Front Page Titles (by Subject) Part II, Chapter VIII: Refined Sugar and the Sugar Trust - Some Aspects of the Tariff Question
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Part II, Chapter VIII: Refined Sugar and the Sugar Trust - Frank William Taussig, Some Aspects of the Tariff Question 
Some Aspects of the Tariff Question (Cambridge: Harvard University Press, 1915).
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Part II, Chapter VIII
Refined Sugar and the Sugar Trust
The sugar refining industry has always been protected by duties higher than those on raw sugar. In early times,—before the civil war,—one factor that contributed to high duties on refined sugar was the circumstance that it was considered a luxury. Most persons used "brown" sugar; only the rich used refined. Partly for this reason, partly because of the disposition to protect sugar refining like other industries, the difference between the rates on raw and refined,—the so-called "differential" of recent years,—was so considerable that all refining was carried on within the country.90 The imports were mainly in the form of raw sugar. In this regard the situation remained unchanged from 1789 to the present time.
The mode of assessing the sugar duties and of fixing the differential has given rise to legislative and administrative difficulties. Until 1883 the duties were graded according to the "Dutch standard,"—the method of grading universally used in earlier times. Cane sugar as it comes from the sugar houses or sugar mills of the plantations is not pure, and is more or less discolored; it may contain anywhere from 3 per cent to 25 per cent of impurities. Under the "Dutch standard" its sugar content is supposed to be indicated by color. Dark or dirty sugar has low numbers; as the sugar becomes lighter, it is designated by the high numbers. The number 16 indicates approximately the line of division between raw sugar and refined. Sugar up to no. 13 is dark and presumably impure; sugar of no. 16 is very light gray in color; number 20 is white. Under the tariff acts before 1883 the "Dutch standard" alone was used in grading the duties; sugars of low number had lower duties, those of high number higher duties. Serious embarrassment ensued, however, because of artificial coloration of sugars having high saccharine content; and in 1883 the polariscope test was adopted for grading the sugar duties.91 This optical test,—one of the striking applications of science to industry,—determines the saccharine content of sugars without regard to color and with perfect accuracy. It had been in familiar trade use for some time before 1883, and its belated adoption by the government is but one of the many examples of the tendency of public management of business to lag behind private. Some relic of the "Dutch standard" system, however, remained in the tariff acts of 1883 and subsequent years, in that the dividing line between raw and refined sugar was still fixed on the old basis, that is, according to color. All dark sugar was dealt with as raw sugar, and was subjected to duties varying according to saccharine content as indicated by the polariscope test.92 All white sugar was treated as refined sugar, and subjected to an additional duty,—the so-called "differential." Under the act of 1883 this differential, serving as protection to the sugar refiner, was about one cent a pound. In later tariff acts it was much reduced, being
The significance both of the earlier high differential and of its later reduction can be understood only in view of the technical and financial development of the industry. The period from 1870 to 1890 saw two great changes, closely connected. Large-scale production developed with surprising rapidity; combination among refiners promptly ensued. The essential process of sugar refining did not indeed undergo great changes. As before, refining was accomplished by passing the raw sugar through ground boneblack. But machinery was applied much more effectively; the scale of operations was enormously enlarged; the capacity of the individual establishment became immensely greater.93 In no modern industry have the economies of the great establishment been more pronounced. A single refinery can turn out daily 5000, 10,000 even 15,000 barrels of refined sugar. Were it not for the limitation imposed by the expense of distributing the output over a wide area, it would seem that one vast plant could refine the sugar of the whole United States. As it is, there were in 1914 but two refineries on the Pacific coast, three or four on the Gulf coast, half-a-dozen or thereabouts on the eastern seaboard; and among these were a few older ones of comparatively small size, and some newer and larger ones that may be truthfully said to illustrate the wastes of competition. A refinery on the modern scale costs millions of dollars; when ready, and operating to full capacity, it does its work with extraordinary economy; to get it ready, however, in competition with established rivals, is a formidable task.
These would seem to be conditions almost ideally favorable for cut-throat competition and for the eventual emergence of some sort of combination. As they gradually developed, there came in fact the successive stages of the sharpest sort of competition; reduction in the cost of refining, and in the margin of price between raw and refined sugar; struggles and failures for the smaller refiners, sustained profits and dominance for the larger concerns; finally in 1887 the sugar trust, a "trust" in the older and more accurate sense of the word. The refusal of the courts to sustain this first form of combination led shortly (1891) to the formation, under strict corporate organization, of the American Sugar Refining Company. This great combination remained the conspicuous figure in the industry, and though no longer in any strict sense a trust, continued so to be called. With the year 1887 the combination problem emerged full-fledged.94
It has already been noted that under the act of 1883 (from 1883 to 1890) the differential on refined sugar was about one cent a pound. This meant a high rate of protection. The improvements in refining had reduced the cost of converting the raw sugar into refined to a figure considerably less than the differential. It seems to have been brought down even then to the figure at which it has been, maintained ever since,—not far from 5/8 cent a pound. The differential duty under the act of 1883, in other words, was much more than 100 per cent upon the cost of refining. It was virtually prohibitory of the importation of refined sugar. This high protection was not due to any deliberate intent. As in so many other cases, it was simply a legacy from older days, entailing consequences quite unexpected on the part of the legislators who had put it on the statute book.
The immediate effect of the prohibitory duty unquestionably was to promote the formation of the trust, and to enable it during its first years to reap large profits. The trust was formed in 1887. The price of refined sugar was at once raised,—that is, the margin between the price of refined sugar and raw sugar. No doubt competition during the years preceding had brought the margin below the line of normal profit; but it was promptly raised above that line. The chart on page 105 has been prepared to show the relation between the price of raw and refined sugar. A glance at it will show that for two years after 1887 the margin was high, and the profits of refining were then great. It is no wonder that the head of the combination, when testifying before the Industrial Commission in 1899, made the remark, destined to become notorious, "the mother of all trusts is the customs tariff bill."95
The subsequent course of events showed, however, that this dictum needed qualification. One of the unsettled questions with regard to combinations concerns the extent to which they are held in check by real or potential competition. The history of competition in this particular case has been so often rehearsed that the briefest review will here suffice. At a comparatively early date, in 1889, the trust became at loggerheads with the great sugar refiner of the Pacific Coast, Spreckels, of whose peculiar position in that region more will be said presently. The Trust established a rival refinery in California; the Californian, in retaliation, built one at Philadelphia. There was also other competition on the eastern seaboard. As the chart shows, the margin between refined sugar and raw, and hence the profits of refining, were sharply reduced during this first period of competition (1890-91). But the warring factions soon united. Spreckels was taken into the combination on favorable terms. The more considerable eastern competitors were also absorbed. For five or six years after 1892, the trust was again in almost sole control, and its profits again were high. Under the act of 1890, the tariff differential on refined sugar was such as to make competition by foreign refiners impossible, and so sustained the position of the trust. As the chart shows, the refiner's margin was profitably high in 1892 and 1893. The tariff act of 1894 reduced the differential (from ½ to 1/8 cent a pound), and the margin, though still comfortably high, became less excessive. The Trust was in virtual control of the domestic situation for several years after 1892, but after 1894 was held in check in some degree by a possibility of foreign competition under the lowered differential of 1894.97
Beginning with 1897, however, a new period of domestic competition set in, and there was a sharp decline in the margin and in the profits of refining. Competition ensued between the trust and the Arbuckles,—a large coffee firm which refused to accept the Trust's terms for sugar and proceeded to build a refinery of its own. The competition was so bitter that for a year or two the profits of refining seem to have entirely disappeared. This cut-throat contest was followed by a truce. After the opening of the twentieth century the situation in the sugar refining trade might be not inaccurately described as one of armed neutrality. The trust retained a strong position, yet not a controlling one. The Arbuckles remained as competitors; and on the eastern seaboard there were other competitors also. The margin became comparatively moderate. The profits of refining do not seem to have been excessive.
That tariff protection did not in itself have a determining effect on the gains of the refiners was shown by the absence of any visible influence on these gains from the Cuban reciprocity arrangement. The Cuban treaty went into effect in 1903. It has already been shown98 that within a short time it caused the price of Cuban sugar to fall in the United States, during a considerable part of each year; not indeed to fall by the full amount of the Cuban remission (20 per cent of the general duty), but by a substantial part of the remission. The refiners, in other words, were able to buy Cuban raw sugar at a substantial reduction below the full-duty price. The protection to them as refiners was thereby vastly increased. For the duty on refined sugar was not affected by the Cuban treaty; this remained throughout at the full rate of the tariffs of 1897 and 1909. Obviously the foreign refiner could not compete with the American refiner who got his Cuban sugar at less than the full-duty price of raw sugar. Except during those few months of the year in which full-duty sugar was imported from Java and other non-favored regions, the American refiners were in the position of having a protection that amounted virtually to prohibition.99 Yet the price of refined sugar was not maintained at all at the full-duty rate; it followed in the main the oscillations in the (reduced) price of Cuban raw sugar.
Surveying the whole course of events, it may be thus fairly said that the history of the sugar trust, so far as its refining operations are concerned, supports the view that protection, though it may stimulate the formation of a combination and for a time swell its profits, does not enable monopoly gains to be maintained permanently. After a few years of high profits, competition has set in. The strictly manufacturing profit in the long run was kept within competitive limits.
One further aspect of the case may be disposed of at this point. The refining industry, whether or no it needed protection in earlier days, ceased to need it by the close of the nineteenth century. The industry is one in which great plant and large-scale production tell to the utmost. It is of the kind in which American enterprise finds a congenial field, and in which this country has a comparative advantage. The indications are that refining is done as cheaply in the United States as in foreign countries, and that it does not need the prop of protection. Even with no protection at all,—that is, with no duty at all, or with such a duty only on refined sugar as would offset that on raw sugar,—the industry would maintain itself.
There were other parts of the trust's operations, however, which were influenced by the tariff. The strictly refining profit, which alone has been considered hitherto, was supplemented, for a time at least, by some other sources of gain. These were connected with the peculiar raw sugar situation described in the preceding pages.
Typical of these supplementary pickings were the extra profits secured on Hawaiian sugar. It has already been intimated that although the Hawaiian planters secured almost the entire amount of the remission of duty on their sugar, some fraction went elsewhere.100 Hawaiian sugar was sold in the United States, from the beginnings of reciprocity in 1876, on the basis of the New York price of raw sugar. But the planters never received quite the full New York price; they sold their sugar at that price less a fraction of a cent. The Hawaiian sugar naturally went to San Francisco, the nearest port. There it was sold at the New York price, less a sum which roughly represented the difference between the cost of carrying the sugar to San Francisco and that of carrying it to New York. This arrangement began in the days before the formation of the trust, and was then due to the circumstance that on the Pacific Coast refining was in the hands of monopoly. The same extraordinary growth of large-scale operations had taken place in California as in the eastern region, and had led to the disappearance of all refineries except one (that of the well-known Spreckels). If there had been effective competition among refiners in California, the Hawaiian planters doubtless would have secured the full benefit of the remission of duty on their sugar, without the loss even of this small slice. But as there was but one purchaser for their sugar in California, he could confront them with the alternative of either accepting from him a slightly lower price or transporting their sugar to the more distant market of New York. Hence the arrangement by which Hawaiian sugars were regularly sold in California at a fraction below the New York price. Needless to say, no benefit arose to the consumer from this reduction. The Californian refiner, so far from selling his product at a lower price than that of the east, sold it on the Pacific coast at a price higher by the cost of transportation from the eastern refiners across the country. The refiner pocketed an extra profit in both directions. He bought the raw sugar at a price below the New York quotation, and sold his refined sugar at a price above the New York quotation. It is not surprising that one of the great fortunes of the country was accumulated.
As has already been noted, a struggle set in between the Californian refiner and the trust in 1889, and came to an end in 1892; and after that time the trust, associated with Spreckels, dominated the field on the Pacific Coast even more completely than elsewhere.101 The arrangement with the Hawaiian planters remained as before. They sold their sugar at a fraction less than the New York price. From time to time there were variations in the terms of the contracts between them and the refiners. At one period the trust became what is described in the pleasant phraseology of business as "hoggish," and insisted upon too great a reduction from the New York price. The Hawaiian planters thereupon threatened to build a refinery of their own in California and in fact proceeded to do so; though before the stage of real competition was reached, a truce between the contestants seems to have been patched up.102
To many persons the process by which the Californian refiner,—at first Spreckels, later the trust,—secured a slice of the profits of the Hawaiian planters will seem iniquitous. To the dispassionate observer, it will appear simply as a quarrel over booty, in which neither party could claim virtue or be deemed guilty of sin. So far as the consumers of sugar were concerned, it made no difference how the contestants haggled over the division of the spoil. No doubt the refiners for a while secured substantial pickings; but had they not done so, the Hawaiian planters would simply have secured so much more.
An extra profit of the same sort was secured by the trust in its purchases of Louisiana sugar. Here too the commanding position of the refiner enabled the purchase of raw sugar to be made at prices below those which would have prevailed under a competitive régime. The trust was virtually the sole purchaser of raw sugar in Louisiana; for here also the march of large-scale production eliminated the small refiner, and left the one huge concern alone in the field. The planter of Louisiana, like the Hawaiian planter, was confronted by the alternative of paying for the transportation of the sugar to a more or less competitive market in New York, or of selling it to the trust in Louisiana at a price slightly below that of New York. It was simplest for him to accept the second alternative. Louisiana raw sugar was regularly sold at a fraction below the New York price. The refined sugar, on the other hand, was disposed of in the Mississippi Valley with no corresponding reduction. Here again the operations of the trust were regarded by staunch protectionists as thoroughly iniquitous; and so needless to say, they were regarded by the Louisiana planters. And no doubt there was one point of difference between the case of Louisiana and that of the Hawaiian planters: the planters of the former could plead that the trust deprived them of some part of the protection which Congress intended to give. The bonus to the Hawaiians arose through no deliberate intent; but Louisiana sugar was doubtless meant to have protection, through an enhancement of the price of raw sugar, by the full amount of the duty. A fraction of this protection was intercepted by the trust. And this fraction, like the other gains, tended to dwindle during the later years, as competition from various quarters deprived the trust of its position of control.103
It was often intimated that the trust secured in other directions additional profits. Thus it was alleged that extra gains were made through ownership of sugar lands and production of raw sugar in Cuba, Porto Rico, even in the Philippines. But the combination seems to have entered on no operations of this sort. Individuals owning shares in it no doubt were also investors in sugar plantations; but it seems to be strictly true that in so doing they acted simply as individuals. Americans were not slow to see the opportunities for profit created by the various exemptions from the sugar duty, and they took advantage of them in Cuba and in Porto Rico, as they did in Hawaii.104 In view of the popular hatred of trusts and trust methods, and the special obloquy under which the sugar combination fell, it is not surprising that anything unwelcome or objectionable in the situation should be fastened on it, and that there should be suspicion of activity on its part in the sugar growing dependencies. Coolly considered, however, all this is seen to have nothing to do with the refining situation or the trust. It made no difference to the consumer what sort of plantation owner in Hawaii or Porto Rico,—native or American, trust stockholder or unaffiliated planter,—was benefited by the sugar tax. Even if the trust had owned all the plantations, the causes of its profit from raw sugar would have been distinct from those of its profit on refining. As it happened, the two problems were distinct not only in their economic significance but as regards the persons involved. The trust itself owned no sugar lands and made no raw sugar; and such of its shareholders as invested in plantations played no dominant or even considerable part in the raw sugar situation.
A different phase of the trust's activity, and one which again was connected more with the duty on raw sugar than with the differential on refined, appeared in its endeavor to control the beet-sugar factories. The astute and unscrupulous head of the combination seems to have concluded, about 1900, that beet-sugar production would be profitable so long as the duty on sugar remained high; that the duty in fact was likely to remain high; and that the trust might secure a share of the beet-sugar profits as well as those from buying and refining cane sugar.
Accordingly large purchases were made of shares in various beet-sugar companies, from California to Michigan; and additional factories were erected by subsidiary companies. Here again the popular view was that the transactions were particularly objectionable because undertaken by a trust. It is probably true that the prices of refined sugar in the Rocky Mountain and Pacific regions were stiffened; since it was here that beet sugar was most largely produced, and here also that the combination profited most from a high margin on its refined sugar. In the main, however, it made little difference to the consumer whether the beet-sugar enterprises were owned by the trust or by "independents." Each benefited to the full by the import duty on raw sugar; and each based the price for refined sugar on the New York quotation. Nor was it of consequence to the farmer who sold the beets to the factories: he received the same price from both, and was suspicious of oppressive dealings by both, though doubtless with an added tinge of suspicion when aware of selling to a trust-controlled factory. The manufacture of beet sugar was at the least as well managed by the combination; it seems to have been better managed. So far as I am able to judge, combination in this case conduced to industrial efficiency. In the selection of seed, the conduct of agricultural experiments, the instruction of farmers, the agents of the trust were active and capable. Factory operations proper were also carried on at least as well as by independent makers. All this, however, had but little connection with tariff problems. These remained essentially the same, whoever owned and managed the beet-sugar enterprises. What might have been the consequences of control of beet sugar by the trust, if extended to the full and continued for a long time, is no easy problem. But the enforcement of the Sherman law, and a change in the personnel of the trust's management, led about 1910 to a policy of gradually divesting itself of the beet-sugar properties and investments. The same policy, of giving up the various arrangements for combination and control, was followed in other directions. The episodes described in the preceding pages belong to the history of the past.
It is obvious that the differential on refined sugar and the possible gains of the refining combination were quantitatively of vastly less importance than the duty on raw sugar. The latter meant a tax, in the form of higher prices of sugar, of a hundred millions a year or more; the former could make a difference at the most of a few millions. The effective duty on raw sugar I have reckoned at 1½ cents a pound. The differential on refined, after 1894 was only 1/8 cent a pound. The utmost additional profit made possible (not necessarily gathered in) by the trust because of the tariff was a matter of a small fraction of a cent,—perhaps 1/10 cent or at most 1/5. In the popular mind, the entire sugar duty was usually associated with trust control and trust robbery. Yet this part of it,—the differential on refined,—bears chiefly on another set of problems,—the significance of a very small fraction of profit on a huge volume of transactions, and the possible gain to be secured by something much short of iron-clad monopoly. An additional profit of 1/10 cent per pound meant several millions a year for the refining combination, but was of negligible effect on the price of sugar for the retail purchaser.105
IRON AND STEEL
[90.]Thus, to give some typical figures, the duties on sugar were:
On some of the early problems of legislation and administration, see C. S. Griffin, "The Taxation of Sugar, 1789-1861," in Quarterly Journal of Economics, xi, p. 296.
[91.]In the years preceding 1883, sugars having high saccharine content were artificially colored dark in order to bring them in at a lower rate of duty. Long contests in the courts ensued, the government trying to collect higher duties, while the importers contended that under the language of the statute color alone, irrespective of saccharine content, settled the rate of duty. The importers finally won their case; hence the final application of the polariscope tests in the act of 1883. On this episode see D. A. Wells, Report on the Assessment and Collection of Duties on Imported Sugars (New York, 1878); "How Congress and the Public deal with a Great Revenue Problem," Princeton Review, November, 1880.
[92.]Thus in the tariff acts of 1897 and 1909, all sugar below 16 Dutch standard was assessed for duty as raw sugar, on a scale graduated by the polariscope test. Sugar testing 75° (75 per cent of saccharine content) paid 95/100 of a cent. For each additional degree, the duty became 35/1000 of a cent higher. Hence sugar testing 96° (which is the grade most largely imported) paid 1.685 cents per pound. If there were such a thing as raw sugar testing 100°, the duty on it would be 1.825 cents per pound. The duty on refined sugar, i.e., "all sugar above number 16, Dutch standard, or which has gone through a process of refining" was 1.95 cents in 1897, and 1.90 cents in 1909; leaving a differential (as stated in the text) of 0.125 cents in 1897, and of 0.075 in 1909.
[93.]An official in a refining company has given me the following figures showing the capacity of a refinery under his charge (not one of the largest) at the following dates:
[94.]For brevity, I shall hereafter follow popular usage in designating the American Sugar Refining Company, as "the trust."
[95.]Report of the Industrial Commission (of 1900), i, p. 101. On this earlier period, see the excellent account in Jenks, The Trust Problem (1900), pp. 133 seq., where is also a chart showing in much detail the fluctuations in the prices of raw and refined sugar.
[96.]The cost of refining is usually stated to be 5/8 cent a pound, or 62½ cents per cwt. This is "cost" in the accountant's sense; including all direct and indirect outlays, but not including anything for return on the investment in the way of interest or profit. The amount by which the margin exceeds this "cost" is the source of profit for the refiner. The figure commonly given for cost (5/8 cent) is, of course, a rough and approximate one. It is much affected by the refinery's "running full": the more complete and steady is the utilization of the great plant, the lower is the cost per unit. I suspect that 5/8 cent is a liberal estimate of cost for a large refinery well managed and utilized to full capacity. But it seems to be impossible, under existing trade conditions, to run a refinery continuously to its full capacity.
[97.]It is not easy to make out precisely what was the situation of the refiner (i.e., the trust) during the period when the tariff act of 1894 was in force. The sugar duties of that act were regarded as a surrender to the trust; see my Tariff History of the United States, p. 308. It has been said that the ad valorem duty of forty per cent then imposed on raw sugar worked to its advantage. For some figures on the profits of refining under the several tariff acts of 1890, 1894, 1897, see the testimony of Mr. W. P. Willett before the Hardwick Committee (1912), pp. 3548-3549.
[98.]See p. 77, above.
[99.]The Cuban remission was not in terms limited to raw sugar; it would have applied to any refined sugar imported from Cuba; but in fact none came thence to the United States.
[100.]See above, p. 60.
[101.]In the holding company (The Western Sugar Refining Company) which took over the California refinery built by the trust and the Spreckels refinery, each party held one-half of the stock. The refinery which had been built by the trust was immediately closed, and was ultimately destroyed by the San Francisco earthquake. The Spreckels plant sufficed to refine all the sugar consumed on the coast. See Hardwick Committee Hearings (1911), pp. 927-932.
[102.]In the earlier period, until about 1890, the Hawaiian planters were not united, and accepted varying prices for their sugar. Later they combined, and made contracts for a year or series of years with the trust, stipulating that all planters should get the same price,—a fraction below the New York price. In 1912 the reduction from the New York price was ¼ cent for sugar delivered at San Francisco, 1/10 cent for sugar delivered at Atlantic ports. The trust contended that its obligation to take at once all the Hawaiian sugar offered made some such reduction reasonable; and the willingness of the Hawaiians to enter on the arrangement for sugar delivered at the eastern ports (1/10 cent reduction) doubtless rests on this circumstance. It is not clear that during the later years of the period the arrangement was such that the Hawaiian planters had ground for complaint. See on this subject, the statement of Willett, in the record of the suit of the U.S. Gov't v. Amer. Sug. Refining Co., i, p. 83 (1912); testimony before the Hardwick Committee (1911), pp. 89-90, and 3610; and the pamphlet by F. C. Lowry, Our High Tariff on Sugar (published in various editions, 1909-1912; see the edition of 1909, p. 4).
[103.]Whether the Louisiana planters were "oppressed" by the trust during the later years is not easy to make out. Their spokesmen naturally thought so; see the testimony before the Hardwick committee (Hardwick Report, p. 1841). The representatives of the trust pointed out (ibid., p. 133) that they engaged to take the whole amount offered by any planter, at the stipulated reduction from the New York price, and to hold it and assume the risk of depreciation; all of which served to make the arrangement a reasonable one. See also the testimony of Mr. Atkins in the suit of U.S. v. Am. Sug. Ref. Co., Transcript of Record, p. 6318.—It must be remembered that during the later period the price of refined sugar in the Mississippi valley could no longer be kept up, being subject to the competition of other refiners and also to that of the beet-sugar makers of the west.
[104.]Cf. p. 60, supra.
[105.]In this sketch of the Sugar Trust, I have confined myself to those operations which had to do directly with the protective tariff. The furious speculation in sugar stock and its manipulation by insiders, the political corruption or semi-corruption practised by the early managers, the trust's methods of competition, the much-discussed episode of the capture of the Philadelphia (Segal) refinery,—all belong to the history of the trust problem, in which this particular combination could be the subject of a veritably sensational chapter. The frauds on the revenue through underweighing are also outside the scope of the present volume. They are connected with the administrative side of customs duties, and with the unsavory political conditions of the closing years of the nineteenth century. On the death in 1907 of H. O. Havemeyer, who had maintained through his life a curious despotic control of the trust, its management came into other and better hands, and a new phase began.