Part 5 (1/2)

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 furnis.h.i.+ng 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-fas.h.i.+oned 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 owners.h.i.+p 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.