Ashes to Ashes (8 page)

Yet he was regarded not as a notorious roué but as the community’s foremost industrialist, wearing a patriarchal beard by now, and notably civic-spirited at that. He took the lead in upgrading Winston from a frontier pesthole through the installation of sewers, establishment of a reliable fire department, and improvement of rail service, all of which served, of course, to enhance and safeguard his own business. In 1889, as the American Tobacco Company was being organized in New York, Richard Reynolds was erecting a six-story, block-long, electric-powered, fireproof factory, the largest plug plant in North Carolina. He was well on the way to becoming the biggest manufacturer of sweet chewing tobacco in the entire South, and it would not be long before his enterprise would whet the omnivorous appetite of Buck Duke.

The Earth with a Fence Around It

IN THE
same year that the American Tobacco Company began to operate under the whip hand of Buck Duke, the Congress of the United States passed its first major piece of legislation aimed at checking the unbridled exercise of corporate might. But in seeking to temper the behavior of any enterprise that attempted to restrain trade or commerce, the Sherman Antitrust Act of 1890 spoke in broad and ill-defined language even as the tentacles of gigantic, monopolistic operations were reaching out to seize a growing portion of the furiously expanding American marketplace.

The corporation had proven an invaluable tool of the industrial age because it permitted the accumulation of capital on a scale never before contemplated, easier access to credit, and limited personal liability without which the risks inherent in the entrepreneurial system would likely have been unbearable. The “trust” carried the concept one logical step further. Taking the form of one corporation owning or controlling another corporation or several of them, trusts were ideal vehicles for the creation of wealth because they facilitated supervision of geographically dispersed activity and economies of scale.

But in their very potential to improve productivity, trusts carried the seed of great mischief-making. To invite their growth in the name of economic expediency was to hope for benign limits to the exploitation of highly vulnerable markets. The peaceable amalgamation of businesses to advance their joint interests was plainly progress over the old law of the jungle, where the fight was to the death unless the vanquished accepted enslavement. What if, though, economic expediency invited alliances that created immense opportunity for
plunder, as in the building of the American railroads, ventures so chancy that their operators felt entitled to extract from their dependent customers all that the traffic could bear? With flaring resentment, the people turned to the frail reed of government to check such abusive profiteering and to tame it without quashing the go-getting spirit.

Such was the genesis of the Sherman Act. Besides far-flung railroad systems, trusts or trustlike combinations had won command over petroleum, sugar refining, whiskey, meatpacking, copper, lumber, and, lately, cigarettes. And the trend was growing; the boom that followed the depression of 1893 would lead, in the year 1899 alone, to the registered formation of eighty-seven new combinations capitalized at an average of $20 million, an immense sum for the time.

If competition and combination were polarizing drives in U.S. society, Buck Duke had brilliantly exemplified the virtues of the former. Competition served to create markets, propagate goods, consume labor, and, ideally, yield profits to reward the investor and plant new growth. For Duke’s rivals, however, the competition proved withering, and combination with him was their only salvation. But where competition created markets, combination was logically intended to control them. Was such control necessarily tantamount to an illicit restraint of trade or commerce within the meaning of the broad Sherman antitrust language and therefore undesirable on its face? Weren’t there “good” combinations that, by curbing the excesses of competition, promoted prosperity for all participants? Buck Duke’s conduct as helmsman of the cigarette business would not advance that argument.

To meld five hotly competing companies into one organization, Duke lost no time in picking the ablest employees from the collective pool and discarding the rest. No one could call that cruelty—only prudence. Similarly, American Tobacco’s cigarette manufacturing was now centralized at the former Allen & Ginter factory in Richmond, closest to the source of the basic commodity and an abundant supply of labor. The Bonsack company, which had promoted the cigarette combination in order to help achieve economies of scale and a more popular and profitable product, was rewarded by having its royalty rate driven down to about one-third its former level—but where else could Bonsack turn except abroad? Duke’s distributors, too, now had to accept a profit margin ceiling of 10 percent, like it or not, and monitor the prices fixed by the company for retailers to charge the public. Those jobbers who did so vigilantly were rewarded with a rebate, while those who failed in their oversight risked temporary or permanent blacklisting. Advertising and promotional costs could now be cut sharply without fear of losing customers to waiting competitors. And the cigarette combination was big enough now to avoid competitive bidding at auction for the raw leaf; tobacco farmers, having hauled their perishable crop long distances to market, were thus often at the mercy of
take-it-or-leave-it bids by American Tobacco. Against his few surviving competitors Duke employed comparably grinding tactics, cutting prices selectively by brands and locations until the smaller independents died off or could be absorbed on the cheap.

All of these steps netted Duke’s combination high profits—$2.5 million after the first year of its joint operation—amounting to 58 percent on tangible assets and a 27 percent profit margin on net sales, and served to feed Buck’s autocratic tendencies. These were rarely exhibited demonstratively, for all his forbidding physical presence; rather, he maintained remarkable self-control and a calm manner behind those chilly blue eyes. “Don’t ever ask me for a raise,” he would tell his subordinates. “I know what my people are worth, and when they earn a raise, they’ll get it.” He rarely squandered his emotional reserves on personal confrontations and never reprimanded an offending employee in public; you were simply dispensed with if you disappointed the boss one time too many.

Despite the great and rapid success he had achieved with cigarettes, Duke calculated early in 1891 that they were not enough to sustain the enterprise he now envisioned. The little smokes were a relatively small piece of the whole tobacco business. He would use them as the lever to move into the much larger and potentially far more profitable sectors of the business, even as his social ambitions were being propelled upward. The overgrown country boy was now received with outward respect by New York’s café society and financial community; further advancement required new initiatives and a clientele beyond the déclassé.

There were twice as many chewers as smokers of tobacco in America, and so Duke summoned to his office the head of the substantial Louisville firm of Pfingst, Doerhoefer & Company, purveyors of several leading brands of Burley-based chewing tobacco, including Battle Ax and Newsboy. Duke painted a rosy picture for the Kentuckian showing what would happen if he joined forces with American Tobacco. The deal, soon consummated, was marked by three features that would come to characterize so many of the transactions that followed. First, the price of nearly $2 million was paid for with only one-third cash and the balance in American Tobacco stock. Second, Doerhoefer and his colleagues were to be retained to operate their beloved business. And third, if any of the principals chose to resign from the Louisville operation or in the unlikely event that they were asked by their New York overseers to step aside, none of them would be allowed to engage in the tobacco business for at least the next ten years.

Two months later, under similar terms, Duke bought a Richmond company that was the leading maker of cheroots. Then Duke added two Baltimore companies with strong lines of plug and snuff, paying for all but 5 percent of the $5 million purchase price with American Tobacco stock and, following the pattern
he had initiated upon merging his cigarette-manufacturing units, he closed down the smaller Baltimore acquisition. Now American Tobacco salesmen had a much broader line of merchandise to peddle, and fewer of them were needed. By 1894, company profits had surged to $5 million.

But as the 1890s lengthened, the cigarette business began to tail off perceptibly. Reformers and moralizers routinely referred to cigarettes as “coffin nails,” distinguishing them from other forms of tobacco mainly on the ground they were all too accessible to boys and damaging to their health. By 1893, agitation had reached the point where the state legislature of Washington outlawed the sale of cigarettes, and other states were considering similar action. Plainly American Tobacco had to expand its other tobacco lines at an accelerated pace. Duke proposed a compact of leading plug makers along the lines of the cigarette combination he had forged, but when they declined the honor, he declared war on them and waged it with a ferocity that made his campaign to dominate the cigarette business look tame. Jobbers were given big rebates to push the American Tobacco line of chews, and those who did not were likely to find their cigarette orders going unfilled. The company spent lavishly on premium giveaways and staged showy promotions, but most of all, Duke employed “fighting brands” to slay his foes. Some lines had their prices cut in half or even below their manufacturing cost in order to win buyers in a war of attrition that was not merely ungentlemanly—it was downright ruthless.

Several of American Tobacco’s ranking directors, Lewis Ginter among them, argued that Duke was acting rashly and squandering company capital in reaching for control of the entire tobacco universe. These rebels approached the Standard Oil multimillionaire Oliver H. Payne, by then a prominent Wall Street investor, and sought his aid to wrest control of American Tobacco. Payne had an audience with Duke, who persuaded him of the necessity of these slashing tactics that, in variant forms, Standard Oil itself had pioneered. Payne came aboard as an ally of Duke, not to check him.

With a major Wall Street player in his camp for the first time, Duke undertook still heavier cannonading in his plug war and soon was practically giving the stuff away. By 1898, his cumulative losses in the plug struggle had reached $3 million and were depressing American Tobacco profits. But the warfare eased that year as five sizable plug companies caved in to Duke, who promptly packaged them with his own properties as the new combination of Continental Tobacco. It was much easier, then, for Duke to entice the young scion of the P. Lorillard Company, probably the nation’s oldest continuing tobacco business, with its big plug and snuff works across the Hudson River at Jersey City, to join up as well for $6 million, payable largely in Duke’s paper. For good measure, Duke also picked up the New York outfit that made the popular Between the Acts brand of little cigars, giving him more than half that market; among the rest of American Tobacco’s holdings now were 22 percent of the
U.S. plug business, 26 percent of its smoking tobacco sales, 6 percent of its snuff trade, and 85 percent of the cigarette market.

The aptly named Thomas Fortune Ryan, Virginia-born moneyman who had gained control of practically every street railway line in New York through his infinitely manipulable Metropolitan Traction Company, saw in Duke’s bludgeoning ambition the chance for a killing. A far more suave operator, Ryan moved noiselessly, as was his wont, to buy up for $4 million in cash Black-well’s Durham Company, the still prospering makers of Bull Durham smoking tobacco, then married the Bull to the National Cigarette and Tobacco Company, one of the few remaining independents outside of Duke’s web. Ryan named the yoked units Union Tobacco and then, as the guiding figure in a syndicate including his powerful financial allies William C. Whitney and Peter A. B. Widener, traveled to St. Louis to meet with the supremely conservative rulers of the world’s largest chewing tobacco manufacturer, Liggett & Myers. Vowing his hatred of predatory trusts in general and Duke in particular, Ryan found a receptive ear among the St. Louisians, whose profits had been badly hurt by Duke’s all-out price war to capture the plug market. For $200,000, Ryan came back to New York with an option to buy Liggett for $11 million; dovetailed with Union Tobacco, it would constitute a formidable rival indeed to Duke’s spreading empire.

Buck saw red when Ryan spelled out his alleged intentions. If the Wall Streeter’s swift thrusts into the tobacco business were a ploy, they were a good one; Ryan’s lineup was a viable enterprise, and Duke dared not call the bluff. He also did not fail to see the opportunity that Ryan was inviting him to share with his syndicate. For one-third of American Tobacco’s stock, Union Tobacco came into the fold; for one-third of Continental’s stock, Duke got Liggett & Myers, $5 million in cash, and sway over the U.S. plug business. Ryan, Whitney, and Widener, who may have made as much as $20 million in paper profits on the deal among them, joined Duke’s board of directors. He was keeping company now, beyond any doubt, with the movers and shakers of Gotham.