The Match King

by Frank Partnoy

  Ivar recalled the extraordinary scheme orchestrated during the seventeenth century by Robert Harley, Earl of Oxford, who had formed the South Sea Company to assume England’s national debt. The scheme had become known as the South Sea Bubble, for the sharp increase in the price of South Sea Company shares. In exchange for the South Sea Company assuming its debt, the British government had given the company a monopoly on trade to the South Seas. The deal helped keep England solvent, and led to a boom in the business and share price of the company.

  It was an audacious deal, but a simple idea. And the idea could be replicated; it wasn’t limited to England and the South Seas or to a time two hundred years earlier. In theory, if a government needed money and a company wanted a monopoly, both sides could benefit from a similar compact - anytime, anywhere, with any product.

  Ivar’s grand idea was to do just what Harley had done, except with matches instead of South Seas trade. Ivar would lend money to the governments of Europe in exchange for a monopoly concession for the production and sale of matches within their territories. It was a brilliant concept.

  There was one immediate problem, though: Ivar didn’t have enough money to lend millions of dollars to foreign governments. Ivar was wealthy, but not that wealthy. Much of his money already was invested in his companies, which were heavily in debt. This was why Ivar needed the backing of a major bank. If he could persuade Durant to raise the money, he was sure he could entice some foreign governments to give him a match monopoly.

  This twist on the South Sea story was the pitch Ivar planned to make to Donald Durant. Like all of Ivar’s speeches, this one would be a tapestry of bold ideas, with a single thread running throughout: Americans would lend money, through Ivar, to foreign governments, and in return everyone would make unimaginable profits from match monopolies.

  Durant and Lee Higginson were ideal for Ivar’s new plans. Durant’s group had built a new sales force, and his partners were embracing new clients, especially from abroad. As Ivar put it,Lee Higginson & Co., with its extremely good sales organization - probably larger than that of any other American firm - is particularly well placed to handle issues for companies that have not previously been introduced on the American market, and therefore require energetic preparation of the market. As an example, this firm has single-handedly managed the financing of the American subsidiaries of the Shell Company, which seems to be the only instance of a European company raising American capital through a share issue. The Shell Company is - as is well known - the most important European business now extant.40

  Ivar entered Lee Higginson’s offices at 41 Broad Street, the center of the financial world, a few steps from the New York Stock Exchange. He stepped into a three-story banking hall framed by bronze-capped mosaic columns and a 225-foot-long seafaring mural.41 The prestigious architecture firm of Cross & Cross had designed the space to grand effect. Durant, the master mariner, was obviously at home here.

  But when the two men finally shook hands, it was immediately apparent who had the advantage. Ivar looked more like a Lee Higginson partner than did Durant. And Durant looked more like a Swede desperate for funding than did Ivar. Ivar mesmerized Durant with his knowledge of the match industry, his worldly sophistication, and his mastery and memory of financial detail. And, most importantly, he hooked Durant with his simple, brilliant idea: government loans in exchange for match monopolies. As Durant understood immediately, it was a plan that would change history.

  3

  THE SPEECH

  Durant wasted no time arranging for Ivar give a formal luncheon presentation. 1 Lee Higg was a powerful firm but, like most investment banks of the era, it was small, a true partnership. When all of the partners were in New York, they could, and frequently did, gather in one room at 41 Broad. Their important business was done at lunch, with everyone sitting around a long conference table set with silver and crystal.

  Ivar’s lunch speech required a different kind of theater than his performance for the passengers on Berengaria. The bar was much higher now; the audience was more critical. Ivar knew of Lee Higginson’s reputation for integrity and rectitude. He knew Frederic Allen and the Higginsons would resist associating their prestigious firm, and its deep Ivy League roots, with a self-made man from a remote town in Sweden. Ivar had attended a Stockholm engineering school whose name they could not even pronounce. He hadn’t gotten anywhere near Harvard or Yale. Ivar knew he should not press too hard during this speech. He should not appear to be a salesman or suitor, but rather a wealthy businessman these prudent men should court.

  Ivar needed the partners to see him as worldly and independent, so in addition to discussing his ambitious plans and perspectives, he planned to weave in stories about his past. He wanted to show them a picture of his character.

  After the food was set, and brief introductions made, Lee Higg’s partners sat and Ivar stood calmly in front of them. Ivar was about to use the two important oratorical lessons he had absorbed from giving hundreds of speeches to investors in Europe: speak from memory, and use lengthy pauses. First, he rubbed his hands together - a long-standing habit - to show he did not plan to use any notes. Second, he paused. And then he paused some more. And then some more. Ivar had learned the power of silence. He liked to make eye contact with everyone in the audience, one by one, and he did so slowly, before he uttered a word.

  Finally, when Ivar began to speak, he gave Lee Higg’s partners a surprising piece of advice. He told them to forget about the American match market, including Diamond Match. Ivar viewed Diamond Match as a small-time company with limited upside. He didn’t want to discuss the American match market at all. Ivar couldn’t be sure he had contained the recent fiasco among Landgren, Fairburn, and Price Waterhouse. He wanted to distance himself from those efforts, just in case the partners from Lee Higg had heard anything about the failures of American Kreuger & Toll.

  In place of an American match monopoly, Ivar laid out a far more ambitious plan: to play the role of “world’s banker” by raising money in America and then lending it to Europe. In this role, he could satisfy the desires of three important groups that were now separated by geographic, political, and economic barriers: American investors, European governments, and the match industry.

  As Ivar explained, the desires of the three parties were clear: American investors wanted high returns, European governments wanted US dollars, and the match industry wanted monopoly power. The resources also were clear: American investors had dollars, European governments had the power to grant monopolies within their territories, and the match industry had the potential for high returns. What was missing was a middleman, a statesman capable of bringing together these three disparate groups.

  Ivar was that middleman, a capitalist with European sensibilities and a strong grip on the match industry. He could link the three groups by raising dollars from American investors, lending those dollars to European governments in exchange for match monopolies, and then using those monopolies to generate high returns.

  The first part of Ivar’s speech to the Lee Higg partners wasn’t just about business. He wove in major ideas in political economy, international relations, and world history. He described how post-war Europe was crippled by inflation and unemployment. He discussed the monetary crises facing major European governments, as evidenced by their weakened currencies. By late 1922, the German mark sold for less than four cents, the Austrian crown was worth just half of that, and Russian currency was practically useless in trade. Millions of people were out of work in England, France, Italy, and Poland. Even Ivar’s home country, Sweden, was struggling through post-war recovery.

  Moreover, much of continental Europe had, as Lenin predicted, developed a hatred of capitalist “profiteers.” European governments turned inward and emphasized the state over the individual. Productivity and trade declined. Ivar agreed with the conclusions of the leading economist of the time, John Maynard Keynes, who wrote, “We are thus faced in Europe with the spectacle of an extrao
rdinary weakness on the part of the great capitalist class, which has emerged from the industrial triumphs of the nineteenth century, and seemed a very few years ago our all-powerful master.”2

  As the partners ate, Ivar crisscrossed all of these topics, frequently citing financial statistics and data from his own companies’ quarterly reports. He did it entirely from memory. When he had finished, he stood quietly and met everyone’s eyes one more time.

  Then Ivar began the second, even more important, part of his speech. He told the men he wanted them to know something about his background. Ivar needed Durant’s partners to see he was like them, a savvy businessman with a long track record. Ivar didn’t deny he was a self-made man, but he wanted them to see his business success as a strong, continuous thread.

  Ivar skipped the early part of his life: the lonely childhood, the awkward teenage years, the fruitless search for a job during his first trip to America after engineering school. The Lee Higg partners didn’t need to know how Ivar had finagled his way into a menial position at Fuller Construction Company, the leading builder in Manhattan. He might have mentioned that he had worked on the Metropolitan Life tower, the Flatiron and Macy’s buildings, and the Plaza and St Regis hotels, and that he had discovered and fixed critical skyscraper flaws.3 But he would have skipped any description of his antics with Anders Jordahl, whom he met at Fuller.4

  Ivar might have said something about traveling to South Africa with Jordahl to build the Carlton Hotel, then the world’s largest commercial building. But he certainly would have left out the part about their gambling on diamond and gold shares in Johannesburg, or how Ivar briefly joined the Transvaal Militia and then went on a multi-year bender through Paris, India, East Africa, Toronto, and throughout the United States.5

  During these early years, Ivar was constantly reinventing himself and reforming his personality. But he didn’t want Durant and his partners to know about his efforts at self-improvement; he just wanted to show them the finished product.

  For these men, the story of Ivar’s life began in 1908, shortly after he learned that his first love, a young Norwegian girl, had suddenly died. Ivar should have given up on her already, after her father refused to grant permission to marry until Ivar became wealthy, and then she told Ivar even a large dowry might not be enough. Yet even after these rejections, he still had harbored hopes of marriage. When Ivar learned about her death, a part of him snapped. As one friend put it, “his love-life had to die away to make room for other things he had to accomplish.”6

  Ivar had been working on the pathbreaking Archbold Stadium at Syracuse University. He regarded his bosses there as inferiors, men who lacked the intellect and ambition of the stadium’s namesake, John D. Archbold, the great capitalist, oil refiner, and philanthropist. Ivar wrote to his parents, “I cannot believe that I am intended to spend my life making money for second-rate people. I hate the American outlook, but I shall bring American methods back home. Wait and see - I shall do great things. I’m bursting with ideas. I am only wondering which to carry out first.”7

  Ivar told Durant and his partners how, as a 28-year-old working on the stadium project, he had met Julius Kahn, the inventor of “Kahn Iron,” a specialized product used to make reinforced concrete. When Kahn mentioned that he had given a Swedish engineer named Paul Toll the contract to represent him in Europe, Ivar persuaded Kahn to recommend that Toll take Ivar on as a partner. Ivar then sailed to England and persuaded Paul Toll to do just that.

  On May 18, 1908, Ivar and Paul Toll formed Kreuger & Toll in London. The business was small, with shoestring capital of just over 2,500 dollars, but they produced a superior product and had ideal timing.8 Kreuger & Toll was part of a wave of migration to London after the market panic of October 1907. Pierpont Morgan had single-handedly rescued several Wall Street banks and indebted trusts from bankruptcy, but the ensuing legislation, which led Congress to create the Federal Reserve System, drove lending abroad. Pierpont sent his son Jack to London, to be groomed along with the world’s leading financiers. The Morgans, and other bankers, shifted operations to London.

  Ivar tapped into the new funds available there to finance construction projects throughout Europe. He developed superior technology and methods of engineering design, as well as novel contractual features. In particular, he was willing to change the standard terms of construction contracts to reallocate risks to him. His appetite for risk was unique among men in the construction industry.

  For example, from his experience at Fuller Construction in New York, Ivar knew how frustrated builders became when there were lengthy delays. Construction firms had not been willing to take on the risk associated with delays; instead, they put that risk on their clients. But Ivar understood a fundamental proposition about the allocation of risk: both parties to a deal can gain when the party in the best position to bear a risk takes on that risk. Construction firms, not clients, were in the best position to reduce delays. Therefore, as Ivar realized, the best way to minimize construction delays was to shift the risk of loss that arose from such delays to him and Paul Toll. Then, Kreuger & Toll would have the incentive - and, crucially, the ability - to speed up a project. And here was the punchline: clients would pay more if they knew the job would be done on time.

  Kreuger & Toll became the first firm in Europe to commit to finish projects by a fixed date.9 After completing some small projects, building some beams and a viaduct, Ivar secured a deal to build a six-story “skyscraper.” He promised that if construction wasn’t finished by a particular date, he would give the client a partial refund of 1,200 dollars for each late day. (At that rate, Kreuger & Toll’s entire capital covered just two days.) In turn, the client agreed to pay a daily bonus for early completion. Ivar then hired three shifts of laborers to work day and night. He personally took over the permitting process to streamline operations, and persuaded the police to ignore neighbors’ nighttime complaints about searchlights and cement mixers. Kreuger & Toll finished early, and Ivar repeated this formula and earned completion bonuses for every project. Builders were happy to pay extra to know a high-quality project would be finished ahead of schedule.

  Word quickly spread about the firm’s reputation for quality, honesty, and timeliness. Paul Toll was smart and hard-working, but Ivar attracted the clients. Within a few years, Kreuger & Toll was regarded as the best building company in Sweden; a few years later, it was one of the top firms in Europe. Soon Kreuger & Toll was building major landmarks, including the stadium for the 1912 Stockholm Olympics and the renowned Stockholm City Hall, which many people considered the most beautiful building in Scandinavia. As the firm expanded, Ivar hired several employees, including Anders Jordahl and Krister Littorin, his closest friend from Tekniska Högskolan, the engineering school in Stockholm, who became the firm’s typist and messenger boy.10

  When Swedish lawmakers decided to permit banks to invest in industrial companies for the first time, Ivar struck a deal with Oscar Rydbeck, a rising star at Skandinaviska Kredit A.B., known as “The Swedish Credit Bank.”11 When Rydbeck said he would be willing to take Ivar’s Kreuger & Toll shares as collateral for an investment in a new business, Ivar’s thoughts turned to his family - and to matches. Ivar’s father, Ernst August, had methodically saved enough money to buy stakes in two small match factories from their extended family’s consortium, Mönsterås Matchworks. Ivar’s brother Torsten now managed one of those factories in Kalmar, Ivar’s home town.

  The match business was highly competitive and not very profitable, but Ivar and the newly liberated Swedish banks agreed there was potential. Ivar saw that the match industry was in the same economic position oil, sugar, and steel had been in a few decades earlier. There were too many owners of too many factories. Competition was driving prices down so far that hardly any profit remained. Ivar knew his family, and the numerous other small factory owners, would never make much money this way.

  However, if these factories could be consolidated, the owner of a Swedish match monopol
y could raise prices and make a fortune. Some factories in Sweden recently had combined, to form the Jönköping-Vulcan trust, but the men running the trust were conservative and slow. Ivar was sure he could dominate them. He began using loans from the Swedish Credit Bank to buy match factories throughout Sweden.

  During the next eight years, Ivar parlayed a few family match factories into a conglomerate. He modernized factories and expanded overseas sales. Production increased from 90,000 cases in 1914 to double that in 1916; his profits more than tripled.12 He reduced costs by purchasing the companies that made his machines, as well as companies that supplied chlorate acid potash for the tips. The hardball tactics Ivar used to take over competitors must have reminded Lee Higg’s partners of John D. Rockefeller, who used a similar approach to acquire competitors of his company Standard Oil.

  To get the money for these expansions, Ivar turned to Oscar Rydbeck. The Swedish markets were going through their version of a speculative frenzy during 1914-15, and Ivar was able to raise 5 million kronor from Swedish banks. During the war, when exports to Britain closed, Ivar turned to Russia, where he not only exported matches, but purchased aspen wood (the best wood for matches) and paper mills. After the war, he bought up virtually all of his competitors in Sweden, using more cash borrowed with Rydbeck’s help. He never gave up control. When he consolidated his match companies, he kept a majority of the voting shares.