these are the essentials to be reckoned with.

Late in 1871, we began the purchase of some of the more important of the refinery interests of Cleveland. The conditions were so chaotic and uncertain that most of the refiners were very desirous to get out of the business. We invariably offered those who wanted to sell the option of taking cash or stock in the company. We very much preferred to have them take the stock, because a dollar in those days looked as large as a cart-wheel, but as a matter of business policy we found it desirable to offer them the option, and in most cases they were even precipitate in their choice of the cash. They knew what a dollar would buy, but they were very sceptical in regard to the possibilities of resurrecting the oil business and giving any permanent value to these shares.

These purchases continued over a period of years, during which many of the more important refineries at Cleveland were bought by the Standard Oil Company. Some of the smaller concerns, however, continued in the business for many years, although they had the same opportunity as others to sell. There were always, at other refining points which were regarded as more favourably located than Cleveland, many refineries in successful operation.

THE BACKUS PURCHASE

All these purchases of refineries were conducted with the utmost fairness and good faith on our part, yet in many quarters the stories of certain of these transactions have been told in such form as to give the impression that the sales were made most unwillingly and only because the sellers were forced to make them by the most ruthless exertion of superior power. There was one transaction, viz., the purchase of the property of the Backus Oil Company, which has been variously exploited, and I am made to appear as having personally robbed a defenceless widow of an extremely valuable property, paying her therefor only a mere fraction of its worth. The story as told is one which makes the strongest appeal to the sympathy and, if it were true, would represent a shocking instance of cruelty in crushing a defenceless woman. It is probable that its wide circulation and its acceptance as true by those who know nothing of the facts has awakened more hostility against the Standard Oil Company and against me personally than any charge which has been made.

This is my reason for entering so much into detail in this particular case, which I am exceedingly reluctant to do, and for many years have refrained from doing.

Mr. F.M. Backus, a highly respected citizen of Cleveland and an old and personal friend of mine, had for several years prior to his death in 1874 been engaged in the lubricating oil business which was carried on after his death as a corporation known as the Backus Oil Company.

In the latter part of 1878, our company purchased certain portions of the property of this company. The negotiations which led to this purchase extended over several weeks, being conducted on behalf of Mrs. Backus, as the princ.i.p.al stockholder, by Mr. Charles H. Marr, and on behalf of our company by Mr. Peter S. Jennings. I personally had nothing to do with the negotiations except that, when the matter first came up, Mrs. Backus requested me to call at her house, which I did, when she spoke of selling the property to our company and requested me to personally conduct the negotiations with her with reference to it.

This I was obliged to decline to do, because, as I then explained to her, I was not familiar with the details of the business. In that conversation I advised her not to take any hasty action, and when she expressed fears about the future of the business, stating, for example, that she could not get cars to transport sufficient oil, I said to her that, though we were using our cars and required them in our business, yet we would loan her any number she needed, and do anything else in reason to a.s.sist her, and I did not see why she could not successfully prosecute her business in the future as in the past.

I told her, however, that if after reflection she desired to pursue negotiations for the sale of her property some of our people, familiar with the lubricating oil business, would take up the question with her. As she still expressed a desire to have our company buy her property, negotiations were taken up by Mr. Jennings, and the only other thing that I had to do with the matter was that when our experts reported that in their judgment the value of the works, good will, and successorship which we had decided to buy were worth a certain sum, I asked them to add $10,000, in order to make doubly sure that she received full value. The sale was consummated, as we supposed, to the entire satisfaction of Mrs. Backus, and the purchase price which had been agreed upon was paid.

To my profound astonishment, a day or two after the transaction had been closed, I received from her a very unkind letter complaining that she had been unjustly treated. After investigating the matter I wrote her the following letter:

November 13, 1878.

DEAR MADAM:

I have held your note of the 11th inst., received yesterday, until to-day, as I wished to thoroughly review every point connected with the negotiations for the purchase of the stock of the Backus Oil Company, to satisfy myself as to whether I had unwittingly done anything whereby you could have any right to feel injured. It is true that in the interview I had with you I suggested that if you desired to do so, you could retain an interest in the business of the Backus Oil Company, by keeping some number of its shares, and then I understood you to say that if you sold out you wished to go entirely out of the business. That being my understanding, our arrangements were made in case you concluded to make the sale that precluded any other interests being represented, and therefore, when you did make the inquiry as to your taking some of the stock, our answer was given in accordance with the facts noted above, but not at all in the spirit in which you refer to the refusal in your note. In regard to the reference that you make as to my permitting the business of the Backus Oil Company to _be taken_ from you, I say that in this as in all else you have written in your letter of the 11th inst., you do me most grievous wrong. It was but of little moment to the interests represented by me whether the business of the Backus Oil Company was purchased or not. I believe that it was for your interest to make the sale, and am entirely candid in this statement, and beg to call your attention to the time, some two years ago, when you consulted Mr. Flagler and myself as to selling out your interests to Mr. Rose, at which time you were desirous of selling at _considerably less price_, and upon time, than you have now received in cash, and which sale you would have been glad to have closed if you could have obtained satisfactory security for the deferred payments. As to the price paid for the property, it is certainly three times greater than the cost at which we could now construct equal or better facilities; but wishing to take a liberal view of it, I urged the proposal of paying $60,000, which was thought much too high by some of our parties. I believe that if you would reconsider what you have written in your letter, to which this is a reply, you must admit having done me great injustice, and I am satisfied to await upon your innate sense of right for such admission. However, in view of what seems to be your present feeling, I now offer to restore to you the purchase made by us, you simply returning the amount of money which we have invested, and leaving us as though no purchase has been made.

Should you not desire to accept this proposal, I offer to you 100, 200 or 300 shares of the stock at the same price that we paid for the same, with this addition, that if we keep the property we are under engagement to pay into the treasury of the Backus Oil Company any amount which added to the amount already paid would make a total of $100,000 and thereby make the shares $100 each.

That you may not be compelled to hastily come to a conclusion, I will leave open for three days these propositions for your acceptance or declination, and in the meantime believe me,

Yours very truly,

JOHN D. ROCKEFELLER.

Neither of these offers was accepted. In order that this may not rest on my unsupported a.s.sertion, I submit the following doc.u.ments: The first is a letter from Mr. H.M. Backus, a brother of Mrs. Backus's deceased husband, who had been a.s.sociated with the business and had remained with the company after his death. The letter was written without any solicitation whatever on my part, but I have since received permission from Mr. Backus to print it. It is followed by extracts from affidavits made by the gentleman who conducted the negotiations on behalf of Mrs. Backus. I have no wish to reprint the complimentary allusion to myself in Mr. Backus's letter, but have feared to omit a word of it lest some misunderstanding ensue:

BOWLING GREEN, OHIO, September 18, '03.

MR. JOHN D. ROCKEFELLER, Cleveland, Ohio.

I do not know whether you will ever receive this letter or not, whether your secretary will throw it into the waste-basket or not, but I will do my part and get it off my mind, and it will not be my fault if you do not receive or read it. Ever since the day that my deceased brother's wife, Mrs. F.N. Backus, wrote you the unjust and unreasonable letter in reference to the sale of the property of the old Backus Oil Company, in which I had a small interest, I have wanted to write you and record my disapproval of that letter. I lived with my brother's family, was at the house the day you called to talk the matter of the then proposed purchase of the property with Mrs. Backus by her request, as she told Mr. Jennings that she wanted to deal through you. I was in favour of the sale from the first.

I was with Mrs. Backus all through the trouble with Mr. Rose and with Mr. Maloney, did what I could to encourage her, and to prevent Mr. Rose from getting the best of her. Mrs. Backus, in my opinion, is an exceptionally good financier, but she does not know and no one can convince her that the best thing that ever happened to her financially was the sale of her interest in the Backus Oil Company to your people. She does not know that five more years of the then increasing desperate compet.i.tion would have bankrupted the company, and that with the big debt that she was carrying on the lot on Euclid Avenue, near Sheriff Street, she would have been swamped, and that the only thing that ever saved her and the oil business generally was the plan of John D. Rockefeller. She thinks that you literally robbed her of millions, and feeds her children on that diet three times a day more or less, princ.i.p.ally more, until it has become a mania with her, and no argument that any one else can suggest will have any effect upon her. She is wise and good in many ways, but on that one subject she is one-sided, I think. Of course, if we could have been a.s.sured of continued dividends, I would have been opposed to selling the business, but that was out of the question. I know of the ten thousand dollars that was added to the purchase price of the property at your request, and I know that you paid three times the value of the property, and I know that all that ever saved our company from ruin was the sale of its property to you, and I simply want to ease my mind by doing justice to you by saying so. After the sale to your company I was simple enough to go to Buffalo and try it again, but soon met with defeat and retired with my flag in the dust. I then went to Duluth, and was on the top wave, till the real-estate bubble broke, and I broke with it. I have had my ups and downs, but I have tried to take my medicine and look pleasant instead of sitting down under a juniper tree and blaming my losses to John D. Rockefeller.

I suppose I would have put off writing this letter for another year or more as I have done so long, had it not been for a little chat that I had with Mr. Hanafin, Superintendent of the Buckeye Pipe Line Company, a day or two since when I was relating the sale, etc., of the old B.O. Co.'s business, and in that way revived the intention that had lain dormant since the last good resolution in regard to writing it was made. But it's done now, and off my mind.