How a Great Power Falls Apart
Decline Is Invisible From the Inside
SWEDEN has long been known to many of the widely scattered millions of the rest of the earth only because she supplied a large share of the world's needs for a very humble and commonplace commodity -- the match. As early as 1870 Sweden was exporting annually some 6,000 tons of her matches to other countries. By the turn of the century the figure had risen to 16,000 tons. It was 35,000 tons in 1913, just before the outbreak of the World War. It is 50,000 tons today. No other country has ventured on such a vast production of matches, nor can any other boast an export trade in this commodity even approaching Sweden's.
The match was not invented in Sweden, but it was most brilliantly perfected there, and successfully turned to commercial exploitation. The Swedes have been skilful in adapting themselves to the widely varying demands of the different markets. If their product did not encounter artificial obstacles such as protective tariffs and other political restrictions it is quite conceivable that the match factories now existing in Sweden might expand in a relatively short time so as to supply, efficiently and cheaply, the demands of the entire world. But, as we shall see, conditions in the world market are not so simple.
Several years ago Americans came to the conclusion that the export of their products could best be furthered by the merger of various producers into large corporations. The stipulations of the Sherman Act were recognized as being out of date. The same fact was perceived by the Swedish match producers long before the war. They realized that most of their output went abroad, and that their interests were not furthered by the multiplication and competition of agents of different concerns. Accordingly, as early as 1903 six Swedish factories merged with the Jönköpings-Vulcan Match Manufacturing Company, and several other enterprises were annexed in the years following. The success of this merger, reflected in increased earnings, induced those companies which were still independent to combine (in 1913) in a rival organization -- the United Swedish Match Factories Corporation. This latter initiative came from Mr. Ivar Kreuger, under whose energetic leadership the new corporation made relatively greater progress than the older Jönköpings-Vulcan. But since the supplies of poplar wood (aspen) and chemicals for the manufacture of matches were seriously affected by the war, competition between the two companies became more and more costly; it was finally brought to an end in 1917, when they merged in a holding company, the Swedish Match Company.
This time, too, the initiative and leadership came from Mr. Kreuger, who became the new company's head. In him, indeed, the industry obviously found the guiding hand it needed. The words "Kreuger" and "match" soon became synonymous terms in Sweden. Ivar Kreuger was not originally in the match business. He was, to be sure, the son of a match manufacturer and therefore from early days in close touch with the industry and its peculiar problems, but his profession was that of construction engineer, and for some time after his graduation he was active as a builder. He received his technical training not only in Sweden but also in the United States, England and Germany, and thus early became acquainted with the business and financial methods of the countries furthest advanced in industry and trade. After the war he turned to big finance. His methods are those of the great American financiers, and he has a special gift for adapting their methods to the very complicated political and commercial conditions prevailing in Europe and the rest of the world. However, it is only in terms of personality that the Swedish match combine is to be regarded as Mr. Kreuger's creation, for the best inspirations of great captains of industry cannot materialize unless circumstances are propitious.
Broadly speaking, the World War enriched America and impoverished Europe. But this "impoverishment" of Europe must not be understood too literally. It was the belligerent countries that suffered especially. The neutral states were by no means ruined. During the war years their prosperity probably did not increase as notably as would have been the case in normal times; but it increased, nevertheless, and especially when compared to the greatly diminished prosperity of the countries directly involved in the war.
Sweden was one of the neutral countries; and she had some of the same advantages as the United States -- great wealth in natural resources, especially wood, iron ore and water power. She was the first European country to stabilize her currency: as early as the last quarter of 1922, the Swedish krona again stood at par on the international exchange, from which position, for that matter, it had never greatly depreciated. Once the gold standard had been virtually restored, capital resources began flowing again through normal channels, which was a great advantage over most other European countries, where the exhaustion of surpluses and the inflation of paper currency threw all economic concepts and values into chaos. At that time, anyone possessing a clear insight into the obscure facts of inflation and also a certain amount of ready money was in a position to realize great profits. Mr. Kreuger possessed this insight, and he also knew how to raise the funds required for the expansion of the interests under his control. His investigations covered the whole world.
During the past three or four years, Mr. Kreuger's policy of expansion has been pursued at a gallop and hence has caused some worry as to how he might weather an economic crisis. Only the head of the concern could know the effective strength or weakness of the foundations on which he had grounded his company's far-flung and -- it seemed to outsiders -- unmanageably huge interests. Since the great crisis on the New York Exchange last autumn, however, we are much better informed as to how things stand. Of the eight big Kreuger securities, the four most important are listed in New York: the preferred stock and the 5 percent gold bonds of the International Match Corporation (the big American subsidiary of the Swedish Match Company), and the partial debentures and the 5 percent gold bonds of the Kreuger and Toll Company (the great holding company of the combined Kreuger interests). In the autumn crash the International Match preferred and the Kreuger and Toll debentures were hard hit, and their drop naturally depressed still further the shares of the Swedish Match, which had already fallen in value. But these three securities made a powerful recovery, especially after the increased dividend declared on International Match shares for the last quarter of 1929. This could not have been more deftly timed.
I have space in this article to sketch the expansion of the Kreuger enterprises only in general outline. The various steps furnish an interesting example of the growth of a so-called "international trust." Backed by very substantial credit from Swedish banks, Mr. Kreuger first succeeded, just after the war, in getting possession of a whole series of foreign match factories on very favorable terms. As the Swedish money market was then pretty well exhausted, Mr. Kreuger from 1922 to 1924 strove to gain access to the great supplies of capital in England and the United States, and by successfully floating stocks, debentures and bonds he gradually assembled funds for the further consolidation of his interests. In the years following he similarly tapped the capital resources of Holland, Switzerland, France and Germany. Thus a great enterprise, originally working with purely Swedish capital, gradually advanced throughout the whole world, using foreign capital at each step of its progress. Meantime the enterprise has remained Swedish both in leadership and in fact, a result achieved by giving the shares of original ownership far greater voting power than the shares sold abroad. In the Kreuger and Toll Company, for example, the so-called "A" shares have a full vote, while the "B" shares have one one-thousandth of a vote; so that 10 million kronor in the "A" shares have 100,000 votes, while 66 million kronor in the "B" shares have only 660 votes!
How Mr. Kreuger obtained almost limitless international credit so readily and so effectively seems a riddle. However, the reputation of the Swedish safety match was in itself an excellent letter of recommendation. There was something else more important still, the principle "Live and let live!" It is easier to formulate than to apply, but Mr. Kreuger applied it, methodically, broad-mindedly. Financiers abroad who took an early interest in his schemes made a good thing of it. The earnings came not so much in cash dividends, for Mr. Kreuger's policy has always been cautious and of late almost niggardly, but rather in stock dividends -- prospects, that is, of future earnings on new stocks and debentures. For example, anyone who held Kreuger and Toll paper toward the end of 1926 must by now have collected from 20 to 25 percent on his investment, what with dividends and stock dividends. (Of course, those who came in later, at top prices, had a different experience.)
This is not the full story, however, of the development of the Kreuger enterprises. In many countries of Europe, and even abroad, matches constitute a favorite source of public revenue and are often a state monopoly. Most of the states which tax matches were greatly in need of capital in the years after the war. To countries which needed ready money and possessed match industries which the Swedish Match Company desired to annex, Mr. Kreuger suggested substantial loans in exchange for concessions of the monopolies for the manufacture or sale of matches, or both. Not only did the countries in question get ready money, but also, in most cases, they began receiving larger revenues from the match tax. The company has so far struck bargains of this kind (the terms varying) with nine European states: Poland, Estonia, Latvia, Hungary, Jugoslavia, Rumania, Greece, and more recently Germany (1929) and Danzig (1930).[i] There have also been three South American contracts, with Peru, Ecuador and Bolivia. In 1924 the company came within an ace of securing the French monopoly, the project failing only through the defeat of M. Poincaré's government. An agreement was later made with France, whereby the company becomes purveyor of match-making machinery, fancy matches, and raw materials to the French monopoly; it will also serve as adviser to the monopoly in the various stages of its reorganization.
In connection with these new-style contracts, the Swedish Match Company is supplying the states mentioned (except Peru) with loans to a face value of not less than 253 million dollars. About 94 percent of this nominal value -- 238 million, that is -- has actually been, or is to be, paid. When the full sums have been delivered, they will yield the company a yearly interest of some 15¾ million dollars, or about 6⅔ percent on the money actually paid. This takes no account of the probable substantial earnings of the monopolies themselves. The 253 millions, with interest rates between 5 and 8½ percent, are distributed as follows: Germany, 125 millions (of which 50 fell due on August 30, 1930, and the remaining 75 will be due on May 29,1931); Hungary, 36; Rumania, 30; Jugoslavia, 22; Turkey, 10; Poland, 6; Latvia, 6; Lithuania, 6; Greece, 4.86; Estonia, 1.88; Ecuador, 2; Bolivia, 2; Danzig, 1. At the moment, however, only 210 or 220 millions of the total have been paid over. The loan to France of 75 millions, issued at 93½ percent, is being paid back before maturity at 103½ percent; this represents a 10 percent profit for the Kreuger concern.
These huge transactions in the loan market have naturally somewhat altered the character of the Swedish Match Company. It is no longer a purely industrial concern, but a sort of banking or investment enterprise, which sells its international credit to states in need of ready money and holds these loans on its books as investments. This policy was not a sudden inspiration on Mr. Kreuger's part. In 1911 he organized the Kreuger and Toll Company to deal in construction and allied enterprises in Sweden and abroad. Through its coöperation with real estate companies and mortgage banks, this company began operating as an investment concern, until it ended by becoming one altogether. It and its many subsidiary companies were Mr. Kreuger's instrument for exploiting the countless opportunities for speculative investment after the war. These must have proved very lucrative. At times they seemed to distract part of Mr. Kreuger's activity from the match industry; at any rate, the larger portion of the resources of the Kreuger interests are now involved in enterprises other than matches proper. The huge loans that have been made to various countries in exchange for concessions of match monopolies should perhaps be credited in part to these other interests rather than to matches alone, though it is hard to speak with certainty on this.
In addition to these monopoly loans, the Kreuger and Toll Company holds important blocks of other state bonds (especially French), which it must have acquired on very favorable terms, and also real estate shares and mortgage bonds and similar securities in Sweden and Germany. Furthermore, it holds not inconsiderable interests in various banks in Sweden, Germany, France, Poland, Switzerland and Holland. The most important of its known properties are its stock interests in the largest ore-producing company of Sweden (and, for that matter, of Europe), the Graengesberg Company; and in the great Swedish Woodpulp Company (the "Swedish Cellulose"), which the Kreuger and Toll concern organized last autumn, and which it will control in the future.
The Graengesberg Company occupies a leading, perhaps a controlling, position on the European iron market. It owns large iron fields in central Sweden, and, in conjunction with the government, works the huge mines in the north. It also owns interests in iron mines in Algièrs and Morocco and holds options on mines in Algarroba, Chile. It transports its ore chiefly in its own vessels and, within Swedish borders, partly on its own railways. The invested capital of the Graengesberg and subsidiaries is estimated at about 120 million dollars. There are many thousands of stockholders, but the Kreuger and Toll concern and a subsidiary company, with stock to the value of 18 to 20 millions, has the controlling influence.
The Swedish Woodpulp Company owns forest areas of from 3 to 4 million acres in northern Sweden, and, as holding company, controls eleven other timber and pulp companies which operate in the north. Its invested capital is 80 million dollars, and its yearly production of timber (140,000 standards) and woodpulp (400,000 tons) has a sales value of some 30 millions. As the company supplies between 15 and 20 percent of the total Swedish export of timber and woodpulp, it is of no slight importance to the country as well as to the world market at large, especially in view of the fact that Sweden is the largest exporter of these commodities, supplying about 45 percent of the total world export.
Perhaps it might be more appropriate if the great enterprise directed by Mr. Kreuger were to choose the comprehensive title of the Kreuger Company, in preference to that of the Swedish Match Company, which really constitutes only one -- though the most important -- of its many activities. The present organization plan is as follows. The Kreuger and Toll Company is the kernel of all, and is controlled by Mr. Kreuger alone. This company, with its subsidiary companies, owns large blocks of stock in the Swedish Match Company and the International Match Corporation, and has large interests in the British Match Corporation. The Swedish Match Company is holding company for the two old Swedish manufacturing concerns, the Jönköpings-Vulcan Match Manufacturing Company and the United Swedish Match Factories Corporation. It has connections with the match industries in Finland, Switzerland and Czechoslovakia. It owns factories in India, Belgium, Holland, Japan, Portugal and other countries. The match monopolies mentioned above are perquisites of the Swedish Match Company and the International Match Corporation. The monopoly loans are held by the Kreuger and Toll Company, which has a further interest in the profits of the monopolies. The British Match Corporation owns factories in Great Britain, Ireland, Canada, Australia, New Zealand and Brazil.
Just how this international match business is distributed among the various companies is not known in all the details. On the other hand, the fourteen state monopolies are known; and it is known that the "match colossus" owns between 150 and 160 factories in thirty-five or forty different countries, employs some 60,000 clerks and workers in them, and virtually controls a large portion of the world's production of matches.
But it is not a question of a real trust monopoly. In countries where the company's position is in every respect monopolistic, that fact is due to the concession of such monopoly by the governments concerned, which are by no means bound hand and foot to the arbitrary will of the company in the exercise of the monopolies. Furthermore, there are still several big "outsiders" in the United States, and several small "outsiders" in other countries. A very important "outsider" is the Soviet-Russian State Match Monopoly, which for some years past has been trying to create sharp competition for the Swedish Match Company abroad, though apparently with little success. There is a general impression that the real aim of the Russians has been to force the Swedish Match Company into some sort of a mutual agreement, conditioned, of course, by a substantial loan to Russia. Apparently it is another example of the same Russian export policy that was revealed in the struggle between the Russian Naphtha Trust and the Royal Shell Company. The Russians sought to intensify their pressure on the Swedish company by placing an embargo on the export of poplar wood, once regarded as indispensable for matches. But the Swedes, who had gained control of all the poplar in Estonia and Latvia in the course of negotiations for the match monopolies of those countries, were left untouched. They seem also to have taken other precautions to safeguard their supplies of chemicals and machinery by the formation of special subsidiary companies.
It is interesting to examine the policies of the Swedish Match Company whenever abnormally high protective tariffs are laid upon its products. A number of countries, such as India, Australia and Egypt, have raised their tariffs on matches to as high as 200 percent of the cost price. But such exorbitant duties do not hinder the expansion of the company; in the long run, indeed, they help, for the company simply establishes its own factories in the countries in question, thus turning the high tariffs to its own profit, since its greater experience enables it easily to meet the competition of the native factories. This was the company's policy in India, where it has set up several large plants in recent years. Such must be its policy in Australia, and presumably in Egypt as well. In view of the prohibitive new tariffs adopted by the United States, the Swedes will doubtless build factories of their own in that country, in order not to lose their share of the American market. The head of the company always declares that he fails to understand the demand for especially high tariffs on matches. In terms of private business it is profitable in the long run for a company to establish new plants in high tariff countries. But in terms of world business it is a waste of capital to force the erection of new factories when, in open competition with native plants, older foreign companies could supply the demands of a given country satisfactorily and at lower prices.
The organization plan of the Kreuger concern is so complicated that the total of its investments can be only suggested. On December 31, 1929, its private capital (throwing out, that is, all double entries) showed 100 million dollars common; 85 million, preferred and partial debentures; 280 million, reserve fund and surplus -- total, 465 million. To this we add 105 million in debenture loans, so that the present capitalization must be some 570 million. On December 31, 1924, the figure was 113 million; in 1927, 280 million; in 1928, 408 million. Quintuplication, therefore, in the space of five years! In mid-July 1930 the 185 million in common and preferred were valued on the Stock Exchange at approximately 620 million. According to the dividends of the various companies these shares and debentures are rated to earn 33 million a year, a return of nearly 5.3 percent.
The combined assets of all Kreuger companies might be estimated at 480 million dollars for 1928 and at 630 million for 1929. Of this latter amount, actual match assets (factories, stocks, shares, concessions) might be put at some 200 million (32 percent), "other investments" account for some 400 million (63 percent), and the remaining 30 million (5 percent) go for cash on hand and bank accounts. Of the 400 million in "other investments," about 200 million must represent bond loans, chiefly monopoly loans, and the other half includes the interests in the Swedish Woodpulp Company, the Graengesberg, and banks, real estate, etc.
In the course of six years, the Kreuger interests have called on the international money market for issues to an amount of some 432 million dollars. The expansion of the Kreuger colossus and the improvement of its international credit are thrown into sharp relief by the extraordinary rise in stock exchange valuations of all Kreuger paper, whether sold to the public or offered on the stock market during the same period. At the end of 1923 this was estimated in round numbers at 65 million; in mid-July 1930 at 720 million -- an appreciation of 1100 percent. In 1923 Swedish Match shares were quoted at 139 percent of their face value, with a 12 percent yearly dividend -- a yield, therefore, of nearly 9 percent. In mid-July 1930, after an even more notable appreciation, most of which was later lost, they were being sold at 280 percent, which, with a yearly dividend of 15 percent, meant a net earning of 5⅓ percent. On the Stockholm Exchange in 1923 Kreuger and Toll shares were costing 237 percent of their face value, and with a 25 percent annual dividend were yielding over 11 percent. Thereafter the paper was introduced to the great foreign exchanges. In mid-July 1930 the shares, with a 30 percent annual dividend, were fetching 515 percent of their face value, so that the yield had fallen to about 5.8 percent. The strong rise in quotations and the heavy drop in yield were to a considerable extent provoked by the listing of the shares on the great exchanges and the realization of speculative prospects based on future earnings of new shares and debentures. They also reflect the general drop in international money rates.
This development in the money market establishes the soundness of a theory by which Mr. Kreuger has guided himself in his financial activities during the post-war period. He believed that the great money stringency occasioned by the destruction of property values during the war, and necessarily resulting in high money rates, could be only a temporary phase. The resumption of peace-time productivity would gradually raise capital resources in every country to their former levels, and even beyond. For as the world became more extensively industrialized there was the certain prospect of increased production of capital, especially of the means of production (or capital in the strict sense of the term), while the opportunities for the fully productive employment of capital would increase in the absolute, but diminish relatively. The supply of capital must therefore tend to exceed the demand on the part of sound borrowers. This tendency would develop first in the more highly industrialized countries, then gradually spread to other lands. As a result of this excess in supply of money over demand, the money market would show a gradual tendency toward lower rates. The fall in rates of interest would, in Mr. Kreuger's judgment, be accompanied by a parallel drop in the prices of commodities. He sees his theory of the development in money rates confirmed by happenings in the international money market during recent years. He believes that the drop in interest rates will go even farther, though temporary interruptions of the tendency, such as took place during the great speculation of 1929, are to be expected.
It has been during the post-war years, and especially during the past five years, that Mr. Kreuger's interests have become a gigantic international enterprise. Contrast this Gulliver with his Lilliputian instrument, that insignificant everyday commodity, the match; the contrast is almost comic. But the match is a mass commodity, consumed in billions of units annually, and a concern that sets out to supply 70 or 80 percent of the world demand must be a great one.
But it is doubtful whether the Swedish Match Company would ever have attained its present position of power on the basis of its technical, financial and business superiority alone. Political and private opposition to its expansion in the various countries has always been considerable. The Swedish company was able to attain its aims for the most part only by adapting itself to the varying situations in the different countries and by avoiding open warfare wherever possible. Furthermore, as I have suggested, opportunities for expansion were furnished by combinations with state monopolies, accompanied by loan transactions whereby the Swedish Match Company became, if you will, an international trust, but also a great investment trust. Further development in this direction depends on the connections I have described between the Swedish Match Company and the Kreuger and Toll concern, through the person of its president.
In spite of the strong international position of the Swedish Match Company there can be no question of a world monopoly in matches, either now or in the future. As I have said, there are still powerful "outsiders." There is also the possibility that competition will assume new forms. Revolutionary technical developments, such as the invention of new match machines, or "lighters," are not impossible. Some day a cheaper, more efficient and really mechanical lighter may be produced, which will crowd the match off the market. To be sure, no such competition has so far appeared. But in any case the Swedish Match Company could never create a real world monopoly unless all the countries of the earth were to grant it their state monopolies. Even then it would not be a real monopoly, especially in the American sense of the term, but a world trust by the grace of the different governments -- something quite different, and for that matter, itself unthinkable.
[i] Since this was written, concessions have been acquired in Lithuania, providing for a loan of $6,000,000 and in Turkey, providing for a loan of $10,000,000.