Ashes to Ashes (12 page)

The upturn in cigarette sales in the United States in the first decade of the new century prompted the Thomson family to open a small American branch. Imports accounted for only 4 percent of the U.S. market, and tariff levels assured that only luxury-priced brands were worth shipping in. The more sensible way to penetrate the American market was to manufacture finished goods there, and so Philip Morris & Company, Ltd., was incorporated in New York in April of 1902; half the shares were held by the parent company in London, and the balance by its U.S. distributor and his American associates. Its overall sales in 1903, its first full year of U.S. operation, were a modest 7 million cigarettes. Among the brands offered, besides Philip Morris, were Blues, Cambridge,
Derby, and a ladies’ favorite named for the London street where the home company’s factory was located—Marlborough.

IX

IN
mid-May of 1911, Chief Justice of the United States Edward Douglass White read the Supreme Court’s opinion on the legality of the Standard Oil trust’s operations. While the net effect of the ruling was the dismemberment of the oil trust, the Court’s reading of the antitrust statute seemed hazily permissive. “[I]n every case where it is claimed that an act or acts are in violation of the [antitrust] statute the rule of reason, in the light of the principles of law and public policy which the act embodies, must be applied,” White wrote. The reasonableness of the degree of restraint on trade exercised by a trust was to be determined by viewing the alleged misconduct in light of its observed effect on competition; the Sherman Act was intended not to limit the freedom to contract but to expand it by outlawing only those contracts that unduly constrained the rights of others. And by that measure, Standard Oil had unreasonably restrained trade. Two weeks later, the Court similarly ruled against American Tobacco.

Regarding the tobacco trust’s contention that its every assailed act was “but a legitimate and lawful result of the exertion of honest business methods … for the purpose of advancing trade,” the Court found such a view “a plain misconception of both the letter and the spirit of the Anti-trust Act.” From the first, the Justices said, American Tobacco had demonstrated its purpose to be the “dominion and control of the tobacco trade, not by the exertion of the ordinary right to contract … but by methods devised in order to monopolize … [and] by driving competitors out of business. … [W]e think the conclusion of wrongful purpose and illegal combination is overwhelmingly established. … ” The opinion divined “a conscious wrongdoing” demonstrated by the form in which the buyout transactions were embodied from the start, “ever changing but ever in substance the same … so as to obscure the result actually attained … to restrain others and to monopolize and retain power in the hands of the few who, it would seem, from the beginning contemplated the mastery of the trade.” American Tobacco was ordered to be broken up and the constituent parts reassembled in smaller units.

Buck Duke had sat at his desk, awaiting telegraphic word of the Court’s decision. When it came, he looked over at the photograph he kept of his father in front of the little log farmhouse in which Buck had grown up and, according to one of his biographers, remarked (to whom, it was not stated), “In England if a fella had built up a whale of a business out of
that
, he’d be knighted. Here they
want to put him in jail.” No one answered him that in class-ridden England, a fella almost certainly could never have accomplished what Duke had in free-spirited America. But he had overreached, and his countrymen had finally whacked him for it.

In fashioning the breakup remedy, the federal courts paid Duke an ironic tribute by turning to him to show how the reorganization might best be accomplished with minimal disruption of the economy and the lives of all involved. Simply put, nobody else knew his monstrous offspring half so well as the man who had sired it. Within eight months, Duke’s plan was completed and approved. Under it, a number of the more independent subsidiaries were cut loose to operate on their own, including United Cigar Stores, British-American Tobacco, and the R. J. Reynolds company. But the core of the enterprise was parceled out unevenly among three new companies. The largest retained the American Tobacco name; its assets included one-third of the total U.S. cigarette and smoking tobacco business, a quarter of the plug trade, and about 6 percent of the cigar market. Liggett & Myers, about two-thirds the size of the the new American Tobacco, was assigned one-third of the plug market and about 20 percent each of the cigarette and smoking tobacco trade. Lorillard, reborn at about half the size of the new American Tobacco, got 26 percent of the nation’s cigarette market, 23 percent of the pipe tobacco market, 5.7 percent of the cigar business, and 3.7 percent of plug.

A key element in the court-approved formula was the effort to dilute the dominant Duke interest in the restructured companies by reducing the holdings of the twenty-nine individual defendants from 56 percent of the common stock in the dismembered trust—the only shares with voting rights—by limiting the amount of stock in the three new companies that any defendant might acquire and awarding voting power in them to the formerly voteless holders of preferred stock, the only classification the minority holders had been permitted under the trust. The defendants, moreover, were forbidden for three years to increase their holdings in the new companies, which themselves were not allowed any financial transactions with one another for five years and were permanently enjoined from recombining any of their brands, offices, or manufacturing facilities or jointly owning any subsidiaries or requiring jobbers to carry one product in order to obtain another. The covenants restricting those who had sold out to the trust from engaging in the tobacco business for a long span of years were dissolved, as was the agreement to divide the world tobacco market among American Tobacco, Imperial, and British-American. The tobacco business was thus converted overnight from monopoly to oligopoly as a “reasonable” and court-sanctioned restraint of trade.

Duke, morose and drinking heavily now, had tens of millions to console him for his country’s rebuke and moved away from tobacco to devote the last thirteen years of his life to a whole new career building the electric power industry
in his native region. To earn the high regard of posterity that contemporary North Carolinians declined to extend him, he turned to philanthropy on a major scale, most notably by endowing little Trinity College, not far from his Durham birthplace, when the school agreed to exchange its name for his and the money to become a university of national rank.

Generally overlooked in the tumult over the reshaping of the tobacco trust was the liberation of Dick Reynolds’s company. It gained none of American Tobacco’s assets and spun free with what it had, namely, about 18 percent of the U.S. chewing tobacco business, 2.7 percent of the pipe tobacco market on the strength of Prince Albert’s ascent, and none of the cigarette industry. Its assets were valued at about one-third the amount of Lorillard’s, the smallest of the three new successor companies carved from the trust. But Reynolds himself was euphoric over the breakup. Within a week of the court’s approval of it, he was sending his salesmen “News of Freedom” in a letter that reiterated for a final time that his company had always remained separate and distinct from the trust. If so, then why the gleeful proclamation of freedom? With the hated Duke out of his life now, Dick Reynolds at the age of sixty-two underwent a rejuvenation. Released from captivity, he decided to put R. J. Reynolds Tobacco into the one part of the business that he liked least and had no experience in—cigarettes. The results would soon turn his industry upside down.

It Takes the Hair Right Off Your Bean

ONE
immediate result of the breakup of the tobacco trust was the onset of authentic competition among the newly independent parts of the former monolith. Each began to fill in its product lines so that it could sell across the board against the others. Nowhere was this new competitive zest more apparent than in Winston-Salem, North Carolina, as Reynolds Tobacco’s home was now called.

Ever the opportunist, Richard Reynolds now used his chronic shortage of working capital as leverage to diminish the control over his enterprise by Duke and his Wall Street cronies, who still held the biggest voting bloc of his shares. Possibly because his operations were still relatively small and they had so much else on their collective minds, the New York crowd did not object when Reynolds proposed a new stock issue that would increase the number of shares outstanding by 25 percent, none of which the former trust insiders were allowed to purchase under the terms of the federally mandated dismemberment. Even so, outsiders, mostly Northern, still held some 55 percent of the Reynolds stock five years later. To rid itself of this protracted hold, Reynolds devised a second or “B” category of common stock, which gave its holders no voting rights but a hefty dividend undiluted by the profit-sharing feature of the regular common. Available on a swap basis for the old issue, the “B” stock was naturally more attractive to outsiders, and before long Reynolds people and their fellow North Carolinians were in absolute control of the state’s biggest company.

Fresh funds in hand, Dick Reynolds was chiefly concerned with how to expand
his business best and fastest. The cigarette field, he knew, was the most promising area in the tobacco industry. Unit sales, which had been only 4 billion a decade earlier, were now more than three times that figure. There were at least fifty prominent brands on the market, ranging in price from a nickel to a quarter for a pack or box of twenty. The leading seller was Liggett & Myers’s Fatima, a blend of Turkish and domestic leaf, which at fifteen cents was most popular in the Eastern urban sector of the nation. But cheaper brands held sway regionally, like Piedmont, the all-Bright leaf entry that dominated in the Southeast, and the straight Burley brand, Home Run, a New Orleans favorite; both sold for five cents.

Before taking the plunge, Reynolds had to satisfy himself regarding the charges that cigarettes, unique among tobacco products because their smoke was so readily inhaled, were a danger to their users. A plug man from the first, he had long since been persuaded that smoking was a more hazardous habit than chewing, which he had convinced himself was a preservative of the teeth. Comfortable with the purity of tobacco, he was susceptible to the claim, voiced most notably by the nation’s genius of electrical invention, Thomas A. Edison, that the white paper cigarette wrapper was the culprit, releasing toxic substances in the combustion process. Only when three separate laboratories hired by Reynolds reported back with negative findings did he resolve to proceed.

But with what sort of cigarette? First he and his blenders tried to mix Turkish with the local Bright and a dash of imported Latakia, an Oriental of keen aroma, calling the brand Osman after a heroic Turkish general and pricing it at twenty for ten cents. Neither it nor an all-Bright they called Reyno and sold for five cents made much of a dent in test markets. Plainly something different was needed. And the answer was to adapt for a cigarette the formula behind Reynolds’s booming Prince Albert pipe mixture—a blend predominantly of Bright and western Burley, with its high tolerance of flavoring additives, supplemented by perhaps 10 percent Turkish leaf and, in a later reformulation, a touch of Maryland leaf for its even-burning character. The mix was not precisely revolutionary, but it did have a taste detectably different from what was then on the market: the Reynolds formula had a richer flavor than the all-domestic blends and a lighter quality on inhalation than the Turkish brands and their American imitators. Reynolds elected to price the new entry in the middle range—a dime for a pack of twenty—and to throw the company’s full resources into this single brand, as none of his competitors did.

Some thought was given, in the wake of Prince Albert’s success, to naming the new brand for another foreign royal—Germany’s Kaiser Wilhelm, who would be pictured in full imperial regalia on a white horse. But Reynolds hesitated to name the product after a living figure because “you never can tell what the damned fool might do.” World events would shortly bear out his canny caution. What was wanted, rather than celebrity with its built-in riskiness, was
a short, memorable name that alluded to the exotic appeal of Turkish cigarettes without seeming to be just another entry in that crowded field. Having set his sights on Fatima, the market leader, which called itself “
TURKISH
Blend
CIGARETTES
” (with the “Blend” in much smaller type on the package), Reynolds would style his brand a “
TURKISH & DOMESTIC BLEND
” in a co-billing that greatly overstated the minor proportion of Oriental leaf in his blend. But if that was the fashion, he would hew to it, and the leading contenders for the new brand were winnowed to three, all redolent of the Near East—Kismet, Nabob, and Kamel.

Reynolds opted for the last, possibly because no other prominent brand was named for an animal. The only obstacle to its selection was a tiny independent brand called Red Kamel, on the market for just a few years. For $300, Reynolds bought the name, good will, and last 5,000 sticks the brand’s New York manufacturer claimed were in existence. Always a poor speller, Reynolds nevertheless recognized that the more familiar English usage was better for the American market: “Camel” it was to be.