The Match King

by Frank Partnoy

  Initially, Ivar’s decision to enter the match business seemed foolish. Match factories were not profitable, particularly at the beginning of the world war. The Baltic and North Seas were filled with submarines, and Swedes had difficulty importing or exporting anything, including matches. Moreover, in August 1914, during the first weeks of the war, Britain had suspended conversion of sterling into gold, throwing the markets into disarray. Most businessmen thought it would be virtually impossible to raise capital for a new business during the war.

  But Ivar took the long view. He believed matches were an important staple, like steel or sugar, and that match factories inevitably would be consolidated. He also foresaw that Britain’s abandoning of the gold standard would open up international finance to newcomers, and that the war would not clog shipping lanes as much as people supposed. He thought that if he could manage the match business as well as he had managed construction, he would be able to acquire a monopoly on production. Then, he could raise prices and earn enormous profits. Just as Rockefeller controlled oil and Morgan controlled banking, Kreuger envisioned controlling matches, and thereby joining an élite group of global monopolists.

  By 1915, Ivar controlled ten match factories in Sweden, including those held by his family. The operation was tiny at first: one small room in downtown Stockholm, where Ivar worked with Krister Littorin.13 They lost money during the first year, but in 1916 he posted operating profits of precisely 2 million kronor.14 Ivar paid his investors, including the Swedish Credit Bank, a dividend of 12 percent.

  Ivar pressured owners of rival match factories to sell to him or lose any chance at making a profit. He took advantage of wartime conditions by negotiating “sweetheart” deals with the Swedish government, and by selling matches to the Germans, which no one else would do. He took over potash and phosphorus manufacturing and choked off his competitors’ supplies.

  By the beginning of 1917, Ivar’s group was almost as large as the Jönköping-Vulcan trust; by the end of the year, he owned that trust. He finally settled on a name for his combined company: Svenska Tändsticksaktiebolaget, or Swedish Match Company. It became known simply as “Swedish Match.”

  During the world war, Ivar crushed Swedish Match’s remaining competitors. He approached factory owners with a simple offer: sell to him or be ruined. Ivar destroyed anyone who refused to sell with ruthless tactics: he took over supply contracts, interfered with customers, and temporarily lowered prices below cost. Almost overnight, he transformed dozens of widely spread and struggling factories into a strong and profitable monopoly. Within a few years, he controlled nearly all of the match industry in Sweden. Swedish Match was one of the few European businesses that remained profitable throughout the war.

  Finally, Ivar persuaded Paul Toll to convert Kreuger & Toll into a holding company, which would own a portion of Swedish Match. Paul Toll would remain on Kreuger & Toll’s board, but Ivar structured the deal so that Toll would give up his voting stake in the holding company in exchange for control of Kreuger & Toll Building Co., a separate entity that Ivar soon abandoned. To keep Toll happy, and busy with other matters, Ivar arranged for him to become Sweden’s Consul General to Lithuania.

  After relating what sounded like the life story of a sound businessman, Ivar told the Lee Higginson men he was confident he could dominate the global match business. He concluded that,There are many reasons why the match industry is particularly well suited for cooperation between the various manufacturers. This is primarily due to the difficulty of establishing new factories and the great advantages in pricing that can be obtained through the elimination of competition. This in turn depends on the fact that the unit price is so low that the consumers will hardly notice even considerable price increases. This is why Swedish Match has made it its objective to bring together all the match manufacturers of the world. These efforts have already advanced so far that a complete success may be considered assured.15

  Ivar finished the second part of his speech by describing how his match interests had grown steadily, even as the world confronted financial turmoil and world war. By 1922, Kreuger & Toll had increased its dividend to 25 percent. He paused after saying that - a dividend of 25 percent per year - to let it sink in. Swedish Match’s dividend also was in double digits. Ivar’s companies were among the most profitable in the world. And this was only the beginning.

  The men studied Ivar carefully. It was apparent that he was a genius. But even more important, he appeared to be a gentleman. His suit was dark, and he had brought a cane and a black dispatch case.16 His tie, though not old school by Boston standards, was a conservative pinstripe of impeccable taste. Ivar wasn’t exactly like the Lee Higg partners - he was fit and thin, from a strict diet and an obsession with his weight, and like Durant he was missing a moustache - but otherwise he matched them beautifully. He spoke five languages fluently, including near-perfect English. His receding hair made him look older than he was, and his eyes shone with experience. The reaction of one partner was that “here was a dignified Swede who could match patrician bearing with any man, just the kind of solid businessman who was deserving of the aid and backing of one of the nation’s most respected banking and brokerage houses.”17

  As the staff removed the plates, the men were riveted by Ivar’s plans to build a new “Match Palace” in Stockholm, a mansion that would double as an office. It would be a masterpiece of art and architecture, with a hundred more rooms than the average apartment or house of a Lee Higg partner.

  Notwithstanding Ivar’s modest background, he now seemed to belong with the whitest of the white shoes. He behaved like an old-line banker, and the partners were surprised that he neither looked nor talked like a Swede (one allegedly remarked, “And he has brown hair!”18). By the time Ivar finished answering questions, the hook was set. When he mentioned his ambition to double the size of his businesses, and his promise to pay a very high dividend in the United States - not the 25 percent Kreuger & Toll paid in Sweden, but certainly something in double digits - Ivar was ready to reel in one of America’s leading banks.

  Frederic Allen, the senior statesman from New York, summed up the views of the partnership after the luncheon with Ivar. They found him to be “all that they had expected, a brilliant business head, full of compelling ideas, and a gentleman to boot.”19 The partners had been right to bet on Durant; he had discovered precisely the kind of man they needed. Ivar shook hands with Durant’s partners. He knew they would be proposing a deal soon.

  There were many compelling reasons for Lee Higginson to support Ivar. His character, smarts, and connections. His brilliant idea for bringing together American capital, European governments, and match monopolies. But perhaps most persuasive was the notion that Ivar would give the men a chance to one-up their key rival, J. P. Morgan & Co. For Durant’s partners, that reason alone was nearly enough.

  Morgan still dominated the financial world, but since Pierpont Morgan’s death the firm had faced a wave of fresh competition. Jack Morgan was a pale imitation of his late father, and Lee Higg was constantly looking for any opportunity to take business from its rival, and to unseat young Jack. They knew Jack had refused to do business with Ivar, following Pierpont’s practice of transacting only with men he already knew and trusted. Jack’s blinkers might be Lee Higg’s opportunity.

  Moreover, Jack Morgan seemed to be losing his grip, not only on the firm’s business, but often on reality. The most recent symbol of Jack’s weaknesses, and his firm’s, was a terrorist attack. As bankers learned about Jack’s response to this attack, it appeared that he was more vulnerable than ever.

  Two years earlier, in 1920, just a few seconds after the Trinity Church bell tolled noon on a pleasant Thursday in September, a massive shrapnel bomb shook the corner of Wall and Broad Streets in New York.20 The blast set fire to awnings twelve stories above, sprayed hundreds of slugs into the façade of the Morgan building, and killed thirty employees instantly. The cloud of greenish smoke that rose from the explosion dar
kened the area for several minutes. When the dust cleared, George Whitney, one of the six Morgan partners, walked outside and found that a fragment of window sash weight had pinned a woman’s head and hat against the bank’s scarred north façade. He reported, “I’ll always remember that. It hit her so hard that it just took her head off and it stuck right on the wall.”21

  At the Stock Exchange, sixty paces around the corner, brokers rushed to the center of the trading floor to avoid falling glass, and trading was suspended within one minute, as William H. Remick, president of the Exchange, mounted the rostrum and rang the gong.22 Trading on the Curb Market also halted immediately; the downtown area became a mob scene. The boys with the telephones attached to their heads weren’t just swinging down from windows - now they were jumping. Brokers scattered, and federal troops rushed from Governors Island to Wall Street.

  When the bomb hit, Jack Morgan was away vacationing at his Scottish shooting lodge. Jack already had been paranoid, even before this attack on his bank’s headquarters. Just before the war, a mysterious German man had attempted to assassinate him, and he had almost succeeded. Although Jack had recovered from the gunshot wounds, he still suffered from the emotional blow. He was obsessed with his personal safety and gripped by fear that he had become a terrorist target. He had hired a group of former Marines as bodyguards, and scampered into hiding whenever he heard reports of an escape from a prison or mental asylum.

  Now, after the shrapnel bomb, Jack descended into full-blown panic. When Justice Department authorities investigated the blast and pursued dozens of suspects, but could not pin the crime on anyone,23 Jack concluded that he must have been the target. If he hadn’t been off hunting in Scotland, he would have been killed. Who was after him? Would they ever stop?

  He posted thirty private detectives to watch his brownstone on Madison Avenue.24 He also began to view competition from other banks as more than merely business rivalry. He spun elaborate conspiracy theories involving the Bolsheviks and German-Jewish financiers. Jack and his friends were on one side of Wall Street; on the other side were the enemy bankers - Kuhn Loeb, Lehman, and Goldman Sachs - many of whom were Jewish. Jack Morgan neither trusted nor liked Jews. When Harvard president A. Lawrence Lowell sought to fill a board vacancy, Jack, who was an overseer of Harvard and a devoted alumnus, warned that “the nominee should by no means be a Jew … the Jew is always a Jew first and an American second.”25

  Unlike Jack, investors ultimately shrugged off the bomb. The new Federal Reserve Bank reduced interest rates and added money to the financial system after the attack. The new Treasury Secretary, Andrew Mellon, brought confidence with a proposal for lower taxes. Investors came to see that neither war nor terrorists could defeat American optimism.

  The Lee Higg partners were especially interested in the business of foreign lending, and here they saw more cracks in Morgan’s foundation. Earlier, during the war, J. P. Morgan & Co. had arranged over $1.5 billion in loans to the Allied forces.26 Immediately after the war, the United States government wanted to become more involved in reparations, but said it could not do so without Morgan, which controlled lending to governments. Only Morgan seemed to have access to sufficient funds to rebuild Europe, and no foreign leader could imagine borrowing money without Morgan playing a leading role.

  For example, the French government, like most of Europe, had been interested in obtaining loans to help rebuild after the war. French officials had considered trying to arrange loans without Morgan, but they quickly became reconciled to dealing exclusively with Morgan. Baron Emile du Marais, a financial advisor to President Raymond Poincaré, wrote that “one can in no way manage without their support. It is a fact about which we can do absolutely nothing. In these conditions, wisdom seems to dictate that we accept the fait accompli, and try to give Morgan’s the impression that we have full confidence in them.”27 Consistent with its historical dominance, Morgan recently had loaned 100 million dollars to France at a rate of 8 percent.

  Before the attack on Morgan’s headquarters, it was inconceivable that anyone other than Morgan would arrange future financing for France, or even that Poincaré would meet with someone else to discuss a loan. But the shrapnel bomb shifted momentum. As foreign officials learned about Jack Morgan’s increasing paranoia, as well as the successes of other American bankers, they considered looking elsewhere for loans. The threat of competition in foreign lending went deeper than Jack Morgan’s concern about Jewish bankers. Yes, there were able Jewish bankers poised to take business from Morgan. But there were plenty of Yankee bankers as well. Lee Higginson, for instance, was the ultimate Yankee bank, with Boston and Harvard roots, and it, too, was eager to arrange loans to Europe. Ironically, although the extent of Jack Morgan’s paranoia about his personal safety was largely unjustified, from a purely business perspective, he wasn’t nearly paranoid enough. Suddenly, in the foreign loan business, Jack was being fired at from all sides.

  For better and worse, during the early 1920s the public came to see Jack and his British country squire lifestyle as a symbol of Wall Street’s dominance and extravagance. American investors might not yet know Ivar Kreuger, but they recognized Jack’s black eyebrows and white moustache anywhere. A picture of Jack’s plump face in the newspaper was usually attached to some opulent leisure activity. Even Jack acknowledged that he tended to loaf, and was not as engaged in the business as he should have been. He preferred gardening and yachting to banking. Being in Scotland on vacation during the attack was typical of Jack. Although he had worked long hours during the war, and was a reasonably skilled international negotiator, Jack lacked Pierpont’s drive, as well as his uniquely sharp financial mind. Jack once likened his own brain to a “soft, overboiled cauliflower.”28

  If Lee Higginson embraced Ivar’s plan, it could strike at the heart of Morgan’s franchise. Ivar was suggesting to Lee Higg’s partners that they could replace Jack Morgan as the leading financier in Europe by helping Ivar give cash-starved European governments better loan terms and lower interest rates, perhaps a full percentage point or more below Morgan’s. At the same time, Ivar also offered foreign governments something Jack Morgan did not: a chance to earn significant profits from an important local industry. When a government gave Ivar a monopoly, it would receive both a loan and a share of monopoly profits from the sale of matches.

  Ivar’s plan seemed too good to be true. The timing was perfect, Morgan was vulnerable, and Lee Higginson was well positioned. It was the idea of a lifetime. Ivar’s speech had done the job. Lee Higg’s partners gave Durant permission to begin soliciting American investors.

  Durant confronted skepticism at first. Ivar had no track record as an international lender, and he didn’t have any deals lined up. Swedish Match had been an active exporter throughout Europe, and Ivar had developed strong relationships with government officials. But his operations outside Sweden had not yet risen to the level of monopoly, or anything close. Ivar had been more of a borrower than a lender.

  Still, Durant could cite many selling points to prospective investors. Ivar had a thriving match business and a history of paying high dividends, as high as 25 percent. The monopoly-for-loan idea certainly was ingenious. Even if it did not generate profits right away, the plan seemed likely to succeed at some point. Like General Motors or RCA, Ivar’s new venture was a bet on the future. Increasingly, American investors liked gambling on the future more than tracking the past.

  Ivar joined Durant on road shows, and interest grew as Ivar repeated his speech throughout 1923. By the fall Durant believed he finally had found enough investors, and Ivar and Lee Higginson began preparing to close a deal. They followed the same procedure as anyone seeking money. First, they created a new firm, called International Match Corporation, and incorporated it in Delaware. During the late nineteenth century, states had begun competing for corporate charters, the formative documents that corporations are required to file when they are created. Delaware had recently surpassed New Jersey as the incorporatio
n state of choice, and increasingly companies chose to file in Delaware, even if their operations were in another state. Delaware judges took a hands-off approach to business, and would be unlikely to second-guess Ivar’s decisions. By incorporating International Match in Delaware, Lee Higginson would give Ivar and themselves maximum flexibility.

  Next, Durant and Ivar chose the initial shareholders and directors of International Match. The two original shareholders would be Swedish Match and a syndicate of Swedish banks; they would contribute start-up capital of 30 million dollars and receive the company’s shares, in equal amounts. As shareholders, Swedish Match and the bank syndicate would vote for the company’s board of directors, as well as other major business decisions.

  The shareholders would elect five directors to oversee International Match’s business: Ivar; Krister Littorin, Ivar’s engineering classmate from Stockholm; Donald Durant; Frederic Allen, Lee Higginson’s senior statesman and head of the firm’s New York office; and Percy A. Rockefeller, a nephew of John D. Rockefeller. Percy Rockefeller owned the World Match Company of Walkerville, Ontario, and recently had met Ivar while negotiating the sale of a Canadian match manufacturing plant to Swedish Match.29 The two men had impressed each other, and Ivar saw that Rockefeller, who then served on more than sixty other boards, would be the ideal director of International Match: he was well connected, wealthy, generally familiar with the match industry, and far too busy to care about any details. Ivar had idolized the Rockefellers since he was a boy in Kalmar; now, a member of that family would serve on his board.

  Once these pieces were in place, Ivar and Durant needed to decide which type of financial instrument International Match would issue to new investors. Ivar wanted a customized investment that would appeal to the relatively cautious mindset of many investors, but that also offered a substantial upside. However, Ivar didn’t want to give away control of International Match. Ivar had experience designing innovative contract features in the real estate and construction industries. Now, he would tailor a financial instrument to the needs of investors while preserving his interests.