The Spermaceti Trust

In Wealth of Nations, Adam Smith noted:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

As if in illustration, this passage from Leviathan: The History of Whaling in America by Eric Jay Dolin. Page 113.

By 1760 the candle manufacturers realized that they had a serious problem. Despite the expansion of the colonial whaling fleet and the rise in the number of sperm whales captured, the demand for spermaceti candles was so strong that it far outstripped the supply of head matter. Just a handful of the largest candle manufacturers, working at full tilt, had the capacity quickly to process all the head matter the colonial whale fishery could provide. As historian James Hedges pointed out, the manufacturers’ ability to respond to this situation was constrained. They couldn’t afford to get into a bidding war with one another over the limited amount of head matter, for that would only cause its price, and hence the price of the candles, to rise. And while the wealthy were willing to pay more for spermaceti candles, they were willing to pay only so much. Were the price of spermaceti candles to rise too high, all but the richest customers would replace them with other illuminants, such as right whale oil, seal oil, or tallow candles.

Although the manufacturers couldn’t charge more for their product, there existed an alternative to keep the price of candles in check while still remaining profitable. Namely, if they could keep the cost of the head matter from rising too fast, then their goal could be achieved. At first, only four of the candle manufacturers joined forces, and they told the main supplier of head matter, Nantucketer Joseph Rotch, that they would only pay a certain amount, and no more, for his product. The folly of this plan, however, quickly became apparent. The four manufacturers could agree all they wanted on a ceiling price for head matter, but there was nothing to stop their competition from paying more, and therefore causing the price to rise rapidly. On November 5, 1761, the eight largest candle manufacturers in the colonies attempted to solve this problem by banding together in oligarchic fashion to form the “United Company of Spermaceti Chandlers,” which came to be known as the Spermaceti Trust. Under the terms of their agreement, the manufacturers established a maximum price that they would pay per ton of head matter, which was six pounds higher than the price that “common merchantable spermaceti body brown oil” was fetching in London. They also agreed to “use all fair and honorable means” to stop potential rivals from building new candleworks. And if the trust’s members were not able to keep the price of head matter from rising above the agreed-upon cap, they vowed personally to “fit out at least 12 vessels” to secure the head matter themselves. The trust was scheduled to remain in force for seventeen months, and during that time the members were to meet twice annually, "at the best tavern in Taunton” (Massachusetts), where they could share intelligence and measure the progress of their endeavor.

The Spermaceti Trust, one of the the earliest industrial monopolies in the colonies and, according to one author, the “world’s first energy cartel,” was plagued by problems from the start.13 Trust members accused one another of breaches of their agreement, the most egregious of which was paying more than the stipulated price for head matter. Rather than let the trust sink under an accumulating list of grievances, the members chose to regroup and clarify the terms of their association, signing revised articles of agreement on April 13, 1763. The new maximum price for head matter was now set at ten pounds above the price for “Brown oil,” and members were allowed to buy only from a specific list of suppliers, thereby minimizing the likelihood of secret purchases at inflated prices. The members remained committed to stifling the competition, and instructed their agents to provide them with “the most early notice of any attempt to set up other spermaceti works,” so that they could take steps to keep the interlopers from obtaining the expertise and tools, mainly the screw press, needed to launch the business. The most critical element of the new articles of agreement was the division of head matter among members. Originally the members were free to buy as much head matter as they could secure at a given price. Now members would receive a set allotment from the entire stock of head matter caught in the colonies, which was divided into one hundred parts. Thus, Nicholas Brown and Company, the largest of the manufacturers received twenty out of every one hundred barrels, while the others got smaller amounts.

For the next dozen years the Spermaceti Trust endured, and so did its problems. The members’ faith in one another and the trust itself was repeatedly shaken. Efforts to quash new candleworks were largely ineffectual, and by 1774 there were twenty-four different spermaceti candle manufacturers, all of whom had joined the trust. Worse still was the growing gap between the price of head matter and the price of candles.

Despite these problems, the members remained committed to maintaining the trust, believing that if it were to dissolve, the situation for all of them would be much worse. Better to have an imperfect union than to open the floodgates to uncontrolled competition, which could easily push the price of spermaceti candles beyond what even the luxury market was willing to bear. As long as the trust’s members could obtain head matter on reasonable terms, they could stay in business. And for many years the rise in the price for head matter notwithstanding, the trust managed to keep that price low enough so that they could still make a profit.