Tobacco Trust

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The American Tobacco Company was a huge holding company that monopolized the U.S. tobacco market between 1890 and 1910. Foundations for American Tobacco began in 1881 when James B. Duke (18561925) went into the cigarette business with his father, Washington Duke, founding W. Duke and Sons Company near Durham, North Carolina. The younger Duke led the company by aggressive, growth-oriented practices such as price-cutting (to undercut competitors) and spending up to 20 percent of sales on advertising and promotion. By the mid-1880s Duke expanded operations to take advantage of the cigarette markets in the North and West. Competition between his company and four other tobacco manufacturers intensified.

In 1889 New Jersey passed an incorporation law that allowed Duke to organize a merger with his competitors in 1890, thus founding the American Tobacco Company. Although it controlled almost 90 percent of the domestic cigarette market, American Tobacco continued to advertise extensively. Duke also increased profits by seeking an exclusive contract with a manufacturer of cigarette-machines. He integrated the company vertically (so that the company did everything from buying the tobacco leaves to selling finished tobacco products at its own retail chain, the United Cigar Store). Duke eliminated less profitable brands and also closed inefficient factories. The company employed non-union labor to keep costs low. As a result, American Tobacco could price competitively.

Duke continued his practice of buying competitors and by 1911 acquired 250 of them. By efficient management and strategic acquisitions American Tobacco was able to hold on to most of the tobacco market. In 1911 the company claimed 96 percent of domestic snuff sales, 85 percent of chewing tobacco and cigarette sales, and 75 percent of smoking tobacco.

On May 29, 1911, American Tobacco Company was dissolved in accordance with a ruling by the U.S. Supreme Court. The decision followed years of court challenges to Duke's monopoly that began in earnest in 1907; an American Tobacco subsidiary was indicted for price fixing (the practice of pricing below cost to eliminate a competitive product). This prompted the U.S. Justice Department to file a petition against the holding company. The Court charged American Tobacco Company with violating the Sherman Anti-Trust Act of 1890, which outlawed restraints on trade and attempts or conspiracy among competitors to monopolize a market. American Tobacco was condemned by the high court for its "unreasonable business practices." (The decision came just two weeks after a similar case against John D. Rockefeller's Standard Oil Company, which set the precedent for the enforcement of anti-trust laws.) Two decades after the passage of the first national anti-trust legislation (the Sherman Act), the federal government had finally voiced its determination to keep the U.S. marketplace competitive.

See also: James Duke, Sherman Anti-Trust Act, Tobacco