The History of the Standard Oil Company/Volume 1/Appendix/Number 27
NUMBER 27 (Sec page 196)
MR. FLAGLER'S EXPLANATION OF THE COMMISSION OF 10 PER CENT. ALLOWED THE STANDARD OIL COMPANY IN 1877
[Proceedings in Relation to Trusts, House of Representatives, 1888. Report Number 31 12, pages 774-775-]
I would like the privilege of explaining about that 10 per cent, commission. The railroad companies, as perhaps Mr. Gowen will remember, he at that time having been head of the Reading Railroad, tried and did agree among themselves for divisions of the oil business. I know that they agreed among themselves that a certain percentage of it the New York Central should take; a certain other percentage the Erie should take; a certain other percentage the Pennsylvania Railroad should take; and a certain other percentage the Baltimore and Ohio should take. We were only anxious that uniform rates should be maintained by these roads. All these roads, and each me of the roads, found it impossible to secure the divisions of the business as they lad agreed upon. Notwithstanding, we co-operated with them, for we were heartily in favour of its being done and were only seeking for a uniformity of rates by the different roads. But as any gentleman connected with railroad interests well knows there always is that desire to get more than belongs to the line. That desire kept cropping out in the practical shape of cutting under rates for the sake of getting a little more, each road feeling that it was not getting enough to insure it its percentage. The Standard Oil Company at that time owned a very large percentage of the entire oil traffic. It was possible for it to do a service for the roads that the roads were unable to do for themselves. That service, however, involved a good many hardships.
The practical working of it was this, that at the end of each month after the arrangement had been made, each of these railroad companies, they first having agreed how they would divide among themselves and not seek to go beyond that certain percentage—at the end of each month each railroad company sent to us a statement of the number of barrels of oil they had transported during the month. It was incumbent upon us during the succeeding month to ship over the road or roads which had received less than its percentage an amount during that following month sufficient to bring up the deficit of the previous month. Undertaking to do that meant, as I well knew at the time, a responsibility imposed upon us, and an obligation to run refineries at certain localities which perhaps at the time it was unprofitable for us to run. It meant a steady continuance of a large volume of business at periods of time when it might not be profitable to run them; and if the gentlemen of the committee will bear with me just a moment you will see the difficulties. It was not only the three trunk lines—the New York Central, terminating at Buffalo, the Pennsylvania, terminating at Pittsburg, and the Baltimore and Ohio, I don't know where—but there came in their Western connections. I remember well the New York Central had two; the Lake Shore was its connection west of Buffalo to Cleveland, and the Dunkirk and Allegheny Valley was its western division to the Oil Region. It was not an easy matter, for we had not only to regard the percentage delivered at the seaboard, but we had to try to keep the Lake Shore satisfied with its proportion, the New York Central's proportion, and the Dunkirk and Allegheny Valley's proportion. As I say, it was no light task, and realising that, I said to these gentlemen, "we will undertake to do this business for you, to secure to each one of you the percentage which we may have agreed upon, upon condition that we are paid for that service a sum which shall be equal to 10 per cent, of the rate you receive for doing the business." There were, however, to be added to what I have already stated as an inducement for the railroad companies to pay that commission, other agreements, one of which was that we assumed the risk of loss by fire in transportation. That may seem to be to the gentlemen of the committee a cheap thing to do, but Mr. Gowen understands, as well as I do, that a railroad company cannot divest itself of the obligations by the common law imposed upon it as a common carrier without a special agreement to that effect. We took that risk, and did not collect from the railroad companies, any of them, any losses sustained by fire in transit. We furnished terminal facilities at the seaboard free of charge to the railroad companies, and for all this service the Pennsylvania Railroad agreed to pay us a commission of 10 per cent. We carried out our part of the contract faithfully, and secured to the roads such a division of the traffic as kept them in a state of accord and peace, so far as quantity was concerned, and yet the Pennsylvania Railroad paid to other shippers than ourselves a rebate or a drawback, or whatever you choose to call it, on their shipments, which were exactly equal to the 10 per cent. they agreed to pay us. So that in that respect we were not favoured at all