-Caveat Lector- an excerpt from: The Emergence of Oligopoly Alfred S. Eichner The John Hopkins Press©1968 Baltimore & London LCCN 74-7930 388 pps. – First Edition – Out-of-print also available; Greenwood Publishing Group(1978); ISBN: 0313205981 ----- 3 :: COMPETITION AND INSTABILITY As in the case of other manufacturing industries, the years from the late 1870's until 1887 were a period of transition for sugar refining. Although the industry still retained its basically competitive structure—indeed, improvements in communications made it all the more competitive—it was now marked by increasing instability. This instability was manifested in various ways: in charges that extensive frauds were being perpetrated against the customs revenue of the United States, in efforts to change the tariff laws, in complaints that certain firms were adulterating their sugar, and in accusations that varying groups of refiners were conspiring to drive other groups out of business. The underlying of the instability, however, was the failure of the demand for refined sugar to expand as rapidly as the potential supply. Given the large fixed investment required in sugar refining, this meant that all but the one or two leading firms found themselves no longer able to cover their full costs, if an adequate return on invested capital is included as part of these costs. Agreements to limit output or fix margins brought, at most, only temporary relief. More drastic measures, it was finally realized, were required. The first public manifestation of trouble in the sugar refining industry was a headline in the New York Tribune of September 6, 1878, hinting at extensive corruption in the collection of sugar duties. " . . . It is no longer a question of doubt," the accompanying article declared, "that for years there has been a systematic movement among certain importers and refiners of sugar to defraud the government. . . ." Estimating the losses in customs revenue at $5 million, the Tribune added, "Many refiners and importers, who refused to go into this combination, have been driven out of business and no honest man can successfully compete with the combination."[1] The charges had a familiar ring. Still fresh in everyone's mind were the recent revelations with regard to the so-called whiskey ring, which it was estimated had defrauded the government of approximately $3 million annually during the four years it had operated.[2] One of the scandals that were to give the Grant administration its reputation for corruption, the "ring" was actually a pool, similar in its purpose to the combinations that arose in other industries during the immediate post-Civil War period to cushion the effects of a growing disequilibrium between supply and demand.[3] The whiskey combination was, in fact, different from other pools only in its ability to enlist the co-operation of prominent government officials in its efforts to restrict output and prevent the entry of new distillers into the industry. With the connivance of Federal agents, certain favored distillers were able to avoid paying the seventy-cents-a-gallon excise tax on at least 50 per cent of the whiskey they produced, half the money saved going to the distillers themselves and half to the leading Republican politicians who had organized the scheme in each of the three major distilling centers, St. Louis, Chicago, and Milwaukee.[4] Not only did the thirty-five-cents-a-gallon cost disadvantage make it extremely difficult for any firm not a member of the ring to survive in business, but also the federal revenue agents, with access to the records of any distiller, were able to see to it that the production quotas set by the pool were scrupulously honored. Yet the scheme originally intended to fill party coffers gradually became more and more a scheme to line the pockets of the prominent politicians involved, and it was this fact, as well as the growing brazenness with which the ring's operations were conducted, that eventually led to its undoing.[5] The resulting disclosures were among the reasons that the Grant administration fell into such bad repute during its final years. Grant's Republican successor, Rutherford B. Hayes, in an effort to improve his party's image following the disputed election victory of 1876, sought in various ways to meet the public demand for political reform. One of his first moves upon taking the oath of office was to appoint a presidential commission, headed by John Jay, grandson of the illustrious Founding Father and a well-known civil service reformer, to investigate the New York customs house, long regarded as a hotbed of corruption. The Jay commission, while condemning certain patronage practices and calling for various reforms, noted in its report, delivered to the president late in 1877, that it had found evidence of dishonesty on the part of only a few minor customs-house officials. The Democrats, however, sensing that the extent of corruption was much greater than the Jay commission had indicated, launched their own investigation of the New York customs house through the House Ways and Means Committee, which they then controlled. In the back of their minds, undoubtedly, was the hope that they might uncover further scandals, rivaling those which had so shocked the nation in the case of the whiskey ring. It was this new investigation, conducted by Representative Fernando Wood, the aged former mayor of New York City, which brought to the surface the charges of widespread fraud in the collection of sugar customs. The article in the Tri bune first reporting these charges appeared only two weeks before Wood formally opened bearings in New York, and that first article was followed by others. Once the committee actually began its hearings, on September 17, 1878, the charges of fraud were repeated by many of the smaller refiners, especially those who bad already been forced out of business. "Fraud has run through the sugar business here for ten years," said William T. Booth, a partner in Booth & Edgar, a refinery which was on the verge of going out of business permanently. He then added, "I have been in and out among men and have preserved a good reputation; and when I say I know a thing to be so, no one will be found who will doubt my word. Now I say I know of frauds on the revenue in the importations of sugar which, when they are fully disclosed, will furnish reading that will astonish the people of this country."[6] Employing a crude statistical analysis, witnesses before the committee were able to offer circumstantial evidence that the federal government was indeed being deprived of substantial sugar duties. The tariff on sugar was levied according to a color standard first developed by the Dutch. Until the invention of the polariscope, this so-called Dutch standard provided the only recognized means of determining the saccharin content of sugar. The lighter the shade of brown, the higher in saccharin content the sugar was supposed to be and the higher the absolute duty levied. Pure sugar was, of course, pure white and was taxed at the rate for refined sugar.[7] Applying the tariff rate for each of the different grades of sugar to the quantities of each grade thought to be imported into this country, witnesses estimated that the customs collections from sugar were falling short of what they should have been by approximately $4 million a year,[8] a rather significant sum. The question was whether the deficiency was due to systematic fraud or to the obsolete manner in which the government assessed the saccharin content of imported raw sugar. As other witnesses before the committee testified, the invention of the centrifugal machine meant that growers in tropical areas were now able, with a modest capital investment, to produce sugar that was virtually free of all impurities. This sugar, sold in the United States on the basis of saccharin content as measured by the polariscope, commanded a top price. Yet because the duties on imported raw sugar were still levied according to hue, it was possible to pay the lowest duty simply by artificially coloring the sugar brown. A leading importer of sugar, after pointing out to the committee the result in a loss of revenue to the government, asked rhetorically, "Did the refiners get it? Certainly not, for the reason that the refiners buy all their sugars here upon their saccharin strength.... the planters—the manufacturers of centrifugal sugars—are the ones, of course, that got [the ben efit]."[9] Undoubtedly, as everyone agreed, the law bad to be changed, for the tariff on sugar accounted for nearly 30 per cent of all customs revenues, the major source of federal funds.[10] But as to what form the changes should take, the industry split into two opposing camps. On one side were those who argued that the only change required was to substitute the polariscope test for the Dutch standard. If this were done, they said, the government would be assured of collecting whatever customs duties it was now losing.[11] On the other side were those who argued that the purported losses from artificially colored Demerara sugars were a "mere bagatelle,"[12] that adopting the polariscope test would not end the drain on government revenues. The Treasury Department was losing money, they charged, not because the wrong standard for determining the value of raw sugar was being applied, but rather because certain refiners, through deliberate underweighing and improper sampling, were systematically defrauding the government. If the drain on government revenues was to be halted, it was argued, far more fundamental reforms were required than the mere substitution of the polariscope test for the current color standards.[13] The conflict, however, involved more than just the question of how the sugar duties could best be collected. Those making the charges of fraud were primarily the smaller refiners, those whose plants were located away from the water's edge. Allied with them were many of the raw-sugar importers, especially those representing Cuban and other Caribbean growers. What seemed to concern these two groups was not that the federal government was being defrauded, but that they, as a consequence, were being put at a certain disadvantage. As the Commercial and Financial Chronicle, which subsequently championed their cause, declared: ... These methods which have hitherto proved so efficacious in depriving the Government of many millions of revenue, and in enriching the parties who have availed of them, are to a certain extent open to both importers and important refiners, but the latter have ... the immense advantage of receiving their cargoes at their own refineries, where, within twenty-four hours from the arrival of the vessel, the sugars [can] be dumped into the boiling vats, thus rendering all identification impossible; wbilst the merchant importer is obliged to land his cargoes at public bonded stores, where they remain for days subject to re-examination by the customs officers and to consequent exposure.[14] It is interesting to note that, as an outgrowth of the various charges, the only person to be convicted of defrauding the government was an importer.[15] The motivation of those making the charges of fraud was even more clearly indicated by the nature of the suggestions they offered for eliminating the supposed evils. These were that the government should permit no sugar to be landed at the refiners' private wharves and that a uniform rate of duty should be levied on all unrefined sugar." These suggestions, if adopted, would have canceled out any cost advantage the major refiners might have had, and in some cases would even have placed them at somewhat of a handicap. Thus the battle over the tariff was actually a maneuvering for position within the industry. In fact, because of the industry's then current condition, it had become a bitter struggle for survival. pps. 50-55 --[notes]-- 1 New York Tribune, September 6, 1878. 2. V. Boynton, "Whiskey Ring," p. 300. 3. See Arthur S. Dewing, A History of the National Cordage Company, pp. 5ff.; Allan Nevins, John D. Rockefeller, 1: 310; Jeremiah W. Jenks, "The Michigan Salt Association," pp. 3-10. 4. Testimony of David P. Dyer, the U.S. attorney who helped prosecute the whiskey frauds (U.S. Congress, House of Representatives, Select Committee Concerning the Whiskey Frauds, Whiskey Frauds, p. 31). See also Jeremiah W. Jenks, "The Development of the Whiskey Trust"; Lucius E. Guese, "St. Louis and the Great Whiskey Ring." 5. Boynton's "Whiskey Ring" is still the best account of how the ring was finally broken up. See also Guese, "The Great Whiskey Ring," pp. 168ff.; Matthew Josephson, The Politicos, pp. 198-202. 6. New York Tribune, September 19, 1878. 7. The colors of the Dutch standard (D.S.) ranged in number from I to 25, the higher the number the lighter the shade of brown. Sugars classified D.S. No. 20 or higher were considered to be refined and were taxed at the full rate of five cents a pound. Those classified below D.S. No. 20 were taxed at a correspondingly lower rate as indicated below. Classification Rate Raw sugars not above No. 7 D.S. 2.180 Raw sugars above No. 7 D.S. but not above No. 10 2.50 Raw sugars above No. 10 D.S. but not above No. 13 2.81 Raw sugars above No. 13 D.S. but not above No. 15 3.43 Raw sugars above No. 15 D.S. but not above No. 20 4.06 See David A. Wells, The Sugar Industry and the Tariff, pp. 22-29. 8. Henry A. Brown, Sugar Frauds, pp. 3-9. 9. Wells, The Sugar Industry and the Tariff, pp. 43-44. 10. Ibid., p. 9, 11 Ibid., pp. 91-99. 12. Brown, Sugar Frauds, p. 10. 13 Wells, The Sugar Industry and the Tariff, pp. 99-100. 14 Commercial and Financial Chronicle, November 16, 1878. 15 New York Tribune, September 12, 1878. ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! 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