VIII

THE TOBACCO MONOPOLY1

HISTORY OF THE TOBACCO COMBINATION

HE Tobacco combination has as its center the American

subsidiary combinations- the American Snuff Company, the American Cigar Company, and the British-American Tobacco Company. The American Tobacco Company and the other three combinations each control a large number of subsidiary companies. The number of companies in the combination doing business in the United States, Porto Rico, and Cuba is 86, besides a considerable number operating only in foreign countries.

The Tobacco combination dominates the tobacco industry of the United States. With the exception of cigars, its proportion of the country's output of manufactured tobacco products is substantially four fifths, giving it a large degree of monopoly power. The magnitude of the combination is further shown by its enormous capitalization. The said 86 companies have an aggregate capitalization, including bonds, of $450,395,890. A considerable part of this, however, represents duplication through intercompany ownership of securities. The net amount of the stock and bonds of the companies in the hands of the public (including the directors and all holders except the companies themselves), however, is no less than $316,346,821.

THE AMERICAN TOBACCO COMPANY AND ITS CIGARETTE MONOPOLY, 1890 TO 1895

The history of the combination begins with the organization of the American Tobacco Company in 1890. This was a combination of the five principal manufacturers of cigarettes, and

From Report U. S. Commissioner of Corporations, vol. I, Feb. 25, 1909, pp. Footnotes and subheadings are omitted without specific indication. Compare also the Supreme Court decision of 1911 in Chapter XVII, infra.

1-41.

its business at first was confined substantially to cigarette manufacture. The company started with a capital of $10,000,000 of preferred stock and $15,000,000 of common stock -- an amount vastly in excess of its tangible assets, which were $5,000,000 (including $1,825,000 in the form of notes of the individual stockholders). James B. Duke was made president, and from that time to this he has been president of the leading companies in the combination and has largely directed its policy.

The American Tobacco Company at its inception secured control of over 90 per cent of the cigarette business of the country. It sought to maintain this dominant position partly by making agreements for the exclusive use of what were considered the best cigarette machines; the most important of these agreements, however, was terminated in 1895. During this period, 1890 to 1895, the average profits of the company were very large, exceeding four million dollars annually.

THE PLUG-TOBACCO WAR, 1894 TO 1897

The American Tobacco Company early began to extend its domination to cover other branches of the tobacco industry. In 1891 the authorized capital was increased to $35,000,000. Of this increase $6,000,000 was common and $4,000,000 preferred stock. In this In this year the company bought two important concerns manufacturing smoking tobacco and snuff, another manufacturing plug chewing tobacco, and a fourth which was the principal manufacturer of cheroots in the United States. During the period from 1894 to 1897 it developed its plug-tobacco business with such a degree of success that ultimately its leading compet itors in that branch were forced into combination with itself.

In pursuit of its policy of expansion the American Tobacco Company, particularly after 1894, sold plug tobacco at greatly reduced prices. Its leading fighting brand bore the appropriate name of "Battle Ax." At one time this brand was sold to jobbers as low as 13 cents per pound, which, considering the revenue tax, was below the cost of production. The company's immense profits from its cigarette business furnished the means for conducting this expensive competitive struggle, in which

several millions were sacrificed. The American Tobacco Company's plug business increased swiftly, and by 1897 it had more than one fifth of the total plug output of the country. To enable the company to fill its orders, an additional plug plant was purchased in 1895, and another erected.

THE PLUG-TOBACCO COMBINATION, 1898-1899

By 1898 a number of the leading independent manufacturers of plug tobacco had wearied of the fierce competitive struggle and were prepared to consider propositions for combining their interests with those of the American Tobacco Company. The first negotiations, early in 1898, were, however, unsuccessful, partly by reason of the increase in taxes during the SpanishAmerican war, which appeared to the financiers who were promoting the enterprise likely to interfere with its profitableness. Shortly thereafter the American Tobacco Company bought outright two important plug-manufacturing concerns - the Brown Brothers and Drummond tobacco companies, of St. Louis. This greatly strengthened the position of the American, and it apparently determined to renew the vigorous competition of the preceding years against its powerful rivals. For this purpose the price of "Horseshoe," the leading brand of the Drummond concern, was sharply reduced.

Before this new competitive fight had become very active, however, further negotiations for combination began. The plug combination, known as the Continental Tobacco Company, was organized on December 10, 1898. It took over the plug business of the American Tobacco Company, including the Brown and Drummond concerns, and also that of six leading competi tors, while a few months later the most important competitor of all, the Liggett & Myers Tobacco Company, was also brought into the combination. Several of the concerns acquired had also a large business in smoking tobacco. Although the American Tobacco Company did not at that time own a majority of the stock of the Continental Tobacco Company, the men connected with the American were, from the very first, dominant in the Continental's directorate.

The Continental Tobacco Company issued at the time of its organization $62,290,700 of stock. This amount was still further increased in April, 1899, by reason of the acquisition of the Liggett & Myers concern. The total issue then became $48,844,600 of preferred stock and $48,846,100 of common stock, or $97,690,700 altogether, an amount which thereafter remained unchanged. The company was greatly overcapitalized, the common stock being issued wholly as a bonus. Much the greater part of both classes of stock was given directly in exchange for the property and business acquired. The company issued $15,137,100 of preferred and a like amount of common stock for the property and business turned over by the American Tobacco Company; $17,500,000 each of preferred and common for $5,000,000 in cash and the property and business of the Liggett & Myers Tobacco Company; and $13,456,100 in preferred and $16,207,500 in common stock for the property and business of other concerns. From the beginning the American Tobacco Company had complete control over the new combination.

ENTRANCE OF FINANCIERS INTO THE MANAGEMENT

The acquisition of the Liggett & Myers Tobacco Company by the Continental, just referred to, was part of a series of trans actions which had a most important influence upon the person. nel of both the American and Continental tobacco companies. During 1898 a group of powerful financial interests, including Thomas F. Ryan, P. A. B. Widener, A. N. Brady, W. C. Whitney, and Thomas Dolan, bought up the Blackwell's Durham Tobacco Company, an important manufacturer of smoking tobacco, and the National Cigarette and Tobacco Company, combining them under the name of the Union Tobacco Company. They also secured an option upon a controlling portion of the stock of the Liggett & Myers Tobacco Company, control of which of course was very important to the new plug combination. Mr. Duke and his associates in the American and Continental companies realized the seriousness of the possible competition of the Union Tobacco Company interests, backed by these wealthy financiers. They therefore entered into

negotiations with these financiers and bought out the properties they controlled at a high price. In the spring of 1899 the assets of the Union Tobacco Company proper were taken over by the American Tobacco Company in exchange for $12,500,000 common stock. Shortly afterwards, through another syndicate, composed in part of the men above mentioned, but also including J. B. Duke, O. H. Payne, and H. D. Terrell, the Liggett & Myers Tobacco Company assets, together with $5,000,000 in cash, were transferred to the Continental Tobacco Company in exchange for $17,500,000 of its common stock and $17,500,000 of preferred stock.

These transactions were important, not only because they still further inflated the capitalization of the two companies, but because they resulted in giving a very large stock interest in both to the financiers who had organized the Union Tobacco Company. Most of these men shortly thereafter entered the directorate of either the American or Continental company, or both, and from that time on have been important factors in the control of the entire Tobacco combination.

Already before this time there had been marked changes in the directorate of the American Tobacco Company. The campaign for control of a larger part of the tobacco industry, which has just been recounted, had not been favored by most of the leaders in the original cigarette combination. Consequently, Ginter, Kinney, Kimball, and Emery (owner of Goodwin & Co.) had practically disposed of their interests in the American Tobacco Company by the spring of 1898. Indeed, none of them was a director in that company after the spring meeting of 1897. This defection of most of the large stockholders among those who had organized the original combination found other men, possessed of large capital but without previous experience in tobacco manufacture, ready to avail themselves of the opportunity offered. During the latter part of 1897 and early in 1898 Oliver H. Payne and H. L. Terrell invested freely in stocks of the American Tobacco Company and were elected directors. At about this time Moore & Schley, New York bankers and brokers, also established close relations with the combination. They financed the organization of the Continental Tobacco Com