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I Enter the Coal Business, Become a Railway Magnate, and Discover the Secret of Monopoly
I presume few people understand why it is that certain business ventures achieve immediate success, while others plodding along the ordinary paths of industry end in failure.
Some explanation of all this I had learned in my street railway and electric lighting enterprises.
I had gotten an insight into it even as a boy, but the full beauty of the modern short cuts to success was revealed to me by the coal business.
Up to 1895 my interests were confined to municipal enterprises and the banking business.
About this time the United Trust Company, of which I was President,
undertook the underwriting of an issue of bonds of the North & River Railroad.
Through this I learned the explanation of the growth of monopoly in recent years.
It is done in this way.
The savings of the people, running into the millions, are deposited in the banks, savings institutions and trust companies.
The latter enjoy immense powers under their charters.
They can do almost anything.
Thus entrusted with the people’s money, they are able to use their savings as they wish.
The bank is controlled by its directors.
They desire to build a railroad, street railway, or consolidate some industries or coal mines.
They organize a syndicate among themselves.
They secure options on the property.
They then arrange to secure a loan on mortgage.
On this they issue bonds.
These the bank or trust company, which the syndicate really controls, agrees to underwrite, or take off the syndicate’s hands at par, or something below par.
On these bonds money is advanced to buy the properties.
Then the trust company sells the bonds to its depositors or customers at an advance, while the capital stock of the railroad, street railway, trust or coal monopoly, for which it has paid nothing, is retained by the syndicate.
The bank has advanced all of the money used.
And this money was earned by the people, the depositors.
Then the people, and in many instances the depositors, buy back the bonds for an investment, leaving the cream of the deal in the hands of the syndicate, which is in fact but the officers of the bank who have borrowed from themselves and kept the stock for themselves.
The next step is to make the stock valuable.
This is done by putting up railroad rates, the price of commodities, of coal, or whatever else the syndicate is operating in.
Thus the circle is completed.
The people’s money is used to buy properties which are taken in the name of the syndicate, who are really the directors of the bank.
Then the properties are consolidated and a lot of water in the form of stock added to the purchase price.
Then the people pay again to their own trustees a big profit, by being compelled to pay monopoly prices for the things they consume.
This was the sort of transaction the United Trust Company undertook in underwriting the North & River Railroad.
The road was designed to open a heretofore undeveloped coal region in the central part of the State.
Through the bank’s connection with the railroad I learned of a large tract of coal, hitherto unnoticed, about the lower terminal of the new road.
I purchased this property at a slight advance over its value as farming property, and planned to develop it.
The coal fields lay at the junction of two railways, the North & River and the Valley Terminal.
With these two outlets from our mines, I expected competing rates.
But in this we were disappointed.
As a matter of fact, the rates we had to pay were twenty cents a ton more than those paid by other mines lying on the new road.
They were considerably nearer the lake, which was our principal market. In large measure we were able to overcome this difference in rates, owing to the improved appliances of mining which we had put in.
I made several unsuccessful attempts to get a lower rate.
All we desired was a rate uniform to all shippers on the line, no matter what the length of the haul might be.
This would have placed us all on the same footing in the market.
But I could accomplish nothing with either company.
This was the more irritating as I had relied upon getting an even better rate than the other operators because we were located at a competing point.
There seemed to be no doubt but that the roads had pooled their rates against us, thus placing us at some disadvantage in the market.
However, our business soon grew until we were one of the largest shippers on the line.
Soon I worked out a plan of action against the railroads.
I determined to play a quiet game and await results.
Up to that time my company had divided its shipments between the two railways.
The North & River Railway was an independent one and had been in operation but a few years.
It was built primarily as a coal road.
It had made a good showing of earning power, and our mines were one of its largest feeders, our shipments amounting to hundreds of cars a month.
Mr. Wardwell was its President.
The Valley Terminal, on the other hand, was part of a trunk system, although its facilities for handling our business were quite as good as the other.
Without saying anything to anybody, I directed our Superintendent to divert all of our shipments over to the Valley Terminal.
We also increased the output so as to make the difference even more apparent.
I waited for results, and was not disappointed.
At the end of a week the General Superintendent of the North & River called upon me and asked me why we were discriminating against his road.
“Discriminating,” I said, “we are not discriminating against anybody.”
“But,” he said, “you are not making any more shipments our way.
We have always taken care of you all right, and have recently purchased a lot of new gondola cars in order to better handle your trade.”
I told him I was very sorry that he had done anything of the kind; that I had endeavored to arrange terms with him, but had been unsuccessful, and that our present arrangements were very satisfactory.
He finally asked me whether the Terminal people had cut the rates in any way.
“No,” I said, “they have not.”
This was true.
I watched him closely and saw that he did not believe me, and was considerably worked up.
Things went on in this way for a couple of weeks more, all of our shipments being continued over the Valley Terminal.
Finally Mr. Wardwell, the President, came in to see me.
“Our General Superintendent tells me,” he said, “that we are not getting any of your business, and that you have turned it all over to the Terminal.
What is the matter?”
“There isn’t anything the matter so far as I know,” I smilingly replied.
“Has Harper” (who was the President of the Terminal) “given you a better rate?” he asked with some warmth.
“No,” I said.
“Nor rebates, nor drawbacks on your shipments?”
“Now, Wardwell,” I said, “I do not know why I should tell you anything about our business.
I came to you some time ago to make some arrangements that would put us on a uniform basis with the other operators, and you would not listen to me.
We are perfectly satisfied with our present arrangement.
Finally he asked: “What are you getting your coal hauled for now?”
“You had better ask Harper,” I said.
“That is just what I have done,” he said.
“I went down to New York and saw him, and called him down for violating our agreement——
“Your what?” I said.
“Oh! we made an agreement; you might as well know that we would try to maintain rates.
And now he has gone and broken it and gotten all your trade.
That was a nice piece of business on his part, especially at this time when my annual meeting is but a few months off, and we have to make a showing.
I might have known that he would not respect such an agreement, even though he did insist that he was carrying your coal at the rate we agreed upon.
If he isn’t, I’d like to know why it is that he gets every ton of coal that you ship, for DU warrant you haven’t turned your business over to him unless you got something out of it in some way.”
I offered no suggestion and let Wardwell worry, for I could see that his annual meeting was staring him in the face, and that his directors would not take kindly to a loss of many thousand dollars a month, which was the amount of freights we had been paying him before.
The next day he came in again and said:
“TIl tell you what IIl do, Palmer.
If you will give us all your hauls, I will meet your request, and reduce your rate twenty cents a ton, which will make it uniform with the other shippers on the road.”
“Is that all you have to offer?” I asked.
“Isn’t that all you wanted?” he said.
“Yes,” I replied, “that is all I asked for before; but now we are satisfied with our present arrangements.”
I saw I had him foul.
He made a fatal mistake in admitting that a pool existed and in offering to break it.
Finally I asked him how many cars his road had in service at the present time.
He told me.
“And you are charging us 15 cents a ton in addition to the rate to the Lake, for switching our cars in the city, are you not?”
“Yes,” he said.
“Those are the charges we make all parties.”
I turned around in my chair and wrote the following memorandum on a slip of paper:
In consideration of the Spring Valley Coal Company consigning all coal shipped from its mines to the Lake district over the North & River Railway for the period of eighteen months, the North & River Railway Company agrees that the rate charged for such shipments to the Lake ports shall not exceed the rate charged the lowest shipper on said railroad for similar shipments, and that said North & River Railway will rebate to said Spring Valley Coal Company all switching charges at the Lake terminal to the extent of ten cents a ton.
And the North & River Railway Company agrees that it will furnish the Spring Valley Coal Company all the cars that it may need for their shipments, and that they shall be served prior to any and all other shippers on the line.
I passed the memorandum to him to read.
“Oh! I couldn’t sign that agreement,” he said.
“That would be most unfair to the other operators, not to speak of ourselves.”
“That ought to be satisfactory to you,” I said.
“Under it you will get all our shipments, none of which you are getting at the present time, while all of the other producers on your road are under your control.
They have no other outlet.
They cannot get away from you, and whatever rate you give us will in no wise affect them.”
He said he would have to take it up with his directors.
But I saw he was weakening, and as a matter of fact he had no alternative except to sign it or stand pat.
Of course the agreement was in no sense binding.
It was probably illegal; but it was business.
The next day he signed it and sent it in.
I had been preparing for this outcome for a long time, and in signing that agreement, as events subsequently proved, Wardwell put himself wholly in my power.
At this time all of the operators on the road were in an unorganized condition.
They accepted what orders they got, and paid the freight rate charged without protest.
From my banking connections and intimacy with the large manufacturers and the Lake shipping,
I had an advantage with the big trade.
And I now had in mind the consolidation of all the coal interests in the Spring Valley district.
Through the agreement which I had secured we were in a most advantageous condition to secure the bulk of the season’s contracts, for I knew that but few of them had been made up to that time.
I sent out our salesmen and told them to secure contracts from the dealers as well as the big shippers on the best terms they could make, but to get the contracts.
All of the steamboat lines were buying for the season as well as for the upper Lake region.
I determined to get this trade.
I could sell at ten cents a ton less than any competitor on the line, and this was a tremendous advantage.
Moreover, our producing cost was as low as any other line in the territory.
By the end of a month I had gotten most of the business, and what I did not get came to us before the season was over by virtue of the inability of the other mines to fill their orders.
Immediately I ordered all of the cars of the North & River road placed at our disposal.
We increased our output and in a short time doubled it.
Shipments over the Valley Terminal were diverted to the North & River Railway in accordance with our agreement.
Soon I had a double row upon my hands.
Wardwell called to see me and complained that I must let up on them a bit as they could not supply the independent operators with cars.
As a result, they were all raising a pretty row, and he was suffering a loss on his switching charges.
Wardwell had begun to appreciate the situation he was in, for every ton of coal that I shipped, instead of the independent operators, meant a loss to him of ten cents a ton, owing to the fact that we got a rebate.
But the independent operators could not understand the situation.
They saw that we had all the cars we needed, and, in fact, all of the cars that the company had in commission, while they were unable to get any at all..
And I knew that the company could not get any more cars within six months at the outside.
As time went on and it became apparent that the railway could not supply the independents with cars, we began to get their orders, but at an increase in price.
Some of the operators threatened Wardwell with proceedings if he did not supply them with cars; but he always pleaded that his supply was inadequate and the builders were loaded up with orders and that nothing could be done for them within six months.
At the same time, I had a row on with Harper of the Valley Terminal.
He came on from New York to see me, and wanted to know why we had abandoned his road after he had gone to the expense of equipping his system to take care of us.
He, in turn, had grown suspicious of Wardwell, and concluded that, while I had received no rebates from him, surely I must be getting them from Wardwell.
I refused to talk with him about rates and insisted that we were perfectly satisfied.
Finally he offered me an even lower rate than we were getting from Wardwell if I would transfer all of our business back to the Terminal.
But I now had bigger game in view than railway rates.
We now had all of the independent operators bottled up, and had I abandoned him and returned to the Valley Terminal I would have lost that advantage.
Some of the independent mines were compelled to close down.
They held indignation meetings and called in a body on Wardwell.
They went to the Attorney-General of the State, thinking some action could be taken against the railroad.
But as I had advised Wardwell of my requirements and had engaged all of his cars, there was nothing he could do.
We were now making money on our coal, and ten cents a ton additional on our switching rebates, and I knew that I could fall back on Harper in case Wardwell sought to get out of his contract.
And this I felt he would not do, owing to the fact that he was getting a larger net revenue under the present arrangement than ever before, for he now had all of the business on the line of the road, even though it was at a lower rate.
The only way the roads could beat us was by consolidation, and that could not be done in time to circumvent my plans, even though it were worth the while of the Valley Terminal to do so, which I very much doubted.
It was to prevent just such a contingency, however, that I was planning, and soon our arrangements were ripe for execution.
Some of the independent operators being in a bad way, and seeing that I had been able to secure all of the cars, suggested that we should buy them out.
But we turned their propositions down.
I had all the mines I wanted, I said, and was able to take care of my customers out of our present production.
But at the same time I had agents from another city out among the mine owners securing - options on their properties, and in this way we ultimately purchased all of the important mines at our own figures.
Before the end of the season we were masters of the situation.
We had secured control of nearly all the mines on the North & River Railroad.
We were now in a position to dictate terms to the railroad company.
This I went about in earnest.
Men were sent out to secure options from the farmers for a railway right of way which would reach all of our properties, and give us an outlet for our coal through one of the trunk lines to the Lake.
When a good part of these options had been secured, incorporation papers were taken out for a new railroad company.
When the terminals and route of the new railway were made public, Wardwell came hurriedly to see me and inquired what we were going to do.
“Oh! well, you know, Wardwéll, there has been a consolidation of all of the coal mines in the Valley, and our Directors have decided that it would be good policy to build a road of our own out to connect with the Central.
This will give us an outlet to the Lakes as well as to the West and the East.”
Wardwell was fierce.
He threatened to break the contract with me at once.
I told him to go ahead if he so desired; that we had enough coal stored to meet just such an emergency.
Moreover, I was still in a position to make shipments over the Valley Terminal.
As soon as our engineers had completed the plans for the road I showed them to Wardwell, and told him what we estimated it could be built for.
We found that the coal shipped from our combined properties alone would meet the fixed and operating charges of the new road, and that under the circumstances it seemed rather bad business to pay that much freight to any one else.
“But you will be paralleling our lines,” Wardwell said.
“You will render them valueless.”
“Well,” I said, “I do not know about that.
Moreover, you know that is one of the hazards of business, and we do not feel like putting ourselves in your power when we can be free from that danger and at the same time make some money for ourselves.”
Wardwell now saw his mistake.
He had given me a special rate and a practical control of all of the cars of his road.
This had enabled us to crowd out all the competition along the line, and finally to secure control of the independent operators themselves.
When Wardwell saw the situation, he made a report to the Directors of his road.
There was nothing else for them to do but to sell out to us, and on our own terms.
The North & River gave promise of being a good property, and we paid them the cost of its construction which was represented by the bonds, and a small sum for the stock, so that those who had gone into the syndicate made something out of it.
But we did not buy the property at its earning value.
The railway cost us a little over three million dollars, and the coal properties along the right of way about a million and a half more.
This was the biggest thing I had ever carried through.
We were now masters of the coal trade.
It was about two years and a half since I had invested a couple of hundred thousand dollars in a mine located in a rather disadvantageous position, and now we were the owners of practically all of the coal in that region as well as the railway itself.
And it had all come about because Wardwell was suspicious of Harper and would not believe that he was square.
Had he held out, we would not have been able to secure advantageous rebates; we would never have been able to have controlled the competing companies, and would have still been at the mercy of the railroads.
Sometime after this I told Wardwell how I had aroused his suspicion, how he had come to the conclusion that we were getting rebates from the Terminal, and that when he had once given us an advantage he could not shake us off.
He was pretty angry over it, especially when he saw it was he rather than Harper who had broken the compact and dissolved the pool.
The properties we had acquired were worth many millions more than they cost us.
Our attorneys advised us that railroads could not own coal companies under the laws of the State, but that coal companies could own railroads.
The former restriction was evidently designed to prevent the railways from going into the coal business, and thus discriminate against other companies.
At the same time, in order to enable the coal companies to free themselves from the control of the railways, the laws permitted them to own or build railways.
All green are the anti-trust laws.
For the legislation designed to prevent combination is often used to promote it.
To get around the difficulty we organized the Central Coal and Railway Company, with a capital stock of ten million dollars.
We then authorized the issuance of bonds to the extent of seven million dollars, and used these bonds to purchase the coal properties as well as the North & River Railway.
As the same parties owned both concerns, we simply turned in the railroad and the coal companies which had cost us four and a half million dollars, for seventeen million dollars of stock and bonds.
As I was the principal owner in both companies, I received the bulk of the issue.
These bonds were afterwards placed upon the market and sold for a little less than their face value.
All of my friends who had gone into the venture received a big return on their money, while from the investment originally made in the Spring Valley Coal Company I was able to clean up nearly ten million dollars in cash and securities.
The stock cost us nothing, and we obtained something over two millions in bonds as well.
In the organization of the syndicate we had taken in many persons interested in the coal and carrying trades, from whom we were assured of a permanent market for our output, and an immediate earning capacity sufficient to pay the interest on the bonds and operating expenses, as well as a good dividend upon the common stock.
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