How Oil Speculation Pauperized Thousands

                Prosperous times swept America following the discovery of oil on Signal Hill, helping end the Depression of 1920-1921. A new industry had been born. By 1924 oil surpassed agriculture as the leading industry in California.  In Southern California alone that year 230 million barrels of crude oil was pumped out of the ground. Everyone seemed to want to make a quick buck from all the oil flowing on and around Signal Hill.  Oil deals were being made every day, many of them by Long Beach businessmen like Willard C. Campbell, John McDuffie, Walter Lee Tully, Charles P. Knight and William R. Buck of the Bay Hills Oil and Land Company. 

                In the fall of 1922, the five original promoters of the Bay Hills Oil and Land Company contributed $5000 ($77,000) each to begin their corporation.  Their first course of business was to buy five town lots on Signal Hill for $20,000 ($308,500). John McDuffie made the purchase in his name, taking title and later transferring title to the company for $35,000 ($540,000)--- the five investors pocketing the $15,000 ($231,375) profit.  With actual land in their possession, they quickly lured backers into purchasing 2250 units of stock for $100 ($1545) per unit, telling investors they would drill one oil well when $225,000 ($3,471,000) was raised.  Fifty percent of those encouraged by “oily” talks of promoters were women over 60 years of age, who invested their life savings in the company. The promoters promised their shareholders they themselves would derive no money from the sale of any unit until the investors had received all their money back.  This was an out and out lie, for Campbell, McDuffie, Tully, Knight and Buck were drawing monthly salaries ranging from $1000 ($15450) to $1500 ($23,137) each.

                Other transgressions followed.  After the original stock was sold, the five set up another company, the Special Delivery Oil Syndicate, which they opened to investors.  Questionable practices included purchasing an oil lease for $12,500 ($193,000) and then selling it to the Special Delivery Oil Syndicate for $15,000 ($231,375) , splitting the profit between them.

                 On October 14, 1924, Willard C. Campbell, who had become one of the most prominent and respected oil stock salesmen in Long Beach, was arrested for mail fraud along with John McDuffie, Walter Lee Tully, Charles P. Knight, William R. Buck and their attorney Joseph G. Richardson.  Mail fraud was one of the few legal ways to pursue the sharks who fed off the hopes of the small investor. Long Beach folk were shocked that such noteworthy members of the community had been scam artists.

                John H. McDuffie, president of the Bay Hills Land and Oil Company of Long Beach and its subsidiary the Special Delivery Oil Syndicate, denied the company ever did any business through the mails.  Instead, he claimed, they hired passenger buses to bring the public to the oil fields.  It was common practice among oil promoters.  Every morning the buses lined the streets in Los Angeles and other Southern California communities advertising free lunches, and band concerts as well as a chance to see the gushers first hand.  McDuffie neglected to mention that along the way salesmen made their pitch.  As they motored past the mansions of business tycoons, movie stars and especially oil moguls, oil promoters made sure to point out that anyone could live a life of leisure if they invested in oil development. The passengers, primed by the promotion, responded emotionally, rather than rationally, and lined up eagerly to purchase shares in not only Bay Hills Land and Oil, but other oil companies as well. 

Prospective investors

                McDuffie told the press that the trouble with his oil firm was brought about not through any intent to defraud anyone, but by poor management.  Somehow, McDuffie said, the bills began to pile up and creditors began to demand payment until investors began to get worried.  Shareholders weren’t buying his sob story.

                On July 6, 1925, the Bay Hills Oil partners and the company’s attorney Joseph Richardson went on trial for mail fraud, having delayed the legal action as long as they could. Investors wanted their money.

                “The law is full of loopholes,” Los Angeles Times writer Walter V. Woehlke later wrote about another fraud, the Julian Pete scandal. “To the layman it is perfectly clear that a criminal fraud of vast proportions has been committed, that tens of thousands of innocent people have been bunked out of an unknown number of millions, but the way to legal proof and conviction lies through a jungle of technicalities in which it is easy to get lost.” (Los Angeles Times, 10/17/1927)

                Woehlke was right. Though Willard C. Campbell, John McDuffie, Walter Lee Tully, Charles P. Knight, Joseph G. Richardson and William R. Buck had defrauded 5000 investors of $750,000 ($11.6 million) , they merely got a slap on the hand, fined $2500 ($38,500) each and given ten months suspended jail sentences.  However, the story has a happy ending.

                In February 1929, “Special Delivery No. 1,” located at Locust and 31^st Street, which had been taken over by the Cypress Petroleum Company, hit pay dirt, with promises of over 2,000 barrels of oil a day. The property that was nearly lost for taxes and given up as hopeless, had now became a valuable asset. However, few had recorded their deeds to the well and over half of the “unit holders” could not be found. Those that had recorded their deeds were entitled to a portion of the earnings. For those that couldn’t verify a legal filing, the funds accrued would revert to the state in five years.  Many were lucky to recover their original investment, but little else. The Great Depression would see the price of oil fall to an all-time low.

                Though this story had a happy ending, this was just the tip of the iceberg, the first of several local oil scandals to follow.

             

 

C.C. Julian

  The biggest Ponzi scheme of all involved Courtenay Chauncey Julian---“C.C.” as he was known to millions---who appeared so folksy and down to earth that investors believed his sales pitch and that he really cared for the little guy. Born in Manitoba, Canada, son of an impoverished farmer, Julian had worked in the Texas oil fields before drifting to Southern California.  He soon began to speculate in oil leases, and from his point of view his luck was phenomenal.  On a four-acre lease he drilled five wells and all five came in, producing gushers.  Now, as a successful independent operator, he decided to form a production, refining, and distributing company to compete with the major oil companies, and open his company to small investors.  Soon he was acquiring more leases, and opening gas stations which sold his appropriately named gasoline, “Defiance.”

                In June 1924 his new company, the Julian Petroleum Corporation, purchased the holdings of the Grump-Steele Company of Long Beach, including contracts on the production of twenty Signal Hill oil wells for $75,000  ($1.13 million today).  Julian also had interests in the Alamitos Heights oil field with wells near Colorado Avenue and Ultimo Avenue. This was but a small portion of Julian’s supposed massive oil investments.

                Julian bypassed the usual techniques used by oil promoters who laid siege to Pershing Square in downtown Los Angeles each morning.  Impressive buses heading for the oil fields filled the streets advertising free lunches, band concerts as well as a chance to see the wells up close.  Julian’s approach was different.  He didn’t rely on bus rides to entice people.  Instead, he wrote his own ads which encapsulated the hopes and dispelled the fears of the small investor. He charmed many into putting money into his oil syndicate, despite warnings from the California Corporations Department and Harry Chandler of the Los Angeles Times who finally caught on to Julian’s schemes and refused to print his ads.  Penniless when he began, Julian managed to raise a lot of money from those he conned. C.C. Julian was the Bernie Madoff of his day.  It was not long before 40,000 folks had invested $11 million ($166 million)  in the stock of Julian Petroleum. His appeals for funds were so successful that one particular stock issue was oversubscribed by $75,000 ($1.13 million).   However, the law eventually caught up with him.

                Bribes and high salaries to bankers and government officials hid what was really happening---more Julian stock was being traded than was supposed to exist.  But the Ponzi scheme, where early investors are paid off with the money of later investors, began to spin faster and faster, demanding more and more cash.  As the “little guy” investors began to get a putrid whiff of what was really happening panic spread.  The “Average Joe” saw his money in Julian vaporize.

               The Julian fiasco was merely the prelude to the devastation that came after 1929.  When the Richfield Oil Company went into receivership in 1931, an audit revealed an operating loss of $54 million ($920 million).  Items such as alimony, hotel rooms, purchases of jewelry, repair of speedboats and so forth had been blithely charged to the company.  Then the Guaranty Building and Loan Association failed (its president had embezzled $8 million), then the American Mortgage Company failed for $18 million ($306 million).  Nearly every major financial debacle involved some political figure, a judge, public official or some well know fixer, Carey McWilliams wrote in Southern California Country. McWilliams also pointed out that in earlier times investors had purchased something physical, such as property (at whatever inflated price), but with Julian stock certificates all they had were pieces of paper.

                The Julian scandal, coinciding with the onslaught of the Depression, pauperized at least 500,000 Southern Californians. Its consequences would ripple on and on, gaining force until in 1930 the region led the nation in the number of bankruptcies and in the amount of net losses in bankruptcy proceedings. The scandal contributed to the collapse of the First National Bank, the election of former Ku Klux Klansman John Porter as mayor of Los Angeles, and the defeat of California Governor C.C. Young in his bid for re-election.

              As a librarian, I feel obliged to tell you to read Oil by Upton Sinclair, if you want to learn Prohibition Madness).  Sinclair wrote the book while living in Belmont Shore, in it he described the transformation of Paradise (Long Beach), from “a quiet little seaside village where retired Iowa farmers pitched horseshoes,” into a bustling boom town porcupined with derricks.  The road into Paradise, Sinclair wrote, was “lined with placards big and little, oil lands for sale or lease, and shacks and tents in which the selling and leasing was done.  Somebody would buy a lot and build a house and move in, and the following week they would sell the house, and the purchaser would move it away, and start an oil derrick.  A great many never got any further than the derrick---for subdividers of real estate had made the discovery that all the advertising in the world was not equal to the presence of one such structure on the tract.”
More about this time in my book Prohibition Madness.

Did Signal Hill Oil Save the Country from Economic Collapse?

                What was the world like after World War I and the influenza pandemic? Time, not medicine, had lessened the deaths from influenza. There was no prevention and no treatment. Isolation, quarantine, good personal hygiene, and limits on public gatherings were used to control the spread…sound familiar?  But what were the effects of the disease economically?  Here is a look at the economic depression that struck soon after the war and the influenza pandemic ended.

               

We all have heard of the Great Depression that encompassed the world in the 1930s. A little talked about Depression brought economic collapse and massive job losses in the years following World War I and the influenza pandemic.  Those were the days when there was no government aid available to businesses and individuals, no Social Security or welfare. People had to fend for themselves.

               

According to today’s economists, the Depression lasted from January 1920 to July 1921, but there were signs of things to come months earlier.  In November 1919, panic conditions threw Wall Street into turmoil and interfered with the operation of the whole Federal Reserve System. Restless speculation forced “call money” up to 25 percent overnight. This “unnatural” demand for cash affected not only the business world; it affected all other parts of the economy. Farmers who wished to raise money on prospective crops found it more difficult to do so; small town merchants were inconvenienced in restocking their stores and builders were kept from purchasing their building supplies.  Unemployment rose sharply. Automobile production declined by 60% and total industrial production by 30%. Southern California, however, escaped the economic crisis because of a major discovery – oil.

                Gas emanations, seepages of oil and asphaltum deposits had long been known throughout Southern California.  Native Americans as well as mission fathers used these substances as roofing materials, natural lubricants and as liniments.  The first oil boom actually occurred in 1859 when it was found that petroleum could be used to make kerosene lamp oil, an inexpensive alternative to whale and coal oil in use at the time. With California gold production diminishing, oil speculation seized the minds of many still eager to make their fortune.  By 1865, sixty-five California oil companies had sprung into existence, though many never got further than just issuing stock certificates and pocketing investors’ money.  Those that did get around to drilling didn’t have enough capital to bore the wells very deep, and only a small amount of oil was obtained.  The modest quantity that was pumped was found to have little value. It wasn’t the same grade as eastern oil, which was perfect for kerosene production and at the time the only valuable use for petroleum.  Oil investors became discouraged and by 1884 there were only four California companies remaining that were actually producing oil.

 

One of Doheny's first wells

               In 1892, Edward Doheny was sitting on the porch of a Los Angeles hotel when he saw a decrepit wagon hauling chunks of a greasy, brown substance.  Curious as to what it was, the newly arrived miner ran after the wagon and asked the driver what he was hauling.  The driver replied “brea,” the Spanish word for pitch.  He told Doheny it came from a great hole oozing gobs of the sticky stuff in an area of the city called Westlake Park.  The driver was transporting it to a nearby ice factory where it would be used for fuel in place of coal.  A light bulb went off in Doheny’s head as he realized this was a new fuel which could become the new energy source of the nation.  The far seeing Doheny leased a three-lot parcel of land near the “great hole” at Patton and State streets in Los Angeles. It was swampland, bubbling with the tarry crude.  From this find, and convincing the Atchinson, Topeka and Santa Fe Railway to substitute oil for coal in their locomotives, the oil industry we know today came to be.

                It took a while for the use of oil to catch on, but as World War I got underway the need for petroleum increased. In 1916, oil wells began to dot Signal Hill. First it was Union Oil Company, then in 1917 St. Helen’s Petroleum Company and Kern River Oil Fields, Inc.  In 1920, Shell Oil Company arrived on the scene, leasing city owned land for oil drilling, but it wasn’t until 1921 that the speculation that Long Beach and Signal Hill was sitting on a vast oil reserve proved true.   On June 23, around 5 p.m. Shell Oil Company struck a huge deposit of oil at its well at Temple and Hill Street.

Oil - Signal Hill

                Oil fever quickly spread.  Sandberg Petroleum Company, with massive Signal Hill oil holdings, was swamped with people wanting to invest in their company.  Within 48 hours of the Shell discovery, Sandberg sold $112,000  ($1.6 million today) worth of stock.   Real estate promoters in the area on and surrounding Signal Hill could barely keep up with sales.  The City of Long Beach owned 36 acres of land between the Shell and Sandberg holdings and envisioned itself becoming the richest city in the world---a city that would end taxation.

                Shell well no. 2, Nesa, on the west slope of Signal Hill, struck oil at 12:45 a.m. on September 2.  It came in with such an explosion that everyone thought an earthquake had struck. People as far away as Los Angeles were awakened by the blast.  Other wells came in on October 26, November 17 and December 13.  On November 28, the city owned municipal oil well hit pay dirt, shooting two hundred barrels of fluid above the top of the derrick.  For many years afterwards this single well brought $360 ($5,200 today) a day into city coffers.

                Amid all of this oil, Signal Hill, which had been renowned for its scenic grandeur, productive soil and magnificent homes, was transformed.  Building restrictions, paved streets and walks and curbs were supplanted by oil leases, oil stocks, derricks and drills.  Palm trees and rose gardens were removed to make way for boilers and tool houses.   It was now dangerous living on the Hill, residents were regularly routed from their homes by blowouts from the oil wells.  Families escaped through the rain of greasy crude oil, leaving behind everything but the clothes they were wearing.  They would pile into their automobile, trying to drive to safety but finding it difficult to get through the oil that coated everything.  On returning home they found their once white home  now black, trees in their orchard destroyed, stripped of branches by the clinging oil, the contents of their homes worthless, and the building, soaked with highly flammable oil, a fire trap in which no one could safely live.  

  

Long Beach/Signal Hill oil field

              Because of oil, Long Beach and the rest of Southern California was able to escape the economic recession striking the rest of the United States in 1920.  Signal Hill was considered the greatest oil field in the United States.  A multitude of new industries associated with oil fields and interests were springing up.  Gas refineries, absorption plants, casing-head gasoline plants and several hundred miles of pipe lines were being built.  But all was not as rosy in the rest of America.  The United States was experiencing a severe, post-war recession due to industrial overproduction and elimination of defense related industries.  The result was widespread wage cuts and unemployment that reached 5.7 million in August 1921.  Thousands traveled west to Long Beach to take advantage of the jobs and other benefits accompanying the oil boom.  On October 7, 1921, Long Beach Mayor Charles Buffum spoke about the “propaganda” being spread through the east calling attention to the alleged employment advantages of Southern California.  "We can take care of the people we have here, but the continued invasion of the army of the unemployed will result most seriously for those who come", he said in an article in the Daily Telegram. "Keep the idle away from the City, Long Beach can take care of its own people, but the influx must stop."

                But the influx did not stop. In the decade 1920-1930, over 2,000,000 people moved into California, 72% of whom settled in Southern California.  The migration into Southern California in this decade was the largest internal migration in the history of the American people, according to author Carey McWilliams. In 1923, oil from Signal Hill alone caused ship traffic through the Panama Canal to double By 1924  (the same year Signal Hill decided to become its own city), oil surpassed agriculture as the leading industry in California.  In Southern California alone that year 230 million barrels of crude oil was pumped out of the ground. 

                The 1920s ---which brought Prohibition, rum runners, jazz, gambling ships and gangsters---also brought tremendous growth to the Southland. But speculation in the oil industry became rampant, with many swindlers out to make a quick buck.  More about this next time when I will tell of how this uncapped speculation pauperized at least 500,000 Southern Californians.