THE DISINTEGRATION OF THE TOBACCO COMBINATION HE decisions rendered under the Sherman Act dealt at THE first with agreements between distinct and competing corporations or groups of corporations. In so far as these agreements contravened the prohibitions of the law, they were pronounced illegal. Other decisions followed that dealt with holding companies, that is, corporations organized for the purpose of acquiring and holding the stocks of competing economic units. The decision in the American Tobacco Company case went further: it held a corporate organization illegal, on the ground that it itself operated so large a proportion of a particular business as to make its existence a violation of the law. In other words: the first decisions did not affect the entity of any corporation; later decisions affected only such corporations as exerted a controlling influence over other previously competing corporations; the latest decisions hold a corporation to be illegal if its own directly conducted business is in restraint of trade. In the Northern Securities case,' decided in 1904, the shareholders of two competing railway lines had surrendered their original stock for certificates of the holding company. The dissolution of the holding company left the corporate entity of the two separate railway companies intact. The original stocks of the two companies were redistributed among the holders of the Northern Securities certificates. It was, however, not feasible to redistribute the original stock to the original holders. Each holder of a certificate of the Northern Securities Company received stock in both railway companies. 2 The case of the Standard Oil Company was in nearly all respects similar, except that a much larger number of separate concerns had been brought into the combination. Here also the control over the separate units was acquired and exercised 1 193 U. S. 197. 2173 Fed. 177; 221 U. S. 1 (1911). through a holding company; and here also, when the combination was dissolved, each stockholder of the Standard Oil Company of New Jersey received an interest in each of the numerous subsidiary concerns. The inter-relation of these companies and the coördination of their functions were such that in many respects they formed a single economic group. When the holding company ceased to exist, there resulted no break in the coördinate activities of the separate corporate entities. In the American Tobacco Company case,' as has already been stated, the interpretation of the Sherman Act was carried a step further. The Supreme Court held the combination "in itself, as well as each and all of the elements composing it, whether corporate or individual, whether considered collectively or separately, to be in restraint of trade, and therefore illegal." The court justified its sweeping condemnation of the entire combination on the ground that the very complexity of the situation required further relief than had been granted in previous cases. The situation could be met only by a reorganization of the entire structure of the combination.3 The task of superintending and approving such a reorganization was left to the circuit court in which the government had originally instituted procedure. These proceedings involved a number of distinctively economic problems; and for this reason the Department of Justice availed itself of the aid of economic experts from the Bureau of Corporations. I The American Tobacco Company was originally formed, in 1890, by combining five concerns whose collective output made up ninety per cent of the cigarette business of the country. Its monopolistic position in this branch of the tobacco industry was thus established at one stroke. Profits retained in the busi 1 221 U. S. 106. "Senate Document 40, 62d Congress, 1st Session, p. 37. For further discussion of the Standard Oil and American Tobacco Company cases, cf. H. R. Seager, "Recent Trust Decisions," POLITICAL SCIENCE QUARTERLY, vol. xxvi, pp. 581-614. ness and additional securities offered in exchange enabled the company to acquire within the next few years extensive interests in other branches of the industry. By the end of 1898 not only had it become the largest single factor in the little-cigar, plug and smoking tobacco branches, but, through a relentless competitive campaign, it had brought the entire industry into a condition of instability that facilitated a general consolidation movement. The first and most important step in the movement for general consolidation was the formation of a new company controlled by the same interests-the Continental Tobacco Company. By the middle of the year 1899 this combination included practically every plug factory of any importance in the country. In 1899, also, the American Tobacco Company greatly increased its direct control by further purchases of independent concerns. Moreover, it adopted the policy, which was followed by the Continental as well, of acquiring controlling interests in other corporations through stock purchases. About the same time the tobacco combination, as it can now properly be called, carried on an aggressive competitive campaign against the Atlantic Snuff Company, a combination of strong Scotch snuff manufacturers, which had been organized independently in 1898. The result of this campaign was the formation, early in 1900, of the American Snuff Company, the American Tobacco Company interests receiving $10,000,000 of the $23,000,000 of stock issued. In 1901 the American and Continental companies were instrumental in the formation of the American Cigar Company, and early in the next year they coöperated in establishing the MacAndrews and Forbes licorice combination. A very large part of the domestic and Havana cigar business of the United States and Cuba came under the control of the combination in 1902 through the Havana Tobacco Company, organized for the purpose of securing this control. At the time when the tobacco combination was dissolved this company was directly controlled by the American Cigar Company. After making an attempt to obtain control of the British tobacco industry, which was only partially successful because the manufacturers of that country formed a counter combination, the American combination was content to consolidate its foreign interests with the foreign interests of the British combination under the name of the British-American Tobacco Company. In this company the American interests received two-thirds of the outstanding stock. This consolidation operates in the world market outside of the United States and Great Britain and is rapidly extending its business. In 1903 the American Cigar Company separated its stogie and cheroot business from its other branches and combined it with the United States Cigar Company, a stogie combination whose interests centered in Pittsburgh. The new combination operated under the name of the American Stogie Company of New Jersey. In extending its sphere of activity, and particularly in every attempt to make itself the dominant factor in a new line, the methods pursued by the combination were substantially uniform. It first bought one or more concerns outright; next, the business thus acquired was utilized to start an aggressive trade war; and then this new business became the nucleus of a new consolidation, in which the combination obtained as its share a controlling portion of the stock. Throughout the period of consolidations, moreover, the combination continued to buy individual concerns outright, and by this means added almost continuously to its already extensive control. From 1903 to 1910 the combination controlled from 75 to 85 per cent of the total plug, fine-cut and smoking tobacco business of the country; 80 per cent of the cigarette business; 93 per cent of the little-cigar business; and 96 per cent of the snuff business. It also controlled about 15 per cent of the domestic cigar business and the larger part of the Cuban and Porto Rican cigar and cigarette production. The principal products contributory to tobacco manufacture were brought. under almost equal control. The MacAndrews and Forbes Company was practically the only factor in the licorice paste industry of the United States; and the manufacture of tin foil, of cotton bags for packing smoking tobacco and of wooden boxes for the packing of plug and twist, and the making of nicotine products from stems and tobacco wastes, although not absolutely controlled, were nevertheless important features in the business of the combination. Through the ownership of a majority of the outstanding stock of the United Cigar Stores Company, the combination was an important factor in the retail tobacco busiAll in all, the combination absorbed the business of not less than three hundred different concerns. In 1910 it held under its centralized control one hundred and forty-six different corporate entities operating in all parts of the world, of which sixty-six were doing business in the United States. ness. Throughout its history the combination was controlled by a small group of persons. From 1890 to 1898, this group consisted mainly of the early promoters who had consolidated the cigarette business; but, beginning with the organization of the Continental Company in 1898, it was enlarged to include a small number of powerful financiers. Before the organization of the Consolidated Tobacco Company in 1901, the central control had been exerted through common directorships, without the ownership of a majority of the voting stock. Through the Consolidated Tobacco Company, however, the outstanding voting stocks of the leading companies were gathered in, in exchange for bonds, and the Consolidated stock, the largest share of which was held by this small group of financiers, carried with it the control of the entire combination. In 1904, when the Consolidated was merged with the American and Continental companies, the Consolidated stock became the only outstanding voting stock of the new American Tobacco Company. The voting control, therefore, remained unchanged. While in 1890 the capitalization of the American Tobacco Company had been only $25,000,000, in 1910 the net capital and surplus of the entire combination had increased to $350,000,000. The annual business in 1890 was less than $10,000,000; in 1910 it had increased to more than $200,000,000. The structure of the combination during the period of its expansion had become increasingly complex. The American Tobacco Company, as the principal holding concern, not only held the stock of a very large number of concerns engaged either in the tobacco trade or in contributory lines of business, |