4 :: THE TRUST IS BORN
THE industry that provided a working model for consolidation of the various sugar refiners was petroleum. It too, had been plagued by the problem of excess supply relative to demand, but by 1882 John D. Rockefeller and his associates were able to bring the majority of oil refiners under unified control while simultaneously excluding new competitors.1 To make this combination a legal entity, Rockefeller and his associates transformed the trust device from a means of simply holding property as fiduciary agent into an instrument of industrial consolidation.2 But before this same solution to the problem of unregulated competition could be applied to sugar refining, a great many issues involving control of the trust had to be resolved. More than a year was to pass, with several setbacks along the way, before enough refiners could be persuaded to risk their status as independent businessmen to make the consolidation a success. Finally, however, eighteen of the twenty-three firms still left in the industry agreed to exchange stock in their own enterprises for the certificates of the newly formed sugar trust. With this act, the Golden Age of Competition in the sugar refining industry came to an end.
The spring of 1887 was a busy one for John Searles as he sought to duplicate in sugar refining what John D. Rockefeller had so recently accomplished in the petroleum industry. Searles’ first task was to win over to such a scheme the other major refiners in the New York area. The smaller refiners did not require much persuasion. They could see at once the advantages that a combination of firms would offer. As George Moller, the manager of the North River Sugar Refining Company, later testified: “We were all practical men, all sugar refiners,… and as far as we were concerned, we did not consider any discussion necessary. We all knew that the only way to make sugar refining pay was to stop over-production.”3
Even some of the larger refiners were easily persuaded to enter into the combination. As soon as Searles broached the idea to Julius Stursberg, one of the principal stockholders in the Brooklyn Sugar Refining Company, Stursberg offered to help convince some of the other refiners to go along with the scheme. He undoubtedly was influenced by the fact that the Brooklyn Sugar Refining Company was then losing several thousand dollars a month.4 Claus Doscher, another major stockholder in the Brooklyn company, subsequently explained: “We might have gone on [indefinitely, trying to keep] that refinery working, but we were handling not only our own money but other people’s money [as well. We felt] we could not go on losing other people’s money.”5
The difficulty was in winning over the largest refiners, the most important of which were the other Havemeyers, Theodore and Henry, and their cousin, Charles Senff, owners of both the Havemeyer & Elder and DeCastro & Donner refineries. The advantages of joining in such a combination were not as clear cut for them as they were for most of the other refiners. The Havemeyers’ new, greatly enlarged plant enabled them to produce refined sugar for only 0.44 of a cent a pound in direct costs,6 and thus, even with the average margin at 0.768 of a cent a pound, they were still in a position to earn a satisfactory return on their investment. Moreover, they were confident that no rival could produce sugar that cheaply; in any fight to the finish, they felt certain they would survive. In fact, as more and more firms were forced by competitive pressures to leave the industry, the two Havemeyer refineries could expect to reap the benefits of the reduced competition.
The proposed scheme of consolidation had many worrisome aspects as well. For one thing, it undoubtedly would require that the Havemeyers and Senff surrender some degree of control over their own enterprises. Although the three partners would have a large voice in the affairs of the new organization as a result of the large capacity they controlled, they still would represent only a minority interest, even among the New York refiners alone. There was, moreover, the doubtful legality of the trust form itself. If later it were to be declared unlawful, control of the valuable Havemeyer properties might be jeopardized.
It was a difficult choice, whether or not to join the combination, and the partners in Havemeyer & Elder were at first divided on the issue. Theodore Havemeyer was anxious to join; Charles Senff advised against it. The deciding vote belonged to Henry Havemeyer, but he had not yet made up his mind. While his initial inclination was to oppose the combination, he felt that he, his brother, and his brother-in-law should discuss the scheme with some of their close associates in the sugar industry before making a final decision.7
Meanwhile, Searles continued to press the Havemeyers to join the combination. Later, recalling Searles’ strenuous efforts during those many months, his associate William Havemeyer said, “… He went out among the different refiners, back and forth, in and out, and would come back and say so and so would not come in, and then we would get him started back again and … he would make a little further progress.”8 Although initially Searles concentrated his attention on gaining the support of the Havemeyer family, he was also anxious to win over the other major refiners. As William Havemeyer pointed out: “There is no use making a combination if you leave half [the firms] out. It is not a combination.”9 Havemeyer was aware of the distinction between consolidating an industry to form a single major firm and consolidating an industry to form several independent entities. The latter plan, he realized, might also be successful, but he felt it would “not make quite so much money.” In periods of dullness, he said, one of the independent entities might be tempted to “refine too much sugar and sell pretty low.” But he hastened to add that he did not think this would continue “for very long.”10 In the idiom of today’s economist, William Havemeyer was comparing the advantages of monopoly with those of oligopoly, and he found the former much more attractive.
As a result of his further discussions with close associates in the sugar industry, as well as of Searles’ continued visits, Henry Havemeyer, too, finally came to believe that the best interests of the family firm lay in joining the combination. (Andrew Carnegie, faced with a similar choice in the steel industry, was later to opt for a quite different solution, pursuing a policy of continuing competition until finally J. P. Morgan succeeded in buying him out.) Of the partners in Havemeyer & Elder, however, Charles Senff continued to oppose amalgamation; and the two Havemeyer brothers, before finally committing themselves to the scheme, insisted that one condition be met. The success of the venture, they thought, depended on enlisting the support of all the leading refiners in all the major cities. Until this support was obtained, they told Searles, they would remain outside the combination.11
New York’s only East Coast rivals as refining centers were Boston and Philadelphia. In the latter city there were only three sugar refineries of any consequence still in operation.12 Of these three the largest and most important was the firm of Harrison, Frazier & Company. At one time Theodore Havemeyer had been among its partners, helping to build its new refinery in 1866. By 1879, however, Havemeyer had withdrawn from the firm, leaving Charles Harrison, his brothers, and his brother-in-law in control.13 Meanwhile, the capacity of the refinery had increased to 4,000 barrels a day,14 an output exceeded only by Havemeyer & Elder and by Matthiessen & Wiechers of New York. Harrison, Frazier & Company far overshadowed its two rivals in Philadelphia, and Searles knew that if it could be persuaded to join the combination the other two refineries would surely follow suit.
Just as the Harrison refinery was the key to the Philadelphia situation, so the Standard Sugar Refining Company was the key in the Boston area. There were six refineries still in operation in Boston in the late 1870’s, but the Standard firm was by far the largest and most important. This was the same refinery that Seth Adams had erected in 1859, but now, greatly enlarged and modernized, it was owned and operated by Joseph B. Thomas.15 With a water frontage of 620 feet, it was excellently located to transport its product either by rail or by sea. Its wharf facilities for handling both anthracite coal and raw sugar were said to be the best of any refinery in the country, while the plant itself was capable of melting 2,700,000 pounds of cane daily, more than half again as much as its next largest competitor in Boston.16
Searles’ initial efforts to win over Harrison and Thomas met with failure. Both men indicated that they were not interested in a combination such as the one Searles proposed.17 Then Theodore and Henry Havemeyer agreed to see what they could do to get the two refiners to change their minds. Theodore was certain that if Thomas could be persuaded to enter into the combination Harrison would then fall into line.18
The Havemeyers called in Lowell M. Palmer, whose Brooklyn Cooperage Company supplied barrels to both their own refinery and the Standard, and asked him to approach Thomas about joining the combination. On receiving assurances that his company would continue to receive all of the Havemeyers’ cooperage business, Palmer agreed to undertake the mission. “I found when I got to Boston,” Palmer later recalled, “that the feeling on Captain Thomas’ part was principally against H. O. Havemeyer.…” After first persuading Thomas that Havemeyer was not to be blamed for Thomas’ brother being forced out of the old Harrison and Havemeyer firm in Philadelphia, and then carefully explaining to him the details of the consolidation plan, Palmer returned to New York with the news that Searles could go to Boston and complete the arrangements.19 As expected, once the Standard agreed to join the combination, the other Boston refineries—the Bay State, Boston, Revere, and Continental—were easily persuaded to do the same.
With the Boston situation in hand, Searles was able to turn his attention to Philadelphia. He soon found that Theodore Havemeyer had been wrong when he predicted that Harrison would follow Thomas into the scheme. Having only recently bought out the Havemeyers in order to end their influence in his firm, Harrison had no intention of allowing himself to fall under their sway again, as would almost certainly happen if he were to enter into a combination which they, by virtue of their large refining capacity, would surely dominate. Though Searles made several trips to Philadelphia to try to persuade Harrison to change his mind, he returned each time with little to show for his efforts. The most he was able to obtain was the promise from one of the smaller Philadelphia refineries, E. C. Knight & Company, that it would enter into the combination.20
Despite this setback, Theodore and Henry Havemeyer were now prepared to support the scheme of consolidation. They realized that the Harrisons—“with their means and knowledge in Philadelphia”21—might prove troublesome, but they were convinced that the combination would nonetheless succeed.
With the firm of Havemeyer & Elder fully committed to Searles’ plan, those New York refineries which had not yet agreed to join the combination were quickly brought around. These included not only the larger firms, such as Matthiessen & Wiechers and Dick & Meyer, but also the more marginal enterprises, such as the North River Sugar Refining Company and Oxnard Brothers. The latter two refineries had already been forced by the falling margin on refined sugar to suspend production. Moreover, the North River refinery was on the verge of being condemned by the city of New York so that a public park could be built on its site, while the Oxnard plant was generally conceded by most persons in the industry to be hopelessly out of date. William Havemeyer later expained why, despite these obvious shortcomings, both firms were brought into the consolidation. The condemnation of the North River property, he said, was by no means certain; and the Oxnard refinery, though “very old fashioned,” had proved its ability to survive on a very low margin, even if it could not make much money. Although it was true that both firms had been forced to suspend production, they would have no difficulty in starting up again, Havemeyer indicated, if the combination of refiners succeeded in raising prices. For this reason, the organizers of the consolidation scheme were determined to include every firm, no matter how small or inefficient. Havemeyer then added, “Sometimes we [took in refineries] to get the brains that were in the concern, to get the people themselves.”22
By the first week in April, 1887, the task of winning over the various refiners in the three major refining centers had for the most part been completed. Though the Harrisons remained adamant in their refusal to join, most of the other surviving firms had agreed to the amalgamation. On April 7 Henry Havemeyer reported that eight refineries in New York and five in Boston—all that remained of the approximately twenty-five firms that had flourished as recently as 1878 in those two cities—as well as E. C. Knight & Company of Philadelphia, had agreed, in principle, to the proposed scheme of consolidation.23
What the organizers of the scheme had in mind, Havemeyer wrote to John R. Dos Passos, the lawyer retained by Searles to work out the details of the consolidation, was to form a corporation that would take title to all the refining properties involved. This corporation was to be capitalized at $19.5 million—$3.5 million in 10 per cent preferred stock and $16 million in common shares. Since it was the business rule-of-thumb at that time to issue preferred shares (considered the equivalent of first mortgages) equal to the assessed value of all the individual properties being brought into a combination of this type, the $3.5 million figure probably represented what the various refineries were thought to be worth as independent concerns. Thus the $19.5 million figure probably represented what those same refineries were thought to be worth when consolidated into a single entity. In his letter to Dos Passos, Havemeyer hinted that the total capitalization might later be increased to $50 million, depending on how many of the remaining sugar refiners throughout the country could be persuaded to join the combination. Fifty million dollars, then, was considered to be the capitalized value of a monopoly in sugar refining. Havemeyer told Dos Passos that he hoped the details could be worked out quickly enough for the scheme to be put into effect within ten days.24
Dos Passos was one of the nation’s leading corporate lawyers and the father of the future novelist. A native Philadelphian who moved to New York soon after the Civil War, he had established himself as one of that city’s outstanding criminal attorneys while still a young man. Gradually, however, his practice came more and more to involve matters of corporate and financial law, and he eventually became known as an authority on the laws governing securities trading.25
Undoubtedly it was because of his special background and knowledge that Dos Passos was retained by Searles to handle the legal aspects of the consolidation scheme. In fact, it was probably Dos Passos who first suggested the trust form of organization. As he later explained to the U.S. Industrial Commission: “A trust was not a novel proposition when it was recently introduced into dealings for the control of certain businesses. It was the application of an old principle of law to new conditions. The object of it was this: to keep people, who had no business to know, from discovering the secrets of that trust, and of the business which it controlled.” He pointed out that, if a corporation had been formed for the same purpose—that is, to acquire control over several previously independent firms—its affairs would, as a matter of law, have been open to public scrutiny. The reason for forming a trust, he said, “was to avoid that publicity.”26
Apparently this argument was sufficient to convince Henry Havemeyer, Searles, and the other principals that a trust was preferable to a holding corporation as a means of uniting their properties. The plans for consolidation were revised accordingly.
Dos Passos also explained the mechanics of forming a trust.
Assume that certain persons … desire to become the owners of some manufacturing business or commercial enterprise which is owned by, say, six corporations; having bought the shares of these companies, they get together and they make what is called a trust deed, or a trust agreement. That trust agreement recites the terms under which the securities are held; that is, the stock, the shares of these six constituent companies, are taken and placed in the hands of a trustee, who has no actual or real ownership, except that he is the custodian—the shares belong, accordingly, to the trustee, to administer the trust.
The trustee, in turn, issues to the former holders of the stock a receipt called a trust certificate.27
Since, unlike the petroleum industry, no single individual or group of individuals owned all the sugar refining properties that were to be consolidated,28 the terms of the trust agreement were extremely important, for they defined the respective shares and rights of those entering into the combination. Helping Dos Passos to draft this trust agreement was a second lawyer, John E. Parsons.29
Dos Passos’ senior by fifteen years, Parsons had also begun his legal career as a criminal lawyer, serving for a time just prior to the Civil War as an assistant district attorney for New York. Later he, along with the Havemeyer family, took an active part in ousting from their positions of power the various members of the notorious Tweed Ring. But for the most part, Parsons’ was a general practice, and by 1887 the Havemeyer family had come to rely entirely on his counsel in all matters of law.30
The proposed trust deed, as worked out by Dos Passos and Parsons, included the following provisions.31
Each of the firms entering into the combination was to turn its capital stock over to a board, which “shall be designated by the name of The Sugar Refineries’ Company.” Since four of the parties to the agreement (including Havemeyer & Elder) were still partnerships, they were to take the additional step of first reorganizing themselves as corporations.
Each firm was to continue to “carry on and conduct its own business” as before. But thenceforth it was to be subject to the overriding authority of the trustee’s board. This board was to consist of eleven members chosen for seven-year terms. However, to provide continuity, their terms were to be staggered: Henry O. Havemeyer, F. O. Matthiessen, John E. Searles, and Julius Stursberg were to serve initially for seven years; Theodore A. Havemeyer, Joseph B. Thomas, John Jurgensen, and Hector C. Havemeyer, for five years; and Charles Senff, Charles O. Foster, and William Dick, for three years. Thus the Havemeyer & Elder interests were to have three representatives on the board (Henry and Theodore Havemeyer and Charles Senff), the other branch of the Havemeyer family was to have two representatives (John E. Searles and Hector C. Havemeyer), and the Matthiessen & Wiechers interests were to have two representatives (F. O. Matthiessen and John Jurgensen). This left four representatives to be divided among the larger New York and Boston refineries (Julius Stursberg of the Brooklyn Sugar Refining Company, William Dick of Dick & Meyer, Charles O. Foster of the Boston Sugar Refining Company, and Captain Thomas of the Standard refinery). Finally, in case the Harrisons or some of the other refiners not yet included in the scheme later decided to join, provision was made for adding two members to the board.
This board was to exercise full control over the various refining properties being brought into the combination, a simple majority of its members sufficing to carry any decision except the removal of one of the trustees during his term of office. The latter type of action required a two-thirds vote. A simple majority of the trustees could also fill a vacancy on the board, provided that the vacancy had occurred as a result of some member’s resigning or dying before the expiration of his term. Aside from receiving their share of the pooled profits, the only right reserved for the actual owners of the properties, now designated as trust certificate holders, was the right to vote during the annual meeting each June to replace or continue in office those trustees whose terms had regularly expired.
The effect of these provisions was to forge an instrument for the highly centralized management of the various refining properties being brought into the combination. Yet, crucial as these provisions were, they were not the major source of contention. Most of the ensuing disagreements, which served to delay the establishment of the trust for nearly six months, arose as to what share each of the various parties to the agreement would receive in the new organization.
The plan had been to appoint a committee to appraise the value of the various properties being consolidated and then to distribute to the stockholders of each company trust certificates in the same ratio as that of the value of their refinery to the value of the whole.32 The first part of this plan was actually carried out, with Hector Havemeyer, Henry Havemeyer, and J. O. Donner being chosen to serve on the committee.33 In going about its task, the committee considered as the most important factor the relative capacity of the various refineries. But this was only one factor which the committee took into account. “Some plants were bought probably more on account of the real estate value,” Henry Havemeyer later told the U.S. Industrial Commission; “others we took because they were going concerns; others we took for their standing; others have very valuable trade marks. All of these things were figured in.…”34
But the value that the appraisal committee placed on a refinery was not necessarily the amount that its owners were willing to accept. In an attempt to prevent invidious comparisons, negotiations were carried out with each refinery’s owners separately, and the amounts offered to others were kept secret.35 Still, in an industry as small and intimate as sugar refining, it was impossible to keep such matters secret for long. Invidious comparisons were made, and when certain refiners discovered how much in trust certificates other refiners had been offered, they began demanding additional amounts for themselves. Ultimately, then, the number of trust certificates which the owners of the various refineries received was determined by the give and take of bargaining between the parties. As William Havemeyer replied, when asked how these amounts were decided upon: “Not scientifically at all. A man simply said, ‘I will not come in unless I get so much.’”36
By mid-June, 1887, it appeared that the trust agreement would soon be put into effect. Two of the firms that had originally agreed to join the consolidation had by now changed their minds. One was E. C. Knight & Company of Philadelphia; the other was the Revere Sugar Refining Company of Boston. “They said they were a small refinery,” William Havemeyer later explained in connection with the latter, “[that] they had never increased their capacity, never intended to increase their capacity, and … only made one class of sugar, which was granulated … that they had a special trade in New England, … never sold out of New England, … had a certain pride in keeping their entity, and that they would not care to come in.”37 As for E. C. Knight & Company, its principal owner, the man whose name the firm bore, was unwilling to accept payment in trust certificates for his property, and the organizers of the trust were unwilling to give him cash as long as the more important Philadelphia refinery of Harrison, Frazier & Company remained outside the combination.
However, despite these defections, the consolidation did not appear to be significantly weakened. It still had the support of all the refineries in New York and all the refineries, except one, in Boston. Moreover, it had by now succeeded in extending its influence westward, receiving promises from the two sugar refineries in New Orleans and the one in St. Louis that they, too, would join the trust.
Located as they were, close to the Louisiana cane fields, these three firms were capable of providing the eastern seaboard refineries with vigorous competition, especially in the surrounding areas where they enjoyed a slight advantage in transportation costs. Also, during the summer months, when the Louisiana crop was exhausted, they could import raw sugar from the Caribbean.38 While their plants were as yet still relatively small,39 their potential as rivals for the southern and western markets was clearly recognized by the organizers of the trust. It was for this reason that the latter were eager to have them become members of the amalgamation.
For their part, the New Orleans and St. Louis firms were just as eager to join. The Planters Sugar Refining Company had been organized in 1881, and for a time had been the only sugar refinery in New Orleans.40 In 1884, however, the Louisiana Sugar Refining Company completed construction of that city’s second refinery,41 thereby touching off a bitter struggle between the two companies, not only over the sale of the final product, but also over the purchase of the raw material. The Planters refinery, as the older, better established firm, seemed to enjoy a slight advantage in obtaining its raw cane. But the Louisiana company, with its newer, more efficient plant, was able to process the cane at lower cost. Thus the two refiners were evenly matched, and for the next two years they continued to compete vigorously against each other, with neither earning the profits it had originally anticipated. Finally, late in 1886, they decided to call an end to the rivalry.
“Recognizing the depression which has continued for several years in the refining and manufacture of sugar in the United States, and particularly in the City of New Orleans, … and that a spirit of harmony will promote the mutual interest of the respective parties,” representatives of the two companies met on November 18, 1886, and agreed to form a pool.42 Each company was to continue to refine and sell sugar separately. However, “to secure similar prices for similar qualities, the Sales Book, as well as outgoing and incoming telegrams and letters of both companies, shall be open at all times to the inspection of the President of both companies.” To further ensure co-ordination of prices, the two companies were to report their sales to each other twice daily. Meanwhile, all profits were to be pooled and divided equally between the stockholders in the two companies, even if, as was soon to be the case, production was concentrated in one refinery and the other refinery was shut down. This pooling agreement, subject to cancelation by either party on fifteen days’ notice, was intended to run for at least a year.43
Thus, when Searles arrived in New Orleans late in the spring of 1887 to discuss his consolidation scheme, he found that city’s two refineries already working closely together. By co-ordinating their prices and pooling their profits, they had finally been able to earn the return on their investment originally anticipated.44 Having observed first hand the benefits of combination, they were easily persuaded to join the trust. The only dispute that arose was over how much in trust certificates they would receive in return for their properties. At first the Planters people agreed to accept $700,000, but when they learned that the Louisiana Sugar Refining Company’s stockholders had been offered $837,000, they successfully demanded the same.45
The Belcher Sugar Refinery of St. Louis was just as easily persuaded to join the trust. Its plant had been completely rebuilt only two years earlier, but for some unexplained reason it continued to experience mechanical difficulties which made profitable operations almost impossible.46 For more than a year its owners had been trying to unload the property, and when Searles promised them $500,000 in trust certificates, they readily accepted his offer.47
The owners of the Forest City Sugar Refining Company of Portland, Maine, for somewhat similar reasons were just as eager to sell out. The plant had originally been built in the hope that sorghum sugar could be grown successfully in that area. When this proved unfeasible, the owners had tried to operate their refinery by importing sugar cane from abroad. Since Portland lacked the commercial facilities and proximity to population that rival refining centers enjoyed, this had soon become a losing venture. The owners of the Forest City refinery were only too glad to receive what little in the way of trust certificates Searles was willing to offer them for their almost worthless property.
Thus the combination grew until it encompassed seventeen of the twenty-one sugar refineries still in business east of the Rocky Mountains. After considerable haggling, those seventeen finally agreed to the relative values placed on their properties, and the actual signing of the trust agreement was about to proceed when an unexpected complication arose. In the early morning hours of June 11, 1887, the Havemeyer Sugar Refining Company’s plant at Greenpoint, which had a daily melting capacity of one million pounds, was destroyed by fire.48 Searles was in Boston at the time to obtain the signatures of that city’s refiners on the trust agreement, but when they heard what had happened they refused to sign.49 Why, they argued, should they accept trust certificates for plants that were fully operable when the owners of the Havemeyer Sugar Refining Company were to receive trust certificates for a plant that was totally useless. Besides, they probably reasoned, now that the Greenpoint refinery had been eliminated as a factor in the market, the downward pressure on sugar margins would ease. As a result of this unforeseen circumstance, not only the refiners from Boston, but also some of those from New York, were reluctant to go through with the consolidation scheme.
It was to take another five months to bring the recalcitrants back into line. Searles and Havemeyer tried to point out that while the destruction of the Greenpoint refinery might bring temporary relief from narrow margins, it offered no long-run solution to the industry’s problems. Just as the rebuilding of the Havemeyer & Elder refinery after it burned in 1882 led to even greater excess capacity, so the rebuilding of the Greenpoint refinery would eventually lead to more intensive price competition. But more than any argument, what probably convinced the other refiners was the fact that the Greenpoint refinery’s lost output was easily made up for by other members of the industry without significant improvement in margins. Nevertheless, before the other firms would agree to go ahead with the consolidation scheme, Hector and William Havemeyer had to agree to take the insurance money they received and use it to erect a new refinery, even though the current level of demand was easily supplied without it.50
By August 16, 1887, this matter had finally been resolved, and all seventeen refiners had again expressed their willingness to enter into the combination. On that day, Henry O. Havemeyer, in behalf of Havemeyer & Elder and the DeCastro & Donner Sugar Refining Company, became the first company head to sign the trust agreement.51 The tedious process of obtaining the necessary signatures, a process that was to take nearly two months, had begun.
Meanwhile, rumors of the consolidation appeared for the first time in the public prints. The story that the nation’s sugar refiners were considering a plan to “curtail production,” the New York Times reported on September 23, “is once more going the rounds.” It added, “The talk now is that the principal refiners of the country are contemplating the formation of a sugar trust, as that sort of business combination seems to be in fashion just now.” However, the same article noted, the refiners themselves deny the story. “The general opinion among New York sugar refiners seems to be that the formation of a trust would benefit the trade, but that the consummation of the scheme is hardly possible.”52 The refiners continued to deny the rumors of a consolidation until finally, on October 13, Willett & Gray’s authoritative Weekly Statistical Sugar Trade Journal reported, “It may be considered a settled fact that a combination has been completed, … thus bringing under the management and control of a Committee of Eleven Refiners almost the entire consumption of raw sugar and production of refined sugar in the United States.”53
The purpose of the combination, at least to the Sugar Trade Journal, was quite clear. “The committee,” it pointed out, “have full control of the production of refined, so that it can always be regulated by the demand.…”54 This control derived from the fact that the members of the trust supplied approximately 84 per cent of the refined-sugar market east of the Rocky Mountains.55 “The new Sugar Trust is prospering,” the New York Times reported on October 19, “and every day sees it nearer formal completion.” Then, suddenly, the organizers of the trust found themselves faced with a new complication. The North River Sugar Refining Company’s owners refused to approve the exchange of their refinery for $700,000 in trust certificates.
The North River stockholders originally had been led to believe that they would receive the same amount for their refinery as did Hector and William Havemeyer for their plant in Jersey City. But then they discovered that the Havemeyers actually were to receive substantially more.56 “Our stockholders,” explained George Moller, the active head of the North River firm, “were not happy with this arrangement. They thought our property was not valued as highly in proportion as other properties which were taken in. They felt aggrieved about it, but under the circumstances they considered our chances as a corporation, if we wished to continue in the sugar business … would be better in going in even at that valuation than to stay out alone.…”57 Convinced that the North River stockholders had no alternative, Moller prepared to sign the trust agreement.
At that point the company’s principal owner returned from Europe firmly opposed to joining the trust. Rather than accept the $700,000 in certificates, he told his fellow stockholders, they might just as well wait and see what the city of New York would pay for the condemned North River properties. His fellow stockholders agreed, and on November 4 they voted to rescind the authority given Moller to negotiate the transfer of the North River refinery to the trust.58
The next day, however, Moller signed the trust agreement anyway.59 Whether he was unaware of the stockholders’ action, as he later claimed, or whether he was motivated by some other consideration, the evidence is not conclusive. In any case, Searles insisted that Moller’s signature was binding on the North River company; if its owners refused to honor the agreement, they would be taken to court. The latter consulted a lawyer and learned that they could in fact be compelled to transfer their refinery to the trust.60
Still, some of the North River stockholders were reluctant to accept trust certificates for their property. The certificates were of uncertain value, they argued, and the trust itself might later be declared illegal. Other stockholders replied that “the sugar trust would likely have just as smart lawyers as the State,” but they were in the minority.61 The majority remained adamant in their refusal to accept the trust certificates, and not even Searles could persuade them to change their minds.
At the same time, the organizers of the trust were unwilling to allow the North River company to remain outside the combination, even though they knew the city might eventually take over the property. The condemnation proceedings, if they did occur, might take several years; in the meantime the North River company would benefit from the higher prices brought about by the formation of the trust without itself having to make any sacrifice.
Finally, to resolve the impasse, Searles offered to pay the North River stockholders $325,000 in cash, the value placed on their property by the appraisal committee, less $25,000 for six small lots which were part of the North River parcel but which the company had failed to purchase.62 Searles himself would then transfer the property to the trust, receiving in return $700,000 in trust certificates. This arrangement was readily agreed to, and within three weeks the transaction was completed, thus removing the last obstacles to the trust’s formation.63 With this matter in hand, Searles and the Havemeyers turned their attention to the sugar refining industry west of the Rockies.
The dominant firm on the West Coast was the California Sugar Refining Company, owned by the colorful and energetic Claus Spreckels. Having immigrated to this country in 1846 from his native Germany, Spreckels operated grocery stores in Charleston, South Carolina, and New York City before deciding that his prospects would be much brighter in the gold-rush atmosphere of California. Upon reaching San Francisco in 1856, he first opened a grocery store, then a brewery, before finally entering the sugar refining business in 1863. Even at this early date Spreckels was unwilling to brook opposition, and when his fellow directors of the Bay Sugar Refinery refused to go along with his plans for expansion, he sold his interest in the company.
He was, however, anything but through with sugar refining. After spending two years in Germany learning the latest refining methods, he returned to San Francisco in 1867 and with the help of his family organized the California Sugar Refining Company. Beginning with a plant capable of refining only 25,000 pounds of raw cane a day, Spreckels gradually expanded the scale of his operations until in 1876 he was processing up to 250,000 pounds of raw sugar daily, a figure that was not large by East Coast standards but that nonetheless made him the largest sugar refiner west of the Rocky Mountains. During this time he maintained a technological superiority over his rivals, inventing several new processes himself to reduce the cost of refining.64
In 1876 an event occurred that was to radically transform the West Coast sugar refining industry. Previously, sugars imported from the Hawaiian Islands had been taxed at the same rate as sugars from all other foreign countries. Consequently, they had enjoyed no particular advantage on the American market, despite the fact that most of the Hawaiian sugar growers were citizens of this country. In fact, since they were generally of high saccharin content, the Hawaiian sugars were placed at a disadvantage by the nearly prohibitive duties on higher-grade sugars. In 1876, however, as a result of pressure from American sugar growers in Hawaii and American expansionists on the mainland, the Senate ratified a reciprocity treaty which made it possible for Hawaiian sugar cane to be brought into the United States duty free.
Spreckels, as the West Coast’s leading refiner, had vigorously opposed the reciprocity treaty. If Hawaiian sugar could be imported duty free, he pointed out, the manufacturing end of the business would inevitably move to the Islands.65 Before the reciprocity treaty was signed, however, he and the other California refiners succeeded in having it amended so that only the lower-grade sugars were exempted from the tariff. With the future of the West Coast industry thus assured, Spreckels hurried off to Hawaii to take advantage of the reciprocity treaty himself. In fact, he was on the ship that brought the news of the treaty’s ratification to the Islands.66
Spreckels’ first coup was to buy up most of that year’s sugar crop before the news of the treaty’s ratification forced a price increase.67 But this was only a taste of what he had in mind. Purchasing a large tract of arid land, he turned it into a prosperous sugar plantation by building a thirty-mile irrigation ditch. Then, according to one set of biographers, he took over a dubious land claim and, using his political influence to have it upheld, added it to his original tract so that it encompassed 40,000 acres, by far the largest plantation on the Islands. Meanwhile, he had formed a partnership with William G. Irwin, one of that small but important group of commercial factors who handled practically all the business affairs of the Hawaiian planters. Together, Spreckels and Irwin were able to direct the sale of more than a third of the sugar cane produced in the Islands. Still not satisfied, Spreckels acquired a fleet of vessels from a Philadelphia shipyard and soon was providing the only regular monthly service between Honolulu and San Francisco. But the key to control of the Hawaiian sugar-cane industry, Spreckels realized, was control of the West Coast refining industry.68
The size of the West Coast market was such that, as time went by and the melting capacity of refineries increased, it became increasingly difficult for more than one company to survive. Spreckels, with his greater command over the technical details of the business, together with his shrewd competitive sense, was more than able to hold his own against all rivals, and one by one they found themselves forced to quit the industry. By 1884 the only remaining competitor of Spreckels’ California refinery on the West Coast was the American Sugar Refinery.69
This was a relatively new firm, having been organized only four years before. Its plant, however, was an old one. It was, in fact, the same Bay refinery in which Spreckels had been interested when he first started out in the sugar refining business. For a year or so, the American Sugar Refinery had tried to compete independently, but finding this impossible it then reached a working agreement with the California Sugar Refining Company. Spreckels, meanwhile, had acquired a one-third interest in the company.70 Faced with this united front, the Hawaiian planters had little choice but to accept the price that Spreckels was willing to pay for their sugar cane.
While the planters were, quite naturally, unhappy with the grip Spreckels had on their industry, they were not the only ones who felt unduly constrained. The majority stockholders in the American Sugar Refinery knew that the only way to reduce the expense of refining to less than the 1.63 cents a pound it was then costing them was to expand the scale of their operations.71 But as the precondition for his co-operation, Spreckels had insisted that the American limit its output to 10,000 tons a year, or one-fifth of what the West Coast market could absorb at the then current level of prices. These prices were based on those prevailing in New York, plus the 2.0 cents a pound it cost to ship refined sugar from New York to the West Coast.72
In January, 1885, this market-sharing arrangement broke down. Spreckels’ son Claus, Jr., later said that the falling out was caused by the American’s insistence on having a larger share of the market.73 But those associated with the American had a different explanation. Spreckels, they said, demanded that they reduce their meltings so that his own California refinery could expand its output. This they refused to do. “There was a great deal of discord in the company,” Edmund C. Burr, the superintendent of manufacturing, later recalled, and finally Spreckels asked that he either be bought out himself or be allowed to buy out the others. The majority of the American’s stockholders chose to buy him out. “Immediately after that, within a week,” Burr testified, “… Mr. Spreckels dropped the price of sugar and the fight between the two refineries commenced.…”74
In this struggle the American Sugar Refinery soon found ready allies. Having long chafed under what they regarded as a monopoly in refining, the Hawaiian planters were only too willing to lend the American their support. The company was reorganized, its capital more than tripled to $1 million (with the Hawaiian planters supplying most of the additional funds), and the melting capacity of the refinery increased from 125,000 to 500,000 pounds a day.75 The improvements enabled it to reduce the cost of refining to 0.9 of a cent a pound,76 but the greatly increased output also caused prices to fall. Even the more efficient California refinery found itself losing money.77 But with the Hawaiian planters backing the American, the fight continued.
It was at this point, in December of 1887, that Searles traveled west to see if the two San Francisco refineries could not be persuaded to join the sugar trust.78 In line with the technique first developed by John D. Rockefeller in the petroleum industry, Searles approached the larger of the two firms first. If Spreckels’ California Sugar Refining Company could be persuaded to join the trust, Searles believed that the American would eventually follow suit.
Meeting with the older and younger Spreckels together, Searles tried to explain the advantages of joining the trust. “He stated that the competition was very fierce in the Eastern states at that time,” Claus Spreckels, Jr., later recalled, “that they could probably get better prices if there was not as fierce competition.” The same, Searles said, was true in the West. Moreover, because the two San Francisco refineries were producing more sugar than they could profitably market on the Pacific coast, they were forced to sell in markets farther east, along the Missouri River, in competition with the New York, Boston, and Philadelphia refineries. With the formation of a trust, this competition would be better regulated. All the refineries “would make more money,” the younger Spreckels remembered Searles saying, and “that was the object of the formation of the [trust].”79
Searles gave other reasons as well. He pointed out that, if the two Spreckelses entered into the trust, they would get a good price for their property. Also, their holdings in the industry would become more liquid. “We could get out of the business,” Claus, Jr., recalled being told, “whenever we wanted to, as a market [would soon be] created for the stock.” Finally, Searles told the Spreckelses that by joining the trust they would be better protected against fire. “He suggested … that in the event of one concern being put out of operation by … a fire, [its owners] would still have an interest in the other refineries and would not, therefore, be deprived of any revenue.”80
These arguments, however, failed to sway the Spreckelses. As Claus, Sr., subsequently told a congressional investigating committee, if a trust is formed, “only one or two men will rule it. How about all that stock in there? They virtually hold that stock, and they will not acknowledge that Spreckels or anybody else has anything to say.” Then, on a final note which drew applause from the spectators, Spreckels added, “I came to this country from Germany for liberty and liberty I shall maintain!”81 To Searles, when he was in California the Spreckelses simply said that theirs was a family concern, that they “had no desire to go into the Sugar Refineries Company, and that perhaps the best arrangement would be if [they] would confine [them]selves to west of the Missouri River.” When Searles threatened that he and his colleagues in the trust might decide to give the California “fierce competition by buying the American,” the younger Spreckels warned that “they better let that alone.”82
Thus rebuffed, Searles returned east, leaving Spreckels and his son with the impression that respective spheres of influence had been carved out, that the California Sugar Refining Company and the sugar trust would be able to coexist in peace. Not long after that, however, the two men were surprised to learn that the trust had, in fact, carried through with its threat to buy the American Sugar Refinery.83 Searles and his colleagues knew that this would probably precipitate a bitter fight between themselves and the Spreckelses,84 but they reasoned that the great Hawaiian sugar magnate and his son eventually would be forced to sue for peace, for while the California refinery continued to suffer losses from its war against the American, the trust would be reaping the benefits of its monopoly position on the East Coast.
For their part, the owners of the American were only too willing to enlist additional allies in their struggle against Spreckels. Besides, they were afraid that Spreckels might sell out first, thus depriving them of a considerable part of the advantage they had in bargaining with the trust.85 With these considerations in mind, they readily agreed to transfer their refining properties to the Sugar Refineries Company for $1.5 million in certificates.86
It was a move that the members of the trust were to regret many times over in the next several years, for Spreckels proved a more determined opponent than they had expected. Still, the American Sugar Refinery provided them with the eighteenth and final firm to join in the combination.
GERBRACHT: I see they have acquired that company, the American.…
DONNER: Yes, they have to do that in order to go to work and compete with Spreckels.
GERBRACHT: Well, what does that mean?
DONNER: … they are going to pound Spreckels.
See United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 330.
1 Allan Nevins, Study in Power, vol. 1, chaps. 4–14; Harold F. Williamson et al., The American Petroleum Industry, chaps. 14–26.
2 Nevins, Study in Power, vol. 1, chap. 21.
3 U.S. House Committee on Manufactures, Report on Trusts, pp. 144–49.
4 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 471.
5 Ibid., p. 587.
6 Ibid., p. 320.
7 Ibid., p. 7114.
8 Ibid., pp. 4513–14.
9 Ibid., pp. 4525–26.
11 Ibid., pp. 7114–15.
12 U.S. House Committee on Manufactures, Report on Trusts, p. 36.
13 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 5912.
14 Ibid., p. 5914.
15 See Chapter 2, p. 41; see also Albert P. Langtry, ed., Metropolitan Boston, p. 662. Very little biographical information on Thomas has survived. Practically all that has been discovered, aside from his ownership of the Standard refinery, is that he was apparently a retired army captain.
16 See note 55 below; see also U.S., Congress, House of Representatives, Special Committee on the Investigation of the American Sugar Refining Company and Others, Hearings, p. 2537 (hereafter cited as Hardwick committee investigation, 1911).
17 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 4528.
18 Ibid., p. 7114.
19 Ibid., pp. 7114–15.
20 H. O. Havemeyer to John Dos Passos, April 4, 1887, reprinted in ibid., p. 4737.
21 Ibid., p. 7116.
22 Ibid., pp. 4522–23.
23 Ibid., p. 4737.
25 This sketch of Dos Passos is drawn from the article in the Dictionary of American Biography and from Henry Woolman, “John R. Dos Passos,” pp. 163–65.
26 John R. Dos Passos, Commercial Trusts, pp. 13–14.
27 Ibid., pp. 12–13.
28 In the petroleum industry Rockefeller and his associates in the Standard Oil Company had already acquired about 90 per cent of all rival refineries even before the trust was organized, and thus the trust arrangement represented a fait accompli as far as consolidation was concerned; see Nevins, Study in Power, 1: 617.
29 Henry O. Havemeyer, Jr., Biographical Record of the Havemeyer Family, 1606–1943, p. 42.
30 See the sketch of Parsons in the National Cyclopedia of American Biography; see also Hardwick committee investigation, 1911, pp. 2065–66.
31 The trust deed, except for the amount of trust certificates received by the respective parties, is reprinted in U.S. House Committee on Manufactures, Report on Trusts, pp. 3–7.
32 Testimony of H. O. Havemeyer before the U.S. Industrial Commission, Reports, 1, pt. 2: 124; U.S. House Committee on Manufactures, Report on Trusts, pp. 32–33.
33 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 4518.
34 U.S. Industrial Commission, Reports, 1, pt. 2: 110–11.
35 So determined were the organizers of the trust to keep the actual shares in the organization received by the various parties secret that they later risked contempt proceedings by refusing to make these figures available to the several legislative investigating bodies appointed to look into the affairs of the trust. Although copies of the trust agreement itself were surrendered, the amount of trust certificates received by the various parties to the agreement was deliberately blocked out. See U.S. House Committee on Manufactures, Report on Trusts, pp. 3–7; Lexow committee investigation, 1897, pp. 384–90.
36 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, pp. 3514–15.
37 Ibid., p. 4529.
38 Ibid., p. 7485.
39 Ibid., p. 7467.
40 Ibid., p. 7466.
41 Ibid., p. 7507; Henry Rightor, ed., Standard History of New Orleans, p. 528.
42 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, pp. 7471–72.
43 Ibid., pp. 7472–76.
44 Ibid., p. 7481.
46 Ibid., pp. 4549–50.
47 Ibid., p. 4517.
48 New York Times, June 12, 1887. The fire was believed to have been set by workmen still disgruntled by the way in which the sugar refiners, and particularly the Havemeyers, had crushed a strike eight months earlier. Suspicion was heightened by the fact that a cooperage factory, also owned by the Havemeyers, had been set on fire several weeks earlier, though in that instance the arsonists had been apprehended. See New York Times, June 15, 1887.
49 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 4547.
50 Ibid., p. 4548.
51 U.S. House Committee on Manufacturers, Report on Trusts, p. 7.
52 New York Times, September 23, 1887.
53 Willett & Gray’s Weekly Statistical Sugar Trade Journal, October 13, 1887.
54 Ibid. Although these details were not made public at the time, the companies signing the trust agreement, along with the capacity of their refineries and the approximate amount of trust certificates they received in exchange, were as follows:
55 U.S. House Committee on Manufactures, Report on Trusts, p. 36.
56 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 7021.
57 U.S. House Committee on Manufactures, Report on Trusts, p. 141.
58 People v. North River Sugar Refining Company: Record, pp. 27–30; Lexow committee investigation, 1897, p. 214.
59 People v. North River Sugar Refining Company: Record, p. 30.
60 U.S. House Committee on Manufactures, Report on Trusts, pp. 142–43.
61 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 7024.
62 U.S. House Committee on Manufactures, Report on Trusts, p. 143.
63 Ibid.; Lexow committee investigation, 1897, pp. 200–14. To the last, Searles tried to persuade the North River stockholders to accept trust certificates for their property. “All I remember,” Max Wintjen, superintendent of the North River refinery and a stockholder in the company, later testified, “is what John Searles said … that it was the greatest mistake in our lives that we didn’t go in with them” (United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, p. 7023). Wintjen and the other North River stockholders were later prepared to admit that Searles had been right.
64 This sketch is taken from Jacob Adler, “Claus Spreckels, Sugar King of Hawaii,” pp. 29–34.
65 Ibid., pp. 20–22.
66 Ibid., pp. 1–2.
67 Ibid., p. 2.
68 Shelley M. Mark and Jacob Adler, “Claus Spreckels in Hawaii,” pp. 25–27.
69 William W. Cordray, “Claus Spreckels of California,” pp. 16–25. Meanwhile, Spreckels had built a new refinery, one capable of melting 750,000 pounds of sugar daily.
70 Mark and Adler, “Claus Spreckels in Hawaii,” p. 27; United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, pp. 3124–28.
71 Ibid., p. 3173.
72 Ibid., pp. 3128, 5966–68.
74 Ibid., p. 3129.
75 Ibid., pp. 3131–32.
76 Ibid., pp. 7173–74.
77 Ibid., p. 5968.
78 Ibid., p. 5970.
79 Ibid., p. 5973.
80 Ibid., pp. 5970–73.
81 U.S. House Committee on Manufactures, Report on Trusts, p. 184.
82 United States v. American Sugar Refining Co. et al., pretrial testimony, 1912, pp. 5970–73.
83 Ibid.; New York Times, February 21, 1888.
84 Ernest W. Gerbracht, the superintendent of the Havemeyer & Elder refinery, later reported the following conversation between himself and J. O. Donner.
85 Ibid., p. 3133.
86 Ibid., p. 4798.