Fortunately, Ivar’s associates had laid out his state room just as he had instructed. The room was fragrant with the precise arrangements of fresh flowers Ivar preferred, including apple blossoms and pink roses from one of his pergolas in Stockholm. Everything was in order. In the morning, while Ivar slept, a few of his men would answer any questions the passengers might have. And now that Ivar had left the radio shack, the ship’s wireless finally was available. The passengers aboard Berengaria could spread the news about the remarkable man who was coming to New York.
Ivar was sailing to America for one simple reason: that’s where the money was. After a brief recession, a post-war boom had ignited the Roaring Twenties, and by 1922 the country was awash in cash. Investor mania had reached even middle-class families, who were spending record amounts on a range of new luxuries: not only shares and bonds, but radios, Mah Jong sets, movie tickets, and, of course, alcohol and cigarettes. The streets of American cities were jammed with new cars - Lexingtons, Maxwells, Briscoes, and Templars, along with Buicks, Dodges, and Fords - and the wealthiest families were buying vacation homes in Miami and California, and sailing to and from Europe on elegant passenger liners.
Optimism and affluence washed through the American economy, as investors began playing the stock market, many for the first time. The buzz inside smoky jazz clubs and behind the curtained grilles of speakeasies was as often about Anaconda or General Motors as it was about the new Atlantic City beauty pageant. At the New York Stock Exchange, where a seat cost more than $100,000 - a hundred times the average annual income - brokers traded shares of the most prestigious companies, such as American Telephone and General Electric.
Just outside the Stock Exchange, at the so-called “Curb Market,” boys with telephones attached to their heads swung down from windows to relay buy and sell orders to the brokers trading stocks, rain or shine, on the curb of Broad Street below. A British journalist who had just arrived in New York wrote that “you could talk about Prohibition, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.”7
A new business-friendly Treasury Secretary, Andrew Mellon, who had resigned from fifty-one corporate directorships to join President Warren G. Harding’s cabinet, pledged to reduce corporate taxes.8 The Federal Reserve lowered interest rates, to spur lending and investment. The Stock Exchange, a private corporation, imposed few rules on investing, and there were no federal laws restricting the purchase or sale of securities. In these laissez-faire markets, investors were free to go wild.
And wild they went. The hottest two emerging industries were cars and radio. Annual car sales had doubled from two years earlier, and there were now more than 15 million cars on the road. Manufacturers introduced faster, safer, and cheaper models every year, and the only asset people wanted more than cars were securities issued by car companies. Anyone who bought shares of General Motors or Fisher Body or Yellow Cab expected to double or triple their money after just a few years.
Shareholders of the Radio Corporation of America, known as RCA, did even better. RCA enjoyed a wireless communications monopoly, thanks to Navy Secretary Franklin D. Roosevelt, who had engineered a “marriage of convenience” among the government, General Electric, and Westinghouse, which manufactured wireless devices.9 RCA’s superheterodyne receiver became the dominant technology. When Ivar or other passengers sent messages from Berengaria, they used a new RCA transmitter.
As recently as 1920, only about 5,000 families had owned in-home radio sets, and RCA’s share price was around a dollar then.10 At that time, radio wasn’t doing much better than other businesses suffering through the post-war recession. Then WBAY, a pioneering New York radio station, sold the first-ever advertising spot, a pitch for apartments in Jackson Heights - and the world changed overnight. Radio stations popped up in every major city, and radio sales soared, to $60 million in 1922. RCA’s share price flew even higher than its sales. Anyone who held RCA shares during the 1920s earned an average annual return of 60 percent. All of that gain was from share price appreciation, not any periodic payments from the company. RCA did not even pay a dividend.
A few naysayers argued that shares of General Motors and RCA were overvalued, because actual profits were slim. Shares represented a claim to future dividend payments, so share prices should reflect the value of expected future dividends. The pessimists noted that RCA didn’t pay a dividend, and claimed it never would, because it didn’t make any money. Their point was simple: no profits, no dividends, no value. Without dividends, the share price couldn’t keep going up.
But these shares were a bet on tomorrow, not today. If people thought the share price of General Motors would rise in the future, no one could prove them wrong now. And even though RCA didn’t pay a dividend or earn much actual profit, the people who bet on that company were winners, year after year. RCA’s share price rose because investors believed RCA eventually would make money and pay dividends. It was hard to argue with expectations, well grounded or not. The skeptics who bet against RCA were stepping in front of a speeding train.
American consumers and investors were in a buying mood. Ivar wanted - and needed - their dollars, and he had a plan to get them. By 1922, he had mastered the complexities of modern finance, and had created a web of related corporations and new financial instruments spanning the globe. But Ivar wasn’t trying to sell anything complex. At least not at first. This time, his pitch involved a basic and essential product everyone used and could understand, something even more straightforward and common than cars or radio. That product was the safety match.
At the time matches were a staple, something the typical American needed almost as much as food, clothing, and shelter. People used matches to light kerosene lamps, gas heaters, stoves, and, of course, tobacco. When the sun set, they struck matches to light fires for cooking, candles for reading, and cigarettes for smoking. Everyone carried matches; everyone used them; everyone bought them.
Ivar told the story of the safety match to anyone who would listen. A German chemist had invented phosphorous matches in 1832, but the German matches had been too dangerous, both because the yellow phosphorous necessary to light the match was poisonous, and because the Germans had put the phosphorous in the match head, which was prone to light accidentally. The Swedes took the German invention and captured the market by emphasizing safety, simplicity, and innovation.
First, the Swedes developed a safer red phosphorous. Then they moved the phosphorous to a striking surface on the match box. Boxes were labeled “safety matches” and were printed with the slogan “Will Only Light on the Box.” They were an instant hit. By 1922, Sweden was the leading exporter of matches, and Swedish Match Corporation made two-thirds of all matches used in the world.11 Matches were Sweden’s pride, and its most important export.
In the heady US markets, safety matches were the ideal new investment, and Ivar Kreuger was the perfect messenger. Matches, like cars and radio, were tangible products. They used new technology, and could be exported throughout the world. Antitrust regulators had declared monopolies illegal at home, but, by investing in Swedish Match, Americans could earn profits from a monopoly abroad. Ivar’s sales pitch was compelling. An investor who heard him talk about Swedish Match for more than a few minutes invariably would pull out a checkbook.
Nearly every passenger on Berengaria used Swedish matches, and many would have heard of Swedish Match Corporation. By the time Ivar’s henchmen briefed the passengers, they also would have known that Ivar controlled Swedish Match, and that his grand postwar plans were to establish a global match monopoly. By all appearances, he was well on the way.
In retrospect, it was surprising that Ivar had ended up in the match business in Sweden. As a child, he had watched his father, Ernst August, a fifth generation Swede, work in the small factory their ancestors had built near Kalmar, a city in the southeast, overlooking the Baltic Sea. Ernst August was a hand
some man, with strong chiseled cheekbones and a high forehead. He was conservative and trustworthy, but he was not the family’s leading mind. Ivar found his father’s job as a factory manager uninspiring. Given the advances in technology, anyone could supervise the mechanized splint sorting, leveling, dipping, and packing of matches.
It was even more surprising that Ivar would return home. He had been the black sheep of a family dominated by his big-boned Scandinavian mother and his five blonde, fair-skinned sisters. His mother, Jenny, was as wild as Ernst August was stable. She had been born in Dutch South Africa, where her father had hurried in search of riches in the mines, just as the “forty-niners” were rushing for gold in America. There were hints of her family’s history of mental illness in her sharp eyes, which darted in as many directions as her corkscrewed hair. Jenny’s multicolored, multilayered outfits, and her elaborate bracelets and combinations of long necklaces and thick chokers, were a sharp contrast to Ernst August’s simple dark suits and bowties.12
Jenny found it difficult to relate to her quiet, poker-faced boy, just as he found it difficult to relate to her. She was embarrassed when he repeated Sunday sermons verbatim or recited the scientific names of plants. He sat quietly, playing games in his head and planning his escape, while his mother and sisters frolicked in the family’s middle-class flat in Kalmar and up and down East Sea Street. Ivar spent hours alone at nearby Kalmar Slott, the massive twelfth-century castle perched above the Baltic, where he saw the abandoned turrets as both an inspiration and a warning that even the strongest defenses ultimately could crumble. When his brother, Torsten, was born, Ivar shared the schemes he had concocted at Kalmar Slott, and kept secret from his mother: to stage a coup at the local school, to escape to Stockholm and then America, and to become a world leader and a wealthy businessman.
After Ivar left Kalmar and graduated from engineering school in Stockholm, his rise was surprisingly fast: he worked construction jobs throughout America and Mexico, formed a construction partnership in London, and then expanded into other industries, including film, real estate, and telecommunications. By the time of the world war, he was a millionaire and an industry leader. When he saw that his family’s match business was struggling, he decided to return home, not just to help his family but also to exploit the enormous opportunity in matches.
While the factories of Europe worked overnight to produce war materials, Ivar quietly purchased match factories throughout Sweden.13 He was a pioneer of vertical integration, buying timber tracts and chemical factories to secure the raw materials needed to make matches. Finally, he merged the leading Swedish competitors to form Swedish Match, a single dominant business with initial capital of about $10 million. Ivar owned half of Swedish Match, held all of the senior executive positions, and controlled the company’s board.
Ivar was attracted to the match business, not for what it was, but for what it might become. In 1922 the industry was highly competitive. Profit margins were narrow. Swedish Match manufactured 20 billion boxes of matches per year, but its profits per box ranged from just a few cents down to a fraction of a penny.
Ivar’s plan was to limit competition and increase profits by securing a monopoly on match sales throughout the world, mimicking the nineteenth-century oil, sugar, and steel trusts. Then, Swedish Match could raise prices without losing sales. According to Ivar’s plan, now that the world war was over, he would make a fortune from the peace.
Swedish Match Corporation was just one part of Ivar’s empire. He controlled ten other businesses through his public “holding” company, Kreuger & Toll, another Swedish corporation. In addition to its stake in Swedish Match, Kreuger & Toll also invested in banking, real estate, and the film industry. Ivar formed separate real estate companies to hold his properties,14 and he used separate subsidiaries for each business, in order to avoid registration fees applicable to larger companies.15
One of his property holdings was Kvasten 6 Biblioteksgatan, where the well-known Stockholm cinema Röda Kvarn was located.16 This purchase led Ivar to become involved in the film industry, and to meet prominent directors and actors, include a leading director in Sweden, Mauritz Stiller. Ivar formed Svenska Filmindustri, a company that dominated Swedish cinema and brought him great pleasure, though little money. SF, as the company was known, was at the center of the golden age of Swedish film, and made critically acclaimed movies based on novels by the country’s leading writers. SF had an agreement to produce five novels by Selma Lagerlöf, who had won the Nobel Prize in 1909.17 Unfortunately, the films were expensive and generated better reviews than revenue. In 1922, he restructured his film business and took losses of 80 percent.18
But the financial difficulties of film were the exception for Ivar, and his other companies rolled on. Overall, Ivar’s network of separately managed subsidiaries was incredibly profitable. Investors in Kreuger & Toll consistently made double-digit returns and Ivar had increased his holding company’s dividend to a whopping 25 percent of “par value,” the initial capital Ivar had raised. No American company came close to that.
Ivar controlled his holding company with a tight grip. Its board of directors was Ivar, Ivar’s father, Ivar’s partner Paul Toll, and two of Ivar’s closest colleagues. As one of those colleagues later explained, annual meetings were perfunctory. Ivar would walk in briskly and deliver a quick monologue:Good morning, gentlemen. Will the secretary please read the minutes? It has been decided to increase the capital of Kreuger & Toll by twelve million kronor by issuing new shares at a rate of two hundred and forty percent of par. Do I hear any objections? Thank you, gentlemen. Good morning.19
Kreuger & Toll’s annual financial statements contained no explanation as to how the company had made so much money. One of the largest profit entries was labeled simply “profits from other investments.” Ivar’s earlier investors, from outside America, hadn’t seemed to mind the vagueness. Why worry about such details when the company paid a 25 percent cash dividend? Their investment would be returned in four years. And, on top of dividends, investors in Kreuger & Toll also made money as the value of their investments rose. Ivar already had made his investors quite wealthy. They saw no reason to ask probing questions about what Ivar’s “profit from other investments” might be.
Before 1922, Ivar had raised most of his capital in Europe, particularly from Swedish banks. As Ivar watched the Americans enter a period of buying mania, he saw a new source of funds. Ivar had studied financial history and was aware of infamous periods of mania and later panic, such as the South Sea Bubble of 1720 and the infamous rise and collapse of Dutch tulip bulb trading in 1637.20 In those cases, men became rich as they rode the wave of investors speculating on risky ventures. Ivar knew the timing was crucial; American optimism would not persist forever. When investors were manic, they would purchase just about anything. But during the panic that inevitably followed mania, the opposite was true: no one would buy. Anyone who bought into the South Sea Company or Dutch tulip bulbs, but held the investment for too long, lost everything when panic hit. It was important to strike, and then exit, early.
Anyone who remained skeptical about Ivar’s businesses could look to the consistent track record of Kreuger & Toll, the parent company of Swedish Match, from as far back as 1907, when Ivar and Paul Toll formed the firm to do construction projects in Europe. Now Ivar’s companies were poised to outperform even shares of RCA and General Motors. When investors learned about the dividends Kreuger & Toll had been paying, they simply went mad. These people were willing to buy shares of companies that, like RCA, did not pay any dividend. What would they think of a reputable company that paid 25 percent a year? Plus a sizeable gain on the value of their investment? It was enough to make even the most conservative investors lose their minds.
As Ivar knew, the number of conservative investors in the United States - the people who might question how his companies could pay such large dividends - was dwindling. Instead, stock buying and selling was dominated by exuberant day traders,
people who bought and sold shares of risky companies throughout the day, often holding positions for just a few minutes.21 There was no securities regulator governing these people or the brokers who sold them shares. Nor were there government laws or warnings about rapid trading in and out of stocks. As a result, there were more day traders per capita during the early 1920s than at any other time in history.
Scattered throughout major cities were scores of unregulated “bucket shops,” shady brokerage firms that encouraged aggressive trading, charged high fees, and sold highly volatile investments that seemed too good to be true, and often were. There were no actual “buckets” at these shops. The term derived from British beer swillers, who walked from pub to pub in London’s East End, filled a bucket at each one, and then carried the dregs back to their own small stores, where they offered the dubious brew along with even more dubious wagers on stocks and commodities. A patron might overpay for the beer, but his real losses came from bets on future grain prices.22
The American version of bucket shops offered margin loans instead of second-hand alcohol. Day traders could borrow as much as 99 cents per dollar invested. Trading on razor-thin margin was intoxicating, but risky, especially if the shop operator could manipulate the prices of stocks, as they often could and did. If you put up $1,000 to buy $100,000 worth of stock, a decline of just 1 percent would wipe out your position.
Most people who bought from bucket shop operators lost money, but that didn’t stop them, and it certainly didn’t stop the bucket shops. Human beings inevitably overestimated the probability of success. Too many young men thought they could become the next Babe Ruth; too many young women sought to become Mary Pickford. Four of five people believed they were of above average skill when driving a car. A majority of people said they could outsmart the stock market, or win money gambling. As stock trading became more popular during the early 1920s, so did this kind of cognitive error, and the widespread passion about markets led investors to focus on winners more than losers, like the gambler who vividly remembers cashing a winning ticket from a particular race at the horse track, but conveniently forgets that she lost money overall.
The Match King Page 2
