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holdings in any of the fourteen companies, except one for-
eign company, but it was provided that any one of the de-
fendants could acquire the stocks held in any of the com-
panies by other defendants, or in case of death from their
estates. 74

The chief problems presented in the disintegration and
reorganization of the tobacco combination were two. The
first was, as far as was practicable, to eliminate the collective
control of the twenty-nine individual defendants from the
new companies. This problem was disposed of by several
measures: Voting rights were conferred upon the preferred
stocks ; the common stockholders of the American Tobacco
Company were required to purchase with cash the common
stock of the new companies organized; the preferred stock-
holders of the American Company were allowed attractive
exchanges of their stock for the stock of the new companies ;
the preferred stocks and other securities held by the Ameri-
can were to be disposed of either at once or by 1915; and
to decrease the monetary influence of the American its bonded
indebtedness was all to be paid, the bond holders being
induced to exchange the bonds for the securities of the new
companies at more favorable rates. The second problem
was the distribution of the business of the combination in
such a way as to make no part taken over by each concern
monopolistic. This was solved by limiting the business of
each concern to approximately one-third of the total busi-
ness in any branch of the trade. The previous concentra-
74 191 Fed. Rep. 430.



134 Trust Dissolution

tion of manufacture, the extraordinary development of single
brands and the difference in their profitableness made this
distribution the most difficult feature of the disintegration.

In October, 1911, by privilege of the court, the National
Cigar Leaf Tobacco Association, the Cigar Manufacturers'
Association, and the Independent Tobacco Salesmen's Asso-
ciation through their counsel, Louis D. Brandeis and Felix
H. Levy, submitted objections to the plan of dissolution
filed by the American Tobacco Company. 75

While this plan was afterwards modified in some parts
the chief objections raised by these independents remained.
The independents claimed that the plan would result "in
legalizing monopoly instead of restoring competition. Its
effects * * * would be more injurious than the continuance
of the present illegal monopoly. There are five fundamental
defects in the plan, each so serious that it forms alone a
sufficient ground for the rejection of the plan.

"First (Community of Interest). The plan proposes to
divide the main properties of the trust among several cor-
porations legally distinct, but to distribute the stock in
these several corporations pro rata among common stock-
holders of the American Tobacco Company. No plan can
be effective to restore competition which does not include
as an essential condition a provision that the separate cor-
porations or segments which are to carry forward the busi-
ness of the trust shall at the outset and for a limited period
thereafter, be owned by absolutely distinct groups of indi-
viduals." 76 While the twenty-nine individual defendants
were to have a smaller control, the independents claimed
"that a legal majority of the stock of the corporation is not
essential to actual control. A small minority may control ;
and as the same individuals would at the outset select the
directors and the officers of each of these colorable com-
petitors it is certain that the officers and directors of the
several companies would be friendly if not in fact iden-

76 Hearings Before Committee on Interstate Commerce, United States
Senate, 62nd Congress, 2nd Sess., 1911-1912, pp. 315-350. Hereafter
referred to as Hearings.

" Op. Cit., Hearings, pp. 314-15.



The Dissolution of the American Tobacco Company 135

tical." 77 They held that not only the twenty-nine defend-
ants, but all who shared in the distribution should be en-
joined from acquiring stock in the other companies. It
should be remembered that the directors and four others to-
gether owned 77 percent of the common stock and that ten
men, six of whom were directors, held 63 percent. 78 The Su-
preme Court had also said that "a mere decree forbidding
stock ownership by one part of the combination in another
part or entity thereof, would afford no adequate measure of
relief." 79 The following table shows the defendants' per-
centage of control after the dissolution:






DISTRIBUTION OF THE BUSINESS OF THE TOBACCO
COMBINATION 8





Capital Defendants'




and Percentage of


Company


Surplus Control


American


$138,611,344 35.16


Liggett & Myers


67,447,499 40.67


P. Lorillard


47,552,501 40.76


British- American


36,000,000 34.66


American Snuff


17,535,938 38.65


R. J. Reynolds


9,541,322 37.53


United Cigar Stores


9,000,000 37.65


Bruton & Weyman


8,000,000 28.44


G. W. Helme


8,000,000 28.44


McAndrews & Forbes


5,714,148 39.77


Puerto Rican-American


2,357,562 45.31


J. S. Young


2,000,000 43.87


Union- American


2,517,740 24.65


Conley Foil


1,215,321 33.88


R. P. Richardson, Jr. & Co


500,000 None


Hernsheim


400,000 None


Johnston Tin Foil and Metal


400,000 33.73



Total $356,393,375

To this objection of the independents the Circuit Court
entrusted with dissolution said: "The main objection to the

77 Op. Cit., Hearings, p. 316.

78 Op. Cit., Hearings, Part I, p. 18.

79 221 U. S. 186.

Political Science Quarterly, V. 128, p. 265.






136 Trust Dissolution

proposed plan, an objection found in every document filed
by those who were given permission to be heard and which
seemed to be principally relied on by those who spoke, is
what is referred to as 'Common stockholding.' For instance,
under the plan two new companies, 'Lorillard' and 'Liggett
and Myers' will be formed out of the American, which will
itself, thus reduced in size, continue in existence. The same
individuals, the present 1,800 or more common stockholders
of the American, will hold the entire common stock of each
of the other companies. A similar condition will exist with
some, at least, of the other companies. It is contended that,
although under such circumstances there may be potential
competition, no real competition can exist. With this argu-
ment or the reply to it, it seems to me this court is not con-
cerned. In two recent cases (Northern Securities and Stand-
ard Oil) the Supreme Court * * * in the disintegration left
the stock of the separate entities into which the group was
split in the hands of the same body of individual stock-
holders. Since there was no disapproval of this method of
disintegration indicated in either opinion it would seem that
the question whether or not common stockholding is 'repug-
nant to the law' * * * has been settled for this Court by con-
trolling authority." 81

The second objection of the independents was that it
created a few dominating concerns. "The plan provides for
a division (generally) among only three huge corporations
of nearly all the properties now held by the trust. * * *
The three or four concerns formed to carry forward the main
business of the Tobacco Trust would together be in a posi-
tion to crush the independents even more effectually than has
been done in the past." 82 The relative position of the com-
panies in the different branches is shown by the table below,
which gives the distribution according to the percentage
of volume.

The cigarette business of the trust, which was carried on
in seven separate factories, was divided into three companies.
The independents held that it should be divided among seven.

81 191 Fed. Rep. 375-6.
M Hearings, p. 316.



IH.D






Dissolution of the American Tobacco Company 137

Cigar- Smok- Fine Little

Company ettes ing Plug Cut Snuff Cigars Cigars



American 37.11 33.08 25.32 9.94 6.06 15.43

Liggett & Myers 27.82 20.05 33.83 44.61 43.78

P.Lorillard ..15.27 22.82 3.73 27.80 5.72 33.84

R. J. Reynolds 2.66 18.07

Union American 1 . 58

G. W. Helme 40.88

American Snuff 32. 05

Bruton & Weyman 29.25

AH Independents 19.80 21.39 19.05 20.65 7.82 86.64 6.95

They also charged that the distribution of the cigarette
brands was such as to give the trust companies dominance
in this branch of the trade. The smoking tobacco business
of the trust, which was carried on in twelve separate fac-
tories, was divided among four concerns. The independents
claimed that it should have been divided among twelve and
they made the same charge of improper distribution of
brands. The plug tobacco business of the trust, carried on
in twelve factories, was divided among four companies
whereas it should have been among twelve. The same charge
as to distribution of brands was repeated. The little cigar
business of the trust, carried on in seven separate factories,
was divided among three concerns. It should have been di-
vided among seven. The snuff business of the trust, car-
ried on in more than three factories, was divided among three
companies but should have been divided among six. The
trust controlled 90 percent of the licorice-paste business
which was divided among two companies. It should have
been divided among four as there was only one independent
competitor. It was also charged that "the control by
the trust of the licorice-paste business gave it control of the
chewing-tobacco business, as chewing plug cannot be made
without licorice; and its control of the licorice-paste busi-
ness of the whole country is fortified by its control of the
raw material, licorice root. The plan makes no provision
for breaking the trust's monopoly of licorice root." 83 The
tin-foil business of the trust was divided between two plants

M Hearings, p. 318. These three companies controlling the trust busi-
ness in this trade had all been found guilty of monopolizing licorice paste
and fined in 1907. See 212 U. S. 585.



138 Trust Dissolution

while the independents wanted it divided among five separate
companies.

To this second objection of the independents the Circuit
Court said : "Manifestly the minuter the fragments into which
the old combination is split, and the more they are prohibited
from conducting business as other companies are free to
conduct it, the less will be their ability to compete with such
other companies. This whole line of argument deals with
the economics of the tobacco business. No doubt the novel
problem presented to this court is connected with questions
of economics as well as with questions of law. But this is
a court of law not a Commerce Commission, and the legal
side of the proposition would seem to be the controlling
one." 84

The third objection to the plan was that the three com-
panies among which the manufacturing properties of the
trust were divided should be "each completely equipped for
the conduct of a large tobacco business. No independent
concern is now completely equipped for the conduct of a
large tobacco .business, or indeed completely equipped to do
any tobacco business covering all the main branches of the
tobacco trade." 85 The independents claimed that the impos-
sibility of fair competition is due to the cumulative effect
of three advantages which the trust secured through its
illegal combination: (1) The large percentage of the
business in each department which the trust companies re-
ceived ; () their business extends to all departments of the
tobacco trade; (3) the control of indispensable brands by
means of which the dealers would be compelled to give pref-
erence to its other products over those of the independents.
These brands would also give large profits with which com-
petitors could be crushed.

Fourth : 86 Many restraints on unfair competition were
asked for by the independents, as well as by the Government,
to make the dissolution more effective. Some of these were
granted and the rest wholly or in part refused. The inde-

84 191 Fed. Rep. 376.
86 Hearings, p. 319.
88 Ibid., p. 320.



The I



Dissolution of the American Tobacco Company 139

pendents contended that for a limited time they should have
more than ordinary protection. The request that the twenty-
nine defendants be enjoined from increasing their holdings
was granted for a period of three years but the special pro-
vision allowing the defendants to purchase each other's
stocks made this less effective. The request for the liberty
of applying to the court for relief in case of alleged violation
of the injunctions was also denied. It may be noted that the
following petitions supported by the Government were re-
fused by the court: that no company established by the
decree should have more than 40 percent of the output of
any one branch; that the giving of rebates or other special
inducements be prohibited ; that espionage on the business of
a competitor, bribery of employees of a competitor, or ob-
taining information from revenue officials be prohibited ;
that independents be allowed to appeal to the courts if the
injunctions were violated; that the stock of the United Cigar
Stores Company be sold to others than the twenty-nine de-
fendants ; that the Government be given the right to reopen
the case within five years to obtain other relief in case the
dissolution did not prove satisfactory.

Fifth : The decree left the United Cigar Stores Company
intact and passed it over as a complete entity to the common
stock holders of the American Tobacco Company. 87 The
independents asked that this company growing up through
the illegal operations of the trust be separated into ten sepa-
rate corporations with separate group of owners for each.
Its strong bond of union with the American and its illegal
practices were a menace to the independent manufacturers
and the retailers. The British-American and Reynolds To-
bacco companies were likewise given wholly into the same
hands. 88 Felix H. Levy, arguing for the independents, said,
"The United Cigar Stores Company has been the most power-
ful agency of the combination in obtaining the control of
the tobacco industry. Through the hundreds of stores which
that company operates, and by virtue of the special trade
advantages given to it by its owner, the American Tobacco

"Hearings, p. 321.
88 Hearings, p. 349.



140 Trust Dissolution

Co., and by exercise of the most ruthless and cruel practices
in driving out retail opposition and obstructing the avenues
of distribution on the part of independent manufacturers,
this company has proven the most effectual of all the bar-
riers to the entry of others into the tobacco trade. If the
mild expedient of merely separating this company from the
combination but of leaving its control in the hands of the
same men who have heretofore controlled the combination,
if the rose-water remedy of gently setting aside this vast
agency of destruction from its former control by the com-
bination and placing it in the hands of the same men who
control that combination, is to be adopted, it is no exaggera-
tion to say that, in this respect at least, the decree of the
Supreme Court of the United States might as well have been
a blank piece of paper." 89 As to the United Cigar Stores
Company, the Attorney General said, "there is one feature
of this combination which, in my personal experience, has
been the subject of more complaints than all the rest put
together. That is the United Cigar Stores Company. The
connection of that organization with this combination had
given the combination the greatest opportunity to I do
not know that I can say to injure, but certainly to harass,
the domestic trade and to incense a larger number of people
than anything else they have done, because they have gone in
and reached the poor corner dealer, bought the house over
his head and when his lease came to an end, instead of his
being able to renew it as formerly, he finds that he can not
get a renewal of the lease, that it has been taken by the
United Cigar Stores Co. It was the hand of the trust, it
reached out and touched the little man who has nobody to
protect him. I have on my files in Washington letters my
files are full of letters and complaints running down to
within the last few days, and I do think if that concern can
be cut loose, it would do more to make the rest of the
plan acceptable to the people of this country than anything
else that could be done * * * , they are a great big organi-
zation to-day. They have something like a thousand stores,
or seven hundred or eight hundred, at least, scattered
88 Stevens, Industrial Combinations and Trusts, pp. 505-6.



The Dissolution of the American Tobacco Company

throughout the country, and they are the most potent com-
petitor of the small dealer in the United States. * * *

"Therefore, I say, it is entirely within your honor's pow-
er, whether you choose to exercise it or not, to say as a con-
dition of this plan : You .have got to get rid of them and
turn them loose so that that concern will no more have any
connection with the American Tobacco Co., or with any of
the distributive companies or with any of these individuals
who have built up this combination through so many
years." 90

Many others have discussed the effectiveness of this dis-
solution. Mr. Roosevelt says it "practically leaves all the
companies still substantially under the control of the twen-
ty-nine original defendants. Such a result is lamentable from
the standpoint of justice. The decision of the Circuit
Court, if allowed to stand, means that the Tobacco trust
has merely been obliged to change its clothes, that none of
the real offenders have received any punishment, while, as
the New York Times, a pro-trust paper, says, the Tobacco
concerns in their new clothes, are in a position of 'ease and
luxury' and 'immune from prosecution under the law.'
Surely, miscarriage of justice is not too strong a term to
apply to such a result when considered in connection with
what the Supreme Court said of this Trust." 91 Attorney
General Wickersham says the "plan, with the restrictive
provisions embodied in the decree, will accomplish a recrea-
tion of lawful conditions, and being so convinced, I opposed
the efforts of outsiders to inject themselves into the situa-
tion, and to delay or prevent the carrying out of the plan." 92
Samuel Untermyer characterized the dissolution as a
"farce." 93

Some results of this dissolution are known. When the
order was given by the Supreme Court to dissolve the com-
pany, the stock of the American Tobacco Company fell to
$690 per share ; but after the decision of the Circuit Court as
to the kind of disintegration which was to take place, this

90 Stevens Industrial Combinations and Trusts, pp. 483-4.

" Outlook, V. 99, p. 711.

n Hearst's Magazine, V. 21, p. 1439.

M Ibid., p. 1439.



Trust Dissolution

common stock rose, within a few weeks, to as high a price
as ever attained in the history of the company, with the
exception of a single day, $529 per share. 94 This was fol-
lowing four years of litigation which cost about $22,000,000
as claimed by the defendants. 95 Louis D. Brandeis, then
chief counsel for the independents, now a member of the
Supreme Court, declared that "a combination heretofore
illegal has been legalized. The value of that legalization is
shown by the high market value of the common stock * *.
At a time when the business of the country is depressed,
when railroad shares and other industrial stocks are rela-
tively low * * *. Surely other trusts would welcome such
an 'immunity bath.' " 96 That the dissolution was a failure be-
cause the price of stock immediately rose does not necessarily
follow. The stocks were somewhat depressed during the
period of litigation and the fact that a surplus of more than
$61,000,000 was accumulated in less than a decade in addi-
tion to large dividends gave rise to the hope of a freer dis-
tribution of earnings, even if in the aggregate the earnings
were less in the future.

Much more definite evidence concerning the results of
the dissolution are obtained from part 3 of the report of
the Bureau of Corporations on the Tobacco Industry, pub-
lished in 1915. This report deals with prices, costs and
profits in the tobacco industry for the period of the combi-
nation and for the two years which followed the dissolution.
The report shows that the successor companies among which
the business of the combination was divided controlled of the
total output in the various branches of the tobacco busi-
ness in 1913, as compared with the combination in 1910, less
in smoking and in fine-cut tobacco, more in cigarettes and
in snuff, and about the same in plug and in little cigars. 97
There was in most branches a more equal distribution of
business among the successor companies in 1912 and 1913
than there was directly after the dissolution. In the snuff
branch each of the three successor companies retained prac-

94 Hearings, Senate Interstate Commerce Committee, p. 1368.
08 191 Fed. Rep. 397. M Hearst's Magazine, V. 21, pp. 1440-1.
97 Report of Bureau, Part III, p. 11.



The Dissolution of the American Tobacco Company 143

tically a monopoly in its respective types and to a large
extent each a distinct sales territory. 98 This branch was
also characterized by unusually high profits and small ad-
vertising and selling costs, with no apparent competition."
Aside from the cost of leaf tobacco which continued to rise
rapidly in price, the report shows that the factory costs of
the successor companies were not materially different from
those of the combination in 1909-10, but that increases in
selling costs after the dissolution were general, resulting
from the duplication of selling organizations and increased
overhead expenses following the division of the business.
There was a marked increase in the advertising expenditure.
In 1910 this item was $11,000,000 and in 1913 it was $23,-
000,000. 100

The aggregate earnings of the successor companies in
1913 were slightly , less than those of the combination in
1910, though the volume of sales was larger. The earnings
on the book value of the investment of the successor com-
panies averaged 12.5 percent in 1912 and 11.3 percent in
1913, but the profit accruing to the common stock was at a
much higher rate. 101 Based upon the book value, the com-
mon stock of the following companies received in 1913 these
respective earnings: the American 14.6 percent, Liggett and
Myers 18.4 percent, Lorillard 17.6 percent, R. J. Reynolds
16.4 per cent. These rates would be much higher if the
actual cost of the investment instead of the book value was
taken. On this basis the earnings of the successor com-
panies averaged 14.6 percent in 1913 as compared with 17.9
percent for the combination in 1908 and 17 percent in
191 0. 102 The earnings of the successor companies were in
general comparatively low in those branches or types in
which competition for business was most pronounced, and
very high in those in which competition was slight.

There have been no material changes in prices either to
the jobbers or consumers since the dissolution. Of 110 prin-



98 Report of Bureau, Part III, pp. 14-5.
89 Ibid.

100 Ibid., p. 18.

101 -



Ibid., pp. 21-2.
102 Ibid., p. 22.



144 Trust Dissolution

cipal brands covering nearly every branch of the trade,
prices were changed for only three. The high profits taken
in conjunction with the practically unchanged wholesale and
retail prices indicate that there has been but little compe-
tition in price. The Bureau attributes this in large part
to the customary retail prices and other peculiar price-mak-
ing conditions of the tobacco trade, including statutory pro-
visions, which make it impracticable in most cases to in-
crease the quantity sold at the customary price. 103

The position of the independents was not improved much
by the dissolution. 104 Their total output remained about
constant or slightly increased in the plug, smoking, fine cut,
and little cigar branches, but declined heavily in the cigar-
ette branch. The independents that increased their business
were generally the larger companies producing a varied line
of products, or small companies with some especially popu-
lar brand. On the whole their profits were small in com-
parison with the successor companies, as was true of the
combination. They made a very poor showing of profits in
the navy plug and Turkish cigarettes, but had a marked in-
crease of profits in long-cut smoking tobacco, while in
scrap tobacco their profits were even larger than those of


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