Random Reminiscences of Men and Events
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 associated 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 association 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. Quantities 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 accumulates 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 passed, 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 competition 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