v^ DEPARTMENT OF COMMERCE OFFICE OF NATIONAL RECOVERY ADMINISTRATION DIVISION OF REVIEW THE TOBACCO STUDY The Tobacco Unit Industry Studies Section, Tobacco Unit March 1936 338 U585w ho. 8 7 3 3f 7 UNIVERSITY OF FLORIDA LIBRARY 1 R E W R D This study of t&e Tobacco Industry was prepared by members of the Tobacco Unit of the Industry Studies Section, Mr. I.I. D. Vincent in charge. The Tobacco Unit desires to express its appreciation of the unfail- ing courtesy end cooperation displayed by officials of all Government departments that have aided , in the preparation of this material. Special acknowledgment • i s made . to the . Treasury Department , parti cularly to ' the Income Tax- Bureau -and. Tobacco .Tar: Division of the Bureau of Internal Revenue; to the Bureau, of Labor Statistics of the Department of Labor; to the Bureau of Agricultural Economics of the Department of Agriculture; to the Agricultural Adjustment. Administration; and to the Tobacco Division of the Bureau of Foreign and Domestic. Commerce, Department of Commerce. Similarly, the Tobacco Unit is indebted to all divisions of the Industry; almost without exception members of the Industry have given freely information needed in certain sectipns_ of this stuc ! : r . In the organization and presentation of material the Unit wishes to acknowledge valuable editorial assistance from other members of the Division of .Review. At .the back of this report will be found a brief statement of the studies .undertaken by the Division of Review. ^9779 10S91 TABLE OP CONTENTS I CHAPTER' I - TIE LARuE CORPORATION III THE TOBACCO IIMIOTACTORING INDUSTRY PAGE A. DEFINITION ' 7 B. SIGNIFICANCE IH THE CIGARETTE; SNUFF, CHEWING A1ID SMOKING TOBACCO MANUFACTURING INDUSTRY 7 C. . THE BIG FOUR - A MISNOMER 10 D. OWNERSHIP AID CONTROL 10 1, Stock Ownership 10 2. Hon- Voting Stock 11 3« Character of the Director? tos 14 4, Returns of Management 14 ( a) Prel irainary 14 Cb) By-law XII 15 (i) The American Tobacco Company 15 (ii) Liggett & Myers Tobacco Company 16 (iii) R. J» Reynolds Tobacco Company 17 (c) Recent Developments 17 (i) Liggett & Myers Tobacco Company 17 (ii) Americrn Tobacco Company 17 (iii) R. J. Reynolds Tobacco Company 18 5. Conclusion 21 (a) Return to Executives 21 (b) Non-Voting Stock 22 (c) Character of the Directorates 23 E. CIGARETTE SELLING PRICES AD POLICIES 24 1 • Preliminary 24 (a) Ordinary Discounts 24 (b) Range of List Prices 24 2. Character of Competition 27 3. Channels of Distribution 27 4. Special Discounts and Allowances 27 (a) Definition (b) Their General Characteristics (c) Their Extent 28 P. PRODUCTION 32 G. ASSETS AID EARNINGS OP THE BIG THREE 33 1 • Canital Invested 33 2. Earnings 34 3. Pis-position of Net Earnings 35 K. ASSETS AD EARNINGS OF THE TOBACCO INDUSTRY 37 I. INDUSTRY COMPARISONS 40 Appendix 1 Appendix 2 52 Appendix 3 65 CHAPTER II - THE ECONOMIC AND SOCIAL STATUS OP LABOR A. LABOR IN THE CIGARETTE, SNUEF, CHEWING AND SMOKING TOBACCO I lANUPACiURING INDUSTRY 70 -ii- PAGE • SaatHoasry 70 . 1»- ■ -The Size- of the Labor Eorce 72 • ■ 2. Regional Co ncentration .......... 74 . . 3» Com position with Respect to Color and Ser. 74 . . 4*- ; Distribution by Companies 74 - ■ 5. • ■ • Workers in Wa-sge' Groups Prescribed "by the Code ..... 75 6, Average Koirrly Earnings in March 1935 77 7. Average Hourly Earnings in Code Groups 80 8 • Average Hours Forked Per Week 81 9, Average Earnings Per Wee k 82 . 10, Position of the Individual Worker 83 ,11« • Manufacturers -versus Independent Leaf Sealers *•». • 84 . 12 • C orroar i s ons • wi th Qthe t Time s 85 13, C otto ari sons wi th Other 'Industries • 88 .14* - Remarks on -Particular .Bran ches of the Code Industry 91 .15. . - Annual -Earnings and - the 'Number 'of 'Weeks Worked by Tobacco lla;nafacturi-ng 'Employees in 1954 • . • . • 93 B. COMPANY -POLICIES OF -XIEX&&B& WOKE 96 . .!• . .I ntroductio n ••••«••.- .-.■. .-.v.v 96 .2.. - Vacations ............ ....... . 96 3. - Sick -Leave 97 4. Insurance '. 97 5. P ensions- .-.-.-. 97 6. Medical Services 98 7. Safety Program '99 8. Recreational 1 A-c-tivities 99 9. Educat i onal Work .v. ■. . ...... '. . . . . '. '. . '. '. '. . ' '99 10. Cafeteria s 100 11. Other Welfare Work ' 100 12. Examples of Welfare Policies 100 C . MECHANI ZATI ON ... •. -. •. ■. •. ■. '. *. . ;.■.... . . ; . . . . . '. . ". . '. '.*..'.. 101 1 • Historical 101 2. Under the Code - ; ; . ; 102 3. Post-Code Conditions 103 4. Conclusion 104 CHAPTER -III-- I1ITE GRATI Oil WI TH AGRI CULTURE A. INTRODUCTION < a < i ;;.;:;;;. ; 105 3 . PRESENT METHODS • OP • SELLING ■ LEAF ' T03ACC0 105 to .!» .. The Loose Leaf and Auction Warehouse 105 (a) • -Rapidity of Sales ' 106 (b) • -Importance of Adequate 'Lighting 106 (c) • -The Small Market •. • 106 (d) . Mandatory Government Grading 107 (e) The Short Marketing Season 107 (f.) Unfair Trade Practices 108 (l) Subsidized Trucking 109 ^ (2) Rebating 109 (3) Reservation of Ploor Space 109 2.. . ,T2ie, Maryland Market- .-..-. .v . . 109 3. The Connecticut V.-illey Situation Ill -iii- PAGE 4. Barn-Buying Ilethods of Cigar Manufacturers 112 5, Collusion in Purchase of Leaf 112 R« Conclusion' 113 . RE^JUSTIENTS III' DEMANS) FOR VARIOUS TYPES OP TOBACCO .... 113 1. Shifts in Production Areas 113 2. The South Atlantic States ' 123 CHAPTER IV - FOREIGN TRADE III LEA? TOBACCO Part l' - TEE IMPORTANCE OP TOBaCCO A3 AN EXPORT COMMODITY AND ' THE GROWTH OF FOREIGN COMPETITION A. TIE IMPORTANCE OP TYPES B." 'THE CHANGE IN SMOKING TASTES ' CV THE BARE TYPES 1. The Lost Italian Market ,. . • ■ D. MARYLAND TOBACCO ,. ... E., BURLEY- TOBACCO ' P.' BRIGHT FLpE CURED TOBACCO 1#. , Domestic Production , , . , 2... , Foreign Production . 3, . Summary Part 2 - . THE RELATION. OF TRADE A. GOVERN! 2MT MONOPOLIES B. PREFERENTIAL DUTIES C. GOLD ELffiARGOS AilD GJJOTA RESTRICTIONS CARRIERS TO AMERICAN EXPORT 'TRADE ♦ • • • • CONCLUSION CHAPTER V - THE CIGAR I IANUFAC TURING INDUSTRY THE INDUSTRY Summary A.' DEFINITION AND PRESENT POSITION 01 1. Definition of the Industry — — ■ — r ' ' I r— | : 1 • p*» (a) Description of Hand Manufacture of Cigars ... (b) Description of Machine Manufacture of Cigars 2. Present Position of the Industry (a) Number of Establishments (b) Total Investment (c) Annual Production (d) Employment B.' DEVELOPMENT OF THE INDUSTRY C." LABOR IN CIGAR ilAFUFAC TURING 1. Employment • (a) Total . Employment .... .(/O, . Division of Employment by Sex (c) . Division of Employment by Occupations . ( d), . Seasonality of Employment (e). . Regional Concentration of Employment (f ). . Distribution of Employees by Size of Company (g,) Distribution of Employees by Ages . .2... , Hpur.s. of Employment. • • • •. -IV- 125 125 125 126 127 128 129 131 131 132 133 135 135 135 136 136 137 140 141 141 142 143 144 144 144 144 145 145 149 149 149 150 150 151 152 154 154 154 PAGE 3. Wage Rates and Earnings • • • 157 (a) Annual Wages and Annual Payrolls 157 (b) Weekly and Hourly Earnings in the Cigar Industry Compared to Other Manufacturing Industries .158 (c) Wage Rates and Earnings by Occupation, Sex, and Grade of Product 159 ( d) Earnings by Stat e s • 162 4, Mechanization ' • • 165 ' 5. Effect of the Code on Labor 170 D. MAJOR INDUSTRY PROBLEMS 174 1 • Declining Volume of Production • 174 2. Trend Toward Lower Priced Cigars • 174 "3 # Mechanization and Concentration of Production 178 4.' Integration ^ith Agriculture , 181 (a) Tobacco Buying Methods • . . . 182 CHAPTER Yl|- DISTRIBUTION OF TOBACCO PRODUCTS PART I - CHANGES .IN .CHANNELS A, 'THE SITUATION IN GENERAL .... 183 3. MANUFACTURERS 1 " 'WHOLESALE 'BRANCHES ' .186 C. THE 'TOBACCO 'WHOLESALER 186 D. CONDITIONS IN THE 'RETAIL TRA.DE ....... 187 E. PRICE CONDITIONS IN THE TOBACCO TRADES PRIOR TO THE CODE. 188 1. Vanishing Margins 188 2. Retail Tobacco Chains in 1932 and 1933 188 P. PRICE REGULATIONS IN THE RETAIL TRADE .. . 188 1. Effects of Price Regulations 189 (a) Independent Retailers 189 (b) Chain Cigar Stores .190 (c) Chain Drug Stores 190 (d) Chain Grocery Stores 190 (e) Department Stores 191 2. Price Spread Between Popular Brands and Ten Cent Brands 191 3. The Cigar Merchandising Plan 191 (a) Operation of the Plan 192 G. RELATIVE STABILITY OE RETAIL PRICES 192 H. PRICE REGULATIONS IN TOOLE SALE TOBACCO TRADE 193 1« ( Effects on the Sub- .jobber 193 2« Compliance with Wholesale Price Regulations 193 I. SOLUTION OF CODE PROBLEMS, t . .... 194 1« Possibility of Consolidation 194 2. Attempt to Secure Voluntary Agreement s • 194 J. LABOR 'IN TOBACCO DISTRIBUTION , 195 !• Hours and Wages in the Retail Tobacco Trade 195 2. Hours and Wages .in .the Wholesale Tobacco Trade .... 195 ..... (a) Maladjustment with .Other Wholesale Trades ... 196 -v- PAGE PART II - ADVERTISING PRACTICES A. ADVERTISING PRACTICES AS AFFECTING DISTRIBUTION III . TOBACCO 1 • GpocL-rWill .and, Compe t itive Warfare 2» . . T he , Ao.V 5 i t i s i n^ Ap~o r 3-n r i a t i on ( a) . . I ': e™.s .11, 12, and 13 . (b) . .The. Nation's Bill for Advertising (c). Is, Tobacco's Share 50 to 60$? ... ... 3. The.A fl ye-rtis ir- Cost of Distribution • B. . TOBACCO. COMPARE TO 7: HER INDUSTRIES . . .1. 1933-1934. Tobacco Linag e 3». The Ten llc~^ ".\ rs •••«••• 3, Comparison of A -.-ver 4 :- : .r.ii V: Expenditures ( a) Newspaper Adver I i c in -- . , (b) Magazine Advertising . (c) Radio Broadcast Advertising ..... 4. Recapitulation • • 5* Estimating the Total Cost , G f WHAT IS THE COST? ... . • ••»•• • • • • • p v THE EFFECTS OF ADVERTISING COMPETITION .,... E. . ADVERT I SlilG ALLOWANCES . 1 • . . Tobacco Products as Loss Leaders 2, Effect of Loss Leader on Retailers . . . 3^. Advertising Allowances to Chains, etc . 196 196 200 201 202 204 205 207 207 208 209 209 210 222 223 224 225 226 226 227 228 229 CHAPTER VII - THE IMPORTANCE OF THE TOBACCO ILANUFACTURING INDUSTRY TO THE. FEDERAL GOVERNMENT AS A SOURCE OF TAX REVENUE A.. GFJIERAL . . . . V 235 B. ADDITIONAL. TAX RSVfifUE FROM CUSTOMS RECEIPTS AND . . , . pR0C*i!3SJNG TAXES . .'.' 237 .c. .state; 'Taxation ... .V. .'.... 237 D. DISPARITY IN TAX METHODS 238 CHAPTER .VIII.- .POSSIBILITIES FOR RESEARCH IN THE TOBACCO INDUSTRY " PAGE A* . THE . SCOPE . OF . RESEARCH IN THE TOBACCO INDUSTRY 239 Bf . THE FIELD FOR COORDINATED INDUSTRY RESEARCH 240 . 1.. The Curing of Tobacco 240 2» P r ir.iary Le af i.fe.rke t 241 By-Products • 241 The Aging of Tobacco 241 d. Distribution Problems 241 6. Labor 242 7. Foreign Markets • 242 3 • Relationship rith Government • ••• 242 C. ASSOCIATIONS IN THE INDUSTRY 243 1, Functional Organization and the Relationship of the 4. Association co Research ,• .... . • • • 243 -VI- /-i-n PAG D. C01TCLUSI0N 244 AEPESDIGES TO TIIE TOBACCO STUDY 245 Appendix 4 Taxation, Revenue Receipts 245 Changes in Rates of Taxation 247 States Taxing Cigarettes 248 States Taxing Smoking Tobacco 249 States Taxing Chewing Tobacco 250 States Taxing Snuff 250 Table - Receipts from Cigarette Taxes and per capita consumption ~» 251 Appendix 5 List of Unpublished Material on which Chapter V is Eased 259 Appendix 6 List of Basic Tables from Department of Labor 263 Appendix 7 Distribution 269 Appendix 8 Table 1 - List of Codes in Tobacco Industry • 276 Table 2 - Finished Code Histories in the Tobacco Industry 275 Appendix 9 Foreign Trade in Tobacco 277 -0- -vii- y^ - 1 - THE TOBACCO INDUSTRY SUM M A E Y sfe s£ s}e afc ?fe Ever since the Colonial period in Virginia when tobacco was the first medium of exchange and the first export commodity, the story of tobacco has been a panorama of American economic history. The tobacco industry is typical of the revolutionary changes which have taken place in agri- culture, manufacturing, distribution and foreign commerce. Altogether, a general study of the tobacco industry affords a wide view of American experience in governmental activities and business development. Tobacco, today, provides the South Atlantic States an agricultural income greater than that from cotton; it ranks first in other important farming areas. In dollar value, tobacco ranks second among agricultural commodities exported. Its manufactured product is worth a billion dollars wholesale. The labor employed is both white and black, North and South, union and non-union. Ho other manufactured product, liquor included, furnishes (as of 1935) so large a proportion of the national governmental revenue. In the spring of 1933, the tobacco industry well illustrated the im- mediate need for governmental intervention in the public interest. The prices then paid the farmer for his tobacco, the wage levels for labor, the policies toward distributors and consumers — all combined to exhib- it depressed prices for the grower and inadequate wages for labor on one side, but continuing large -profits for the manufacturers on the other. In 1932, average prices paid farmers for tobacco were far below cost of production. General wage levels were below adequate subsistence require- ments. Wholesalers and retailers were suffering severely and, in part, directly from the sales policies and distribution methods of some of the large manufacturers. Cooperation and, later, an agreement with the Agricultural Adjust- ment Administration in the fall of 1933, when the manufacturers guaran- teed higher price levels for tobacco and a certain volume of purchases; and the compliance of tobacco manufacturers- with the President's He-em- ployment Agreement, represented the first forward steps taken by the manufacturers. It was not until February of 1935 that the cigarette, snuff, smoking and chewing tobacco industry accepted a Code of Fair Com- petition and that Code was limited solely to labor standards. Later dur- ing the Code period, wages were raised somewhat above those existing under the President's Re -enrol oyment Agreement, and with that addition, repre- sented roughly a 50fj increase over the weekly earnings that had prevailed in early 1933. There was another Code in the industry — one for the cigar manufac- turers. Under this cigar manufacturing Code, although the Code provided a considerable increase in wages, the long struggle between the handwork- ers and the machine operators resulted in exemptions and many inconsisten- cies in wage rates. 10691 , -2- The leaf dealers, wliose primary business is exoort, employ negroes for stemming and other unskilled operations during the short marketing season of tobacco leaf. Por years these unskilled workers, representing the low- est class of casual labor, have received a meserable pittance as their wages, No Code agreement for leaf dealers was ever reached. Comparisons of wages paid by leaf dealers with those paid by the manufacturers, often in the same areas, show a condition to exist that needs immediate remedy. The situation existing since the end of the NRA Code period is of de- cided interest. The large manufacturers in the cigarette, snuff, smoking and chewing tobacco industry have not only continued their wage standards under the Code, but they have raised them. Comparisons with the automobile industry in Section 15, Part A of Chapter II of this study are well worth reading. Although the wage levels, particularly for unskilled negro women, are still on a very low subsistence basis, the general labor story of this particular industry, developed from Code experience, shows for the first time a sense of social responsibility. It is unfortunate that the same conditions do not exist in the cigar manufacturing industry; there, with certain definite company exceptions, even the low code standards have been dropped. On the distribution side of the tobacco industry, wholesalers and retailers have lost the Drofit advantages received during the Code period; they are continuing actively however, through their associations an attempt to work out their problems. The whole situation in the tobacco industries became so deeply a na- tional concern that, in February 1935, under an Executive Order of the •President of the United States, the Division of Reasearch and Planning of the National Recovery Administration began a survey of the manufacturing industry, covering not only labor but other problems pertinent to the po- sition of the manufacturers in relation to the national economy. Immediate- ly after the Schechter decision and the formation of the Division of He- view of the National Recovery Administration, it was determined to continue the Tobacco study, widening its scope to cover the several divisions of the industry and to develop insofar as possible their inter-relationships. The Tobacco Unit of the Industries Studies Section, Division of Review, was therefore authorized to include in its study a survey of the methods of purchase of tobacco leaf from the farmers, to trace the relation of tobacco to world trade and to examine domestic processing and distribution of all important tobacco products. The present study is a result of that survey. It is not complete, as this report points out; there are wide areas yet to be surveyed; and the need of continued research is indicated constructively in each phase of this present report. Almost without exception the representatives of the industry have talked freely with members of the Tobacco Unit and have aided materially in the compilation of part of the information here presented. The Tobacco Study as here presented surveys the tobacco industry in the following relationships: Chapter I. - The Large Corporation in the Tobacco Manufacturing Industry. There is discussion of the divorce' of management from ownership. Non-voting stock, first used as a legal device for control; the character of the directorates and the limitation of their member- ship to those holding other official -oositions in the corporations; 10691 -3- the remuneration to management; — these are all given critical ex- amination. Cigarette selling prices and policies, the effect of these policies on wholesalers and retailers, and on the relative position of the largest companies in the industry are studied. Comparisons are made of their assets and earnings with those of the entire tobac- co industry and with other industries. Chapter II. - The Economic and Soci a l Status of Labor . The study of wage levels gives an opportunity to trace region- al, sex, and racial differentials. The extent of welfare practices is described and the question is raised whether the welfare programs at present conducted offer resistance to adequate wage levels. La- bor studies are presented to reveal certain inadequacies of the wage structure. A survey was made during 1935 by John ?. Troxell covering the labor union organization in the cigarette, snuff, smoking chewing tobacco industry. This survey is in the file of- "Special Materials" of the Division of Review. An independent survey, by Dr. Charles S. Johnson of • Fisk University , was made during the Code period and was especially concerned with living conditions in a number of tobac- co manufacturing centers in Virginia, ITorth Carolina, and Kentucky. Chapter III. - Integr ation with Agriculture . But a few of the many problems are listed, indicating the inter-dependence of this industry and tobacco culture, Ho one of the present methods open to the farmer for selling his tobacco is free from fault. There is need of immediate consideration of this problem by government as well as by industry. The readjustments in demand for various types of tobacco have resulted in pronounced shifts in production areas. The dependence of the South Atlantic States on both tobacco culture and tobacco manufacture is of such, significance that this area is given special consideration. Chapter IV. - Foreign Trade in Leaf Tobacco. So large a proportion of American grown leaf ordinarily finds its way into foreign markets that the American tobacco manufacturer alone cannot guarantee reasonable prosperity to the American tobac- co farmer. Certain foreign markets have been lost and cannot be regained. This chapter indicates possibilities of new markets abroad, based on further analysis of world requirements. Trade barriers, such as government monopolies, preferential duties and quota re- strictions are discussed and comment is made on the tariff walls erected ih the past by this Government and their restrictive influ- ences on tobacco export. Chapter V. - The Ci^ar Manufacturing Industry. All the problems incident to a declining industry are here il- lustrated. The never-ending pressure on labor, as on all other costs, has resulted in wage levels, still continuing, that have no 10691 r -4- license to exist in American industry. The increasing use of the cigar maid. ng machine has had less influence on total labor employed than has the decline in cigar production. No attempt has been made to answer these problems. A field survey now in progress by the Bureau of Labor Statis- tics, Department of Labor (covering wage levels and annual earn- ings, in -plants manufacturing cigars by hand and in highly mechan- ized factories) should be of great aid in showing the unfortunate conditions surrounding labor in this industry. This is but ano.ther instance of the need of further study. Chapter VI. Distribution of Tobacco Products. This chapter is a consideration of the national problems that arise from the distribution and the advertising policies of the manufacturers. Seven changes in the channels of distribution for tobacco products are described; the subject of demand in relation to price is considered; the effect of loss-leader practice is eval- uated. The decline of the tobacconists' snons, the growth of chain stores and of co-operative of various kinds, and direct selling ~oy manufacturers to retailers of large -purchasing nower — these are factors that call for continued analysis. The use of large scale advertising campaigns, running into scores of millions of dollars, presumably to develop consumer demand; the effects of advertising on the whole industry; the social and economic consequences of ad- vertising allowances, free deals and the like, constitute a field of more than industry interest and significance. Chapter VII. - The Im portance of the Tobacco Manufacturing Industry to the Federal Government as a S ource of Tax Revenue. Recognizing that it is not the province of this study to pass upon the varioxis problems of taxation as illustrated by this indus- try, the fact that tobacco manufacturing is the largest single in- dustry source of federal revenue warrants a full statement of its contribution and a direct comparison with other revenue sources. The special State excise taxes and State sales taxes are discussed, for they tend to decrease government revenue from tobacco products. Mention is .aade also of the graduated tax on cigars and the differ- ent tax rates on cigarettes and on other products. Chapter VIII. - Possibilities for Research in the Tobacco Industry. Herein are outlined the fields of research which invite the at- tention of government and industry. There is op-oortunity for the tobacco industry to establish a Tobacco Research Foundation in which all divisions of the industry take part. Some such -clan would per- mit the tobacco industry to work its own 1 way out of its many malad- justments, and make thereby a valuable contribution to the national economy, L 1C691 -5- APPSNiHCES Aroendix 1- — Froc'.uction Table Lumber 1. Quantities of Chewing, Smoking and Snuff Tobacco, . . Cigars and Cigarettes manufactured hy the Tobacco Industry in the United States, and the Quantities, (and Percentages of the total), produced by se- lected groups of corporations. For calender years 1934 to 1926 inclusive (2 sheets) Original and ten photostatic copies Table Lumber 2. List of statements basic production data TOTE: This Appendix bound frith Chapter I. 4 b erdix 2 — Financi al Table lumber 1. Statement shoving comparisons of Net Sales, Com- piled Net Profit, Statutory Net Income and Cash Dividends paid for certain groups of Tobacco Cor- porations to all Tobacco Corporations reporting on Income Tax Returns for years 1926 - 1934 inclusive. Table Number 2. Letter dated January 27, 1936 from 17m. R. McHey- nolds, Administrative Assistant to the Secretary of the Treasury. (8 pages) Table Number 3. Market .Value, as at January 2, 1935, of the Capital Stock of the Big Three. Table ITumber 4. Basic Financial Lata. LOTS: This Appendix bound with Chapter I. Appendix 5 — Financial Table ITumber 1. The Official Positions and Stock Holdings held by the Directors of the Big Three (3 pages) . Table ITumber 2. Corporation Income Tax Returns for 1925 - 1933 for six groups as listed on each .page of this table, showing' for each year totals for certain i^ems of assets, liabilities, receipts, and deductions; also compiled net profit or deficit, statutory net income or deficit, net loss for prior year, cash dividends paid, gross profit from sales, and gross profit from other operations _ (5 pages). LOTS: This Appendix bounc 1 with Chapter I. -6- Appendix 4 — Taxation Table Number 1. Total Revenue Receipts of the United States Govern- ment; Total Internal Revenue Collections, (showing revenue from tobacco taxes and other major groups); , and Total Customs Receipts, (showing import duties on tobacco and all other commodities'). For Select- , ed Years between 1935 and 1914. Table ITumber 2, Changes in Rates of Taxation on Tobacco Products from 1914 to 193 5 (inclusive). Table Number 5. States Taxing Cigarettes and their rates of fcaxa- tion; States Taxing Smoking; Tobacco and their rates of taxation; States taxing Chewing Tobacco and their rates of taxation; States taxing Snuff ana their rates of taxation. Table Number 4. Receipts from Ciy.rette Taxes and Per Caoita Cigrr- ette Seles in States Taxing Ci ; ;r..rcttes Alone. Table Nvmber 5. Li^t of Statements. NOTE: Appendix 4 is bound with Chapter VII. A-Q-iendix 5 — Ci~ar llmui'actv.i-in~ Costs A-yoendi:: 6 — List of Basic Tables received from the Department of Labor on llumber of Enrolo-rees, hours, and earnings in the cigar- ette, si: 'off, chewing and smoking tobacco manufacturing industry NOTE: A list of these Tables is appended to Chapter II. The Tables will be found In Appendix 6. Appendix 7 — Distribution Appendix- 8 — List of Codes and List of Finished Code' Histories in the Tobacco Incustr- - . Table ITumber 1. List of Codes. Table ITumber 2. Finished Code Histories in the Tobacco Industry in the National Recovery Administration files. Ao'oendix 9 — Foreign Trade in Tobacco Table ITumber 1. A description of a series of charts and tables in photostat form, covering exports of leaf tobacco and tobacco products from the United States to each of seven countries, which are in National Recovery Administration files, Tobacco Unit, Exports. 10691 -7- CHAPTER I TEE LARGE CORPORA TION Ii. Th£ T OBACCO MA NUFACTURIN G INDUSTRY "The translation of perhaps two-thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly fi- nanced corporations vitally changes tne lives of property owners, the lives of the workers, and the methods of property tenure." (*) a. pm, ii tip::. • Berle and Means define the "quasi-public corporation" as one "in which a large measure of separation of ownership and control has taken place through the multiplication of owners" (**), and names among other distinguishing characteristics that of the public mar- ket for its securities. b. 3IG3&IC& JCE i;..; the jiaasTTD, s:\~J2. .: t ~~;i:.:g :o d s::o::i::g tobacco. JSTRY. The growth of the quasi -public corporate structure is of peculiar significance in the tobacco manufacturing industry. The monopoly developed by The American Tobacco Company in the last decade of the nineteenth century and continued until 1910, resulted in the decree of dissolution bjr'the Supreme Court of the United States in May, 1911, based on direct violation of the Sherman Act. In its decision, the Supreme court recognized the interest of the general public and further the large interests of the investors in the securities of the company. (***) The tobacco industry, together with the oil industry, was responsi- ble in large part for direct national recognition of the interests of tiie general public and the interests of investors in the con- duct of large corporations. Since 1911, the corporate system has grown by leaps and bounds. As of January 1, 1930, the two hundred largest non-banking corporations, with combined assets of eighty-one billions of dol- lars, represented nearly half of all corporate wealth in the United Sta.tes. (****) Listed among these two hundred corporations are four tobacco companies: The American Tobacco Company, Liggett & Myers Tobacco Company, P. Lorillard Company, and the R. J. Reynolds ( *) "The Modern Corporation and Private Property", by Berle and Means, Preface, page vii. ( **) See further notes and quotations, pages ?-10 of this chapter. ( ***) U. S. v. The American Tobacco Co., et al. , 221 U.S. 185. (****) Berle and Means, page 19. 10691 -8- Tobacco Company, all of them owned or controlled "by the American Tobacco Company before its dissolution. (*) As compared with average assets of forty and one-half million dol- lars for each of the two hundred largest non-banking corporations, these four tobp.cco companies show average assets of 172 million dollars and three of them, the American Tobacco Company, the Liggett & Myers Tobacco Company and the R. J. Reynolds Tobacco Company, show combined assets of 578 million dollars, or an aver- age of 193 million dollars. (**) The market value of the pre- ferred and common stocks of the Big Three together, as of January 2, 1936, was $1,481,596,000 (***) (based on stock outstanding, December 31, 1934. In addition to the four tobacco companies named, three snuff com- panies which were component parts of the trust prior to its dis- solution, and certain other tobacco manufacturing corporations, illustrate clearly many of the characteristics of the quasi-public corporate structure. (****) ( *) Abundant sources for definite statistical and financial infor- mation concerning these four companies are available. Standard Statistics, Moody's and other published manuals, have together recorded their growth since 1911. Government sources, the more important listed below, have also been extensively used. 1. Treasury Department, Bureau of Internal Revenue. (Group information only). (a) Statistical Section, Income Tax Unit (b) Tobacco Division, Miscellaneous Tax Unit 2. Federal Trade Commission 3. Securities and Exchange Commission. ( **) Berle and Means, page 20. ( ***) See Appendix 2, Table 3. (****) "The Modern Corporation and Private Property" (Eerie and Means, MacMillan, 1933). Numbers in parentheses refer to pages. 1. The two hundred largest non-banking corporations have shown a rate of growth of 5.4^ (from 1909 to 1928), more rapid than that for all coporations of 3.6$ in the same period, and as compared with a rate of 2.0,o for all non-banking corporations other than the two hundred. (35) 2. "The trend of the recent past indicates that the great corporation will become increasingly important in the future 1 ! (41) "There is apparently no immediate limit to its increase. It is coming more and more to be the industrial unit with which Aaerican economic, social and political life must deal." (44) 3. "The process of stock dispersion nas proceeded furthest in the very large companies. " (47) — "The larger the size of the 10691 -9- company. the smaller was the proportion of stock held by the manage- ments" (i.e., officers and directors). (52) 4. Individuals with taxable incomes under $5,000, estimated in number from three and one-half million to six and one-half million, received (1929) 26.28$ of all corporate dividends (60). Based on 1922 tax returns, "the conclusion seems certainly warranted that corporations represented very much more than half of the national savings apart from those directly employed by the owner". J[_64) 5. "The value of an individual's wealth is coming to depend on forces entirely outside himself and his own efforts". (67) 6. "Finally, in the corporate system, the 'owner 1 of industrial wealth is left with a mere symbol of ownership while the power, the responsibility and the substance which have "been an integral part of ownership in the past, are being transferred to a separate group in whose hands lies control". (68) Control over industrial wealth con.be and is being exercised with a minimum of ownership interest. (69) Five major types of control evidenced: "(1) control through almost complete ownership, (2) majority con- trol, (3) control through a legal device without majority owner- ship, (4) minority control, and (5) "management control" (70), defined as "ownership so widely distributed that no individual or small group has even a minority interest large enough to dominate the affairs of the company". (84) "The stockholder is practically reduced to the alternative of not voting at all or else handing over his vote to individuals over whom he has no control and in w hose selection he did not participate . " ( 87 ) 7. "Are we to assume for him" (i.e., the controlling individual) "what has been assumed in the past with regard to the owner of enterprise, that his major aim is personal profits? Or must we expect him to seek some other end - presitge, power, or the grati- fication of professional zeal?" (122) 8. "For the tens and even hundreds of thousands of workers and of owners in a single enterprise, individual initiative no longer exists. Their activity is group activity — the problems of con- trol have become problems in economic government"". (125) 9. "Both the New York Stock Exchange and the New York Curb have refused to list new issues of non-voting common stock". (76) 10. "Legally, the proxy is an agent for the shareholder; and necessarily under a duty of fidelity to him. Factually, he is a dummy for the management, — perhaps assisted by the company's attorney". (245) 11. "There is no longer any certainty that a corporation will in fact be run primarily in the interests of its stockholders. The extensive separation 'of ownership and control, and the strengthen- ing of the powers of control, raise a new situation calling for a decision whether social and legal pressure should be applied in an effort to insure corporation operation primarily in the in- terests of the 'owners' or whether such pressure shall be applied in the interests of some other or wider group". (333) 10691 -10- C THE BIG FOUR - A MISNOMER While p. Lorillard Company was an important unit at the time of dis- solution of the trust, in fact it was given a percentage (in value) of cigarettes, smoking tobacco, and little cigars in excess of that alloted to Liggett & Myers Tobacco Company, and furtner a position (and products) far more important than t hat given to the R. J. Reynolds Tobacco Company (*), its oresent status does not warrant its consideration with the three other large companies. It is, therefore, for the purposes of this study included in another group of companies. D . * OWNERSHIP AND CO NTROL . 1. Stock Ownership An analysis of the total capital stocks of the Big Three out- standing as of December 31, 1934 (**), clearly shows the marked degree of separation of ownership from control which exists in these corporations. The total par value of stock issued and out- standing by these three corporations at the above date was $372,241,125. Of this amount, only 2.75$ was owned by the officers and directors, while 97.25,-a was owned by stockholders not directly connected with the management of the corporation's affairs. The percentage of the capital stocks of all classes, outstanding as of December 31, 1934, owned by directors and officers for each of the three corporations, and the stockholdings of all o tilers follow; Percenta- es Owned By Officers and Oti 99. 98. 92 Directo .28 1.75 7.98 rs lers 72 25 02 2.75 97. 25 American Tobacco Company Liggett & :.yers Tobacco Co, R. J. Reynolds Tobacco Co. Together The R. J. Reynolds Tobacco Company shows by far the largest pro- portion of stock ownership by officers and directors, approxi- mately S'o of the total capital stock outstanding. In the American Tobacco Company, the management owns a negligible portion, approximately 1/4 of 1$ of the total capital stock outstanding. This company is an excellent example of the extent to which the control of the large corporation has passed from property owners to centralized management groups. ( *) "Competition in the American Tobacco Company 1 ', by Cox (1933) p. 30. ( **) Source: Securities and Exchange Commission. This subject is treated in greater detail in Appendix 2. 10691 -11- The modern large corporation is, of necessity, a form of "busi- ness organisation providing for and requiring s wide distribu- tion in the ownership of its securities. The divorcement of ownership from control is not a new problem, "but one which must continue to command increasing attention. Certain files and records of the Securities and Exchange Commission are publicly available to acquaint stockholders and others interested with pertinent facts on this and other related matters. As long ago as 1927, Professor William Z. Ripley of Harvard University (*) suggested "introduction of shareholders 1 independent audit or general check-up committees", and commented upon the fact that "such independent auditing at the expense of the corporation but under the supervision of shareholders entirely independent of the management, is necessary under the British Companies Act; as also in G-ermany. " The definite and permanent advantages to management of some form of direct stockholders representation is obvious. 2. Non-Voting Stock Under this same subject, the relation of ownership and control, the employment of the legal device of non-voting stock is of decided interest. The considerable extent of its use ~by these three corporations in the tobacco industry, as an aid in re- taining control by the management, is most pertinent to this study. This type of stock not only dis-f ranchises the owner from any right of participation in the election of the directors, but prohibits its holder from any voice whatever, direct or in- direct, insofar as the management of the affairs of the cor- poration is concerned. The interest of the owner of non-voting stock is practically limited to the dividends which he may receive by virtue of his stock ownership. Due to the evident limitations of non-voting stock and the discrimination as between stockholders which this instrument permits, the New York Stock Exchange and the New York Curb have prohibited the listing of new issues of non-voting stock. (**). The R. J. Reynolds Tobacco Company was the first of these three corporations to make use of this class cf stock, by the authori- zation and sale of 100,000 shares of Common B stock without voting rights, with a par value of $100.00 per share, in 1918 (***). Under the preemptive rights of the common stock holders, this non-voting stock was first offered to them. ( *) "Main Street and Wall Street", Little, Brown and Company, Boston, 1927, page 215. ( **) See note 9, page 9. ( ***) Later changed, to par of $25.00 and again to par of $10.00. 10691 "-'-." Li ■-': t . eVs To or ceo Company followed the example of the H. J. Reynolds Tobacco Company in 1220, selling $10,738,200 of Common 3 stock, and the American Tobacco Company, nine years later, sold its first issue of this class of stock. As of December 31, 1934, the records of the Securities and Exchange Commission show that out of a total par value of $372,241,125 of all stock issued and outstanding of these three corporations in the tobacco industry, $225,288,525 or 60.52$ consisted of non-voting stock. The percentages of non-voting and voting stocks outstanding in each of these three corporations as of December 31, 1934, were as follows: percent of Stock Non-Voting Voting American Tobacco Company 45.74 54.26 Liggett & Lyers Tobacco Co. 56.40 43.60 R. J. Reynolds Tobacco Col 90.00 10.00 It will be noted that stockholders owning 10, o of the par value of all stock outstanding of the R. J. Reynolds Tobacco Company are entitled to participate in the selection of the management of the corporation, while stockholders owning 90,t, the holders of the Common 2 stock, are deprived of any voice in the direction of the corporation's affairs. While this illustration exempli- fies to an extreme degree the extent to which this legal device of non-voting stock has been employed in the tobacco industry, it should, in fairness to this company, be stated that only $10,000,000 of this amount resulted from the sale of non-voting Class 3 stock, the remaining $80,000,000 being accounted for by stock dividends declared by the directors of the corporation from its surplus. In discussing the distribution of the par value of stock out- standing between officers and directors, and other, it was stated that the officers and directors own less than 3$ of the total capital stock outstanding, at par value, v/nen considering the combined position of the three companies. In making a similar comparison of the votes held by officers and directors and those held by others, it was found that the former have in- creased their percentage from 2.75 /3 of the par- value of all outstanding stock owned to 6.59)j of the number of votes con- ferred by reason of their stock ownership of those classes of stock possessing voting rights. The percentage of votes held by reason of stock ownership as between officers and directors and others for each of these companies is as follows: Percentages Owned 3y Officers and Directors Qtiiers American Tobacco Company .43 99.57 Liggett & i.;yei s Tobacco Co. 3.79 96.21 R. J. Reynolds Tobacco Co. 34.44 65.56 Together 6.59 93.41 10691 -13- Because of- the wide divergence "between the three companies in percentage of voting stock to total stock outstanding, the average figure is of little significance. As' of December 31, 1934, the total stock holdings of all classes of stock held by the managements of Liggett 8c Myers Tobacco Company and the American Tobacco Company were insignificant. It is evident that their managements were no longer dependent for control upon the stock they own, whatever differences in character or amounts of the various stocks outstanding. For these two companies, the transition period from strong minority control to direct management control has. been ended. The situation as regards the management of the R. J. Beynolds Tobacco Company (incorporated under New Jersey laws) differs from that of the two other companies. The management of this company owned slightly more than 1/3 of all voting stock as of December 31, 1934. In addition thereto, 200,000 shares of common voting' stock, or 20fo of the total voting stock, was in the Retirement and Insurance Investment Fund (*); these shares, company-owned, cannot be voted under New Jersey law. Because of the fact that voting privileges given to only 10$ of the ten million shares outstanding, and because of the unusual terms of "employee profit participation" (**) and its direct incentive for ownership of common voting stock, all classes of employees of the R. J. Reynolds Tobacco Company are interested in the acquisition of common voting stock, and in the ratio that this class of stock bears to all other stock outstanding. In this company, therefore, management and ownership are not divorced insofar as the voting stock is concerned. The significance lies in tne ten to one ratio of non- voting to voting stock, a ratio so abnormal that only the remarkable success of the management in earning profits has warranted the continuance of such a ratio to this date. *) Of the total of one million shares of common voting stock of this corporation, the records of the company filed with the Securities and Exchange Commission indicated that 307,000shares were owned by employees other than officers and directors, as of December, 1934. As of January 1936 (and after a sale in 1935 to employees of the company by the Executors of the Estate of il r . Bowman Gray, former Chairman of the Board of Directors, of all or part of his holdings of 75,000 shares of common voting stock), eighteen hundred employees, other than directors or officers, were stockholders. Four hundred of these were, new stockholders. (Derived from a letter from the company, dated January 27, 1936.) Stock holdings of common voting stock as of January 1936 are therefore indicated to be as follows: Shares Officers and Directors 269,000 Retirement & Insurance Invest- ment Fund 200,000 Other Employees 382,000 351,000 Otherwise Held 149 , 000 Total Stock Outstanding 1 , 000 , 000 **) See .page 17, this chapter. 10691 -14- The unusual era of prosperity through which America passed from the turn of the last century to 1929 was responsible, the Sherman and Clayton Acts notwithstanding, for tremendous corporate growths and profits. The return from investment in the R. J. Reynolds Tobacco Company to those who bought either its common or non-voting B stock as late as 1916 or 1917, seems hardly credible. IS it to be wondered at that the in- vestor gave but scant need to the right conferred upon him in his stock certificate — or to their lack? Similarly, though in lesser degree, the earnings of the two other companies during the same period, were such that without interruption the management advanced toward complete divorce- ment from supervision by stock ownership. 3 . Character of the Director ates The files of tne Securities and Exchange Commission, covering the year of 1934, were examined to secure the lists of indivi- duals on tne boards of directors of these three large cor- porations in the tobacco industry. Every one of the forty-one directors (American Tobacco Company with 17; Liggett & layers Tobacco Company with 12; R. J. Reynolds Tobacco Company with 12) constituting all the directors for the three companies, held other official positions in one capacity or another with these corporations. This appears of unusual significance since it is customary for all corporations comparable to these in size to have at least some representation on their boards of directors of stockholders witn no other official relation. It is evident that a board of directors so consituted is directly subservient to management control. It is apparent also that the Big Three, due to their earnings and strong financial position, have maintained their inde- pendence of any outside banking or financial assistance. One cf the fundamental conceptions of director responsibility is that of examining and passing upon the acts of management, in behalf of ownership. Insofar as this conception of the duty of directors is concerned, a question arises at once when dual responsibility is thus accepted by management. In Appendix 3 of this study, dealing with the Cigarette, Snuff, Chewing and Smoking Tobacco Manufacturing Industry, tables are presented based on information from the Securities and Exchange Com- mission, showing the official positions and stock holdings of these directors. 4. Returns to Management (a) Preliminary Today, increasing interest is displayed by stockholders in the amounts of salaries that large corporations are paying to executives. The Bureau of Internal Revenue and Securities and Exchange Commission are the chief C-ov 1 1 10691 -,1 F_ sources for information of this nature. Additional in- formation concerning salaries and other returns to management paid "by the three large tobacco corporations to officers and directors has been obtained from data filed by these comoariies with the federal Trade Com- mission, in its survey of the tobacco manufacturing in- dustry for the five year period 1928 to 1932 inclusive. These three companies have filed with the Securities and Exchange Commission their respective profit participating plans for officers and director?- for the year of 1934. Two of the three — the R. J. Reynolds Tobacco Company and the American Tobacco Company — in filing with the Com- mission, made their data covering executive salaries im- mediately available to the public. Liggett 2c I.Iyer s Tobacco Company, in filing this information, marked it as "confidential" and requested in accordance with the law a private hearing before the Commission for its decision as to publication of the data. As of January 1936, no decision had been made by tne Commission. Therefore, to make a comparable analysis of the remunera- tion of officers ana executives of those companies, it has been necessary to rely to a considerable extent upon the five year period 1923 to 1932 inclusive, as shown in the records of the Eederal Trade Commission. (b) By- law XII (i) The American Tobacco Company shows the' most liberal policy in the remuneration of its executives. During the five year period under examination, the records indicate that, together, officers and directors of this corporation received total compensation of $12,856,101, oi which $3,706,205 represented salaries and $9,159,895 other compensation from participation in the profits of the company in accordance with its By-law XII. This profit participation plan provides that the president and five vice-presidents together shall be entitled to participate in ten percent of the annual net profits of the company, (after divi- dends on preferred stoct) in excess of $8,222,245.82, the estimated amount of the net profits earned dur- ing the year 1910. The plan further provides that the amount available shall be distributed: 25$ to the president and 15;o to each of the five vice- presidents. This plan of participation in the com- pany's profit, allwed to executives, accounts during tnese five years for more than 70jS of their total com- pensation, approximately two and one-half times their During this five year period, $3,848,620 was paid to the president as t otal compensation, approximately 10691 -16- 30;o of the entire compensation paid to all executives. The total compensation paid in 1930 and 1931 was larger in each of these years than in 1929. The large profits of this company (American Tobacco Company) for these years are discussed, later in this chapter. Tno remuneration of the president of the American Tobacco Company for this five year period averaged in excess of three-quarters of a million dollars per annum, and in two of these years, 1930 and 1931, amounts exceeding one million dollars each year were paid to him. This executive received the highest re- muneration of any of the Big Three executives. (ii) Liggett and Lyers Tobacco Company A comparison of the profit sharing plan for execu- tives of tne Liggett & i/iyers Tobacco Company shows that it is practically identical with the plan of the American Tobacco Company in all respects, save one. This plan, also, is outlined in a By-law XII, suggesting a common parentage. The one difference between the tv;o plans, however, has great signifi- cance. The plan of the American Tobacco Company pro- vides for participation by the president and vice- presidents in lO'o of the net orofits after deduction, while the Liggett & Myers Tobacco Company limits the participation of their officials to 2f/o of similarly determined net profits. Furthermore, the 1928-1932 report of tne Federal Trade Commission previously referred to clearly shows that the fixed salaries of the six participating executives of the Lig ; .ett & Myers Tobacco Company are substantially lower than those paid ''oy the American Tobacco Compaq". During this five year period, the American Tobacco Company paid its president in fixed salary a total of $6o7,500 as compared to $250,000 paid to the president of the Liggett & Myers Tobacco Company . The total compensation paid to executives of the Liggett 8i Myers Tobacco Company was less than 43^ of the total compensation paid to executives of the American Tobacco Company. li/hile a certain proportion of this difference in the total amount of compensation is explainable by comparison of their net income records, by far the major portion is accounted for by the variation in the percentage of participation. It should be noted also that the total compensation paid to the President of Liggett & layers is 70^ less than the anount received by the president of the American Tobacco Company during this same period. k. 10691 -17- (iii) R. J. Reynolds Tobacco Company While "both the American TpTJacco Company and Liggett & Myers Tobacco Company have definite plans for re- muneration of their chief executives as previously outlined, the ^employee profit participation plan" of the R. J. Reynolds Tobacco Company differs so materially from the plans of the other two companies that direct comparisons cannot be made. While the Federal Trade Commission in its report on the period 1928-1932 listed the total amount of compensation by the executives of the two other large companies, it listed only the specific salaries of the officers and directors of the R. J. Reynolds Tobacco Company. This company is therefore treated under Section (c) immediately following. (c) Recen t Deve lopments Comparisons thus far made are based primarily on Federal Trade Commission data and refer to the years 1928 to 1932 inclusive. The following comments are based upon the material filed by these tnree companies with the Securi- ties and Exchange Commisson as of December 31, 1934. Ho information is available for the intervening year of 1933. As discussed later in this Chapter, in connection with the financial growth of these companies, their combined earnings available for dividends in 1932 ($100,017,097) were considerably larger than in 1929 ($84,406,253). Their profit showing did not indicate any impact from the depression until 1933. Since 1932 their profits have been so far below the immediately prior period that re- muneration to management insofar as it is based on earn- ings naturally has shown a decided decrease. (i) Liggett & Myers Tobacco Company As previously stated, certain information filed with the Securities and Exchange Commission by the Liggett & Myers Tobacco Company is not as yet available, so that it is not possible to make a direct comparison of the amounts of "other compensation" for the three companies. Significant facts about the two other companies are, however, available. (ii) American Tobacco Company On July 12, 1933 at a meeting of the board of di- rectors of the American Tobacco Company a resolution was unanimously adopted, the following being a por- tion thereof: "This Company does hereby declare its policy that hereafter no President or Vice President 10691 -18- shall be elected to oi-'ice unless he shall in advance, as part of his terms of compensation for his employment , agree in writing to waive any payments to him under Article XII of the By-Laws of this Company in excess of an amount computed in conformity with the following formula. " Then follows a formula specifying the method for calculating the amounts to be paid under Article XII to the president and to each of the five vice-presi- dents of the company for the years of 1933, 1934, 1935 and each year thereafter, reducing somewhat the remuneration to officers and based on larger and in- creasing amounts of deductions from earnings before setting u"o 10, o of the remaining e rnings as their re- muneration. The company further made the statement to the Securities and Exchange Commission that during 1934, no payments in excess of ^30,000 to any one person resulted from the profit sharing arrangements. With Article XII apparently still unchanged as a By-Law, it is evident that there have been waivers of its full privileges by the executives of this corpora- tion. It is presumed that the publicity resulting from the report of the Federal Trade Commission, com- bined with the heavy drop in earnings were largely responsible for these changes. (iii) R. J. Reynolds Tobacco Company Prom data in the dockets of the Securities and Ex- change Commission, as of December 31, 1934, there has been secured the P.eynolds plan for "employee profit participation" by both officers and employees. Article XII of its By-laws is quoted herewith: "All of the Company 1 s officers and employees who nave owned its com:., on stock and have been in its employ for not less than twelve months, then next preceding may be allowed, in the discretion and at the option of the Board of Directors, begin- ning with the year 1912, to participate in pro- portion to the Common Stock thus owned, in the Company's annual profits which are in excess of the percentage of the profits earned during the year 1910, to wit: 22.19 per cent, not exceeding, however, 10 per cent of those profits in excess of 22.19 per cent of its entire outstanding issue of Common Stock, taking into account pro rata any increase or decrease thereof made during the year. The Common Stock owned by an officer or 10691 -19- employee, for the purpose of this By-law, "be- ginning with the year 1916, shall include any stock purchased during the year from an officer or employee or from the personal representative of a deceased officer or employee, provided such stock would have entitled the former owner to participate in proportion thereto had it been held for the entire twelve month period." (*) As the above plan for profit participation is based on holdings of common voting stock, the company does not consider that amounts distributed under the provisions of this plan should be classified under "other com- pensation".' The outstanding differences in this plan from that of the other two companies are (1) the necessity of in- vestment in the common voting stock of the company (**) in proportion to the return realized, (2) the pro- vision wh ere b y all officers and all employees may parti- cipate, based on their holdings of common voting stock, and (3) employment by the company for not less than twelve months. Again referring to the Securities and Exchange Commission, there was set aside from the profits of the year 1934 and carried to reserve for the Retire- ment and Insurance Investment Fund the sum of $500,000. As this fund contains 200,000 shares of common stock, it is evident that the participation of tnis fund represented $2.50 per share. There was also a declaration by the Board of Directors on December 31, 1934, -under Article XII of the company's By-Laws and payable to 1,489 officers and employees in the sum of $1,629,257.50. Based on the $2.50 per share participation in the fund, it is assumed that the number of shares participating in the last named amount is 651,703. The officers and directors of this company owned 334,410 shares of common holding stock as of March 18, 1935 (***). Based upon such holdings there was ( *) There has been no increase in the amount ($10,000,000) of common stock (voting) since 1916. (Except changes in par value and-con- sequently in number of shares) . The practical result has been that 22.19$ or $2,219,000 has been deducted from profits each year, before the 10$ is determined as "employee profit participation" on the employee-owned common voting stock. ( **) The company reports that there have been many exchanges by em- ployees, of B stock for common voting stock, on a basis of heavy premiums for the common voting stock. ( ***) See Table 1, page 65 Appendix 3, 10691 -30- evidently distributed to the officers and directors the sun of $836,025 under the "employee profit parti- cipation plan", or approximately one-hslf of the total paid to all employees. Since the common stock hold- ings of officers and directors are known only as of March 18,1935, there is orobcbly some variation from the actual stock holdings as of December 31, 1934. Therefore, the sums so paid to officers and directors are subject to any change in stock holdings between the two dates. 3y referring again to their 3y-Law XII and the note thereto (page 18), it nay be assumed that the sum payable to officers and employees, holding common stock, and that amount carried to the reserve for the xletirement and Insurance Investment ITund, a total of $2, 129, 257.50, represents the 10,0 deducted from profits in accordance with the plan and for that year. The one point of similarity between the plans of these three companies is that a certain percentage is deducted from tne earnings of the company either be- fore or after net profit is determined. Since the earnings of the R. J. Reynolds Tobacco Company in 1934 were $21,563,894 as compered to $36,674,800 in 1931 (*), it is evident that the sums paid under the "employee profit participation plan" have been materially reduced from the high point. The share to officers and directors has apparently been fur- ther reduced by decrease in their stock holdings. ( *) See Table VI 10691 -21- 5. Conclusion (a) Return to Executives If, in each case, Article XII of the by-laws of these companies was drawn upon the dissolution of the trust in 1911 or within a few years thereafter, the methods of computing ad- ditional compensation to executives, "based on profits over and ' above the 1910 earnings, had. much in its favor. A distinct incentive for developing additional profits was presented to the officers, and the 10$ share of the. additional earnings allowed to the executives, as in the case of the American Tobacco Company, then apparently represented a reasonable com- pensation for their services. The tremendous development of cigarette smoking in which these three companies have had so large a part, has resulted since in such increase in their earnings that the 1910 profits are but a fraction of total profits, and .their deduction, prior to determining the net earnings on which the percentages for officers' compensation are based, has become relatively immaterial. The percentages to management, 10$ or otherwise, have grown to represent a much larger proportion of total earnings. The total remuneration to executives of the Liggett & Myers Tobacco Company is not out of line with the consistent earnings and growth of the corporation. The fixed salaries are moderate for a corporation of this size, and the percent- age of profits distributed in the form of other remuneration, to certain of its chief executives, is not excessive. This conclusion is based upon remuneration to its principal officers as shown in the records of the Federal Trade Commis- sion for the period ending 1932. As previously stated, 1934 information from the Securities and Exchange Commission is not available. The method of payment to the directors and officers of the R. J. Reynolds Tobacco Company has several unusual pro-' visions. 1. No director, official or other employee can partici- pate in the "employee profit participation" plan unless he is the owner of common (voting^ stool-, and the participation is directly proportional to the stock owned. The incentive, .i.e., to buy or add to stock holdings, is excellent. 2. The "employee profit participation" plan is open to all employees. It is estimated that employees other than directors and officers now hold (January 1936) approximately 382,000 shares of common voting stDck, distributed among 1,800 stock holders. Employees also have beneficial in- terest in 200,000 shares in the Retirement and Insurance In- vestment Fund. These, together, represent 58.2$ of all common voting stock. This opportunity to own stock and 10691 -23- participate in profits is of decided advantage to all employ- ees who can avail themselves of its privileges; and to the company. 3. The fixed salaries of the five highest paid execu- tives as shown in the files of the Securities and Exchange Commission for the year 1934, total $199,000. As in the case of Liggett & Myers Tobacco Company, these fixed salaries are without question moderate for the responsibilities of manage- ment resting upon the shoulders of these executives. In the case of the American Tobacco Company (as previous- ly mentioned), there has been a readjustment in this compen- sation to management although the By-Law XII itself remains unchanged. A far simpler method of readjusting this would have been to reduce the percentage of earnings applicable to the remuneration of officers. There is no question that management is entitled to fair compensation for its services. Individuals whose skill in management is primarily responsible for the remarkable finan- cial success of these companies deserve liberal rewards. Based on any such rate of earnings as that of 1928 to 1931, the present method of executive profit-sharing as outlined in By-Law XII of all three companies is not, in all instances, equitable to stockholders. Giving full weight to the excel- lent showing of earnings during that period, it is still evident that the share of profits paid some officials is a reproach to' management. By-Law XII was originally drawn to develop incentive in management. The profits at the peak and at the present time are so much larger than those on which these methods of profit sharing by management were based that it cannot be de- termined to what degree incentive still remains. There is a wide difference between "other remuneration", or additional compensation or profit-sharing beyond fixed salary and based on profits; ;md excessive returns to officials that points toward a greater interest in personal profits than in cor- poration earnings. The present size of these three corporations would ordinarily prevent the ownership by younger men in respon- sible positions of considerable amounts of company securi- ties. No such holding is essential for profit participa- tion in the American Tobacco Company or the Liggett & Myers Tobacco Company, nor should the lack of it prevent executive remuneration in direct proportion to accomplishment. (b) Non-Voting Stock Two of these three corporations have evidently passed beyond the stage where non-voting stock has bearing on man- agement control. It is possible, but highly improbable, that the third has not. whatever the original motives for 10691 issuing stock of this character (in the case of the R. J. Reynolds Tobacco Comnany the profit participation plan has di- rect "bearing), the question is naturally raised concerning the elimination of the non- voting restriction on all stock. (c) Character of the Directorates As the directorates are at present constituted, the di- rectors of these corporations, insofar as they pass upon the acts of the officers, pass upon their orn acts, and their de- cisions therefore represent the policies of the controlling executives. The first step, evidently, is a readjustment in the di- rectorates. The Boards might he enlarged to permit member- ship thereon by stockholders not otherwise associated with management, or in some instances, minor officials, now board members, might be replaced by such stock holders. To these direct representatives of ownership, definite responsibility, possibly along the lines of the British Companies Act as de- fined by Ripley, should be assigned. It was not until 1933 that these three companies felt the impact of the depression. Since that time, profits have been smaller; social responsibility to agriculture and to labor, and other charges, have increased costs. The joint competitive position of these three companies in the tobacco manufacturing industry has not improved. A wise management, facing problems of greater responsi- bility and of decided social import, will of its own accord • seek the cooperation and assistance of ownership. In the period that this study has been in process, the interest and keen appreciation of management in these problems has been sometimes evident. The large corporation is an integral part of American industrial life. It bears upon its shoulders the same .dual burden existing in every component part of the national structure, that of recognition of present social re- sponsibility, and adjustment to its needs and demands. 10691 LZ £ -24- E. CIGARETTE SELL HI & PRICES A1T3 POLICIES 1 • Preliminary; The American Tobacco Company (Lucky Strike), Liggett &. Myers Tobacco Company (Chesterfield), and the R. J, Reynolds Tobacco Gompany (Camel) have manufactured most of the small cigarettes ever since the present type of blended cigarette became stand- ard. This section is concerned with sales policies governing these three brands and a fourth, Old Gold, manufactured by P. Lorillard Company. (*) The competitive position of these com- panies in the industry; the striking adherence to the same list prfce vrith its consequent lack of price competition; the large expenditures for publicity (**) to develop consumer de- mand for particular brands; the relations of these companies to their various classes of distributors — all these are fac- tors of great significance. (a) Ordinary Discounts Fnile there are exceptions, the standard discounts are a trade discount of 10;o of list and an additional discount of 2)o for cash. (b) Range of List Prices Table I indicates the range of manufacturers 1 list prices since iTovember 1919 as reported by Cox and Barney(***). Comparatively frequent changes and some price variations occurred prior to 1923. For the following eight years, or until June 24, 1931, prices remained stable and appro- ximately uniform at $6.40 per thousand, except for the period between April 1928 and October 1929, when prices were lowered to $6.00 per thousand. Since 1928, these four brands have been sold at the same list, changes in price by these four concerns being practically simultane- ous. (*) The popular brands discussed herein are designated for excise pur- poses "by the Internal Revenue Bureau as "small cigarettes weighing not more than three pounds per thousand". Small cigarettes are subject to an excise of $3.00 per thousand. The other well known brands, including Philip Morris, mentholated cigarettes and the ten cent brands, are in this same excise classification. (**) See Chapter VI, Distribution, Advertising. (***)" Competition in the American Tobacco Industry" by Reavis Cox, Columbia University Press, 1933. Chas. D. Barney & Co., IT ew York City, "The Tobacco Industry", 10th Edition, 1934. 10691 -25- In June of 1931, the list for small cigarettes was increased from $6.40 to $6.85 per thousand. This price increase will remain as one of the most significant steps ever taken by the manufacturers in the history of the cigarette industry. Con- sideration must he given to the fact that this increase of 45^ per thousand was made in a period of low labor costs and when leaf tobacco was at its lowest price since the war. TABLE I CIGARETTE PRICES Date Manufacturers ! List Prices a/ November 1919 December 1919 December 1921 January 1922 March 1922 August 1922 October 1922 August 1923 April 1928 October 1929 June 1931 January .1933 February 1933 January 1934 y c/ $8.20 §/ $8.00 8.00 7.75 7.50 7.50 _ — 6.80 6.80 6.20 e/ 5.80 a/ 6.40 6.45 i-j — 6.00 6.00 6.40 6.40 6.85 6,85 — M 6,00 5.50 6.10 Moreover, the full impact of the depression was becoming most pronounced. In view of declining costs and decreasing consumer buying power, a general decrease in list prices might well have been expected under conditions of free competition. Production figures of the Big Three indicate that they had main- tained a, percentage of approximately 91$ of the total production of small cigarettes for the years of 1928, 1929, and 1930. It is evident that a/ Includes excise of $3.00 per thousand. b/ Compiled from data provided by the American Tobacco Company as re- ported "o-j Reavis Cox "Competition in the American Tobacco Industry", Columbia University Press, 1933, page 199. c/ Chas. 3D. Barney and Company, New York City, "The Tobacco Industry" , 10th edition, 1934, page 26. d/ Special allowance of 20/ given in addition to thy usual 10$ and 2}o» ej Prices quoted net subject to. 2^>. discount, for casn in ten days. 10691 .26- the manufacturers felt confident that they could maintain their joint competitive position at these higher prices in spite of the continuing downward spiral of the depression. That this percentage (91$) would he continued at the higher price levels is an assumption of at least semi- monopolistic market control. A further examination of Table I shows that the price of $6.85 per thousand remained unchanged until January 1933 when the list was lowered to $6.00 per thousand. This decrease was almost immediately followed (February 1933) "by a further cut to $5.50 per thousand. This was the lowest list price since the war or since the excise on small cigarettes had "been raised to $3.00 per thousand. The underlying causes for these two sharp "breaks in list prices are obvious. At the close of 1932, after a period of eighteen months, it was evident that the Big Three had failed to maintain their competitive position in the industry. In 1932, the Big Three produced only 81.4$ of the total small cigarettes manufactured, this comparing with 91$, the average for the three years prior to 1931 when the price was raised to $6,85 per thousand. A still shrinking pocketbook was refused the high retail prices. Six other manufacturers produced 17.9 billions of small cigarettes in 1932, amounting to 16.8$ of the total production for the year as compared to 8.2$ for 1930. Large increases in production of the ten cent brands (*) and in roll~your-own cigarettes indicated that the depression- ridden consumer had shifted to more economical forms of smoking. The high prices permitted also some expansion of mentholated cigarette sales of other blends of small cigarettes, particularly the Phillip Morris and the Raleigh. The low list price of $5.50 per thousand was a definite attempt by the Big Three and ?. Lorillard Company to regain their former proportion of the business. Retail prices broke to the lowest level in years. (*) I'To statistics have been obtained showing the definite amount of ten cent cigarettes manufactured. High prices for the standard brands, cheap tobacco leaf and low wage rates were responsible for its rapid growth, parti cularly during the period under discussion. The ten cent cigarette, of course, would not be justified if unable to absorb the additional wage cost under the code and since its termination. luring 1934 and 1935, the processing tax and the high cost of tobacco leaf, particularly Flue-Cured, together with the excise of $3.00 per thousand, the same as for all small cigarettes, forced almost all manufacturers of ten cent cigarettes t6 incur ' loss on this product. The elimination of the processing tax and the lower price paid for tobacco leaf in- the fall and winter of 1935 will again place the- manufacturer of the ten cent cigarette on a profitable basis. See Chapter "The Contribution of the Tobacco Industry to national Income Through Tax Revenue". 10691 -27- .. In January 1934, the list price of Lucky Strike, Chesterfield, Camel and Old Gold was raised to $6*10 per thousand where it has since remained. The 1933 earnings, had shown extremely heavy shrinkage; wage levels had increased due to the President's Reemployment Agreement; processing taxes had "been added; the cost of tobacco leaf was decidedly higher, Further, the year and a, half of low prices had aided hut little in increasing the share of the Big Three in the total number of small cigarettes manufactured, (in 1933, their share was 83.9$; in 1932, 81.4$). It was evident, also, that higher leaf cost and processing taxes would practically wipe out any margin of profit in the manufacture of the ten . cent cigarettes and expensive promotional campaigns for these brands would be out of the question(*). 2. Character of Competition . The habit-forming characteristic of the product, the relatively slight differences in tobacco blends, and the same list price — all point toward a form of competition between these companies of which price competition is not a part. Were it not for the special allowances later discussed, the statement could be made that competition is not on a price basis. That there is competition of the sharpest character among the brands of the large manufacturers, there can be no question. It consists in the direct effort by each manufacturer to secure a larger share of the cigarette market by the use of various publicity channels* 3. Channels of Distribution . ( ** ) As mass distribution developed from mass production, the manufact- urers whose principal channels of distribution had been tobacco, drug and grocer jobbers, began to sell direct to the large department stores, retail chains and other large retailers. The fact that tobacco manufact- urers sold these retail accounts at the same discounts of 10$ and 2$ given to wholesalers, decidedly complicated the wholesalers' problem, since the gross margin allowed to the direct retail buyer represented the combined gross margins of wholesaler, of the sub-jobber, and, in part only, of the retailer. This step also transferred to the manufact- urer the choicer volume and credit accounts. 4. Special Discounts and Allowances . In addition to the problems resulting from these two distinct types of direct buyers, there is a further complication. The manufacturers — and ''oy no means limited to the Big 'Three — have made and are still mak- ing special "secret" allowances over and above the standard discounts. This subject merits close scrutiny. (a) Definition As used by the Federal Trade Commission and in this report, apecial allowances and discounts are defined as all those forms of discounts, exclusi ve of cash discounts, which are not (*) Processing taxes were probably a heavier burden on some manufacturers of ten cent cigarettes than on the Big Three, because of the larger proportion of Burley tobacco in the ten cent cigarette. Burley bore a neavier processing tax than Bright Flue-Cured during most of the processing tax oeriod. (**) See Chapter VI, Distribution. 10691 -28- . shown by the manufacturers on the face' of their rejular invoice, but which are subsequently paid or allowed by them to chain stores ,. wholesalers or other outlets. (b) Their General Characteristics All such orice concessions may be divided into three gen- eral categories: (l) volume or quantity; (2) advertising and "oromotional; (.3) all others. Variations in tyoes of allowances extend fr.>m ordinary discounts increasing with volume purchase to straight cash refunds for which no ex- planation need be given.* (c) Their Extent In a stud,y made by tue Federal Tr-de Commission, several hundred reports were secured from manufacturers of tobac- co products, groceries, and drugs, covering their sales and allowances to a large number of selected distributors for the years of 1929 and 1930. Of the 134 manufacturers reporting, 89 gave allowances in 1929 and 94 in 1930. More manufacturers made allowances to chains than to whole- salers and the oronortion of chain accounts receiving al- lowances was far greater than in the case of wholesalers. 32.5,3 of the chains, received allowances from manufacturers as against 16j of the 'tobacco wholesalers. Almost without exceo'&ion, tobacco wholesalers (*) carry other lines. The manufacturers of many of the other items ordinarily allow larger discounts and give special allow- ances representing far higher percentages on their sales to wholesalers than those allowed by the tobacco manu- facturers, and the some cut price story, both wholesale and retail, has followed in their instance. Without question, the practices of manufacturers of these other products have complicated the oroblcm.s of the tobacco manuf ac tur ers . Referring again to the study made by the Federal Trade Commission, the total allowances by all tobacco manufac- turers making allowances to chain stores in 1930, repre- sented only 2.13 » of their sales to these chains. While the "oercentage to total sales is relatively insignificant, the oractices that have developed therefrom are far more serious than the percentage would indicate. There is no question that a considerable oart of these total allowances to chains are given to a small number of large chains, furnishing a further pretext for the use of tobacco pro- ducts, principally cigarettes, as loss leaders. (*) Ordinarily classified as those for whom tobacco products represent more than 50^ of total sales. 10691 -29- The data from the Federal Trade* Commission is based on 1929 and 1930. That these s ame allowances are still in use is indicated by the textimony presented before the Special Congressional Committee on the Investigation of the American Retail Federation on the question of the ex- tent of special allowances made by the manufacturers of tobacco products, one large drug chain was shown to have received special allowances from twenty. of the largest manufacturers of tobacco products (**).. Most of the large cigarette manufacturers gave this drug chain 5fo in special allowances for disp.lays. One manu- facturer paid $25,00 per store making window displays for one week; another paid the chain $3,300 per month. Special allowances on cigars ranged from 2fo to 7$ and one manufacturer paid this drug chain $25.00 per store for making a window display for one week. One large cigarette • manufacturer paid a grocery chain $1,00 per store per month for seven months in 1934, an amount computed to be in excess of $100,000 (**) . Special discounts for the in- troduction of new brands were common. In this connection it is interesting to note that the same sources reported that both the drug chain and the grocery chain received allowances in excess of their di- rect advertising outlay. However, it must lot be con- sidered that these chains limited their promotional ac- tivities to paid advertising space in outside media. Their counter and window displays in practically all cases were considered valuable advertising space. While, as already mentioned, the special allowances to the wholesalers are much less in amount than to the chains, a field study in December, 1935, by this Unit, covering certain metropolitan centers, discloses the methods used by tobacoo manufacturers with the wholesale trade, parti- cularly the tobacco wholesalers. The following illustra- tion was picked at random in a large metropolitan • center (***). One tobacco wholesaler was allowing a large retailer lOfo and 2fo discounts, presumably the total discounts from list given this wholesaler by a manufacturer. It may safely be assumed that this wholesaler did not pass on these discounts without other compensation in some form of special allowances from the manufacturer. Competition (*) Hearings before the Special Committee on Investigation of the Ameri- can Retail Federation, House of Representatives, Seventy-Fourth Congress, First Session, Vol. No. 2, July 31, August 8-9, 1935, pp. 75-80. (**) Remarks of Hon. V/right patman, Congressional Record, 74th Congress, First Session, July 29, 1936. (***) Data on file in Tobacco Unit. HRA Files. -30- is such among the manufacturers that if one manufacturer makes a special arrangement of this character, it is highly probable others will follow and at once. The ef- fect on other wholesalers is demoralizing. In connection with a campaign of this sort, special allow- ances, ordinarily taking the form of free cigarettes, are made by the manufacturer direct to some of the larger re- tailers who buy through wholesalers. The chain stores al- so receive allowances of this character, whatever their channel of purchase of tobacco products. With these special allowances to a small list of large retailers, it is enevitable that some retailer will cut prices using cigarettes as a loss leader. The final step, of course, is a spread of the cut price. This is exactly what happened in the metropolitan center from which the illus- tration is taken. Small retailers without the advantage of special discounts or the free cigarettes are forced to do business at a loss or quit. This subject receives further attention in the Chapter on Distribution and in particular under the heading of "Ad- vertising". It is enough to point out the responsibility of the manufacturers in breaking down standards of dis- tribution and profits of distributors both wholesale and retail. These policies as exemplified by the tobacco manufacturers find their counterpart in many other industries. The to- bacco manufacturers are by no means alone in continuing methods and practices that place a heavy burden on chan- nels of distribution. Because the tobacco manufacturing industry has shown such rapid growth and large profits and has also been built upon the direct development of con- sumer demand, it has paid little attention thus far to the economic position of the wholesalers and retailers, a group essential for the proper distribution of tobacco products. Both wholesalers and retailers, in talking about their problems, have generally stated their belief that these trade practices of the manufacturers are primarily re- sponsible for their troubles and ra-e evidences a decided lack of good will toward the manufacturers on this ac- count (*). This lack of good will is, without question, in part responsible for the loss in competitive position of the large manufacturers. The growing sense of social responsibility evidenced by industry in general is a most significant result of the efforts to administer the National Industrial Recovery Act. The recognition by the tobacco industry, definitely (*) From field study by this Unit, data on file. NRA Industries Studies Files. 10691 -31- including the three largest corporations, of its respon- sibility to labor has "been elsewhere discussed. (Chapter II ) There is no doubt that a similar social responsi- bility toward distribution must be recognized. Further economic research is required so that the problems and inequalities of distribution maybe clearly presented. If the large manufacturers have the vision to see the benefits that will accrue to themselves by the elimina- tion of the friction they have created with the distrib- utors, such a program of research will originate with them. Recognition of social responsibility, primarily to the national economy, will not permit further avoid- ance of this major problem. 10691 -33- PE0DUCTI0I7 Due to changes in methods of compilation by the Bureau of Internal Revenue, Treasury Department, and the necessity for grouping certain information to prevent disclosure of the operations of individual companies, yearly. qompari sons of all types of manufactured tobacco, cigarettes and cigars cannot "be made for extended periods ( *) . Ir the chewing tobacco manufacturing industry, production has de- clined from 143,400,000 pounds in 1931 to 115,500,000 pounds in 1934. During these srme years, the total of smoking tobacco manufactured increased 5.5$ — from 183,000-, 000 pounds to 193,000,000 pounds. One group of manufacturers dropped from 79. lp' to 54.5p ; . Coinci den- tally, e second group of manufacturers increased their -oercentage from 14.5$ in 1931 to 29. lp' in 1934, an increase of 111. 6$; the balance of the industry showed ctically no change (6.4p to 5.3p). Interesting changes have taken place in the geographical location of factories producii ] ~ : rettes, and in the percentage of production in various states* Table II following shows a marked increrse in production in three states, North Carolina, Virginia ■^nd. Kentucky, with little change in the number of factories in busi- ness in those states. The percentage of total -oroduction of small cigarettes in those states jumped from 61.92fi in 1920 to 92.32p in 1934. Hew York state shows the heaviest losr". in this srme period* Generally, the concentration in Virginia and 1'orth Carolina repre- sents a grouping of the more important manufacturers who use a large amount of Bright Plus— Cured tobacco in their products; si i- larl", Kentucky production is based primarily on large use o± Burley, grown in that area. The economic and social problems based upon the manufacture of to- bacco products, other than cigars, are localized, and to a large extent bonnd up with the economic industrial prosperity of the South Atlantic states and Kentucky. (*) See Appendix 1, Tables 1 and 2. 10591 -33- TABLE II Humber of Factories in Business on January 1st, and the Percent of Total Production of SMALL CIGARETTES produced in the states leading in manu- facture, for the selected years of 1934, 1930 and 1920. (*) 1934 1930 1920 Fumber of factories in business on January 1 United Stctes 111 110 237 North Carolina 3 7 5 Virginia 7 7 8 Kentucky 3 3 1 Hew Jersey 4 3 13 Californie 12 S 4 Pennsylvania 3 9 23 Few Y rk 45 51 126 Other States 2S 22 57 Percent of Total Production United States 100,00$ 100.00;^ 100,00$ Forth Carolina 53.50 63.79 50,84 Virginia 29.45 23.50 11.06 Kentucky 9.47 3.58 .02 Few Jersey 3.89 4.21 5.60 California 2.74 3.86 2.40 Pennsylvania .59 .05 -1.G3 Few York .22 .95 22.83 Other States .04 .05 2.22 ASSETS AID EARF IFG S OP THE 31 G THEEE 1, Capital Invested The capital invested in the Big Three companies has shown a tremendous increase since the trust dissolution decree of the Supreme Court in 1911 against the old American Tobacco Com- pany, of which these companies were a part. Table III following, shows the capital funds invested ^y the Big Three. ( *) Source: Annuel Reports of the Commissioner of Internal Revenue, 10G91 -34- TA3L3 III (*) Caoital Funds Invested Cornea;-- Dec. 31, 1912 Dec. 31, 1954 Percent of D Increase American Tobacco Company $138,392,000 $277,518,000 100.5 Liggett L Myers Tobacco Co. 73,130,000 211,193,000 130.8 R. J. Reynolds Tobacco Co. 15,844,000 149,931,000 046.3 Total 5227,355,000 $633,642,000 180.9 Capital Ponds are here defined as the amount of capital stock issued at par value plus accumulated profits retained in the business and funded indebtedness: they are equivalent to the net assets of the comjanies, plus funded indebtedness. As evidenced in the above taole, the capital funds invested in the three companies combined as of December 31, 1954 shovr an increase of 150.9^ as compared to December 31, 1912, the year following the decree. There exists among the individual companies a V7ide difference in the percentage of incre: se in capital funds invested. Al- though the R. J. Reynolds Tobacco Company-' shovs a. remarkable ra.te of increase, this compap"/ still ranks last, as of Decem- ber 31, 1954, in the amount of capital funds invested. 2. Earnings Table IV presents the total amount of income available for dividends beginning with the calendar year 1912 and ending December 31, 1934, a period of 23 years. TABLE IV (**} Total Income Available for Dividends 1912 - 1934 Percent of Company Amount Total Income American Tobacco Company $493,576,461 40.03 Lig-ett & Myers Tobacco Co. 302,337,203 24.27 R. J. Reynolds Tobacco Company 444,757,817 35.70 Together $1,245,731,401 100.00 (*) Source: Standard Corporation records and Moody's Manual. (**) Source: Same as for Table III. 10591 -35- This large sum of one and one— quarter "billion dollars of net earnings available for dividends was uninterruptedly a,ccumu- lated over the twenty-three year period without one single year recording a loss either for the three companies combined or for any single one of the individual companies. The average annual earnings for the Big Three over this period exceeded $54,000,000. In three years of this period, 1930, 1931 and 1932, the net errnings exceeded one hundred million dollars annually. The Big Three recorded net earnings of $25,513,103 for the year 1912, reached their low point in 1914 with earnings of only $19,942,924, registered their peak in 1931 with total earnings of $105,707,939 and closed this 23 year period with net earn- ings for 1934 amounting to $55,128,133. Table V sets forth- corresponding information on earnings for each of the three • companies. TABLE V (*) Earnings Am. Tob. Co. Liggett & It. J. Reynolds Myers Net earnings for 1912 $15,443,960 $ 7,169,186 $2,899,957 Lowest Annual Earnings (1915) .(1914) (1913) 1912-1934 11,234,532 5,391,174 2,862,567 Highest Annual Earnings (1931) (1930) (1931) 1912-1934 45,189,741 24,002,315 36,574,800 Net Earnings for 1934 23,504,554 20,086,690 21,535,894 Average annual earnings 1912-1934 21,681,535 13,145,096 19,337,731 From these figures, it will be observed that although the American Tobacco Company ranks first in average annual earn- ings, the other two companies have materially improved their relative position as compared to the year 1912, with the net earnings of the R. J. Reynolds Tobacco Company showing a remarkable increase. It is also interesting to note how closely the earnings of the three companies parallel each for the year 1934. 3. Di stop sit ion of JJet Earnings Table VI, next presented, shows the disposition made "03' the Big Three of the net income available for dividends for the 23 year period., 1912 to 1934 as indicated by the compilations of I.ioodv' s Manual ant Standard Corporation Records: (*) Source: See Table III & IV. 10591 ■ ii mi i inTira -36- TABLE VI (*) DISPOSigiOlT C? E8T I]'Cj;S AVAILABLE FOR DIVI DENDS 1912 - 1934 Company . Tet Income dash Dividends Paid Retained In Eusi- Available for Per neos (**) Per Dividends Amoutit Cent Amount Cent American Tobacco $498,676,431 $405,357,180 01,32 $ 93,119,201 1G.57 Company Liggett & ifcrers 302,337,203 208,769,295 39.05 93,357,908 30.95 Tob. Co. R. J. Reynolds 444,767,817 318,657,500 71.65 126,110,317 23.35 Tob. Co. Together $1,245,731,481 $938,903,975 74.89 $312,797,506 25.11 The three companies as a group, distributed three-fourths of their income in crsh dividends and retained one-fourth in the business. The American Tobacco Company has distributed the largest percento~e of its net income in cash dividends. Al- though the R. J. Reynolds Tobacco Company has retained in the business the largest amount of income, its dividend policy has been slightly more liberal than that of the Liggett & i.yers Tobacco Companj'. Of the total of $932,983,975 of cash divi- dends paid during this period, $812,281,723 was po.id on comnor. stock issues or slightly more than 87^ of the total dividends paid. The amount of net income retained in the business, while ■ only one-fourth of the net income earned, is nevertheless a sizable amount, and of decided significance when considered in relation to the amount of capital stock issued and paid in# The accumulated earnings from January 1, 1912, to December 31, 1934 retained in the business by the Big Three amounted to slightly more than the entire capital stock equity paid in at December 31, 1934 plus the surplus existing at the beginning of the period, January 1, 1912. (***) This indicates the extent to which these three companies have gone in financing their 'business out of net earnings rather than through the sale of capital stock. The American Tobacco Company, due to its large net worth ($133,037,148) in 1912, shows a much lower percentage when compared to the two other companies. The R. J. Reynolds Tobrcco Company, with accumulated earnings re- tained in the business during this 23 year period amounting to more than five and one-quarter times their capital stock equity paid in (end of 1934) plus their existing surplus as of January 1, 1912, furnishes an excellent illustration of the extent to which some companies have relied, upon the retention of net earn- ings, in financing expansion. (*) For Source, see Table III, page 34 (**) Either capitalized \)y issuance of stock or credited, to surplus. (***) For Source, see Table III, wage 34 10691 -37- H. ASSETS AND EARNINGS OF THE TOBACCO INDUSTRY This section is based on data contained in the published re- ports of the Commissioner of Internal Revenue. The interpretation of this information is subject to certain limitations set forth in a letter from the Treasury Department, dated January 27, 193S, and which appears in part as Table 2, Appendix 2 of this study. It is suggested also that 'orior to further reading of this section, Table 1 of Appendix 2 be examined. While it must be noted that this information is based on re- ports from corporations only, it may be stated that for all prac- tical purposes, the corporations represent the entire tobacco manu- facturing industry; the amount of business transacted by individuals as distinct from corporations is insignificant and affects but slight- ly the total figures. (*) The total assets of corporations whose principal line of busi- ness is tobacco manufacturing is in excess of one billion dollars. Figures for four years are shown below: 1930 351 1931 318 1932 336 1933 351 : Number of : Year : Coroorations : Total Assets $1,195,940,801 1,171,429,041 1,106,217,695 1,033,724,283 It will be noted that the total assets show steady reduction for each year after 1930. This decline in the amount of aggregate assets is, no doubt, principally due to sustained dividend payments. Table VII following indicates the volume of business done by all corporations in the tobacco manufacturing industry, 1926 to 1933 inclusive, and the trend of sales during this period (1926 — Index, 100). TABLE VII (*) : Number of : : : Statutory Year ; Corporations : Net Sale s : Index ; Net Income • $1,134,752,192 100.0 $115,108,720 1,171,095,521 1C3.2 122,299,922 1,179,897,428 103.9 119,530,548 1,247,033,703 109.9 127,740,109 1,147,454,549 101.1 137,133,598 1,153,706,245 102.6 136,8S7,408 1,023,155,156 90.2 133,247,921 9 24,035,116 81.4 50,351,561 (*) The total receipts from individuals engaged in tobacco manufacturing, reporting for 1933 net income of $5,000 and over, amount to $2,11.3,000, less than l/4 of 1$ of the amount reported by corporations for that year. (*) Based on compilations of the Bureau of Internal Revenue. 10691 si 1926 497 1927 430 1928 419 1929 420 1930 392 1931 366 1932 370 1935 385 -38- These sales are net sales "by manufacturers. The relatively small charge in volume of sales, particularly when cigarette prices in 1932 and 1933 are considered, warrants the conclusion that cigar- ettes and other tobacco products are no longer in the luxury class. This is strikingly represented later in this chapter when compari- sons are made between the tobacco manufacturing industry and certain other selected groups. It should also be noted before Passing this table that the number of corporations actively engaged in this industry in 1933 was 20S less than in 1925. The industry is still continuing the process of concentration. Table VIII following snov/s tne division of the total sales of the industry as between those corporation reporting statutory net incomes (*) and those corporations reporting deficits in their in- come tax returns. TA3LE VIII (*) NET SALES OF COEPGE AIIONS REPORTING > Statutory Net Income Statutory Net Deficit : : f; to all : :/& to : y> to all: . ftto : :Corpora- : : Total: Corpora-: : Total Year l"o . : tions : Amount : Sales: No. tions : Amount Sales 1926* : 289: 58.15 .81,101,162,558:97.04: 208 : 41.85 :S33,599,561. ! 2.96 1927 : 261: 60.70 . 1,149,055,860:98.12: 169 : 39.30 : 22,037,751 1.83 1928, 238: 56.80 . 1,151,493,653:98.52: 181 : 43.20 : 17,403,775 1.48 1929 : 243: 57.86 ■ 1,202,648,288:96.44: 177 : 42.14 : 44,385,420 3.56 1930 : 195: 49.74 • 1,078,187,181:93.95: 197 : 50.25 : 69,277,353 6.04 1931 : 155: 42.35 1,072,199,623:92.14: 211 57.65 : 91,506,622 7.86 1932: 114: 30.81 953,126,649:94.13: 256 59.19 : 60,028,517, 5.87 1933 ; 122: 31.85 819,838,493:88.72: 251 . 68.15 :104,245, 623: 11.28 It will be noted that the percentage of corporations in this industry reporting statutory net income shows a decrease of approxi- mately 42fj in 1933 as compared to 1926. It is evident that this decline in the percentage of corpora- tions reporting profits was primarily due to the depression, while this table does not bring out this fact, it is later shown that the drop . in number of corporations reporting net income was with one or two exceptions among the smaller asset classes. The year 1932 accounts for the largest drop in ratio of corpor- ations in this industry reporting statutory net income (the per- centage for that year 30.81,o, as compared to 42.35$ for 1931). (*) S^ee Table 2, Appendix 2. (*) Eor source, see i'able VII. 10691 -39- A further analysis is of interest: the percentages of corpora- tions re-porting statutory net income or deficits offers a most in- teresting comparison with the percentage in dollar volume of net sales of these corporations. Although the number of corporations reporting losses during this eight year period range from 39.3;o to 69.19-^ of all corporations reporting, their sales ranged only from 1.48$ to 11.28:3 of all sales made in this industry. Further, sales in this same group for 1933, showing a sales percentage of 11.28,j, are far larger than for any of the prior years mentioned. Table IX following states the statutory net income (*) or def- icit covering this eight year period for all tobacco manufacturing concerns reporting to the Bureau of Internal Revenue. TABLE IX (**) STATUTORY NET IHCOME OR DEFICIT All Tobacco Manufacturing Corporations Corpora- $ to Corpora- ;o to Year tions Net Income Sales tions Net Deficit Sales 1926 289 $117,355,959 10.55 208 $2, 257, 249 6.72 1927 261 124,774,568 10.86 169 2,474,546 12.23 1928 238 121,577,829 10.48 181 2,147,181 12.34 1929 243 132,581,571 11.03 177 4,941,562 11.13 1930 195 143,788,111 13.34 197 6,554,513 9.51 1931 155 142,493,817 13.29 211 5,505,409 6.13 1932 114 138,398,553 14.37 255 5,150 ,532 8.58 1933 122 65,224,339 7.95 261 14,892,778 14.29 The relatively steady increase in income from 1925 to 1931 has taken place in spite of a dro-o of more than ?>2\o in the number of corporations showing net income. The surprisingly small decrease in net income for 1931, 1932 and the heavy dron in 1933 are explain- able only after consideration of the sales policies of the large corporations. (***) In 1926, 497 corporations reported to the Bureau of Internal "tevenue showing either net income or net deficit. In 1933 the num- ber dropped to 383. This is at least a partial indication of con- tinued concentration of tobacco manufacturing among a smaller number of corporations. In the year of 1932, 114 corporations, approximately 60;j less than in the year 1925, reported statutpry net inccme of $133,398,553, or 17.9$ more than for 1925. This also indicates that the profits of the tobacco manufacturing industry are showing similar concentra- tion among a smaller number of corporations. (*) For definition, see Appendix 2, Table 2, paragraph 7 (b) . (**) See Appendix 2, table 1. (***) See this Chapter, Section E, Cigarette Selling Prices and Policies. 10691 -40- Further reference to Table 1 of Appendix 2 is suggested for a comparison of cash dividends paidby all corporations whose nrinci- pol line of business is tobacco manufacturing, with the dividends paid by various groups therein shown. The cash dividends -oaid during this eight year period aggre- gate $708,555,600, or an annual average of #88,569 ,450. It is fur- ther of interest to note tne increasing amount for Qash dividends paid since 1926, and particularly the large sums paid during the de- pression period, a considerable portion of which has come from sur- plus rather than earnings. I • IiuTJSTHY COMPARISONS This section of the study is concerned with certain compari- sons of the tobacco manufacturing industry to all manufacturing in- dustries and also to selected manufacturing groups as classified by the Bureau of Internal Revenue. The facts given herein have been prepared from data con-oiled by that Bureau, and apply to corporations only. Table X, following, shows a comparison of the trends for the eight year period 1926 to 1933 inclusive, covering the above groups. It will be noted that the tobacco industry reached its peak in dollar volume of sales in 1929, as did all corporations in all manufacturing groups and also the selected groups. Of particular interest is the rate of decline in sales from 1929 to 1953. The net sales of all corporations in the United States in all manufacturing groups, for the year 1933, showed a decline of 52.9$ in dollar volume from the peak year of 1929. In corn-oaring the net sales of tobacco manufacturing corporations for this same period, it will be noted that the decline was oy no means as drastic, the sales for 1933 showing a reduction of only 25.96$ from 1929. In other words, the decline in sales of all corporations in the tobacco manufacturing group as between these years was approx- imately one-hald that suffered 'oy all manufacturing corporations. 10391 -m- to 8 tO tO "8 rH CO 05 to to C>- CM CO • ••••• to to to to rH CO CD CO ^ CO 05 « N O) (DO CO «3 <0 Ifl > ^ (O I" o> rH • rH • to • • • tO CM CM rH C- O t>- tO CO • t •••••• co o ao cd co to to cd <^ a> m^t>-N tow t-4 CO O^KOWC • • •••••• O CM CO O O M lO N t- O C- CO D to to CD co u r — ■» to CO O lOM OCOH <# ^ t- O tO CO lO ^H • • • ••••• to to t-^wino .' r-i s^» rH rH CO CO o LO CM CO WlOO ^ co C~ ID O) H rt CO rH ^H ^^ rH ^ CO S CT> CO O CD cd O co cd c- e» ^ to • ••••• t> CM O tO CM CO CD CO CO t> f- rH (O ^ S MO 0> • ••••• cd co to t- CO t>- OOCJHO) ^ o CO o o • co cm cd cd to cd co co oi ^ to to to • ••••• co to to ^ to t> to o cd r-< CM O to "* CD r-^ CM CM as O t- to to CM • • • • • • • • CD CO O to r-\ cd t- o to d I rH as - o 53 H - *3« t- O CO « f i o t-l fa CO £> Q i CO r -5 CM CO ^ CD 3 rH CO Eh O cH • P9 S ' S: C5 | >H g Q 6 W IX) EH CO O •♦ H fl g J M •H PQ CO 3 1 s o 3 nH -P | o o fa M HH 5 to c— o CO o o o CO t3 CD to o »M to o o o 10 fa s d H 8 to Cs fa 5 fcO Jh .h M> Jh 3 co « oo -i as J=> go, o H rH E-« -H © »: co CD rH t> CO CO ■* • ••••• lOrl t-HN CO O O rH O CO O rH rH rH rH rH rH C- CO CO to to • ••••• tO O CD t> CO f- O O O CO c- o <-\ r-{ r^ i-i o o o o o o o o o o o o rH rH rH rH rH rH CO CO o • H U g o Is © as n £5 •H * rd c aJ -p o o ■8-d as t«p fa CO t> o o to «# CO CO f-\ D • • • • • • • 3 o tO CM CO CO CD CO r-i rH © Jh 3 CO © • -tf CO CO o CO n CD ^ to "* CO CO CO r-t SO to HJ -P • • • • • • • •H o CM tO ^ t- tQ CM >> O r-i -H t-i X> © rH •rl • rl © -d © Jh © 3 Jh If © fa TJ r© © aS o fa •d o 1? « JH r*" - "X) o fa rH O Sh 3 © Q •H »H J-. O © • • •• -P < O CQ •8-fi 1 o -P -P o •H JH © o © -P © o O © Xi o csS 3P Jh O r-i EH fa Eh O . A fa 3 ^H o CO 1 ;6s ] -42- In malting similar comparisons to corporations in the various manufacturing groups, it will be noted that the tobacco manufactur- ing corporations made the most favorable showing, and by a wide mar- gin. The comparison in the percentage of decline as evidenced in the tobacco manufacturing industry and in the food products and beverages industry is of particular interest, since the -products of each of these groups are in every-day demand by the consuming- public. It will be noted that in the peak year of 1929, the sales index numbers were practically identical for the two groups. In 1933, the index numbers were 31.4 for tobacco and 62.9 for the food group, representing a decline in sales from 1929 of approximately 42$ for food -products a? compared to 26^ for tobacco -products. In 1932, a larger variation in the rates of decline was shown between the net sales of these two grouos . For the purposes of comparative analysis, groups manufacturing both consumable goods and durable goods have been included. The comparison with the textile, chemical and motor vehicle groups are of decided interest. The second section of Table XI shows trie ratio of net income to net sales for all corporations manufacturing tobac- co products and for the same period of years, and the comparative percentages with the other corporate groups. The ratios of net income to net sales for corporations manu- facturing tobacco products are decidedly higher than those shown for all manufacturing groups for each year of this period. This same statement applies also in corresponding comparisons with the selected manufacturing groups, excepting only the two durable goods groups making factory machinery and agricultural machinery and equipment. With these two groups, this statement applies in a majority of the years. From the percentages in this table, it is evident that the full impact of the economic collapse was felt in the year of 1932 ^oy all corporations engaged in manufacturing, since a composite net loss ratio of 5.43^ is shown to total net sales. The six other manufacturing groups selected here for compari- son also made their most unfavorable records in 1932, with one ex- ception, chemicals. The average net loss ratio of .92^ in 1931 for all corporations manufacturing chemicals and allied products was larger than that of 1932. In contrast, it is nightly significant to note that the corpor- ations engaged in tobacco manufacturing, when considered as a whole, entirely escaped the force of the crash until 1933. Their best showing during this eight year period was ma.de in 1932, when net in- come ratio to net sales was 13.43 3. Their drastic decline follow- ing in 1933 was primarily due to a price war resulting from their sales policies and not from any curtailment in the consumption of tobacco products. 10591 -43- Whether compared with consumable goods or durable goods indus- tries, the showing of the tobacco manufacturing group is most sig- nificant, and stands in a class by itself. This is even more strik- ing when it is borne in mind that more than 50- of the net selling price of tobacco manufacturers represents government excise tax. The average ratios of net income to net sales would be far higher if the excise were eliminated. Starting in 1931, the jiiureau of Internal Revenue has separated corporations into various asset classes, snowing for each class statistical data on assets and earnings. It is to be regretted that this most valuable information does not extend over a longer period of years. It is of inestimable value in bringing out facts on the concentration of business and of nrofits among the larger corporations. Table XI following shows ratios of net income to net sales by total asset classes for the same groups given in Table X. The situation as revealed in Table XI presents a very dark picture, due, of course, to the fact that the three years covered follo\7 in the depression period. The first item of interest is the improvement in ratios as the size of the corporation increases. It is impossible to state that a similar condition obtains in other than depression yearsi since no statistical basis for judgment is available. The average ratios of net income for corporations in all manu- facturing groups combined, for 1932, in all the various total -assets classes, were negative, with larger deficits reported for this year than in any year of the three year period covered. Corporations manufacturing tobacco products, in the total-assets class of one million to five million dollars, recorded average net earnings for 1932 of 4.1$, and the average net income ratio for all reporting tobacco coroorations in the total-assets classes of five million and over was 15;j of net sales. In 1935, average earnings for all comoratiohs manufacturing tobacco declined from 1932, while small increases in average earnings were recorded in 1933 for corporations in all manufacturing groups combined. The price war, so often men- tioned, was again responsible for tobacco's showing. It will be observed that all corporations manufacturing tobac- co products mode a far more favorable snowing from the standpoint of average net earnings under the various total-assets classes in each year of the three year period than that snown for the average of all manufacturing corporations. Corresponding comparisons with the other six selected manufac- turing groups show some wide variations. The average net income ratios for corporations manufacturing food and beverage products and for corporations manufacturing chemical and allied products make a better showing than the average for all corporations manufacturing tobacco in most of the total asset-classes for each of the three years. This particularly applies to corporations in asset-classes of less than one million dollars, and is indicative of a greater 10691 M X w « Eh Q O fa CO CO CO £ « CQ u cd rH rH O n u o CO •B a CO 3 o E-« CQ 0) W •H P-4 CO CD CO CO CO rH O CO P CD CO CQ < I rH a p o Eh O o-d h lO o o o o o «p o o o in o o o o p • o o moo CM +> lO O O O O lO H -P W o o o o (0 P o •H P cd o o o ^ •* to • o • CM CO I CO t> t> • • • rH C- CM I I r-\ O to CO • • CO I 1 CO t* CD • • • o co I i H • rH CT> o to • 1 1 l CO » CM • co t> • I I I o o is CO CO CO cm in cn . • • • • • . • . • O • • • CO H IN -* CO I I iH t> e . . MM N m cn • • in rH to ■ rH CO . CM CO * rH rH • CM • CM cn • to • CO to • to t> • rH in < 1 1 1 1 1 1 1 i <* to • • <* rH to • to • CO • to CM • in in • to rH in • to rH • rH I I 1 1 1 i 1 1 to c^ • • CM CM C\i • CM o • rH • CO CO • <* • • in CO • CO • <* • in o 1 1 1 1 1 1 1 1 l 1 1 i 1 U CD CM tO £>- CO ri tH CN rH CM fN CM C> * H 0> T3 O • . • • • • • • • e • • . • . c in in o to CM C^ tO CM m CM CM £N ^ to O to p 1 r-\ rH 1 1 1 1 1 1 1 1 1 1 1 1 1 1 u u a) > i> o o >o T) cd i o o o o o o M •i o o o o •n lO » <* cn ■<* to Cm m in to . • • ... * • to in to in CM CO iH I i 1 CM «Hi • • t> m CM l i to CO • • rH to rH I . • a) sp iH I 1 ■^ O • . in in H I I * CO p • Ph CO CO w • • • p Ph p CO p. CO cd CO -P o p ri c p Ui Q TJ o f* 8 cd rH .P T3 8 CD CO 00 CD O P< P Pi t» rH CD p W) CD Pt ■a <-\ o c rQ CD 2< u • cn en CO cn cn cn cn cn cn 13 cn cn cn CD a> cn U rH H H

P T o Ph rH o P CD o •H •H U S! P '-' •d 15 s o s O pel o CD -p CD o o CD & q rH ■ 1 rH CO CO Eh fa Eh O s 3 -1*5- o CM -P O c X CO H O o o O xi u o d © « co i> id o •> o T O J> o o i-« iO o o o o o o lO +> • o o moo n p m o o o o to rH -P CM O O O O lO +3 cH •d c PI lO CO PI o •H •P cd Pi O O O lO o o a> • • • • c- u> «0 en CM 1 1 1 r-( ^> CM •o • • • • -M lO # CM to 1 1 1 1 lO CM to o • • • • .H o ^ rH rH to 1 1 1 1 lO o lO co • • • • «H CO ■«• '£> r-t rH 1 1 1 I O <0 CM -13 * • • • ^ C7> CD H iH CM 1 1 1 1 lO o> CD CM • • • • lO vO .H uM 1 1 1 ' cn CM 1 1 H 1 rH 1 Pi iH PI •H CO CM XI to CO o o> o» o ■p o CO XI o CO CM iH tO CO CO C7> O M rH H 2 o 3 3 d CD CD Pi 3 Vl O © id -P >» CD O o CQ d o •H ■P CO CO ■p a o Pi Vi © Pi CO p. CD Pi P4 CD O o CO to Pi CO © CD d -p Pi O X> CO •3 3 5 (0 CO o •H P CO tH ■P CO *> CO o i CO © O -P P! j£ • •H O -P O o Pi LO •H S P! CD H H Cd © 3 -! J © o O CO ^ Pi P< Pi O 10O Oi Ci Ua 'J © Pi C O X O '■, E-t -p C t-0 w -P • H O •H Ch © T3 ■P P! © co © Pi © Pi CO O •H -P CO Pi b0 c" •rl "d © O © S> o •H -P Pi ri W -46- degree of concentration of profits, in tobacco manufacturing, among the high asset-cla.sses, which have recorded the "best average earn- ings of any of the groups listed in the table. In closing this section, a further word of caution is neces- sary. The report of the 3ureau of Internal Revenue for 1934 is not yet available. That the ratios for these three years will be con- siderably changed is evident from information available from public sources. The tobacco industry has shown little change in 1934 and in 1935, while many other industries which followed the normal curve of the depression, showed considerably imnroved earnings during these years. - - 10S91 -47- Contents of Appendix 1 (Production) TABLE ilDHBBI Quantities of Chewing, Smoking and Snuff Tobacco, Cigars and Cigarettes manufactured by the Tobacco Industry in the United States, and the quantities, (and Percentages of the total), produced by selected groups of corporations^ Por calendar years 1926 to 1934 inclusive (?. sheets) Original and ten photostatic copies. List of statements. 10691 -1,0- S £& S RS S S 8 16 CW ^4) 0>rH i-i ON s$ §Z sv r-oj o o o in WW w OJ SB M*J> 5 »«-» 0"\O r-iiS ^V. - . J\0 ~8 ~~ ^./ (VI (T\ K\*JD KMT O o O CM £G ojV*. cr\,o SV I— ON KT 1 t> o r^i OJ OJ (TiOJ eo s> to r~ 1 a 1 B ■9. £ rH O O +> • (H 1 n 13 rX-Wt ini— 8 vi vDVD S» ^Vt OJ -X> JD to ir*r— r— ir\ IS f* 1 a 5 o G oj p\ ON> #>» ©)!■ S* ** »8 i o 3 SI 3 16 e p. ES S* 2*. ^^*-» ^^.f— r^ CJ C5 O CT.»0 115 i«JJ JJ8l ■O « fl r-**-« do 9 • Is * II 1 .s — Si c • 118 11"* JB ,0 wn_, ^ U O O O 3 SlrH bflrH • 5l ^1- ftjV- 1T.W. MV. r-t>*L r^r— vj> dS r*^oj lf\ir« >oj 3 oj i o75 ^,o7 ftoT, S^X*. CSV- 5>B. rH?> r l. *C\t— 0>r*-t iTSr-t rlH iH OJJ 1 r*>OJ ITvOJ I h ' +* *~\ c . et • ♦» • s* -as •h ** ** a. CTirH, O I Q>rH *— *-^ «0 I Cb OJ O O | O Rv 5* to OJ V o I inn ^^w O^ •0 OJ o c to to ^.*-^ fl rH • JD r-t IP goo rill ail— c? OJ r w to S£ -a. •JO. o ^ 4 U M SIS o o t> 65 33 jl 'S fc o o si h If o « "3 rH Ed r*-\r-j o u tr* m ■** OH • C o a 6 a *> o a • • o ,c 3 a o S" ■v * & CM iH 3(0 B0*O JJO^C AlOW S i *•* £3 S3 2 8 £88'-' Ei » 0*\U> CM K\ sO -J3 -^ > K\cr* Q CM 0-nJ3 O rH OJ O CJ> 8 ft/.!* CM Jt tA J* Q r-T KV- UT» CM •« CT* r— r-t -X> CO CM O -: JD -* r-< H(^ 8 io 5s sD r— BO J- JT B0-~ oj q r— so r-CM k-,bo 5* '" l - 32§* fc3 RJR:?8 S8£' ITV SO 10 f-t**A ^HV. 3>* a w " w *r f* £*S 3.-*. £-*G-* 3 SV S* f,-*S* SVSV a ff -*• 'Is §£ t> O O K\CT\ I^CV 2> S^G" ^ £" O .-i o O C-rl flA CM 3 3 CA fe «o £«&* ^O CM no ir\sc j* cm <-i kv-* irv cm -* IT* o 3 r*2* *3 8 ££8 f— K\,-l S3 8~ £v $*. fc* ""* ^"* *~^ tO ^ «0 \C ON CM ^^ O BO ^■* O O O K\j3(-« hw 3>o*t mo ew on t^^» crs ok\ ^>itn -5 i-h j- ■-» r-sD o^r^-r^o kiOO\io *-% ^» «J 4T\ O KNOTS C-CM OJO 4HU r4 'w t0 w KMfs CM »^» C~!^» , * t-^O O tfv rHJ0»-lj» r«^CM K> CM BO O SS K\ to 2T g &* 3t* l^-BH BO KN r— »*- O ir oS^» o ok-- JJr-lrSo »o«-*^ K\ CM iH H £ J0.=f f» ■s o CM sD a\jt O ^ --^ *-* ^-» IT\sO (M r-t r- r P* K O O O f-\0> Q K\ CM b SJ3 ^^ J5p» 3o JO ^ O (- • 4 c JO JO X) a«i i fi i a' &1 t w r & a & ^ • ^-i o o o t hrl fi) • rj rl a §| •-< • B -o 6 o 3 u r3 & & t & * ■ » ■ H 111 if a, 5 < O I o to « <£ ? c ^ — Vi v. t -• s -• i «■ a* a a • a 633565 ** h I h CVh Bl • • II I -h o, a p, ^ a, « s « 11 " " es r ja .8 JPv. 1° es *» a. c ft l t t? u o u u • * • 4 », ri M •-• JO O 2 O w jO w.O B S * toe tog tog to a • »4rHk • hH h to«rH« to«r-J« o ** a 0J • JO s < WW — -50- APFEimiX 1, TABLE 2 BASIC PRODUCTION DATA Following is a list of comparative statements prepared from tlie statistical records of the Tobacco Tax Division, Bureau of Internal Revenue, and from the Annual Reports of the Commissioner of Internal Revenue. Portions of the "basic data contained in these statements have been used in preparation of certain Tables and percentages appearing in the test: SECTION 10. 2 (* ) STATEMENT UUMEER Statements showing for the calendar 3rears 1928 to 1934 inclusive; Number of factories in business in January 1st, Quantities of Tobacco, (Unstemmed, stemmed, scraps, in process, and stems) , used in manufacture, Quantities of Chevying, Smoking, end Snuff tobacco produced, Quantities of Cigars and Cigarettes produced. For the Tobacco Industry, and groups of selected corporations as follows: 1 Tobacco Industry in the United States 2 Group A — Selected Corporations 3 Group B — Selected Corporations 4 Group C — Other Corporations 5 A group consisting of cigar manufacturers 6 A second group of cigar manufacturers 7 Inventory of Leaf Tobacco, (Unstemmed, stemmed, scraps, and stems), at beginning of year; quantities of Leaf Tobacco, (by classes), received from farmers and other source's; and the quantities exported and shipped, to other sources during the calendar Tr ears 1933 end 1934, for a selected group of corporations 8 A third group of cigar manufacturers 9 A fourth group of cigar rioimf acturers (*) Eor purpose of identification, all original "work papers were indexed by sections. Section I'o. 2 deals primarily with statistics of pro- duction. 10691 STATEMENT NUMBER 10. 11, 12. 13. 14. 15. 17, -51- Rates of Taxation; Amounts of Tax Collected; Quantities tax- paid for consumption; Average Quantity of yearly consumption Per Capita; by classes of tobacco products, (Cigarettes, Cigars, Chewing and Smoking Tobacco, and Snuff) also miscella- neous tobacco tax revenue, for the fiscal years ended June 30, 1900 to 1934 inclusive. Production of Tobacco Products, (Small Cigarettes, Plub, Twist, Pine-Cut, and Scrap Chewing Tobacco; and Smoking Tobacco) , in the United States, North Carolina, Virginia, and Kentucky; and the percent that each State's production bears to the United States, for the calendar years 1926 to 1934 inclusive. Production of Tobacco Products, (Plug, -Twist, Pine-Cut, and Scrap Chewing Tobacco, Smoking, Snuff, 'Cigars and Cigarettes), in the United States, and in the ten (10) leading stores in manufacture of tobacco products; and the percent that each State's production bears, to the United States, for the calen- dar years 1926 to 1934 inclusive. (Data on Large Cigars for calendar years 1920 to. 1934 inclusive) llumber of Cigar Manufacturers; aggregate number of Large Cigars produced, classified as to output; end percent of the total production in the United States, for the calendar years 1926 to 1934 inclusive. Quantities of Leaf Tobacco, (unstemmed equivalent) , used in manufacturing Cigars, Cigarettes, Tobacco and Snuff, for the calendar jrears 1920 to 1934 inclusive. Summary of operations of manufacturers of Tobacco, Cigars, and Cigarettes, showing; number of manufacturers; total production classified as to output; and percent of total, for the calen- dar years 1926 to 1934 inclusive. Summarjr of operations of producers' and dealers in Perique To- bacco, for the calendar years 1926 to 1934 inclusive. Pumber of Dealers in Leaf Tobacco in Business; quantities of Leaf Tobacco exported; and quantities received f romi Farmers, for the calendar years 1926 to 1934 inclusive. Quantities of Leaf Tobacco imported by; Dealers in Leaf Tobacco, Cigar Manufacturers, a,nd Toba.cco Manufacturers, for the calen- dar years 1924 to 1930 inclusive. Quantities of Leaf Tobacco, (Unstemmed, stemmed, scraps, cuttings and. clippings), owned or held on Januar}'- 1st Toy; Dealers in Leaf Tobacco, Cigar Manufacturers, and Tobacco Manufacturers, for the calendar years 1924 to 1931 inclusive. 10691 SSCTIOi: -BO. 4 STATZMZ3NT Lionthly quantities of manufactured Tobacco Products, (Large Cigars - Classes A, B, C, D, and E, Small Cigars, Large and Small Cigarettes, Snuff and Chewing and Smoking Tobacco), tax- paid for consumption, together Trith imports from the Philippine Islands, and Puerto Rico, for the years 1925 to 1935 inclusive. Quantities of manufactured Tobacco Products, (Chewing, Smoking and Snuff Tobacco, Large and Small Cigars, Large and Snail Cigarettes, Peri que Tobacco, scraps, cuttings, clippings, sitt- ings, etc., Cigarette papers and tubes), exported in bond, for the fiscal years ended June 30, 1926 to 1934 inclusive. Contents of A'roendix 2 (Financial) TALL! Statement showing comparisons of : T et Sales, Compiled Net Profit, Statutory 1'et Income and Cash Dividends paid for certain groups of Tobacco Corporations to all 'Tobacco Corporations reporting on Income Tax Returns for years 1926 - 1934 inclusive. Letter dated January 27, 1936 (and presented in part) from I7m. H. J.icReynolds, Administrative Assistant to the Secretary of the Treasury. (8 pages) Market Value, as at January 2, 1936, of the Capital Stock of the Big Three. List of statements. 10SS1 -53- o O (23 II SL 63 3P ON -O r-l S*J> pH W OJ i°5 CO E-. tg e> o o to »iE H to << c sa° ■-< w o s°s o w h a CO o 3£ .8 •d -h oi C O i- *» o o v. a cot. i-t O • e o v» p O £ 3 5 a o n 5 £ is! rH CJ 3, "3 - « (3 O p,tj u Est h o c i oj r— r— r— -rf i— t-- o K\eo r— in Sin jo jo inmoNrH in ON© HHJtO ,3- m*o iT*h in j* a\ Q 60 60 J ON m ON ON on r--.i* r— j- mj in ja mm.* J- . eu j- mto hk^j inmeo o in in r— to r— r- in O .* if)HO sD r-t mj? 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OJ J* O ON Q Oj v. r-ON3> r-i m^ o> u ONinrH 0J ONO I eou)ojH«o oi^f^ ONrH ONinr^ONONON M) 1\IH J; in UN^JD OJ minoj r- o - eo in in in in eo r-t i-t i-\ ooNr— r— r— ooo'incocceooN minmininininh— 3 VJD m-rH O - mmoj tninin OJ OJ ONvD v£3 OJ >JD OJ CO CO OU> 60 O ONVJD OtOOJOONmrHtO O in 5- 'to eo mo r— jo m oj oj oj m in j- 0NOJsO^3- J" 'JO f r— to vjd mojinoNmi r— w QON-a-jj r-t r-t ao j- mu) rt iTihw mr-j mm^ . . moN-JD OijD 0j Oj Oj toONOQm.r— r-rH rHOJinr-rHtO O r^ mr-oj eo c ^ to j* f^p— ~ oj o fna>f*^ m oj on r— r— v*o m o rH OJrH oj m,fnmin HHrtHHrtH n % a, in > P t~* f*N_H; oj inr-eo in r— r-sjo ono o onon H rH vjor— eooNQrHOjm oj oj oj oj rir.r.^ ON ON ON CT\ ON O^ >OrHOJm oj a ww^r,^^ ON ON ON ON ON ON ON ON I* ^5 S3 § 9 «- r !« r. « « tj a o >»-H ■fl 2 9 « dp, p. ■*» o O rH r s a O h •H O »- TJ o * E-S e AND SMO KING- TOBACCO MANU- FACTURE KG INDUSTRY . ~~ ~~ SUMMARY In 1935, workers employed in the cigarette, snuff, chewing and smoking tobacco manufacturing industry numbered about 42,000, some 80 percent of whom were 'located in four Southern States — North Carolina, Virginia, Kentucky, and Tennessee — while the remainder spread from Missouri into New York, with negligible numbers elsewhere. The force comprised in roughly equal propor- tion white men, white women, negro men, and. negro women. Three companies designated for the purposes of the Labor Study as the Big Three (Reynolds, Liggett and Myers, and American Tobacco) employed 65 percent of all workers and 85 percent of the negro workers. 6 companies (Lorillard, Brown -Williamson, Axton-Fisher, Philip Morris, Larus, and Scotten-Dillon) employed another fourth of all the workers, while three snuff companies (U. S. Tobacco, Helme, and American Snuff), together with the small tobacco companies, employed the remaining tenth. In all company groups but the Big Three, white workers predominate; three-fifths of the Big Three workers were negro. In part this results from the fact that the Big Three engage to a larger extent than the other companies in early preparatory processes such as stemming of the tobacco leaf. It is in such chiefly manual pro- cesses, or as common labor, that the great majority of the negro workers is employed. As the result of a field survey (*) made by the Bureau of Labor (*) Shortly after the Executive Order authorizing the study of the Cigarette, Snuff, Smoling and Chewing Tobacco Industry, the Tobacco Unit in the Division of Review, National Recovery Administration, arranged for a field study by the Bureau of Labor Statistics, De- partment of Labor, covering wages and hours in the tobacco industry. Prior to the actual field work the Tobacco Unit sent representatives to a large number of factories, and determined, both the occupational classification and the plant coverage desired. Throughout the course of field work and office tabulation, the Unit cooperated with the Bureau of Labor Statistics, and ultimately set up the forms for the basic tables in which the results are incorporated. 10691 -71- Statistics, Department of Labor, in the spring of 1935, it is pos- sible to examine closely the situation of the different sex-color groups composing the' labor force and the different wage groups set up by the Code. One of the first facts to appear is that, particu- larly as respects earnings, there are marked differences in level associated with sex and color of the workers and explainable only in part by differences in the character of the work performed. Thus in March 1935, white men earned on the average 55 cents an hour; white women, 41; negro men, 37; and negro women, 31. On a weekly basis, taking the groups in the same order, the average figures ran: $19.50, $13.50, $13.50, and $11 — the longer hours put in by negro men bringing their overage weekly earnings to ap- proximately the seme level as that of white women. Among company groups, if snuff companies are put aside, the Big Three in i.Iarch 1935 paid to the sex-color groups in general the highest hourly and weekly rates, though negro men had a higher hourly rate with the Second Six companies and white men a higher weekly rate with small companies, where their hours were longest. In general, earnings with small companies were comparatively low. Despite the higher earnings of particular sex-color classes with the Big Three companies, the average hourly rate paid by this group to all employees was comparatively low, because of their large em- ployment of negroes. With reference partly to different branches of manufacture, the Code set up four classes of employees, for each of which a differ- ent minimum wage, ranging from 40 cents down to 25 cents, was pre- scribed. From analysis of the occupations entering these groups, it appears that about one fourth of all workers fell in occupations entitled to the 40-cent minimum, and that these occupations (con- fined to the final stages of cigarette manufacture) employed white workers almost exclusively. The proportions of the workers entitled to the- 35- and 30-cent minima cannot be indicated closely (because of admixture in the returns of the chewing tobacco employees entitled to only 25 cents), but did not exceed 40 percent and 20 percent re- spectively. Examination of these Code groups on the basis of actual earnings reveals, as would be expected, that groups as a whole averaged above the minimum rates. Some Code violations are indicated by the fact that in certain cases even average earnings for negro workers in particular occupations fell belo^ the prescribed minimum earnings. But many apparent defections from the 35- and 30-cent minima result from the failure of the returns to separate chewing-tobacco employees from wage groups. Within each of the Code wage groups, the occupa- tional averages spread over a wide enough range to indicate that the setting up of minima did not reduce workers within a group to one level. "Then attention is turned from average conditions to the dispersion of hours and earnings for individual workers, it is found that some eight percent of all employees are in a very low earning group, re- ceiving in March 1935 less than $8 a week. This low group is consti- tuted largely of workers in a few occupations — notably stemmers, 10691 -72- pickers, and searchers -- where ^omon, especially negro women, are primarily employed. Terms of work for this group are strongly af- fected by the existence of even less favorable conditions — far lower wages and longer hours — in similar employment by independ- ent (*) For all workers, hours and earnings in March 1935 represent distinct improvement over those obtaining in earlier periods examined — 1930, 1933, tnd 1934. Moreover, there is clear indication that the termi- nation of the Code did not lead to breakdown of standards, but that in September 1935 hourly and weekly earnings were higher on the whole than in the spring. Against wages paid in manufacturing industries in the country at large, tobacco wages in March 1935 were distinctly low. Against wages -pi id in some other Southern industries and in some of the in- dustries important in the tobacco manufacturing States, particularly by comparison with cotton-textile wages, they make a better snowing. In evaluating the significance of such comparisons, account must be taken of the relative unimportance of labor costs in tobacco manu- facture (as compared, for example, with labor cost in cotton goods manufacture) and of the exceptional prosperity of the tobacco com- panies. 1 ?he Size of the Labor Force In March 1935 there were about 42,000 wage earners and minor salaried employees in the industry defined "oy the Code for cigarette, snuff, chewing, and smoking tobacco manufacture. (**) Since activity in March was somewhat lower than for the year as a whole, average employ- ment for the year may perhaps run a little higher than this. In number of workers, therefore, this manufacture is among the more im- portant code industries, since less than 80 of the first 500 codes approved had as many as 40,000 employees even in 1929, when employ- ment generally was distinctly greater than 1935. (***) H (*) An independent field survey of living conditions among tobacco workers was conducted in the spring of 1935 by Dr. Charles S. Johnson of risk University. The scope of the survey differed in sundry respects from the Code industry — covering only six Southern cities, omitting snuff employees, and including employees of independent leaf dealers. Dr. Johnson's complete manuscript is on file in Division of Review, Nation al Recovery Administration. (**) This figure is based on questionnaire or payroll returns secured from all leading companies and from a significant fraction of the small companies, and on an estimate for the remaining small companies. It excludes officials, executives, and persons engaged in buying or selling of leaf and manufactured tobacco products; but includes, along with wage earners, persons of lower supervisory rank and ordi- nary office and clerical workers. (***)Leon C. . Marshall, "Hoars and Wages Provisions in !JRA Codes", the Brookings Institution Pamphlet Series No. 16, 1935, p. 4. 10691 This figure of 42,00.0 is somewhat higher than suggested "by the Cen- sus of Manufactures for 19.5b or than will be reported, probably, by the Census of Manufactures for 1935. The Census puts the number of wage earners in cigarette; chewing and smoking tobacco, and snuff manufacture in iiarch, 1933, at only 31.00C — or 33,000 if one adds an estimate for salaried employees (*) — against 38,000 indicated for that month by 1935 returns (subsection 5, this chapter) (which show employment for March, 1933, approximately 10$> belo v> that for March, 1935). Two Census omissions chiefly account for this difference: (l) the omission of small establishments with product valued at less than $5,000, and (2) the omission of leaf departments of manufacturing plants. (**) The Code included such leaf departments (beginning as it did with the process of redrying or with delivery of the leaf to the manufacturing plant), and embraced establishments of all size. For these reasons, figures applying to the Code industry naturally run higher than Census figures. (*; For salaried em-ploy ees (including in this case managers, superin- tendents, and like administrative officials) the Census gives no monthly figures but only an average for the year of 1,898. (**) While it is the intent of the Census to omit stemming and rehand- ling, evidence exists that such operations are not in fact always omitted from its f i?rures . 10691 -74- 2 . Regional Concentration Regional concentration of the industry enhances greatly the importance of this employment} to particular States. Approximately four-fifths of the workers were employed in the tobacco "belt of the South, in the four adjacent States of North Carolina, Virginia, Kentucky, and Tennessee — with almost half of all employees in North Carolina alone. The remaining fifth spread across the six or eight northern States from New York and Hew Jersey into Missouri, with a few scatterings elsewhere, as in California. Obviously the industry as employer is important primarily to Southern factory labor. 3 . Composition with respect to Colo r mid Sex. In view of the regional concentration of this industry and its heavy dependence on unskilled and semi -skilled labor, it is not sur- ■orising to find that almost half the workers are negro. In neither sex do negroes predominate, but in both they approach equality of numbers with the white, and on the whole comprise some 45 per cent of the labor force. Outside the four Southern States, of course, the proportion runs very much smaller than this, while in those four States it reaches the half-way mark. Interesting shifts in this proportion occur, however, when one examines workers in different company groups. Thus, the Big Three companies, as a group, employ in both cigarette manufacture and in chewing and smoking tobacco manufacture distinctly more negro work- ers than white. In March, 1935, almost three-fifths of their work- ers were negroes, compared with only one-third negro workers in the small companies, and still smaller proportions (a fifth and an eighth respectively) in the other tobacco groups and the snuff companies. Even greater variety, of course, appears among individual concerns, with some employing no negroes at all, while others have 90 per cent or more. In part, the differences are a result of location; but in part the very dissimilar proportions of negro workers presumably reflect differences either in the type of operations (e.g. stemming) or in company policy. Among both whites and negroes, the industry as a whole employs a slightly higher number of women than of men. In snuff manufacture, men predominate; but in the two other branches of the industry — cigarettes, and chewing and smoking tobacco manufacture — there is a slightly higher proportion of women than of men. 4. Distribution oy Companies . Of the aggregate of 42,000 workers, 65 per cent, or practically two out of every three, were employed by the three largest companies R. J. Reynolds Tobacco Company, Liggett & Myers Tobacco Company, and American Tobacco Company. Another 24 per cent were employed by the six tobacco companies next in size — Brown oc Williamson Tobacco Cor- poration, P. Lorrillard Company, Axton-Fisher Tobacco Company, Phil- ip Morris and Company, Ltd., Inc., Larus & Brother Company, Inc., and Scotten Dillon Tobacco Company; 4 per cent were employed by three snuff companies — United States Tobacco Company, George '..'. 10691 -75- Helme Company, and American Snuff Company; and only 7 per cent "by the remaining indeterminate number (perhaps not exceeding one or two hundred) of small companies. (*) Clearly, as regards the con- dition of labor with respect to wages and hours, it is desirable to examine closely the nine companies which together employed nine- tenths of all the workers. Workers in Wage Grou ps Prescribed by th e Code . The wage provisions in the Code for the Cigarette, Snuff, Chewing, and Smoking Tobacco Manufacturing Industry covered four main groups of workers, for each of which a different minimum hour- ly wage was prescribed. At the top, with a 40-cent hourly minimum, came factory workers engaged in the final stages of cigarette manu- facture, together with office workers in all branches of the indus- try. (**) At the bottom, with a 25 -cent hourly minimum, came all workers engaged in processing or manufacture of chewing tobacco, together with "slow" stammers (***) in cigarette or smoking tobac- co manufacture. Intermediate were two groups, one — at a 30-cent minimum — comprising seven specified occupations, (****) and the other : — at a 35-cent minimum — comprising all processing or manu- facturing workers not elsewhere specified. The 35-cent group thus embraced employees engaged "in the processing or handling of cig- arette tobacco at any stage prior to the fabrication of the pro- duct" or "in the processing or manufacture of snuff or smoking tobac- co" — other than those in occupations specifically excepted. (*) The number of small companies cannot be determined from reports either of the Census of Manufactures or of the Bureau of Internal Rev- enue. The Census in its latest report, covering 1933, showed 139 es- tablishments (omitting, of course, those with product valued at less than $5-,000) whose primary business was manufacture of cigarettes or chewing and smoking tobacco and snuff; but since the term establish- ment, though it may apply to multiple plants in one place, ordinarily means a single plant or factory, the number of establishments covered is greater than the number of companies covered. Again, the Bureau of Internal Revenue reported 98 cigarette factories and 738 "tobacco" (chewing and smoking tobacco and snuff) factories in operation on Jan- uary 1, 1935; but the Bureau's totals refer to separate plants, not to companies. Thus, a single company might enter the total many times, since each of its cigarette plants and each of its "tobacco" plants is counted separately. The scrap chewing departments of cigar companies also enter the figures, such departments being required to register as separate tobacco factories. (**) The Code specified for "accounting, clerical or office" workers a minimum of ^16 for a 40-hour week, except that office boys, girls and messengers (not to exceed 5 per cent of the office force) might get 20 per cent less than that. (***) Not to exceed 15 per cent of all hand steamers. (****) Searchers , pickers, cleaners, hangers, prizers, classers and hand stemmers. 10S91 -76- Great interest naturally attaches to the number and type of employees included in the four wage groups. On these points some information can now be derived, on the basis of a survey of employ- ment in the industry conducted for National Recovery Administration by the Department of Labor in the Spring of 1935. While not a com- plete census, the survey covered a large fraction of the industry, embracing nearly 50 per cent of all employees in a sample selected to represent fairly different size companies, different regions, and different branches of the industry. The survey does not permit a 4-way breakdown like that in the Code, because it does not segregate employees in chewing to- bacco manufacture from these in smoking tobacco. It does, however, permit the statement that under the Code about one-fourth of all workers in the industry were accorded the 40-cent minimum; less than 40 per cent were accorded the 35-cent minimum (the figure includes an unknown number of chewing-tobacco employees entitled to only 25- cents) ; and less than 20 per cent were accorded the 30-cent minimum (again, the figure includes an unknown number of employees subject to the 25-cent minimum) (*). For about 9 per cent of the industry no minimum hourly wage was specified in the Code; while for the re- (*) The above breakdown of employees into groups subject to the specified hourly minima was made by allocating to each group the occupations that came under that group as defined by the Code. Thus, the Code indicates that the 40— cent minimum is to apply to office workers and to cigarette workers engaged in "fabrication" of the product, as distinct from proces- sing or handling of cigarette tobacco at any stage prior to fabrication. Assuming that fabrication, or "final finishing" (as the Code Advisory Committee called it in letter of March 14, 1935) includes not only shap- ing of the product but also wrapping and packing for shipment, 11 classes of cigarette workers enter this 40-cent group (along with office workers); viz. : Carton makers Hand packers Carton packers Machine adjusters Carton wrappers and Making-machine feeders banders, hand Making-machine operators Carton wrappers and Packers, case banders, machine Packing-machine operators Cigarette catchers (These occupational classes were defined jointly "by representatives of NRA and the Bureau of Labor Statistics, Department of Labor on the basis largely of a field study preceding the wage and hour survey in the Spring of 1935. Each class embraces several individual occupations varying only slightly in character.) To the 35-cent group are allocated occupations processing or handling cigarette tobacco, .and all processing or manufac- turing occupations in snuff and smoking tobacco, except in each case the seven specified for the 30-cent group (and excepting slow stemmers) . As stated above, it is unfortunately not possible to separate out from the figures for these two groups employees in chewing tobacco manufacture, who were accorded a 25-cent minimum. 10691 -77- maining 6 per cent not accounted for above the applicable minimum cannot readily be determined. (*) If color and sex of the worker be taken into account, certain marked concentrations appear. Most noticeable are these two: (l) that practically all workers entitled to the 40-cent minimum were white (less than. 4 per cent were negro); and (2) that in seven oc- cupations subject to the 30-cent minimum (or in the case of chewing tobacco workers 25-cent) 90 per cent of the workers were women, with negro women outnumbering the white two to one. In no other group did negro women figure to a significant degree. 6 . Average- H ourly Earnin gs in March 1935. to Against the Code provision (as/the least that workers should get) are to be put the facts as to what they actually get. Presum- ably groups as a whole would earn more per hour than the minimum rates set in the Code. From the Bureau of Labor Statistics survey already described, the facts can be elicited. And although the Code, as already indicated, nowhere deals with a single minimum rate for all workers, it will undoubtedly be useful to start with the over- all position. In March 1935, then, a month after the Code became effective, all employees in the Code industry earned on the average a little over 41 cents an hour.(*) In a labor force so diversely constituted, however, with respect to color, sex, and — in some degree — loca- tion, a single average could hardly be, and in fact is not, a typic- al figure about which other rates cluster. It is practically essen- tial to deal with a scale of averages, including rates for white men, white women, negro men, and negro women. In this scale the departures from the central figure of 41 cents are indeed wide, with white men (*) Occupations not readily assignable to a particular minimum comprise: foremen, inspectors, "miscellaneous direct" and "miscellaneous indirect" workers in cigarette manufacture, together with "miscellaneous indirect" workers in snuff and smoking tobacco manufacture. Occupations for which no minimum wage rate was orescribRd by the Code com- prise: Janitors, cleaners Skilled mechanics Machinists Skilled mechanics ' helpers Power-House workers Substandard workers Service employees It should be remarked, however, that the Code prescribed for watchmen (a small group included by the Department of Labor with service employees) a minimum wage of $18 for a week of 56 hours. (**) All the figures dealt with here, unless otherwise indicated, are the weighted as distinct from the simple averages constructed by the Bu. of Labor Statistics. The simple averages commonly run somewhat higher than the weighted, but do not tell so true a story, because they under-repre- sent the Big Three Companies and consequently the proportion of negro workers . 10691 -73- 13--§v£ above and negro women lO-jy^ below the general average. In des- cending order, the (rounded) figures run: white men, 55 cents; white women, 41 cents; negro men, 37 cents; negro women, 31 cents. This situation, throughout the wage data, strongly suggests the operation of two wage differentials, color and sex, which could, if it exists, be confirmed only by a study of occupational rates and groups. The Code forbade any sex differential for "female employees performing substantially the same work as male employees" , but did not advert to regional or to color differentials. The general averages afford also a first view of the position of workers in different sizj companies. Reverting for a moment to the single figure embracing workers without regard to color or sex, and aligning on this basis the several company groups, one finds that the Big Three companies and the small firms paid a little less than the general average per hour (respectively one cent and two cents less) , whereas the intermediate and the snuff companies paid more than tne general average (respectively one cent and ten cents more). (*) When one looks at the rates paid to each sex-color class, however, the Big Three and the Second Six Comoanies change places. That is, with respect to each of the four classes — white men, white women, negro men, nei;ro women — it appears that the Big Tnree companies paid more per hour (though in some instances only a trifle more) than the average for thao class in all companies combined, whereas, the Second Six companies paid — except to ne- gro men — less per hour than the average. (**) The ex-olonation of these aooarent contradictions whereby the Big Three companies bettered the all-company hourly average for each particular class of workers and yet fell short of it for all workers together, while the Second Six comoanies fell short of the all-company average for most classes of workers and yet exceeded it for all workers together, lies in the composition cf the labor force. As noted earlier, almost three-fifths of the workers for the Big Three companies are negro, whereas more than four-fifths of the workers for the Second Six companies are white. In other (*) The noticeably high figure for snuff companies is discussed later. (**) In detail, the cents differential earned in March, 1935, by em- ployees of the Big Three and the Second Six companies, a.s against the comparable averages for all companies combined, ran as follows: All Workers White Men White Women Negro Men ITegro Women Big Three -.8 /l.7 ^3.0 /.I /•! Second Six A .2 -3.5 -2.7 /-l.l -.2 10S91 -79- words, the Big Three employ heavily the two low-wage classes — neg- ro men and women — whereas the intermediate co^mvanies enmloy pri- marily the two higher-wage classes — white men and women. Differences in ccmnosition of the labor force, in turn, are associated in part with differences in the operations performed, since the Big Three companies do relatively more stemming then the Second Six. Here, as in the case of sex-color differentials, exam- ination of particular occupations is needed, to show in this case now the different company groups compare with respect to rates and type of labor employed for identical operations. In the case of the small and the snuff companies, no contra- dictions arise. Hot only to their entire force hut also to each sex-color class, snuff companies paid more aer hour and small com- panies paid less per hour than the comparable general average. (*) For the small comnraiies, lower rates are in hormony with reiterated statements during the period of Code formation that such companies could not afford to pay siiggested minima, and probably reflect the fact that the small concerns are engaged to a relatively large ex- tent in a declining industry — chewing tobacco manufacture. The high averages displayed for snuff companies result from a combination of factors; such as plant location (more than half the snuff employees are located in the North) and negligible employment of negro women, the lowest wage class. That the rate differential reflects also the highly mechanized character of snuff operations is suggested by the fact that it persists in a majority of cases even when comparison is made against tobacco -plants in the same States by sex and color. In connection with the showing made for the snuff and the small companies, it is well to recall that together they employ little more than one-tenth of the labor in the industry. (*) In detail, the cents differential earned in March, 1935, by employees of the small and the snuff companies, as against the comparable averages for all companies combined, ran as follows: A ll Workers White Men White Wo men Negro Lien Negro Women Small com panies -2.0 -1.8 -5.7 -4.4 -3.4 Snuff com- panies /-9 . 6 ^5.1 • /-l . 5 -1 . 5 a/ a/ The differential for negro women is /-S.0 cents, but the reported employ- ment, of negro women is so saiall that the figure lacks significance. Snuff differential for all workers exceeds that for groups, because negroes de- press the all-company figure. 10S91 -80- 7 • Ave rage Hourly Earnings for Code Groups The presumption chat in the industry as a whole the wage groups defined by the Code woald average above the set minimum rates is borne out by the record. It will be recalled that the 4-0-cent minimum applied to a dozen occupations, all (except office workers) confined to cigarette manufacture. In all these occupa- tions average hourly earnings were above 40 cents, settling in most cases at 41 to 48 cents, but rising higher than that for two factory occupations as well as for office workers. (*) One defection stands out; namely, that in four of five of these occupational classes, the averages for negro workers were barely above or actually below the prescribed minimum. Even though the number of negro workers involved is small, such defection might appear significant. In this connection, however, a. technicality of the computation must be borne in mind; to wit, tnat workers in occupations common to several branches of the industry, including some of the occupa- tions here in question, were allocated to a particular branch ac- cording to the primary product of their plant. Hence a minor num- ber of the employees classified as cigarette workers may in fact have been working in smoking or plug departments entitled to only a 35 or 25-cent minimum. This circumstance, together with chance errors in the occupational assignments, probably accounts for the defect of the negro average in three or four cases, though it does not suffice to explain all cases. In the group of workers entitled to a 35-cent minimum, all oc- cupations but one averaged above the prescribed figure, varying for the most part between 37 and 43 cents. (**) The exception was stem- mi ng-machine feeders, who got a little less than 35 cents (34.7). When one examines the groups on a color basis, no exceptions at all appear among white workers — in all the affected occupations they averaged above the 35-cent minimum; but among negro workers excep- tions multiply, with negroes in nine occupations, chiefly in the chewing and smoking tobacco and snuff branch of the industry, aver- aging below 35 cents. The impossibility, already indicated, of separating out from the group entitled to a 35-cent minimum the em- ployees in chewing tobacco entitled to only a 25-cent minimum may be assumed to oe the chief explanation of the defect in the negro averages. For the group of seven occupations entitled to a 30-cent mini- mum, the story is essentially the same as above. Except for negro workers in one or two occupations (for whom again, presumably, the inclusion of employees in chewing-tobacco manufacture helped lower the average), average hourly earnings cleared the minimum by amounts varying from one cent to several. The diversity of average hourly earnings among occupations in this group, and still more in the (*) Making-machine operators averaged 51 cents, machine adjusters SS^ cents, and office workers 57 cents. For occupational classes no weighted but only simple averages have been computed. (**) Machine cutters averaged 46 cents; and in the smoking and chewing tobacco and snuff branch of the industry, carton makers also averaged 46 cents and machine adjusters, 50 cents. Inspectors and foremen, likewise, had high hourly averages. 10691 -81- other groups, indicates that the setting up of wage minima did not reduce workers to flatly uniform levels. It is of incidental interest that in those occupations for which no minimum was specified — comprising, it will "be remembered, some nine per cent of all workers — employees "belonged more largely to occupations with rather high hourly earnings than to those with low earnings. The small number of substandard workers in this group, however, averaged only 24 cents an hour. 6. A verage Hours worked P er Week (*) The Code provided that the normal work-week for wage earners and minor salaried employees should not exceed 40 hours, except for a few specified groups. (Engineers, firemen, receiving and shipping employees could work 44 hours; and watchmen, 56.) In the week of March 1935 covered by the survey, hours for all workers combined averaged well below 40, barely exceeding 35. In fact, from the month by month figures available, they seem to have been below 40 (for all workers combined) ever since the summer of 1933. (**) Among company groups, the nearest approach to a 40-hour week in March 1935 was made by the snuff companies, with an average for all employees of close to 38 hours. Longer hours in snuff manufac- ture than elsewhere were connected, partially at least, with a seasonal activity not experienced by other branches of the industry. Outside the snuff companies, the Big Three had the fullest week, averaging 36 nours. Their white workers had shorter hours than those of any other company group, but the longer hours and the number of their negro workers bolstered up the group average. Small companies fell a little below the total-industry figure of 35, even though their white employees worked relatively long; while the Second Six had the shortest work-week of any group — not much over 33 hours. (***) In some instances, the number of hours worked resulted di- rectly from staggering of employment. (*) In this section again the weighted rather than the simple averages secured in the 3u. of Labor Statistics survey is used. Giving due rep- resentation to Big Three's negro employees, the weighted figures show somewhat longer hours, for all companies combined and for the 3ig Three group, than do the simple averages. (**) The month by month figures (not all of which are published) are com- piled by the Employment Division of the United States Bureau of Labor Statistics. They cannot be sub-divided to show particular classes of workers, except that employment in chewing and smoking tobacco and snuff factories is reported separately from that in cigarette factories. (***) One plant in the Second Six group showed' an exceptionally short week, of only 24 hours; but even with this plant omitted, the Second Six still had a shorter week than the other groups. 10691 -82- Some differences in hours associated with color and sex appeared, Thus, women, averaged only 34 nours against the men's 36; white work- ers only 34 hours against the negroes' 36. Except for the influence of the Big Three Companies, the color average would have run in the opposite direction, since among all other company groups — (Second Six, small, and snuff) — white workers had a fuller week than ne- groes of the same sex. With the Big Three, not only did negroes work longer than white employees, but negro women worked a trifle longer than negro men. This was the only instance in which the work-week for women exceeded that for men of the same color. Average Earnings per Wee]: Working approximately 35 hours, at approximately 41 cents per hour, the average employee in the Code industry earned $14.50 for the week. Three of the four sex-color classes in the industry, however (white women, and negro men and women) , earned less than $14.50; and one class (white men) earned more. In descending order, their average pay ran: white men, $19.50; white women, $13.50; negro men, $13.50; negro women, $11. In every group of companies this same descending scale aopeared, excent that in tne Second Six, negro men — because of slightly longer hours — earned a trifle more than white women. (*) Though the industry averaged $14.50, the only company group to average that much was the group of three snuff companies, which showed a figure of $19. In part this relatively high figure re- sulted from the practical non-employment by these companies of ne- gro women (from the lack of stemming operation) , but it also re- flected better-than-average hourly rates and longer-than-average hours for each of the remaining employee classes. Just under the total -industry figure were the 3ig Three com- panies, with an average of $14.44. The Second Six and the small companies followed at about half-dollar intervals, with (rounded) figures for the week of $14 and $13.50. Each sex-color class ex- cept white men likewise made more with the Big Three than elsewhere (snuff companies aside); taus , white women earned almost $2 more with them than in the nearest competing group; negro men almost $1 more; and negro women almost $3 more. In the case of negroes this spread resulted from the combination of better-than-average hourly rates and longer-than-average hours; while in the case of white women it was the result solely of the relatively high hourly rate (44 cents), their work-week with the Big Three, as already noted, being very short. White men earned most from the small companies (snuff companies still aside) where their hours were longest; and also because of longer hours, negro women made somewhat more with (*) Bounding of the figures to the nearest half dollar puts negro men at the same approximate level as white women; though more detailed fig- ures show the white women slightly ahead. (See nobe, next page.) 10691 the Second Six. (*) 10 . position of the Individual Worker To supplement the incomplete view afforded "by averages, it is essential to consider the effective limits of hours and earnings. In defining those limits here, no attempt is made to consider ex- treme cases, the purpose "being solely to get a view of the situa- tion of the bulk of the workers, and of significant departures from average conditions. With respect first, then, to hourly earnings, the bulk of the workers — in each case roughly 95 per cent — were subject to the following limits, according to their color and sex: negro women, 20 to 20 cents; negro men, 25 to 50 cents; white women, 25 to 60 cents; and white men, 30 to 90 cents. The order here is the same as that indicated ~oy the averages per hour, v/hich ran, respec- tively, for the same groups: 31, 37, 41, and 55 cents. Earnings were most diversified in the highest-paid group, most uniform in the lowest. A point to attract attention is that a significant number (5 per cent at least) of the negro women were receiving less per hour than the lowest minimum prescribed by the Code. (**) In all sex- color classes, some infraction of the 25-cent minimum .appear, but only in the case of negro women are they considerable. Almost all these subminimal women were hand stemmers, and only- a small number of them were classified as either slow or substandard. . Affected by length of week as well a.s by hourly rate, weekly earnings naturally range more widely than hourly. On a weekly ba- sis, the bulk of the workers (again, close to 95 per cent in each of the several groups) came within the following limits: negro women, $4 to $15; negro men, $6 to $18; white women, $6 to $20; and white men, $10 to $35. These ranges indicate that those near the too of the group earned 3 or 4 times as much as those toward the bottom. If the limits are narrowed to the belt of highest concen- tration, they become: $8 to $14 for 75 per cent of negro women; (*) The weighted average weekly earnings by compaxiy groups ran, in detail, as follows: Companies Big Three $14.44 Second Six $14.13 Small $13.67 Snuff $14.50 $19.19 19.55 20.03 18.18 20.25 23.67 13.51 14.36 12.55 12.04 14.97 13.46 13.65 12.71 10.82 14.90 10.92 11.33 8.34 8.57 (a) All White Men White Women Negro Men Negro Women (a) The snuff company average for negro women was $10.75 but less than a half-dozen were reported. (**) Since frequencies cover only the unweighted figures, proportions in low groups may be somewhat higher than "indicated in this section. 10691 S10 to 818 for 80-or; : ] - er cent of negro men; '510 to 116 for about 6J per cent of tiie iiriuite hoa.Gxj.; and •, 1 . : .- *c q»&4 for the' same propor- tion of white men. It will be observed that the earnings of white workers are less highly concentrated and more diversified than those of negroes. flie lowest earnings attached for the most part to women in a few occupations. Three-fourths of all workers in those particular occupations receiving lesb than ^8 per week — and- about 8 per cent of the entire force did receive less than that ' — were white and negro women engaged in largest numbers as pickers, searchers, or hand steamers. Again only a minor proportion were classed as slow or substandard. In other instances very low earnings, seemed to re- flect either nart-time work by a few employees in occupations norm- ally higher-paid, or casual work (as in the case of floor hands). For no group were they as marked as for negro women, almost 20 per cent of whom earned less than $8 for the week. As resoects length of work-week, employees atroarently suffered more from under-employrnent than from excessive hours. Less than 5 per cent worked more than 40 hours, and less than 1 oer cent worked 48 hours or more. (*) On tne other hand, a fifth of the men and almost two-fifths of the women worked less than 32 hours. Yet while a large portion of the negro women were under-em- plo;/ed, another sizeable group had particularly long hours, running from 41 to just under 48. For the most part, the women working these longer hours were -nickers, searchers, and hand stemrners — occupations characterized, as already noted, by low earnings de- spite the long hours. 11 . Manufacturers Versus Independent Leaf Dea lers It has just been indicated that the outstanding instances of low hourly rates, long hours, and low weekly rates occurred in oc- cupations connected with the earliest stages of manufacture — pri- marily with stemming. Stemming operations are carried on also by independent leaf dealers; and in order to compare their rates with manufacturers' rates for similar operations, payroll data for leaf- dealer employees were collected in the spring of 1935 and again in the fall. Vfhile' compilation of the spring data has been delayed, the fall data, covering eleven dealers in Virginia and North Caro- lina, ore sufficiently in hand to permit some comparisons of hours and earnings in the two industries. (**) (*) While the figures may include some cases of Code violation, the various exceptions permitted to the 40-hour week would suffice to ac- count for the small -oroportion of employees indicated. (**) The fall data have this advantage, that special arrangements were made to keep a record of hours worked. Since the industry pays piece- rates largely, little information on hours and hence on hourly rates was secured in the spring. ..•■'/.. 10891 -85- Employees of independent leaf dealers fall into three main occupational categories: floor workers, dickers and searchers, and hand stemmers. In leaf dealers' and also in manufacturers' plants, negro men predominate among floor workers, while negro women are the oredominant class in the other two occupations. Average conditions with respect to hours and earnings for these employees in the Code industry in March 1935 and in leaf dealer plants in October 1935 are compared in the following table: Manufacturers' versus L e af Dealers' Plants: Hour s and E arnings in Select e d Occupations in One Week ■ Per Capita: Average Occupation and Industry : Average: : Earnings : Hourly Hours : (dollars): Earnings (cents) Floor workers, negro male : Tobacco manufacturers : 34.8 : 12.99 : 37.0 Leaf dealers : 49.2 : 10.82 : 22.0 Pickers and searchers, negro female Tobacco manufacturers : 33.1 : 9.72 : 29.3 Leaf dealers : 39.8 : 5.39 : 13.3 Hand stemmers, negro female Tobacco manufacturers : 34 . : 10.49 : 30.8 Leaf dealers : 39.1 : 5.17 : 13.2 Darnings of leaf dealer employees were obviously exceedingly low and their hours long as compared with those in the same oc- cupations in manufacturers' plants. (*) It is contended that the dealers, who stem chiefly for export, must have cheat) labor if the business is to remain in this country. Their stemming opera- tions, conducted for the most part during the green-leaf season, are concentrated in a few months of the year and offer supplemen- tal employment to farm laborers or attract castial workers. Hence it is not to be supposed that the two labor forces are directly competitive. Yet the existence of such extremely low rates for work of the same general character undoubtedly depresses the mar- ket for all workers in these occupations. 12. Comparisons with Other Times. While surveying wages and hours in the Code industry for March 1935, the Bureau of Labor Statistics gathered figures for March 1933 also and — by a later follow-up — for September 1935, in orier to permit comparison of conditions under the Code with (*) As respects earnings, at least, the different months involved do not account for the difference in levels, since (as will be indicated later) employees in manufacturers' plants had higher earnings in the fall than in the spring. 1 0^91 -86- conditions prior to tne inception of the National Recovery Adminis- tration and subsequent to the termination of codes. Other materials available include: a survey by the department of the cigarette branch of trie industry in the spring of 1930; re- turns for all branches of the industry in June and November 1933, secured by a National Recovery Administration questionnaire during the early period of Code discussions; a special study of man-hour employment and earnings in 1933, made by the Bureau of Labor Sta.- tistics in cooperation with the Bureau of the Census; and the par- tial survey, conducted for tne National Recovery Administration by the Bureau of Labor Statistics of wages and hours during July 1934 in six occupations in the cigarette, smoking, and chewing tobacco industry in Virginia and North Carolina. (*) While the diverse scope of these materials precludes analysis of changes in tne vol- umes of employment, inferences can be drawn as to changes in hours and earnings over the period covered — 1930, 1933, July 1934, and the spring and fall of 1935. The average employee in cigarette manufacture was distinctly better off in March 1935 tihan he had been in March 1933 or 1930. As against 1930, his weekly earnings had improved slightly and his work-week had shortened materially. As against 1933, his weekly earnings had increased by one-half, with only a moderate increase over the very short hours then obtaining. His better position was thus due to a sharply higher hourly rate combined with a short work-week. (**) In a similar way, the average employee in the total Code in- dustry was distinctly better off in March 1935 than in March 1933, since his hourly and weekly earnings had botn increased materially tiiough che work-week continued very short. For white workers and negro the dollar gain was about tne sane, but on a percentage ba- sis the negro gain was of course much larger, being reckoned from a. lower base. The sajme things hold true of male workers as con- trasted witn female, the women faring relatively better than the men, though their dollar gain differed but little. The greatest advance accrued to negro women, trip group in the most disadvanta- geous position, with average weekly earnings in March 1933 of only :?S.50. (***) (*) It might be thought that the monthly figure regularly published by the Division of Employment Statistics of the Department of Labor on employment, payrolls, and earnings in the chewing and smoking tobacco and snuff industry could be combined with its unpublished figures for the cigarette industry (as distinct from cigars and cigarettes combined) to secure a continuous record of fluctuations in employment and earnings in the Code industry. In fact, however, this cannot well be done, since the Division's figures for cigarette manufacture omit some very important plants, and have been strongly influenced in recent years by returns from a single company with highly seasonal stemming operations. The Di- vision now has under advisement the improvement of its cigarette sample. (**) Comparisons are based on unweighted averages of all companies re- porting in each period. The 3u. of Labor Statistics, 1930 study appeared in its Bulletin 532, "wages and Hours of Labor in the Cigarette Manu- facturing Industry, 1930". (***) Figures used are weighted averages for all reporting plants. 10691 -87- Comparison with November 1933 again indicates a gain in week- ly earnings for March 1935, not due this time, however, to a large difference in hourly rates' but rather to a fuller work -week. Hours in November 1933 were abnormally low because of reduced manufactur- ing activity. Hourly rates, which had been increased by the sub- stituted President's Re-employment Agreement, under which the in- dustry was then operating, are indicated as not much lower than in dicated as not much lower in March 1935. For all employees, the figure is 41.0 cents per hour for November 1933 against 41.3 cents for March 1935. The comparison is not entirely valid, however, since the November 1933 average does not include employees in some of the lower-paid preparatory processes that are represented in March 1935 figure. (*) For the full year 1933 average hourly earnings in cigarette, snuff, chewing and smoking tobacco manu- facture as defined by the Census have been reliably indicated as a little above 37 cents. (**) In July 1934, with the President's Re-employment Agreement standards still being observed, hourly rates in six occupations in the cigarette industry averaged from 2 to 6 cents below those of the Code month, March 1935. (***) The evidence thus indicates a definite, if natural, improve- ment in the position of workers in March 1935 as against prior years, — an' improvement represented by larger hourly and weekly earnings with generally short hours. Summary figures to show whether the gains achieved were maintained after the termination of the Code are not available, but inspection of the figures for individual plants' leaves no doubt that as late as September 1935 at least they were maintained. weekly earnings of workers in the industry as a whole were unquestionably larger in September than in March. In part this increase was the result of longer hours attendant on greater ac- tivity in September, but it reflected as well numerous increases in hourly earnings. In snuff plants, hourly earnings tended to decline, and among small companies decreases were somewhat more numerous than increases. But in Second Six and particularly in Big Three plants, where the bulk of the "workers are employed, ad- vance s quite cl : early predominated. (*'"'**)• (*) Results of the NRA questionnaire are presented in Chanters VI and VII of a report by Donald Y. Yakeley, Research and Planning Division, "Cigarette, Snuff, Chewing and Smoking Tobacco Manufacture", September 21, 1934. The figure of 41.0 is computed from his separate items for the different branches of the industry. (**) Computed from data in the report by Arthur P. 3eal of the Bureau of Labor Statistics, "Man-Hours of Employment in 35 Manufacturing In- dustries in 1933" , p. 5. (***) See the report of the Bureau of Labor Statistics, "A Study of Six Occupations in the Cigarette, Smoking Tobacco, and Chewing Tobacco. In- dustries in Virginia and North Carolina, July 1934" . The report also covers earnings in chewing and smoking tobacco manufacture, out does not combine the two branches, so that comparison with the joint figures com- piled for March 1935:.: not feasible. (****) i-ji^g &- iec y f conditions in September 1935 covered a representative sample of the workers scheduled frT March 1935. The approximate size of the sample (as against the numbers scheduled in March) varied as follows: Big Three employees, 20 per cent; Second Six, 40 per cent; small companies, 95 per cent; and snuff plants, 80 per cent. 1069] -bo- ll. . 3.:::..:-.i'jgo:'S vita CV 'or In'-'^^'ie?, Wages in the tobacco manufacturing industry rank low a_s com- pared with those paid by manufacturing industry in general. Of the 90 manufactures reported upon monthly oy the Division of Employment Stati sties of the Department of Labor, only eight (omitting tobacco industries (*)) reported weekly earnings lower in March 1935 than the $14.50 paid by the Code industry, and only five reported lower hourly earnings, For all manufac- turing industries combined, weekly earnings averaged $21, for a week l\ hours longer tarn the tobrcco week* Of the eight industries ranking lower than tobacco, three were down because of an exceptionally short work-week, hourly earn- ings in each of them being higher than in tobacco. (**) The remaining five not onli? fell below tobacco on weekly earnings but also were the only industries to report lower hourly earn- ings. They comprised: turpentine and rosin, cottonseed (oil, cake, and meal), fertilizers, cotton goods, and canning and preserving. (***) This low-wage jroup thus includes three Southern industries, at least two of which — naval stores and fertilizers — - employ negro workers largely. In the four States where the Code industry is chiefly concen- trated (Forth Carolina, Virginia, Kentucky, and Tennessee) , the important manufacturing industries are, besides tobacco:-cotton goods, knit goods, railroad repair shops, furniture, rayon, and lumber. (****) The national figures just referred to indicate for all these competing industries except cotton goods hourly and weekly wages appreciably higher than in tobacco. ( *#**) But none ofj (*) In cigar manufacture also, earnings must have been less than $14.50. The Division does not publish figures for cigars separately, but reported per capita weekly earnings in cigar and cigarette manufacture combined at $13.37. (**) These three were: shirts and collars, men's furnishings, and cast— iron pipe. (***) Por turpentine and rosin, the statement respecting hour-earnings is based on uiroublished figures of the department of Labor, Division of Employment Str.ti sties. (****) Importance is judged by number of wage earners employed in 1933, the latest Census year now available. (*****) The hourly earnings in March 1935 ranged from 43.3 cents in saw- mills to 65.2 cents in steam railroad repair shops, and the per capita weekly earnings from $15.29 to $26.03, in the same two industries. Excluding railroad repair shops, the upper limit is 51,1 cents per hour and 19.21 for the week, in rayon manufac- ture. 10691 -09- these manufactures (possibly rayon (*)) is confined so largely to the South as is tobacco; hence the Northern wage differen- tial influences their over-all figures more strongly than it influences the tobacco over-all. A comparison confined to the Southern States is plainly desir- able, but is difficult because of the scarcity of data, (**) Such figures as are available, however, suggest that when com- parisons are restricted to other manufactures in the same area, wages in tobacco manufacture occupy a mid-way position. To be sure, for all factory workers reported upon in the four States of North Carolina, Virginia, Kentucky and Tennessee, per capita weekly earnings in March 1935 were $15.50 against a figure of only $14 for the Code industry in the same States. • (***) rj-i^Q g enera i hourl}^ wage in this area in March cannot be ' figured, since man-hours worked are available by States from • May: 1935 only. (*) In 1933 a little less than 70$ of the wage earners reported by the Census in "Rayon and Allied Products" were in Southern States, against about 80$ of tobacco (not including cigar) workers so located in March 1935. (**) For rayon, lumber, and hosiery and underwear, 1932 is the latest year covered by "Uages and' Hours" Bulletins of B, L. S. , Depart- ment of Labor; and for furniture, 1931 is the latest year covered. According to the sections in NBA concerned with these industries (Industry Studies end Statistics) NRA. has no information on wages in Southern States later than that given in these Bulletins, ex- cept in the case of lumber. For lumber, the Code Authority supplies data on average hourly and weekly wages in the "South" for Jvly and December 1933 and the 10-month period January-October 1934 — the South comprising in this instance 10 southern-pine States. Because of the unlike periods covered, and the minor in- fluence on the aggregate of the two tobacco-manufacturing States included (North Carolina and Virginia), no use of these figures is made here. Reports of State Departments of labor and industry might yield useful information, but to examine them in the time allotted this stud;'- has been impossible. For railroad repair shops, current hourly wages in the Southern region can be computed from monthly reports of the Interstate Commerce Commission. The type of labor emploj^ed in this industry, however, appears unsuitable for comparison with labor in tobacco manuf ac turi ng. (***) The figure for all factor;' - workers is computed from the unweighted aggregates of number employed and payrolls, published oy the Divi- sion of Employment Statistics. The Division has estimated its coverage of factory workers in the 'several States as follows! North Carolina, 74$; Virginia, 60$; Kentucky, 44$; and Tennessee, 50$. 10691 -90. Against particular industries, however, the story is somewhat different. In May 1935 the hourly earnings in this ares of workers in importance manufactures other than tobacco ran rs follows: Hours and Earnings of Factory workers in Specified Industries in the Jour States of Forth Carolina , Virginia, Kentucky, and Tennessee, Hay 1035. Manufacture \ ! Average Hourly Earnings Hours : forked Weekly Earnings Cotton goods : - 36.1 : 33.2 : 11.99 Knit goods 42.5 • 34.6 : 14.75 Furni ture 35.9 : 33.1 : 13.63 Rayon and Allied Products : 50.4 : ( DO . \.J : 19.32 Sawmills i 31.1 32.9 : 10.23 Source: Computed f rom figures furnished "by the United State? Department of Labor, Division of Employment Stati sties, on aggregate employ- ment, payrolls, and man-hours in each of these industries in the four States specified. Measured against average employment re- ported - for 1933 the size of the sample is indicated as ranging from 25 percent for sat? mills to complete coverage for rayon. If against these figures are matched the March figures f or to- bacco in this area — hourly earnings 40 cents, hours worked 35, weekly earnings 314 — it appears that on both an hourly and a weekly basis earnings in the Code industry were higher than earnings in cotton goods, furniture, and sawmills, (*) though lower than earnings in rayon and knit goods. The dif- ference in months involved may affect relative position with respect to weekly earnings but is unlikely to affect it with respect to hourly. For cotton manufacture, by far the largest emploj^er of factor/ labor in this area, a fe rr sup 'elementary figures are at hand, tending to confirm still further the indications already given that cotton-mill rates fall appreciably below the tobacco rates. In the "Textile Report" made by 3. L. S. earl; last year, average earnings per hour in cotton mills in the South were reported for August 1934 (the latest month covered) at 34 cents for men and 32 cents for women. Corresponding averages for tobacco factories in the South in March 1935 were: men, 45 cents; women, 35 cents. (*} perquisites may affect the money wages paid in sawmills; it will be ■ noted also that the sample for this industry is comparatively small. 10591 -91- A collateral fact highly important to comparisons of this sort, however, is the relative burden of labor costs in different industries. It has frequently been emphasised that in the to- bacco Code industry this burden is exceedingly low. 1 4 . Remarks on Particular Branches of the Code Industry . The method of compiling the wage and hour returns does not per- mit a clear-cut distinction among the several branches of the Code industry — cigarettes, smoking tobacco, chewijig tobacco, and snuff. This is so for two reasons: first that in many cases it was not possible to identify the branch to which particular employees belonged; and secondly, that in classifying the returns from multiple-product plants, the Department followed in general a standard practice of allocating all employees within a plant to that branch of the industry indicated by the primary product of the plant. (*) Prom information supplied ty the companies themselves, it is possible to see how far the results produced by this s3>"stem of classification differ from those -produced by a more exact as- signment of employees according to their actual duties. The companies' own statement, taken as a whole, indicated that in March 1935, 51 percent of all employees were engaged in opera- tions connected with cigarette manufacture and 49 percent in operations connected with manufacture of chewing and smoking tobacco and snuff. (**) The office classification, however, threw 61 percent of the employees to the cigarette branch and only 39 percent to the other two branches. Since the snuff returns were on the whole pretty distinct, the indicated dis- proportion would be still larger as between cigarettes and chew- ing and smoking tobacco. It is also unfortunate, in view of their separation in the Code and their diverse trends, that separation of chewing tobacco manufacture from smoking tobacco manufacture was found impractical Yet although the method of compilation blurs the picture as between industry branches, some general differences are plainly indicated. Employees in the snuff branch of the industry have unquestionably longer hours and higher weekly and hourly earn- ings than those in any other branch. Hence the appropriateness (*) In the outstanding case of the R. J. Reynolds Company, it modified this rule by allocating the departments within a plant rather than the entire plant. (**) The necessary information was secured, by letter of personal visit, from all the Big Three Companies, from five of the Second Six com- panies, and from three other (including two of the snuff) companies. In the case of small companies it is improbably that differences between B. L. S. office allocation and company allocation are im- portant. Hence for these companies the tabulated employment is used in compiling both pairs of aggregates contrasted above. 10691 -92- of prescribing for this 'branch wage minima as lov/ as those prer scribed for smoking tobacco manufacture, rs was done in the Cods, is not apparent. Employees in the cigarette branch of the industry, in tarn, generally rank above those in smoking and chewing tobacco manufacture with respect to both hourly and weekly earningSi though exception on one score or the other Plight be made of negro women and white men. Finally, it is probable, from the averages displayed by small companies engaged largely in chewing tobacco manufacture, as well as from other evidence, that this declining branch of the industry pays the lowest wages. TOTE: A list of the basic tables received from the Bureau of Labor Statistics on number of employees, hours, and earnings in the cigarette, snuff, chewing, and smoking tobacco manufac- turing industry, together with copies of tables one through seven, are listed as appendix 6 of this chapter are in the Tobacco Study Unit files of the -..HA. Records Section of the Department of Commerce and are not here reproduced. Tables G-10, which i:i their present : c- orm would involve disclosures, are not included but have been returned to the Department of Labor, tfages and Hojurs Division. -0O0- 10591 -93- 15. Annual Earnings and the Numb er of Weeks ?forked "by Tobacco Manufac- turing Employe es in 1934 . In addition to weekly earnings, the agents of the Bureau of Labor Statistics secured also, so far as practicable, data on annual earnings and on number of weeks worked. Although the industry coverage is far less complete for these items than for the weekly figures, and although the data pertain only to employees working in 1934 who were also working in March 1935, yet because of the great interest attaching to them, such data as were secured are summarized below. The figures pertain to 1934, the latest calendar year preceding the field survey. Tobacco workers employed "oj manufacturers who came within the scoioe of the tobacco manufacturing Code averaged 47.4 weeks of work in 1934 for which they received an average of $700. These averages are based on the records of 7,815 male and female workers, both white and colored taken from the pay roll records of 16 plants by agents of the Bureau of Labor Statistics, Figures .just released by the Bureau, of Labor Statistics (March 1935) reveal that the annual earnings in the motor vehicle indus- try as a whole were exactly $900 in 1934,^ while, the average number of weeks worked was only 37.7 in the year. Employees in the cigarette branch of the tobacco industry worked more weeks .and had higher annual earnings than those in the combined chewing and smoking tobacco and. snuff branches, averaging 48,2 weeks and $705 against 44.9 weeks and $582 for the workers .producing chewing, smok- ing, and snuff. On a sex-color basis, cigarette workers have the advan- tage over chewing, smoking and snuff workers in that they averaged from 1.4 weeks (white males) and 6,8 weeks (white females) more of work per year. However, this advantage does not follow through the annual earn- ings of the various sex-color groups, because the average annual earnings of white females in the cigarette industry is the only average annual figure exceeding the annual earnings of the sex-color groups of chewing, smoking tobacco and snuff workers. It becomes of interest to compare the weeks worked by tobacco employees and their annual earnings with those of the automobile employees, who, on the average, rank among the highest paid for time worked in all manufacturing industries. p For this purpose, figures for only white male and white female tohacco workers will be used, since the automobile industry does not recognize a. color problem. In the tobacco manufacturing industry, all white males averaged 49.4 weeks of work for which they received on the average $1,048. In the cigarette industry, they worked 49.7 weeks for $1,018 and in the smoking, chewing and snuff 43.3 weeks were worked for $1,170. Opposed to these averages, the male workers in the automotive industries worked 37.8 weeks during which time they averaged $923. There was only a 0.7 week differential in the automobile industry between the male and female workers, whereas in the tobacco industry white females worked on the average four weeks less than males. Thus, the length of the work year for white females in the tobacco industry exceeded that of females in the automobile industry by more than eight weeks, A*L1 white females in the tobacco industry averaged 45.4 weeks of work for which they received 10691 -94- an average of $617; they worked 47.2 weeks in the cigarette industry for 5342; and in the smoking! chewing and snuff industry they averaged 40,4 weeks and received $545. The females in the automobile industry worked only 37,1 weeks for which they averaged $6^7 or approximately one ;oer cent more than all white females in the tobacco manufacturing industries, while the foregoing discussion gives a broad view of the position of tobacco manufacturing workers over the year, it does not reveal any of the special characteristics pertaining to the relative number of workers employed full or short time, more of those actually earning relative!" high or low wages for the year. The following discussion, though brief, will throw some light on these points. Of all tobacco workers -covered by these data 72]o '-ere employed 50 weeks or more in 19-34. White males were particular! 1 / fortunate in that 85 percent of them fell in the above class* The ?roup also included 69,6 percent of the colored males, 69,. 3 percent of the* colored females, and 61,7 percent of the white femrles. Less than 10 percent of the workers had under 26 weeks of work, with white males and colored females having the fullest employment, White females showed larger percents in almost every two ,r eek interval up to 36 weeks of work in the year than any other group. Very little variation from the above conditions was found to exist as between cigarette workers and the rest of the tobacco Indus try. Annual earnings reveal more variation as between the sen-color groups than weeks worked. For example, 25,2 percent of all workers earned less than $500, while 5,1 -oercent of the white males, 23,1 per- cent of the White females, 21,9 percent of the colored males and 30,1 percent of colored females constituted the group. At the other extreme 19.0 percent of all workers earned $900 or more, Tims group consisted .of 57,2 percent of the white males, 2,3 percent of the colored males, and of 6,1 percent of the white females. No colored females earned as much as $900. The most concentrated group of 'workers in the industry as a whole appeared to earn $400 and less than $800, 61,0 percent of all workers having annual earnings between these amounts, 'White males are concen- trated between $700 and lens than $1,100, 47,3 percent, while 83,3 per- cent of all colored males earned $400 and less than $300, Eighty percent of the white females earned $400 and under $900 while 95,2 percent of .the colored females earned $200 and less than $700, In the cigarette industry 12.0 percent of all workers earned less than $400, while in chewing, smoking and snuff 12,7' percent earned less than $300, On the other hand, 36,3 percent of all workers in cigarettes earned ^800 or more while only 24,3 percent of the workers in the other branches fell in that classification. As between the cigarette branch and smoking, chewing, and snuff, the annual earnings of only colored males appear to have common charac- teristics, that is, 83.5 -oercent of those in the cigarette industry and 82.1 percent of those erroloyed in the other branch earned $400 and under $800. 10691 . ,-95- The sex-color grouos ir_ cigarettes show 62.2 percent of all white males earning $600 but less than $1,100; 95.8 percent of the white females earning $400 and -under $900; and 84.1 percent of the colored females as having earned $300 and less than $600, Of the 36.3 • • percent of all workers who earned no re than $800, the group consisted of 68.3 percent of all white males, 4.8 percent of all colored males, and of 14.9 percent of the white females, no colored females having earned that much* The data for chewing, smoking tobacco and snuff workers show con- centrations of white male workers and colored female workers consider*- ably above those of the similar groups in the cigarette branch. The white males who earned $900 but less than $1,400 in this branch were 49.3 percent of all white males, while in cigarette manufacture the corre- sponding group was only 12.7 percent. Of the colored females, 73.3 percent. working in chewing, smoking and snuff earned $400 but under $600 while the corresponding group in cigarette manufacture was 60.1 -percent. Of the 12,7 percent of all workers who earned under $300, the group con- sisted of 5.2 percent of all wi>ite males, 3.4 percent of all colored males, 22.3 percent of all white females, and 13.1 percent of the colored females studies in the chewing, smoking and snuff branch. At the other extreme 78,6 percent of all white males, 3.2 percent of the colored males, 17,0 percent of the white females, and but 0,3 percent of all colored females made up the group earning $800 or more in the year. One defection in the chewing, smoking and snuff annual earnings data seems of considerable importance. It is registered in the distri- bution of the annual earnings of the white females for whom this item is reported. Some 18 percent of them are shown as having earned $100 in 1934, Inspection of the constituent returns, however, discloses that practically all these white women were employed during the stemming season by a single plant located outside the four Southern States. Since it has already been pointed out that conditions in snuff manufacture are highly dissimilar from those in chewing and other tobac- co manufacture, it is unfortunate that a more complete breakdown by industry branches has not been practicable in this discussion. Possi- bilities of disclosure, however, forbade separate presentation of the snuff figures. Note: Tables covering this section are not in the files of the National Recover}' Administration but in the files of the Bureau of Labor Statistics. -• - 10691 r -96- B. COMPANY POLICIES 0? WEL5A.RZ V/OHK 1. Introduction . The policies of the dominant companies in the tobacco industry respecting welfare work, whether significant or insignificant in appraising the total effect of the industry's industrial policies, are nevertheless essential to a broad survey of the industry. Welfare ^ork is sometimes a manifestation of continu- ing paternalistic attitudo toward industrial relations. Since the wage income of unskilled workers is inadequate to provide desirable standards of living, especially ^hen satisfactory wage income is knoini to be well within the capacity of most of the tobacco industry to pay, it becomes necessary to appraise both the purpose and effect of such welfare work to determine whether or not it is a factor in resistance to the development of wage income essential to desirable living conditions. In what follows, the attempt is simply to state the welfare poli- cies of these> companies. (*) The following description of company policies as reported by their central offices points out the extent to trhich they have engaged in welfare work. The scope of such ^ork, it will be noted, is not insignificant. Five of the eight companies have organized welfare systems; one maintains contact with a small group of employees; the other t^o have very limited welfare policies. 2. Vacations as a general rule, the companies studied gave their salaried employees (office) two weeks' vacation with pay. Of the eight companies, four reported that such vacations were granted after one year's service; two companies gave them to employees with six months' service. In one company the vacation period varied from one to two weeks; in another the salaried employees got one week with pay and one week without pay. 'Two companies ex- tended the paid vacation privilege to foremen who were working on a salary basis. Four companies reported that their wage earners could get vaca- tions without pay upon request. One company closed at the end of the year for overhauling and this served as a vacation per- iod (without pay; for its wage earners. Another company gave (*) Letters were sent to the nine large tobacco companies listed here- with: American Tobacco Company, Axton-Pisher Tobacco Company, Brown & Williamson Tobacco Company, Larus ft Brother C~>. , Inc., Liggett Myers Tobacco Company, P. Lorillard Company, Philip Morris & Company, Ltd. , Inc. , R. J. Reynolds Tobacco Company, Scotten Dillon Tobacco Company, Sight responded, and the description is based on their an- swers and represents their policies. 10691 -97- ton days at Christmas time", also without pay, "but with a cash present. S r-r -ie wage earners in one company were allowed, one week ,7 "ith -ocy; these were in hey positions. 3 . Sic): Leave • Four companies stated that they gave sick leave with pay to salaried employees, rut they had no fixed policy as to how much time was allowable on this "basis. In a fifth company, sick leave was given only to office employees (the -policy as to time being indefinite), and in a sixth, supervisory foremen were in- cluded as 'fell as office workers; here also the time allowable for sick leave was indefinite. Two companies paid their sal- aried employees through the entire period of sickness. There was one company which reported granting sick leave with pay to wage earner? "hen, in the judgment of the company, individual conditions warranted such leave. 4 . Insurance Six of the eight compani s provided some form of insurance for at least some of their workers. In t^o cases, the insurance extended to all employees and was voluntary and contributory — the employee paying part of the cost and the employer paving part. It covered life and disability. In addition, accident and sickness benefits were paid by one type of policy; while in the other, sick benefits and hospital bills were handled, through a welfare association financed .jointly by the workers and the company. Two of the companies paid, the entire cost of insurance with no contribution from employees. One, which had a group insurance policy for total disability or death, covered all the white workers, but not the negroes. The other plan was not, strictly speaking, insurance, but in the event of the death of an em- ployee earning not more than $50.00 a week, the company paid to his beneficiary an amount not exceeding $1,000. In the other two companies, insurance systems were limited to the better paid workers. The officials of one were covered by a voluntary contributory group life insurance policy. The other extended this privilege to foremen and their superiors; in this case there was also a contributory annuity scheme available to white male salaried, employees. 5. Pensions While six of the eight companies granted pensions to workers, in only one instance were definite standards set up as to eligi- bility. The other five companies gave pensions in individual cases, presumably passing on the merit o^ each case as it came up. One of these five reported that the amount to be paid was worked out with each employee, on the basis of length of ser- vice; both wage-earners and salaried workers grown old in their 10691 -98- employ were eligible. The policy of another company was to grant pensions to incapacitated persons "who have rendered faithful service"; this pension was not less than $30. DO a month, but its actual amount and the eligibility therefor were judged "by the individual case. Men of 65, women of 60, and permanently incapacitated persons, if they had served the company for twenty years continuously, were eligible for pensions under the one formal pension plan encoiintered among the eight tobacco companies studies. The amount received was based on average earnings and also on length of service, but was not to be less than $6.00 nor more than $40.00 a week. However, the right was reserved "to ter- minate . . . the plan . . . when in the judgment of the Board of Directors it shall have become expedient to do so". 6 . Medical Services Three companies gave no medical care at all. One company gave its employees physical examinations; another had a doctor on call and also used the city ambulance. However, in the other three companies, workers could avail themselves of organized medical programs. In one which had doctors in daily attendance and always on call (in all plants except one:, the employees were given free medicine, free optical service, and if they earned $5,000 a year or less, surgery bills were paid by the company. The doctors' services cou"'d also be used in the homes of the workers. Employees were taught the value of pre- ventive medicine; they went through a physical examination before being hired, and could take periodic examinations there- after. A visiting nurse was used by another company to follow up cases cared for in the plants (which were equipped with emergency hospitals and dispensaries, with full-time nurses in attendance) If, upon investigation, it was deemed necessary, free hospital- ization was given. A completely equipped central medical department was maintained by the eighth company. Two full-time doctors, a full-time den- tist with an assistant, twelve nurses, and a technician were em- ployed, and the laboratory was equipped for X-ray, fluoroscopy, and various tests. Medical and dental care was given to all em- ployees. Physical examinations were given before hiring, and vaccination was compulsory. The policy of the company was to carry on educational work in the medical field; a typhoid im- munization campaign caused thousands of employees to take pre- ventive doses, and examination of pregnant women employees brought 100$ cooperation from the women affected, the company reported. The medical department also gave information on pre- natal care and on contagious and communicable diseases. Hos- pitalization for employees and their dependents was arranged with the local hospitals, through a system of weekly deductions from wages after the employee returned to work. This company 10691 -99- is at the present time working on a plan which will give their employees free hospitalization to the value of $90.00 in any one year, and will pay laboratory fees and operating room ex- penses up to $15.00 in that period. 7. Safety Progra m Safety programs varied widely, depending on the size of the company. In only one plant was there no organized safety pro- gram. Educational and preventive work was handled "by simple set-ups of committees and by regular weekly inspections, lec- tures, prizes for suggestions, posters, councils, and inter- departmental competition in the larger companies. Pour com- panies used air-conditioning. Bast-control devices were used by two companies, and respirators by a third. Pirst-aid care likewise varied. Pom" companies had first-aid rooms or fully equipped plant hospitals in their plants. Three of these also reported that they had full-time nurses on duty there. One company had a r^om and bed for those who were in- capacitated at work, and a first-aid kit in each department which was in the care of department managers, who were given instruction in first-aid. In another, the foremen gave first- aid. Practical nurses were hired in the plants of a third, with a doctor on call. One company had no provisions for first-aid in its plant. 8 . Recreational Activities Recreation for their employees was organized in some form by all but three companies. Baseball was the popular sport; five companies had teams in at least some of their plants. Three companies also offered bowling to their workers; basketball and volleyball were other sports mentioned. One employer had ar- ranged group rates at the local Y.M.C.A. 's for both white and negro employees. c • Educational Work Educational work was not so well organized as recreation. Only three companies did anything in this field. One firm furnished supplies for classes. Another reported that this type of work varied, employing not only their own methods, but "cooperation with outside organizations". In one plant of that company, this cooperation took the form of arranging group rates at night school. Education in public health, as typified in the campaigns carried through by one company, has been discussed in the description of their medical service given previously. This same company sponsored an engineering club for white workers in mechanical divisions (which fulfilled social as well as educational func- tions), and once a week during the noon hour religious services were held in the various departments, followed by group singing. 10691 -100- 10. Cafeterias Cafeterias were maintained "by six of the companies reporting, and one furnished a free lunch to its employees . A second gave a hot meal to salaried employees, and coffee free to factory workers. Other companies did not have cafeterias in all their plants, but where they did have them, two remarked that they were run on a non-profit "basis. 11. Other Telfare ' T ork In addition to the above services, the different firms engaged in various other activities. One firm gave all its employees at Christmas a cash present, averaging $12.66 last year (1935), and /mother gift. T^o companies said that they helped "worthy employees 11 — in one case loaning them money without interest. One company also paid funeral expenses of employees in certain cases. Company housing was mentioned by one employer; in this instance the rent was a/jlied against the -purchase or ice. - -.:■' - 1 2 . Examples of Tel fare Policies In connection with '3 dical care, two companies were in the fore- ground in giving their employees free service. The American Tobacco Company maintained hospitals in all its plants but one, with a full-time nurse and doctor in daily attendance and on call at any time; the company paid for surgery bills, gave free medicine, care of the eyes, and similar services. Sick leave for both salaried employees and wage-earners was determined on the basis of individual conditions. The system of care for health of the employees of the R. J. Reyj holds Tobacco Company (described as the eighth company under Section 6 on Medical Services was "out part of this company's organized welfare policy. The joint contributory system of in- surance — covering sick benefits, disability, and death; the standardized pension plan — the only one found in the industry; the provisions made for recreational activities; the excellent first-aid system with a graduate nurse in each plant; — such provisions mark the company's welfare policy as taking in a wider scope than any other in the tobacco industry. Another distinctive feature of its plan is that a fund of $10,000,000 has been set aside from the surplus of the company and invested in the common voting stock of the company, the regular dividend return on which is made exclusively applicable to the support o the company's welfare program. The company contends that this greatly reduces the pressure of the expense of welfare work against wage levels. Among the smaller companies, a generous policy was evinced by Larus & Brother Co., Inc. It was this company which paid all its salaried workers in full through any period of sickness; bore the entire cost of insurance for ^hite employees; and gavi Christmas presents of money to all its workers. TQAOT -101- C. MECHANIZATIO N (*) 1. Historical There is, of course, a natural trend in industry towards mech- anization. This trend, steadily progressive, has a varying rate of speed, dependent largely on consumer demand, economic pres- sure, and resultant invention. The cigarette, snuff, chewing and smoking tobacco manufacturing industries have followed this natural trend. They present within their group practically all of its major variations. Prior to the development of the cigarette industry, the trend towards mechanization among manufacturers of tobacco products was from normal to sub -normal. The excellent development of the cigarette fabricating and packaging machines forced the first highly mechanized department in this industry. Mechani- zation slowly followed down the line, covering the processes prior to fabrication, "but showed no such degree of development as in the finishing processes. Since the large manufacturers of cigarettes were also manufacturers of smoking and chewing tobacco, it was but natural that a considerable impetus should be given to improvement of mechanical equipment in the manufac- ture of these two products. The processing of tobacco in the course of its manufacture di- vided naturally into three sections: 1. All operations up to and including the storage of the dried leaf. 2. An intermediate section from that point on through processing of tobacco up to, but not including, the final operations of fabrication and packaging, and 3. The operations of final fabrication and packaging. Until a period ending about 1928, the operations of the first section, performed almost entirely by the colored race (in the South Atlantic states), were generally the same. for all products. These particular operations were simple in character and the long hours and low wages then in existence acted as a brake on rapid improvement of mechanical processes. Due to the impetus given to mechanization by cigarette manufac- ture, the intermediate section showed a varying trend. The con- centration of cigarette manufacture among a small number of con- cerns , and the competition resulting therefrom, forced the con- struction of economic compact units for cigarette making, both (*) This discussion of mechanization is based on a field study in the summer of 1935, by a trained factory engineer, F. D. Manning, at that time consultant to this Unit. ?or mechanization in the Cigar Manufacturing Industry, see Chapter V. 10691 • -102- by the introduction of more modern machinery, and "by "better flo^ of the product through the plants by re-design in plant layout and increased use of conveyors. Prior to the code, most of the large companies making any con- siderable quantity of cigarettes had already eliminated hand stemming insofar as possible. The smaller concerns manuf; cturing smoking and chewing tobacco faced an entirely different situation. With the decline in consumer demand and the larger companies fairly well mechan- ized, the smaller companies were feeling a new economic pres- sure and were trying to lower costs, thus speeding up the mech- anization trend. Their problem was almost insurmountable wher- ever volume was insufficient to warrant the use of expensive equipment. The result has "been steady concentration of produc- tion, as small companies have be-m forced out. The snuff industry, with steady consumer demand, no economic pressure, and already well mechanized, was giving no consider- able thought to further mechanization. Except insofar as cigarette smoking displaced other forms of tobacco use, mechanization in the fabricating and packaging section of cigarette manufacture had not resulted in technolo- gical unemployment. As a. general thing the labor employed in this section, mostly young white women, has been secured from outside as the business has grown. 2. Under the Code There was a pronouced effect from the code on the mechanization trend. The most important of the early operations in the processing of tobacco is that of stemming. It is sometimes done prior to storage or the leaf may be stemmed after storage and as it start in the process of manufacture. For this reason, it is found in both the first and the intermediate sections. In hand stemming, done on piece rate, the effect of the code was the rapid elimina tion of slow employees whose piece rate earnings did not equal the minimum hourly code rate required. Except for a small amount of leaf that must be stemmed by hand, machine stemming is practical. A fair basis o^ measurement of the output of stemming machinery is its comparison with the out- put of an average hand stemmer in terms of pounds of leaf stem- med per day, with the daily output of a stemming machine in pounds of leaf, divided by the number of employees in the crew. Measured on such a basis, the older stemming machines in use when the Code went into effect (varying more or less with the product and plant layout^, were two or three times as produc- tive as the hand method. None of these older machines rate very 10691 -103- high in mechanical efficiency, i.Ieasured by the same yard-stick, some of the newer machines are much more effective, equaling, depending on the type of product, the output of five to six hand stemmers. Certain large stemming machines are limited in use because of their high cost and their requirement of high volume output. A small type, fully as effective as the large machine, enables the small company to compete in this operation on even terms with the large corporation. There are definite indications that the newer machines are coming into increased use and wher- ever installed there will be a resulting drop in the number of stemming employees of approximately 75,o as compared to hand stemming. Daring the last five years, there has been material improvement in drying or ordering machines, in the methods of conveying tobacco, and otherwise processing it. While labor still repre- sents a small percentage of the total cost of tobacco manufac- turing, the increase in labor costs resulting from the code ac- celerated the replacement of equipment of this character. Far- ther elimination of hand labor took place, although to no such extent as in the stemming operation. Other definite trends toward mechanisation (and prior to the fabrication and packaging), are indicated in the increasing use of automatic feeders, re-design of plant layout, and improve- ments in cutters, the latter approximately doubling the output per machine. All of these developments are resulting in the further elimination of employees. Post-Code Condit ions In fabrication, packaging and final operations, performed al- most entirely 'oy the white race, and where the operations are already largely mechanization is limited. Furthermore, the machinery already in place as a whole, including cigarette mak- ing, is not under pressure from consumer demand. This condi- tion, of course, does not obtain in all individual companies. The output of the different types of cigarette 'making machines may vary widely. Most machines are not run at mechanically normal output, due to the necessity of making a quality product. The mechanical output of cigarettes per machine is not, however, a true measure of output. If, as a bar,is of operation, the out- put is determined per operative per minute of the crew required to operate a battery of cigarette making machines, including the makin^-ma.cnine operators, catchers , inspectors and adjusters, a making machine at a relatively low mechanical rate per minute may show the highest output per operative. There was found to be wide variation in the industry on this particular production cost, and the best operative performance was on a relatively low rate of mechanical output. 106P1 -1.0: The elimination of labor is still proceeding in this section, but is of far less importance than in the intermediate section, ' not only in the processing of cigarette tobacco, but in smoking and chewing tobacco manuf net-ore . 4 • Conclus ion To summarize:, the introduction of the code into the Cigarette, Snuff, Chewing and Smoking Tobacco Manufacturing Industries accelerated the normal trend toward mechanization, which is still continuing, as wa^e levels were found to be slightly higher in the Fall o^ 1935 than during the dode period. The effect of further mechanization will be felt principally in the preliminary and intermediate operations, those performed in the South Atlantic states by the colored ro.ee, and "'ill tend directly towards a reduction of their number in the industry. Also, in the fabrication of cigarettes, it is still possible for some concerns to reduce the number of employees on the operation of cigarette making by approximately 40$, this by the addition of mechanical appliances already available, and further adjustments of present standard equipment. Prior to and during the code period, there hf.s been one notable exception among the lar-~e cigarette manufacturers to the gen- eral practice of eliminating all possible hand stemming. This corporation is spreading out the period of adjustment from hand to machine stemming in a successful effort to prevent unemploy- ment. It offers an excellent illustration of the type of re- search needed by the industry as a whole, if further distress is to be avoided as mechanization proceeds. Had this been done, much past suffering fro:.i the occasional rapid replacement of men and women by machines might have been avoided. It is unfortunate that facts covering the proportion of labor costs to total production costs are not available for this study. That labor costs generally represent but a small propor- tion of total costs is evident. There 'has been a decided question as to the advisability of co- operation of any character between members of the industry in discussion of its problems. Insofar as joint effort for greater knowledge of the effects of mechanical performance on technol- ogical unemployment is considered, such cooperation is not only justified but essential. With the present trend toward further necha.nization definitely continuing, with labor costs but a small percenta. e of total costs, the social responsibility toward labor requires a com- plete analysis of all problems having to do with technological changes . 10691 -105- CHAPTER III INTEGRATION WITH AGR I CULTURE . A. INTRODUCTION Tobacco is the oldest cash crop in the United States. Its production and position in the economic welfare have "bulked large in the commercial and agricultural development of this country from earliest Colonial days. Its importance is greater than the acreage cultivated or the cash valued received would indicate, "because production is localized to certain distinct areas where it is generally the principal source of agricultural income. Buying methods in the various areas are not satisfactory, "but the possibility of constructive change is severaly hampered "by the inertia of long established tradition and the active opposition of "buyers, whose present advantages might "be curtailed. Until 1933 and the introduction of the crop control pro-gram of the Agricultural Adjustment Administration, the lack of a suitable sense of the mutual interests of tobacco growers, workers^ and con- sumers resulted in a complacent attitude by manufacturers towards depressed leaf prices. (*0 B. PRESENT METHODS OP SELLING LEAF TOBACCO 1. The froose Leaf and Aucti on , Warehouse There are several ways in which tobacco is marketed by the grower, each of which is peculiar to a certain area of the country. Plue. Cured, Burley, Dark-Pired Virginia, SurwCured • Virginia, One Sucker, Green River, and Dark-Fired Kentucky- Tonnessoe are marketed through the auction warehouse system; although an uncertain small percentage of the last three types is also sold at the barn door, Tobacco, under this method of marketing, i6 brought to a central auction warehouse .by the farmer, and is there sold by competitive bidding to buyers representing tobacco manufacturers, exporters, other dealers, and speculators. The warehouse exacts certain commissions from the farmer for selling the tobacco, which vary in amount with the weight and value of the sale. It is, therefore, to the direct advantage of the warehouse to have tobacco bring as high a price as possible, for the warehouse profits in a direct ratio with the producer. This syst«m has been in general use for at least" eighty- five (85) years and is considerably out-moded in its style of operation. However, in spite of its obvious defects it is the most satisfactory method now existing in this country for the sale of leaf tobacco. (*) See Chapter I, Section E (b). 10691 10691 -106- (a) Rapidity of Sales One of the most striking disadvantages of the system is the rapidity with which sales are made. During the Code period, sales were limited to a maxi- mum of 360 piles per hour, hut it is common to find as many as 400 or more piles sold per hour. Such exces- sive speed, in selling, forces the tobacco "buyer to make a hasty appraisement of the lot offered for sale, and in order to protect himself against increasing his grade average, he bids on, and often secures, cer- tain lots at prices lower than the tobacco should bring. It is impossible to avoid a wide variation in the price of tobacco of the same quality when the transaction is conducted at such a rapid speed; for, irrespective of the degree of skill which the buyer may possess, he cannot fairly appraise the tobacco of- fered in an elapsed average time of ten seconds or less. (b) Importance of Adequate Lighting Color is one of the most important qualities de- termining the value of tobacco. This "cannot be ac- curately gauged by the buyer except -under good light- ing conditions. It is 'of decided importance to the farmer that his tobacco be sold in a warehouse which is correctly lighted by windows and sky-lights so that it may be displayed, examined, and purchased under the most favorable conditions. If the farmer's tobacco is displayed in an old warehouse, pressed into service by the lack of space caused by the brevity of the marketing -season, where the illumination is un- satisfactory or the sunlight too brilliant, he stands to realize less than his tobacco is worth, because the hurried buyer must protect himself by making a con- servative bid when he is in doubt as to the quality of his purchase. ■ (c) The Small Market Although the development of good roads and the increased use of automobiles and trucks have tended to lessen the number off markets on which tobacco is sold, nevertheless, there still exists a number of small markets. All companies do not have their own buyers on small markets, frequently placing their orders through local buyers, who often handle several ac- counts. The farmers suffer thereby from a lack of true competitive buying. Furthermore, where there is not a full representation of buyers, and where a con- siderable amount of the tobacco sold is purchased by commission men, it is possible for a warehouseman and a buyer to combine for the purpose of depressing prices by jointly buying in the tobacco for resale at a higher price on another day or on some other market. 10691 -107- The primary reason for the continuation of these small markets, where warehouses are generally old and poorly lighted, is the short season, .and market glut, later discussed. (d) Mandatory Government Grading The greatest source of dissatisfaction among farmers is the wide range of prices frequently paid for identical grades during the same sale. Under the pres- ent system, it is almost impossible to expect any other condition to exist as a very large proportion of the tobacco offered is not well graded "by the farmers. One solution of this serious problem might be found in compulsory government grading. Although there is a certain amount of grading done now by gov- ernment agents, it is of relatively minor importance. If, however, competent government experts were em- ployed to grade all tobacco sold and if the average market price for each grade were published daily, the farmer would then have a standard by which he could be guided in the sale of his tobacco. Mandatory government grading would aid distinctly in familiarizing the farmer with those grades most in demand, and encourage him in such production. Closer cooperation and better understanding between the grow- er, warehouseman, and buyer would result, and a far more orderly marketing machinery for one of America's great- est agricultural crops would supplant the haphazard one now in use. The adoption of such a plan would unquestionably mean a considerable readjustment of the Loose Leaf and Auction Warehouse system as it now exists. (e) The Short Marketing Season. The. most unsatisfactory feature of the present method of marketing, .tobacco by the loose leaf tobacco and auction warehouse system is the shortness of the season .in which the farmer can dispose of his product. This s.e.ason has grown increasingly shorter during the past few years. The factors that have caused this shrinkage are another result of the unplanned and archaic system whereby practically all leaf tobacco produced in the Middle and South Atlantic states finds its way : from producer to processor. The tobacco marketing season opens in Georgia about August first and moves progressively northward, A small group of expert buyers take what they want from each market as they move on through South Carolina, and Virginia- ending in Kentucky or Tennessee sometime in April or May. -108- The short season is caused "by the farmer's fear, engendered from years' of experience, that the big com- panies will buy their requirements of what he has to sell during the early part of the market, and that when they have done so prices will break. His credi- tors, and this is particularly true of share-croppers, are anxious to have their accounts settled before the end of the year. The disadvantages of this system are obvious. If the farmer does not offer his tobacco before the large buyers have withdrawn their support from the market, he must elect to sell at a loss, or stand the expense and hazards of shipping to a distant market, perhaps in another belt. Because he does not have time care- fully to grade his crop, some of his better tobacco is sold with the poorer lots. Under the present system, labor is worked night and day for a brief period. This is undesirable (l) from management's point of view because of the haste with which purhcases must be rehandled, and the over- time wages involved; and (2) from labor's point of view because employment is for a very limited period of weeks, with a resulting long period of idleness. This glut of the market could be relieved by lengthening the buying season. The farmer -would then have time to grade his crop intelligently. Modern and efficient warehouses would be used and tobacco displayed to better advantage. Two serious difficulties are recognized in connection wit. this lengthening of the season. The farmer would have to readjust his marketing habits, and the purchaser would have to readjust his buying staff to the longer selling period* Neither of these objectives is impossible of ful- fillment. The first could be handled by the coopera- tion of an active trade association, the Department of Agriculture and the county agent. It should not be difficult to induce the industry to increase the num- ber of buyers if necessary. Such added expense would be more than off-set by consistent grade standards. (f) Unfair Trade Practices Several trade practices indulged in by warehouse- men have resulted in considerable harm both to them and the farmers. 10691 -109- (1) Subsidized Trucking One of the most glaring practices is that of employing truckers to induce farm- ers to sell their tobacco at a certain ware- house. The trucker so employed receives a fee from the warehouse in addition to his drayage from the farmer. If the farmer has not instructed the trucker to deliver his tobacco at a particular warehouse, the truck- er may shop around from one warehouse to another until he gets what he believes to be the maximum fee. By arrangement with a warehouse, the subsidized trucker may also demand an addi- tional fee for placing the farmer's tobacco where it will be promptly sold. It is the poorer farmer who is unable to transport his own crop to market and who is therefore at the mercy of the trucker. Warehousemen in their eagerness to se- cure a volume of business have lost many thousands of dollars through engaging in this sort of competition. (2) Rebating Another unfair method of competition has been the occasional practice by some ware- housemen of rebating to prominent growers a part of the fees and commissions. (3) Reservation of Floor Space The practice of reserving floor space for large and influential growers has devel- oped, particularly in Kentucky. Where a marketing season, it is often possible for a large grower to arrange for a favorable dis- play of his crop. 2. The Maryland Market The method of marketing tobacco in Maryland differs ma- terially from the auction loose leaf warehouse system. This crop is sold by "closed-bid auction". Under this plan, tobacco is graded and packed in hogsheads on the farm and consigned to a broker or the Maryland Tobacco Growers Association, Inc. , which now has a membership of more than 5, 000 growers. 10691 10691 •110- In. either case, samples of the contents are removed "by state inspectors, sealed, and turned over to the consignee for display. Buyers make the rounds of the "brokers' offices and submit sealed bids on such tobacco as suits them, after an examination of the samples — all bids "being opened at the close of the day. Baltimore is the sole market for Maryland tobacco. This method of selling tobacco is highly unsatisfactory. There has "been much complaint about poor grading and care- less and inferior packing on the part of the growers. Such faulty preparation, coupled with the fact that samples are not always representative of the lots offered, has "been harm- ful, "oreign buyers have also complained of poor packing and inferior grading, and these complaints are reflected in de- creased purchases. This has "been particularly true of France, which until 1934 was by far the leading export market for this type. If the Maryland growers are to recapture lost foreign markets, and to retail, at a fair price, present foreign and domestic "business, they must pay more attention to packing and grading and devise an intelligent plan of marketing to replace that now in use. Buying "by samples, drawn from hogs- heads packed by the growers, was discarded in Virginia about 1850. mmim^^^ -111- 3. The Connecticut Valley Situation Conditions exist in the Connecticut Valley, with reference to Shade Grown Sumatra type cigar tobacco, that are not found elsewhere in this country, ex- cept in small areas in Georgia and Florida. Cer- • tain grades of this particular type of cigar wrap- per tobacco ordinarily "bring the highest prices for any tobacco produced in the United States. In the production of American type Sumatra Wrapper leaf for use on the cheaper grades of cigars (*), it has "been found necessary to shade the growing plant. (**). Due in large part to the fact that the cost per acre of raising this type is far beyond 'that of any other American type, there has grown up a producer-dealer group, better able to finance this problem than the farmer . Almost QQfo of this Shade Grown crop of the Connecti- cut Valley is controlled by an alert trade associa- tion composed of these producer-dealers (***). The association aids its members in growing tobacco to the specifications of cigar manufacturers. Non-mem- bers of the association are frequently financed by the member dealers. Apparently, the only other outlet that farmers can find for this type of tobacco is a contract with a manufacturer before the crop is grown. (*) See Chapter V - The Cigar Manufacturing Industry. (**) "The shades are constructed of poles with wires stretched across to support a covering of cheesecloth. .,. .The effort is to produce a 60 percent shade to protect the plants from direct and intense sunlight, conserve moisture From 7,000 to 9,000 acres of tobacco are grown under shade each year in the Connecticut Valley and from 3,000 to 4,000 acres in Georgia and Florida. " Circular 249, U. S. Depart- ment of Agriculture, page 40, by Charles E. Gage. (***) From field study by this Unit, January 1936, data on file. 10691 -112- This method limits the member of growers and places in the hands of the producer— dealer or manufacturer an unusual amount of control, which, for practical purposes, '• strips the farmer of a large part of his bargaining power. 4. Barn-Buying Lie t hods of Cigar Manufacturers This subject has been treated in Chapter V, The Ci^ar Manufac- turing Industry. Except for certain farmers' cooperatives, such as the Wisconsin Cooperative, the method of biding from the farmer at his barn is used not only in connection with the seed- leaf filler type grown in Pennsylvania and Ohio, but o.lso the Connecticut Valle2>- tobaccos other than the shade—grown type. The "circuit riders" sent out by the large manufacturers and the dealers direct to the farm barns have the farmer at a decided disadvantage. The possible effect of this system on over-pro- duction in an industry where there has been steady decline in demand for tobacco leaf is an illustration of the inequitable burden placed on agriculture in the sale of one of its most im- portant commodities. It has been stated earlier in this chapter that the Auction and Loose Leaf .Warehouse system, in spite of its evident deficien- cies, is today the most satisf actor-/ method that the farmer hi s for sale of tobacco leaf. It is not assumed, however, that the auction method is fitted to the sale of cigar types. 5. Collusion in Purchase of Leaf In December of 1935 this unit made a field survey with technical assistance, covering the Flue Cured area only, with direct re- ference to this question. I T o evidence was discovered indicating such collusion. There has been frequent corn-plaint by tobacco farmers that the price of the leaf is depressed by manufacturers and other buyers. Table III, this chapter, shows the yearly average prices (1925- 1934) of Plue Cured and Light Air Cured tobacco (the last named including 3urley and Maryland) . These "types represent a large part of the tobacco used in cigarette manufacture. Until 1930, ;orice averages for these types were generally equal to "parity" prices as later determined by the Agricultural Adjustment Ad- mini strat i or. In 1930 and 1931, average prices were very low. The corrrolaint of f armers is based particular^ on these two years, together with the opening price levels in 1933. There is no evidence shown in these price levels of any interest by manufacturers or other huyers in the farmers' economic distress. In 1933, the market for Plue Cured opened at such low levels that farmers forced the closing of the auction warehouses. This resxilted in conferences between the Agricultural Adjustment 10691 "113- Admini strati on and the manufacturers, when the manufacturers pledged themselves to support the tobacco market by purchases of agreed amounts at agreed price levels. This program worked out in accordance with the agreement. The tobacco production control program of the Agricultural Adjustment Administration was in full operation during the buying seasons of 1934 and 1935, and price levels generally during these two years have been exceedingly satisfactoi"3 r to the farmer. 5. Conclusion Comprehensive research is needed before the most satisfactory methods may be determined for selling tobacco leaf by the farmer. The task is as much within the province of the leaf dealers and manufacturers as within that of the Dei)artment of Agriculture. As in so many other instances mentioned in this study, it is evicent that research alone will point the way to prevent continuation of present serious maladjustments. C . 5EADJUSTMEIT T S II! DEI;IAuD POP. VEEIOUS TYPSS OH 1 T OBAC CO 1 . Shifts in Production Areas Tobacco ir raised on approximate!;'- 400,000 farms in the United States, and ordinarily constitutes the principal source of their cash income. Today, approximately 45 percent of total produc- tion (*) is exported. There are six distinct classifications, all of which have special uses and are grown in well— defined areas. ■ l L es As consuming habit's change, both at home and abroad, such chan L are reflected in the demand for particular types, and the econo- mic effect resulting there from, is concentrated within the special areas where those t;npes are grown. On the pages immediately following, three tables e.re shown, cov- ering (1) leaf tobacco production for the United States and for thirteen selected states (1339-1929); (2) the acreage harvested, production, and value, for the United States and the same group of states; (3) the estimated acreage, production, and farm value and price per pound, subdivided by classes. Table I shows remarkable shifts. Virginia has apparently passed its production peak, and has increased its total production by only one-third since 1839. In Kentucky, the large increase has been primarily in Barley. 'North Carolina has grown to larger production than any other state. Maryland produced the same amount in 1929 as in 1839, ninety years ago. With the single exception of Connecticut, the states producing the cigar type of leaf — among them, Ohio, Indiana., Wisconsin, and Pennsyl- vania — show a material decrea.se, Pennsylvania less than the other states. 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Q M ■< Q M O o o x> o o o CD Xi o Eh tJ O PQ bD •H O Ph CD Ph O 03 O Ih o o o w •3" o t ttO CO i 3 CO I CD ^ P. h CD cd ^ O I U 3 CD t H'§ O 45 CD 1 & ° c p, 3 O TJ O CD o u O fQ lo aJ •» u CO CV rcJ T3 CD ■8 J +3 CO CD CD T3 «H 3 B u rH O -p o CD 5 rH H -P uj o Cm in c O •« CQ CO CD CD n ^ U O 0) ^3 3 •n 5 -P H ■ rH a CO ■ii •r 1 o •H -P •rl 43 43 £ << • 5 o x: 3 to o o CH 01 rH H o rH Ph XI p h -p « • FH ri p (0 a> [ | CD S rH • CO -P ("I td t-3 H o f 1 c) Fh ^ n P. P. to f 1 CD < OD a 8 a rH u T) • CO CO CO •d •H § 0) -p 13 Ml r=> p o Eh §5 CD O • • u CD 3 -P o o C/J S3 10691 -121- Table II, covering ten jeers only, ending with 1934, indicates steady or increasing production in those states raising Flue Cured and Burley, the types most largely used in cigarettes. Again the heavy losses in the states producing the cigar types are indicated. The constantly increasing proportion that Flue Cured hears to total United States production, as shown in Tattle III, is of great significance. The Fire Cured type, grown both in Virginia and in Kentucky- Tennessee, has dropped in this oeriod from 210,753,000 pounds produced in 1925 to 126,477,000' pounds in 1954. Its dollar value has decreased in about the same proportion. Its foreign market has been drying up, and its only other extensive use is in the manufacture of snuff. It is interesting to compare the average farm price per pound for this type with the average earnings of snuff companies. Corporation statements indicate that the three largest snuff companies for the period 1925-1933 inclusive, reached their highest earnings, $9,500,000 in 1929; and their lowest earnings, $7,900,000 in 1953. Cash dividends in excess of $5,000,000 were paid each of these years by these three companies together. The snuff companies are by all odds the largest buyers of Fire Cured tobacco for domestic use. During this same period of years, the average price of this tobacco paid the farmer ranged from a high of 15.1JJ in 1927, to a low of 5.1<£ in 1931. The dollar value to the farmer of this entire crop including the amount exported., ranged during these same years from a high of $24,800,000 in 1929 to a low of $7,780,000 in 1932 (see Table 3, page this chapter). In 1931, the three largest snuff companies produced in excess of 38,000,000 pounds of snuff at an estimated profit of 22^ per pound, but in that same year, the average farm price for Fire Cured tobacco was 5.1^ per pound. In 1933, the farmer received an average of 9.1^ for Fire Cured tobacco. In 1933, the three largest snuff companies made a dividend, disbursement at the approximate rate of 23^ per pound manufactured. The Dark Air Cured type, with production of 92,258,000 pounds in 1925, dropped to 37,145,000 pounds in 1934. The cigar types, excepting only cigar wrapper, show similar or worse declines. The crop of cigar filler worth $10,000,000 in 1925 brought but little more than $3,000,000 in 1934. Production dropped from 92,000,000 pounds to 34,000,000 pounds. Cigar binder made an even worse showing. Its dollar value for the same years de- creased from $14,600,000 to $3,200,000 and its production drop- ped from 95,000,000 pounds to 25,000,000 pounds. 10691 -122- The percentage of unstenraed tobacco used in menufacture in the United States of all tobacco products is shown in Table IV, below. The- marked increr.se in percentage of tobacco now con- sider", in the raanufactxzre of cigarettes, and the heavy losr.en in .-.•'11 other types, indie '.';e th- t the only t T ~o areas of rea- sonable prosperity ^or farmers raising tobrceo leaf are the South Atlantic Strtes — anc Kentucky and Tei-rcs^ee, where Flue Cared and Burley, respectively, are grown. TA3L2 17 dele/di ve Percent o f Unstenneo Tobac co Uv? d in Tobacco ■ /irna facturi n- (*) Product 1,... A 5 Cigarettes Snuff, Chewing & Smoking Tobacco 27.7 50.9 1910 5.7 60.7 1920 23.0 50.7 1925 20.7 54.0 45.3 1934 14.3 4E.4 37.3 ] .o.v ioo.($ loo. c$ 100.0$ ioo.o; Table V, following, shows the pounds of unstemmed tobacco re- quired for the same ^roup of products* The domestic consump- tion of all t'~ es of unstemmed tob:;oco has about doubled since 1900. TAELZ V Pounce of Unstomned Tobacco Consumed (000 omitted) (*) Pro cue t Cigars Ci yarettes 1900 1020 19^5 1934 Siiuf: Chewing & 105,595 100,096 149^001 111,123 15,004 146,007 244,310 375,303 252,375 324,470 323,109 200,024 Smoking Tobacco It is evident that the hee^ry decline in the cigar industry sirce 1920 has forced a readjustment in production among the agricul- tural areas raising these cigar types. The loss in foreign de- mand for the Dark Fired types has had similar effects. The disproportionate increase in the amount of tobacco used in ciga- rette manufacture has brought greater prosperity to the areas growing Flue Cured and Burley, particularly- during the years that the cron has be a. under control. It is srfe to assume, based upon statistics of recent years, that the requirements for snuff and chewing tobacco manufacture will not increase. Cigar leaf types are not used in other American tobacco products ex- cept for scrap chewing, the consumption of which in 1934 was 27-j less than in 1931. Furthermore, these types ere not e:rported except in small quantities. It appears* therefore, that unless (*) Annual He-ports of the Commissioner of Internal Revenue. 10S91 -123- there is marked increase in the" consumption of cigars, which is improbable, production of tliis particular class of leaf Willi never reach its former peak. 2. The South Atlantic States There is not only the problem of shifting areas for tobacco cul- tivation, but the relationship of tobacco to other agriculture commodities. The South Atlantic States present an interesting illustration of this problem. Four states — Virginia, ITorth Carolina., South Caroline, and Georgia — depend for agricultural income to a marked degree on two crops, cotton and tobacco. Florida, growing some cotton and tobacco, is included to complete the group. Bright Flue-Cured tobacco (Types 11-14) grown in these five states is used primarily in the manufacture of cigarettes, al- though small amounts find their way into the manufacture of chewing and smoking tobacco. Approximately 55$ of the Flue- Cured crop is exported in leaf form, although Flue-Cured represents 70$ of all tobacco exports. While the money value of the total cotton crop grown in all southern states is far greater than the value of the total tobacco crop, the rela- tive position of the two crops is different in these five states. In 1910, cotton production in the South Atlantic States amounted to 3,710,000 bales, having an estimated farm ^value of $255,000,000 and in 1934 2,406,000 bales with an estimated farm value of $152,500,000. When compared with 1910, J he year 1934 shows a decrease in bales produced of approximately 35$ and a reduction in farm value of 42$. (*) In 1910, this group of five states produced 32$ of the entire cotton crop of the United States, and in 1934, 25$.. The states of South Carolina and Georgia, account for the major portion of this decrease in production. In 1910 these same states produced 275,758,000 pounds of tobacco with, an estimated farm value of $27,360,000; in 1934, 606,640,000 pounds, an increase of approximately 120$. In 1934, tobacco pro- duction had an estimated farm value of $164,500,000, or approxi- mately at 500$ increase when compared with 1910. Uliile this group of states accounted for only 28$ of the total tobacco produced in the United States in 1910, they accounted for approximately 55$ in 1934, practically double their 1910 ratio. The state of North Carolina alone is responsible for the major portion of this increase with a production of 418,800,000 pounds in 1934, compared with a production of 129,500,000 pounds in 1910. (*) Ba;sed on data published in the Yearbooks of the United States Depart- ment of Agriculture for the years 1910 and 1934. 10691 -124- In the South Atlantic States, these two crops together hs.& an estimated farm value in 1910 of $292,400,000 as compared to $317,083,000 in 1934. These amounts were respectively 32$ and 37^3 of the estimated fammalue of these two combined crops ior the entire United States. While there has been a relatively- small increase in 1934 over 1910 in the estimated farm value of these two crops combined, it is of paramount importance to re- cord the change in relative position of each of these two crops during the period covered. This is shown in the following table: TA3LE VI COTTON AKD TOBACCO CC: EPA33D ' " 1934""' (*) Est. Farm Value Per Cent Zst. Farm Value Per cent Cotton $255,074,804 90.65 $152,580,000 48.12 Tobacco 27,360,000 9.35 $292,434,804 100.0 164,503,054 $317,083,054 Together 100.0 Tobacco, constituting less than 10$ of the total estimated frrm value in 1910, accounts for more than one-half of the total estimated farm value in 1934. If the relative trends of these two crops continue, the economic agricultural prosperity of this section is evidently to become more and more dependent on its tobrcco production. This is particularly true of Forth end South Carolina and Georgia, both Virginia and Florida having greater agricultural diversification. ' While it is impossible to estimate with any degree of accuracy the amount of Bright Flue-Cured tobacco that will be required for domestic consumption during the next few years, the steady increase in cigarette consumption by the American public warrantl the conslusion that there will be a slowly increasing demand for] this type by American manufacturers, unless there should be cn unforseen change to blends using a smaller proportion of Flue- Cured Lea?. However, the percentage of tobacco exported is so large that the economic agricultural prosperity of this section- is dependent upon a continuation of world markets. This subject, which is of major importance, is discussed in Chapter IV. The industrial prosperity of all of these five states is depen- dent to a considerable extent on the products made from these two agricultural commodities. North Carolina leads in tobacco manufacturing as in tobacco production, and also has exceedingly large textile manufacturing interests. It does not appear probable that these states will materially increase their present percentage of manufactured tobacco pro- ducts. Any considerable additional contribution to the economi prosperity of the South Atlantic Sta.tes on the part of the to- bacco manufacturing industry is largely limited, therefore, to an increase in the, levels of leaf* wrices end of wawes. (*) Id 10S91 em -125- CHAPTER IV FOREIGN TRADE IN LEAF TOBACCO PART 1 - THE IMPORTANCE OF TOBACCO AS All EXPORT COMMODITY AND THE GROWTH OF FOREIGN COMPETITION Leaf tobacco enters world trade for two reasons - first, to supply the needs of countries that cannot produce it - and second - to supple- ment or augment local production. A — THE IMPORTANCE OF TYPES Tobacco is a commodity made up of a number of different types, each one of which has separate and distinct uses. Although a limited degree of substitution of one type for another is possible, the differences in types are so great that anything approaching complete substitution is impossible because of individual smoking habits and preferences. To a lesser degree there is the same differential within each type. This is best exemplified in the case of the principal type, - Bright Flue Cured. The demand for this type of tobacco is world-wide in character, but certain grades or qualities have very specific markets. This complexity of types and qualities can be more easily under- stood by explaining that although tobacco is grown for domestic use in almost every country of importance with the exception of Great Britain, Denmark, Norway, and Holland, more than half of the tobacco that enters world trade comes from the United States. This country is, by far, the largest source of leaf tobacco, the next largest being the Netherlands East Indies whose exports averaged only 30f as much in the five-year period 1926-1930. (*) The United States also imports substantial amounts of Turkish leaf from Greece and Turkey for blending in cigarettes, and cigar leaf from Cuba, Puerto Rico, the Philippines and the East Indies. Turkish leaf as a type does not compete with any type produced in this country. B— THE CHANGE IN SMOKING TASTES As the general demand for tobacco has increased and as consuming habits have changed, and furthermore, as foreign production has been initiated or has expanded, just so has the United States foreign trade in leaf tobacco followed these changes. The United States Department of Commerce classifies tobacco exports into ten separate types. Each of these types is grown in separate and well defined areas with practically no over-lapping. Consequently as any change in consuming habits or in foreign production is reflected in the demand for a -particular type, so the economic effect is concentrated within the special area vrtiere that particular type is grown. Thus, the sharp decline in exports of the Dark Fired types has adversely affected (*) Plantation Crops. Empire Marketing Board, London, November, 1932 10691 -126- certain tobacco growing sections of Virginia, Kentucky and Tennessee; while the increase in exports of Bright Flue Cured, due to the immense growth in cigarette smoking, has been of great benefit to the South Atlantic States. Analyzing changes in recent years by comparing the five-year period from 1927-31 inclusive with the three-year period 1932-34, annual exports of all tobacco in the first period averaged 553, 158, 000 lbs. , while for the latter period they were 430. 320. 000 lbs. , or an average annual loss of 122, 838, 000 lbs. , When broken down by principal export types the following average re- sults are obtained: TABLE I (*) EXPORTS IN POUNDS Increase or Decrease Type Av. 1927-31 Av. 1932-34 Amount Percent Bright Flue Cured 386,821,000 286,412,000 -100,409,000 -25.96 Dark Fired Types 108,623,000 86,375,000 -22,248,000 -20.48 Maryland & Ohio 11,966,00') 8,019,000 -3,147,000 -26.30 Burley 9,653,000 13,112,000 -•-3,459,000 +35. 83 Green River 8,965,000 3,058,000 -5,907,000 -65.89 One Sucker 3,415,000 1,058,000 -2,357,000 -69.02 Black Fat, etc. 4, 904, 000 8,786,000 ••-3,882,000 +79 . 16 It is observable from the above figures that the exports of Bright Flue Cured and the Dark Fired types comprise the bulk of the export trade in leaf, with a decided preponderance of the former. Further, it is particularly noticeable that there has been a decrease in the exports of every type during the second period with two exceptions, Black Fat, and Burley types. C— THE DaRK TYPES The figures in Table I do not go back far enough to indicate that some years ago the relative position of the Bright Flue Cured and the Dark types was reversed. In 1912 the Dark types, consisting of Dark Fired Virginia and Dark Fired Kentucky - Tennessee, together with the Dark Air Cured types, One Sucker and Green River, and Black Fat, accord- ing to estimates made at the time, (**) comprised 65^ of the total ex- ports of American leaf, while Bright Flue Cured was only 26.7<# of the total. In volume this represents a decline in exports of the Dark types from approximately 230 million pounds in 1912 to only 67 million (*) 'Figures compiled from Department of Agriculture 1935 Year Book (**) Department of Agriculture V. P. I. Bulletin 244 10691 -127- dn 1935, or a net decline ox 163 million pounds. In 1935 Bright Flue Cured accounted for 73.07 per cent of total exports of leaf tobacco, which amounted to 396,300,308 pounds. (*) While it is generally understood that consumption of the dark types has not increased appreciably in Europe, production in Europe of substitute dark tobaccos increased from .211 million pounds in 1920 to 349 million in 1932, or a net increase of 138 million pounds. (**) Production of Green River type in Nyasaland is now of sizable pro- portions in comparison to foreign demand. The British companies, The Imperial Tobacco Company and Gallahers, Ltd., have evidently shifted their main source for this type from the United States to South Africa in order to take advantage of the preferential duty. While there will probably be a continued appreciable demand for dark tobaccos in the important European markets and in parts of Africa and the West Indies, there is comparatively little chance that former levels of exports to European markets can ever be attained for these types, particularly in the case of Italy. 1-The Lost Italian Market Table II shows exports of Lark Fired tobacco from this country to Italy from 1918 to 1935. TABLE II (***) DARK FIRED TOBACCO EXPORTS TO ITALY Calendar year Quantity in Pounds Value in Dollars 1918 50,357,819 7,356,959 1919 43,623,888 '. 8,375,622 1920 44,160,278 13,097,714 1921 50,589,889 11,267,083 1922 37,961,398 8,072,658 1923 34,316,420 8,390,196 1924 16,893,207 3,893,207 1925 11,263,481 2,877,197 1926 5, 935, 509 1 , 387 , 452 1927 3,262,039 648,014 1928 1,817,126 387,980 1929 3, 375, 137 938, 144 1930 3,880,689 832,234 1931 4,085,116 811,728 1932 2,223,636 329,510 1933 1, 660, 409 254, 064 1934 2, 141, 053 380, 861 1935 842,709 216,654 (*) Department of Commerce, Bureau of Foreign and Domestic Commerce Bulletin issued February 1936. (**) "Consumption and Production of Tobacco in Europe" by J. B. Hutson, Chief, Tobacco Section Agricultural Adjustment Administration MS. (***) Department of Commerce, Bureau of Foreign and Domestic Commerce, Tobacco Division. 10691 -128- The loss of the Italian market, which was once the most important foreign outlet for American Dark Fired tobacco, does not mean that there has "been any let-up in the demand for tobacco products made from this particular type of leaf; it siiaply means that the American leaf has "been replaced "by native leaf grown from American seed. This ability to sup- ply its own needs, coupled with intense nationalism and its economic conditions, has made Italy practically independent of the United States for its requirements of Dark Fired tobacco. In fact, not only has the market been lost to American exporters, but Italy, through its ability to produce large quantities of Dark Fired tobacco, has become a serious threat to American trade in this type of leaf in other world markets. The question involved is one of replacement of American leaf by native production, rather than by imports from other countries which must be accepted by Italian consumers. Since the tobacco industry in Italy is a state monopoly, there is little likelihood that the once im- portant Italian market for American Dark Fired tobacco will ever be re- stored to American exporters of leaf tobacco. A logical hope is that, owing to a growing preference on the part of many consumers for a milder type of tobacco, American Bright Flue Cured and Eurley types will find favor once again with the Italian smoking public, and thus off-set to some extent the loss of the Dark Fired business. D— MARYLAND TOBACCO Maryland tobacco comprises about two and one-half percent of Ameri- can production. (*) Neutral in aroma, its usefulness is found in its unusual burning quality. When it is blended with other types in ciga- rettes, the burn is materially improved. From early colonial days, when Virginia leaf was sold through English merchants exclusively, Maryland tobacco had a free competitive market in France, Holland, and Switzerland. Until a few years ago, France was the leading e report market for this type. In 1927 exports to France amounted to 8, 957, 000 lbs. , but in 1934 they had declined to only 162,000 lbs. (**) Other important export markets are Switzerland, the Netherlands, and Belgium. For a number of years there has been a larger relative stability in the production of Maryland tobacco than in any other American type. For the sixteen year period, 1919-1934, the average yearly production was 23,000,000 lbs. (***) In 1928, 51.01$ of the Maryland crop was exported; in 1932, 37.01$, and in 1934, 30.21$. For the same years the exports of Maryland tobacco represented, (*) U. S. Department of Agriculture. Year Book of Agriculture 1935. (**) These figures include not only Maryland, but also Ohio export tobacco. However, the amount of the latter is very small. Sources Tobacco Division, Bureau of Foreign and Domestic Commerce, Department of Commerce. (***) Department of Agriculture Year Book of Agriculture - 1935, page 456. 10691 J. -129- respectively, 1.88$, 2.47$, and 1,60$ of all tobacco exports. (*) While it is possible that the French market for Maryland tobacco is not lost to the extent that the Italian market is lost for Dark Fired tobacco, it is improbable that future exports of Maryland tobacco to France will ever attain former levels. The Maryland growers are partly to blame for the loss of the French market because of poor grading and careless and inferior packing (the loose leaf auction system does not prevail in Maryland). France is in a better position than other foreign customers to be independent of Mary- land tobacco, because of nearly comparable types that are obtainable in Algeria and Madagascar. However, if the growers will grade, pack and otherwise properly handle their product, at least a part of the French markets may be restored to them, other important foreign outlets saved and new outlets created. E— BURLEY TOBACCO Burley tobacco is grown extensively in Kentucky and Tennessee, and along the borders of adjacent states. It is second only to Flue Cured in volume of production. Increased demand for Burley in American blended cigarettes (Camels, Lucky Strikes, Chesterfields, etc. ) has not kept pace with the increase in its production. Very little Burley is exported. In recent years, the amount has never exceeded 6$. (** ) This type is used extensively for American smoking mixtures, and also for plug chewing tobacco. It has to a greater extent than any other type the ability to absorb a large quantity of sweetening and flavoring. Table III shows Burley production for the years 1931-1934, giving the percentage of its total to all the United States tobacco production, and also its percentage of total farm value, of all tobacco production. It will be noted that the average price per pound has almost doubled during this period, while at the same time the total supply of stocks on hand has also appreciably increased. (*) Department of Commerce, Bureau of Foreign and Domestic Commerce, Tobacco Division. (*'*) Department of Commerce, Bureau of Foreign and Domestic Commerce, Bulletin 521, issued July 2, 1935, page 8. 10691 -130- TaBLE III (*) BURLEY TOBACCO 1931 1932 1933 1934 Production in Ids. (000 omitted) 435,313 308,385 375,453 233,827 Percent of total tobacco production 27.49$ 30.15$ 27.47$ 22.35$ Percent of total farm value 29.2$ 35.8$ 22.17$ 17.7$ Ave. Price in cents per lb. 8.7^ 12.5^ 10.6^ 16.9^ Total supply- in lbs. (000 omitted) 956.9 1,008.2 1,119.7 1,120.8 In the period 1916-1920 inclusive, production of Burley averaged 281.7 million pounds. In 1929 production reached 342 million pounds; but decreased to 234 million pounds in 1934. The piling up of surplus stocks of this type has created a considerable problem in the tobacco industry. Because of decreased production under crop control, and in- creased consumption of the popular brands of cigarettes, all of which contain an appreciable quantity of Burley in their blends, production and demand are today in better relation than for the past five years. Although some efforts have been made to popularize Burley in foreign fields, the type in leaf form has never found marked favor outside the United States. More than for any other American type of leaf, with the exception of Bright Flue Cured, substantial foreign outlets are needed for Burley to care for the production over and above domestic requirements. Manu- factured American tobacco products, a majority of which excepting cigars, contain Burley in their blends (*^, are popular in many foreign lands, and would enjoy much larger export sales if it were not for excessively high import duties. Therefore, there is a distinct opportunity offered to American exporters for the development of foreign made tobacco prod- ucts containing a sizable percentage of Burley type. It is believed that much can be accomplished in this direction, and once a taste is ac- quired for this type, either in a blend or in an all Burley product, this tobacco may well become an important factor in the export of American leaf. Because of its mildness, it is particularly well suited to ciga- rette blends and to smoking mixtures. (*) The United States Department of Agriculture, Bureau of Agricultural Economics, Crop Reporting Board - "Tobacco by Types" - April 16,1934 (**) Some smoking mixtures and plug chewing tobaccos are almost entire- ly Burley, except for flavoring. 10691 -131* F— BRIGHT FLUE CURED TOBACCO 1. Domestic Production Bright Flue Cured tobacco is the : outstanding type grown in the United States. It has an even greater relative money value compared with its production. As an export commodity, it now dominates foreign tobacco trade. This is substantiated by the percentage figures given in Table IV, which show the relative position of Bright Flue Cured to the total to- bacco produced in the United States, and also the large percentage of the American tobacco exports of this type. TABLE IV (*) BRIGHT FLUE CURED TOBACCO 1931 1932 1933 1934 Production, lbs. 660,879,000 376,819,000 738,583,000 556,930,000 $ of Total Production 42.3$ 36.8$ 54.1$ 53.3$ Flue Cured Tobacco Exported, lbs. 388,252,000 255,311,000 297,941,000 305,948,000 $ Total Tobacco Exports 74$ 62$ 68$ 69$ Av. Farm Price per lb. 8.4<£ 11.5^ 15.3^ 27.3^ $ Total Farm Value 43.5$ 40.2$ 63. $ 68 $ As indicated in the discussion of Dark types, the present dominance of Flue Cured tobacco is of comparatively recent origin. The growth of this type reflects the sharp world-wide increase in per capita tobacco consumption following the World War when smoking became general with women, and also the decline in the use of cigars, smoking tobacco, and chewing tobacco in favor of cigarettes. Declining export figures show the increased foreign production of the Flue Cured type which has now reached substantial volume, notably in Canada, British India, British Africa, and China. Also reflected in the United States world trade in this type are various foreign policies regarding duties, tariffs, trade barriers, and government monopolies. Beyond all these influences, however, an even force is observed in the financial and commercial dominance of the to- bacco industry in certain countries where the industry is not state con- trolled, by two great foreign inter-related companies, the Imperial To- bacco Company of Great Britain and Ireland, Ltd., and the British Ameri- can Tobacco Company, Ltd. (*) Figures compiled from 1934 Year Book, Department of Agriculture. 10691 y -132- 2. Foreign F reduction Foreign production of the Flue Cured types is confined almost en- tirely to the British Empire and China. Geographical distribution of British Empire production is found in Canada, South Africa, and India. While no accurate or adequate figures are available covering the pro- duction of this type in India/ there are, however, records of production in South Africa and Canada for the past ten ysars. TABLE V (*) FLUE CURED PRODUCTION III AFRICA (000 omitted) YEAR UNION OF SOUTH AFRICA SOUTH RHODESIA 1927-8 20, 579 24,263 1928-9 12,157 6,060 1929-30 11,962 4,887 1930-1 14,799 7,234 1931-2 20, 700 12,687 1932-3 9,265 12, 927 1933-4 13, 725 23,737 (*) Department of Agriculture, Technical Bulletin 466. (**) Report of Commercial Attache at Ottawa, Department of Commerce, February 26, 1935. (***) Bureau of Agricultural Economics, U. S. Department of Agriculture - Tobacco: Production in specified countries, 1933-34. Issued 10-15-35. 10691 The South Rhodesian product is superior to that grown in the Union of South Africa. However, because of its distinctive flavor, which tends to limit its satisfactory blending with other tobaccos, it is much less desirable than the United States product. Nevertheless, its use is being exploited principally within the Empire, and may find wider ac- ceptance. Canadian production of Flue Cured has increased to five times its volume in 1924, - at which time it was 5,479,000 pounds. The peak was in 1932 when 27,941,000 pounds were grown. The crop in 1934 decreased to 22,000,000 lbs. (**) The quality of Canadian Flue Cured and Burley loaf is more nearly equal to that raised in the United States, than that grown in any other country, and hence offers greater competition in quality of leaf than other foreign sources. India offers greater potential competition than, other known Empire sources. Its tobacco production in 1933-1934 was approximately equal to the total United States production. (*** ) -133- In China, production of Flue Cured tobacco began in 1913 when the British- American Tobacco Company sent there a number of American experts to introduce its cultivation, and to train natives in the proper method of its curing. It soon developed that periodic importation of American seed was essential for quality. Chinese production has increased rapidly, and has now approached the estimated Chinese domestic requirements of 200 million pounds. In 1934 enough was planted to yield this amount, but unfavorable weather reduced the yield to 155 million pounds. ('*) 3. Summary Irrespective of type of quality, the duty on American leaf going into England is approximately $2.31 per pound. Tobacco imported from Empire countries carries a tariff duty of 50^ per pound less than that on tobacco from the United States. Great Britain is the best customer of the United States for Flue Cured tobacco. The type of cigarette popular in England requires a large production of American grown Iright Elue Cured on account of its quality and color. While it is impossible to determine to what extent substitutions of Empire grown leaf can be safely made, without materially changing the taste desired in the English market, it is probable that Great Britain" will continue to buy Bright Elue Cured tobacco from the United States in large quantities. Due, in part, to readjustment in exchange rates between the two countries, exports from the United States to Great Britain in 1933 and 1934 averaged 170 million pounds, larger than for any year since 1923, except the years of 1929 and 1930. 1935 exports to Great Britain totaled 209 million pounds, a larger volume than has ever been exported in any one year since export statistics have been broken down by types (1923). (*"$ This continued export to Great Britain is direct proof of the superior quality of American Bright Flue Cured. China has been and still is the second largest actual and potential customer for American Bright Elue Cured tobacco. However, American ex- porters are definitely threatened with the loss of a large part of this important market because of a native grown type of Bright Elue Cured to- bacco of sufficient volume to meet a large part of total requirements. The quality of this Chinese tobacco. is inferior -to that of the American grown. However, it is suitable for cigarettes which are acceptable to the masses. The well-to-do Chinese and the foreigners who reside in China will probably continue to demand cigarettes that "are imported or Chinese made from American tobacco. While the United Kingdom imports the finer grades of American Flue Cured leaf, China imports the lower grades. (*) Report of Commercial Attache, Shanghai, Bureau of Foreign and Domestic Commerce, United States Department of, Commerce. (**) United States Department of Commerce, Bureau of Foreign ard Domestic Commerce, Tobacco Section. 10691 -134- Because of low consumer purchasing power, and substantial supplies of native leaf which can he bought at prices lower than those of com- parable American leaf, the price of American leaf is an important fac- tor. As export of leaf to China is primarily to supplement the native supply, quality is not as important as quantity. In 1928, Flue Cured exports to China were 160 million pounds, rep- resenting 36.7$ of total United States exports of this type. Since that date, except for the year 1931, there has boen a steady yearly decrease in exports of Flue Cured to China. In 1934 American Flue Cured exported to China totaled 53 million pounds, representing 17.5$ of total exports of this type. In 1935 China took only 16 million pounds of a total of 290 million, or 5.5$ of American exports of this type. (*) The situation which is now developing in China is parallel in many respects to that which has taken nlace within the last "few years in the Dark Fired tobacco trade with Italy. A discriminatory excise has raised the price of cigarettes made from American leaf to a point almost prohibitive except as a luxury article for the well-to-do. But still more important, the illicit man- ufacture of hand made cigarettes evading the excise has spread to as- tounding proportions, estimated to be at least one-fourth the total production. These cigarettes contain no American leaf. Superimposed on these relatively simple and definitive factors is the much more general and aggravating condition of financial and indus- trial collapse resulting from the recent Chinese depression. Assuming no change in the grades of this type required for domestic consumption, the loss of Chinese business, unless elsewhere replaced, must of necessity reduce the American farmers' return on the lower grades of American Flue Cured. In 1935 there were but six countries taking more than 5 million pound, each of Bright Flue Cured. In addi- tion to the United Kingdom and China, they are Australia, Japan, Germany and Canada, in the order of their importance. Taken all in all, the various reasons given for the sharp decrease in exports of this type to China are as follows: Increased native pro- duction; relatively high prices for American Flue Cured leaf suitable for China; the Silver Purchase Act; illicit cigarette manufacturing in China; . and a strong feeling of Chinese nationalizm. Over a period of time, in- creased Chinese production and high prices for American leaf will apparently have more weight than the other reasons named. The spread of cigarette smoking in China has been rapid. It is possible that improvement in economic conditions will increase the per- centage of consumption of cigarettes containing American Flue Cured tobacco provided its price is not too far above the price of native leaf. (*) United States Department of Commerce, Bureau of Foreign and Domestic Commerce, Tobacco Division. 10691 -xoo— PAKE II. - THE BELApLOij 0. THA2E JUE2IESS TO MIERI GAU EXPORT TRADE A- GOVERNMENT MONOPOLIE S Anotiie: general influence on United States production and export of tobacco, which is clearly reflected in the figures for Bright Elue Cured, is a combination of various national pressures. These pressures mar be the result of internal needs for additional revenues, and express themselves in the form of monopolies. At present, thir- teen distinct European countries, two African colonies, two minor countries in South America, and Japan, operate their tobacco busi- ness as a government monopoly. Although some of these countries are not natural markets for American tobacco, because of national pre- ferences for Turkish or cigar leaf types, yet the power which monopoly control implies is not conducive to the uninterrupted flow of tobacco from this country. The manufacture of different grades of tobacco products in monopoly countries affords a degree of choice to the smoker, but the existence of internal pressure for greater revenues without the stimulus of free competition tends to reduce quality and increase profits. Such bar- gaining power in the hands of a government agency can and does har- monize national desires for exportation of surplus commodities in direct exchange for the tobacco surpluses of other countries, thus avoiding loss of gold in making international settlements. In this respect this country is hampered oy its own good fortune, because there are few commodities for which there is a vital need which in turn are surpluses in those countries offering a substantial market for American tobacco. Likewise in respect to countries which supply coffee, rubber, tin, sisal, and cocoa, the need of the United States for their products so far surpasses the needs of those countries for American tobacco, that the united States has comparatively little bar- gaining power to force the exports of leaf, except where there are alternative sources for those commodities. Among other trade barriers resulting in diminishing exports of American leaf, mention must be made of the marked effect of the high tariff wall erected by the United States against the free flow of commodities from foreign countries. This policy has distinctly en- couraged other countries to impose further restrictions against the use of American-grown tobacco. B. PREFERENTIAL DUTIES An^ important foreign government policy, affecting our foreign trade in leaf tobacco is the British Preferential Duty on Empire grown to- bacco. This import duty first came into effect in 1919, and has been raised from time to time. A preferential of fifty cents per pound was established July 1, 1925, an increase from the former preferential of thirty-four cents. At present, tobacco entering the United Kingdom carries a duty of $1.81 a pound if grown within the Empire, while foreign tobacco must pay a duty of $2.31. This preferential advantage of a sum greater than the actual average cost per pound of United States leaf acts a? a decided impetus to production of Empire tobacco, 10691 -136- and directly affects our outlet for leaf in Empire markets. The British preferential duty has had a very interesting effect on establishing definite markets for specific qualities of Bright Flue Cured tobacco. It has tended to force into the United Kingdom the highest grades of Bright Flue Cared Tobacco because the actual price per pound of the best quality leaf is rarely as much as this preferential. When the duty plus the preferential is such a large sum, the difference in the warehouse price of various grades is so small that it is not worthwhile to take anything but the better grades. Of course, this cannot be said to be the only reason why the Imperial Tobacco Company, Ltd. . and other British companies have consistently bought the higher grades of American leaf, thereby put- ting millions of additional dollars into the hands of tobacco growers in the South Atlantic states, but it, nevertheless, has been a contributing factor. In Great Britain it is not permissible by law to add flavoring to cigarettes, nor has there developed as yet a taste for cigerettes made with a blend of Bright Flue Cured and Burley tobaccos similar to those which are popular in the United States. The demand is for a very mellow z obacco, light in color and in texture, and is so pronounced that the consumer in G-rea.t Britain will often examine the color of the tobacco in the cigarettes before purchasing them. It has been mainly due to this demand for light colored Flue Cured tobacco which has caused the cultivation of tobacco in the New Belt, or Eastern Carolina section, and the emphasis which has been placed on high color and thin texture. C. GOLD E1/J3ARG0S AxP QUOTA RESTR IC T IONS Other policies affecting export of American leaf have resulted from general financial distress and inability on the cart of many foreign buyers to make gold settlement payments. This condition has created a scarcity of American exchange in the hands of foreign buyers avail- able for the purchase of American goods, and has resulted in the establishment of quotas and exchange restrictions designed to compel the purchase by the United States of foreign goods before the creationj of credits for the purchase by foreigners of American products. As this has tended to narrow foreign trade to a bilateral basis, it has seriously impeded the free flow of American tobacco into foreign mar- kets. D. IMPORTANCE OF BRIT ISH COkPANIBS Overshadowing all these forces and influences on foreign trade in American leaf tobacco, and very accurately reflected in our trade in the Bright Flue Cured type, is the dominating power exerted "oy '■' two inter-related foreign corporations v/hich together handle almost half the volume of our exports. Soon after the formation of the tobacco trust in 1901 by the late James B. Duke, there arose very serious problems of price cutting and severe competition in world markets, particularly in the United 10691 -137- Kingdom. After a few years of industrial warfare, a truce was made. Out of the ensuing agreements there was formed the British-American Tobacco Company, Ltd. , to which was allocated all world territory outside of the United Kingdom and the United States with authority to use existing brands in those foreign markets. As originally organi7ed, ownership was held two-thirds by the American Tobacco Company (Trust) and one- third ~by the Imperial Tobacco Company of Great Britain and Ireland, Ltd. The dissolution suit (*) in 1911 scattered the American shares into the hands of individuals, but it is understood that the one- third ownership of British American is still held by the Imperial Tobacco Company. The significance of this corporate relationship is that just as the Imperial Tobacco Company dominates the tobacco "business in the United Kingdom, so the British-American Tobacco Company through its large number of subsidiaries, dominates the tobacco busines in the British Empire and in certain of the other free mar- kets of the world. The British-American Tobacco Company has been largely responsible for tne introduction of American tobacco into many parts of the world. Individual exporters of American leaf have followed in its wake in order to take advantage of the uemand created by the sale of its products, and sell to competing concerns. China is an out- standing example of this d evelopment . As the United States is the most important source of leaf tobacco, both the Imperial Tobacco Company and the British-American Tobacco Company have in this country extensive facilities for pur- chasing and handling their requirements. In order to maintain or increase their profits, and in order not to be entirely dependent upon one source of supply, each of these companies is under pressure to substitute Empire or native leaf to the extent that its customers will accept the product without complaint. The result is that both companies are active in the exploitation of native grown tobaccos to further their own financial interests, and be assured of a continuity of supply. Thus it is that almost one-half of the foreign trade of the United States in leaf tobacco is controlled by two- inter-related foreign corporations whose financial interests are enhanced by the degree of their freedom from the American source of supply. E . CONCLUSION It is unnecessary to do more than indicate the direct relation that United States tobacco exports bear to the industrial prosperity of other countries. The policies of the two major foreign tobacco corporations and their dominance in world trade are conditions that must be faced by American exporters of tobacco leaf. It must not be overlooked that both of these corporations a re buying, and will continue to buy, ( * ) See Chapter I, this study. 10691 -138- large quantities of American leaf. It is generally conceded that Bright Flue Cured tobacco grown out- side of the United States lacks the aronatic qualities character- istic of that grown in this country. It is impossible to determine as yet to what extent soil and climatic conditions are responsible for this difference in quality, or what improvements in foreign Flue Cured tobacco may develop from an increasing knowledge of its cultivation and curing. As evidenced in the United States by the change in consumer habit to the cigarette, and in consumer taste to the blended type of cigarette, there are distinct opportunities in world trade for the sale of mild tobaccos, such as Bright Flue Cured and Burley. This particular subject needs the joint cooperation of the Department of Agriculture, the Department of Commerce, and the exporters of leaf tobacco. A failure to restore the Chinese market or to replace it cannot but result in a surplus of Flue Cured stocks of the lower grades. Prob- lems of this character reflect the need of continued control of American production. On account of the continued replacement of native by American seed in most foreign countries producing the Flue Cured type, the sug- gestion has been made that an embargo be placed on exportation of tobacco seed. However, the seed is so small that it is highly im- probable that its exportation could be controlled by law. The Tobacco Association of the United States has never been con- spicuously active and until 1935 it had given little attention to analysis of foreign trade in leaf tobacco. As in so many other industries, prior to the world depression and without the limita- tions resulting therefrom, the business of exporting leaf t obacco was increasing in size and generally producing a profit satisfactory to the exporters. The many problems that exporters of American leaf face today require complete analj^sis and research; otherwise, the economic prosperity of those agricultural sections growing export types of leaf tobacco is seriously threatened. Some months ago, in cooperation with the Tobacco Division, Bureau of Foreign and Domestic Commerce, and a committee appointed by the Tobacco Association of the United States, the Tobacco Unit of the Industry Studies Section of the Rational Recovery Administration made statistical surveys of the tobacco industry in four South American countries. These surveys covered every phase of the industry insofar as information was available, and included imports of leaf and manufactured tobacco products, as well as production of leaf and tobacco products and consumption of tobacco products. When this work was completed in December 1935, the committee ap- pointed by the Toba,cco Association of the United States met in Washington, for the purpose of going over and analyzing these sur- veys. Conferences were later held by the Committee witn the 10691 " -139- Assistant Secretary of Commerce and the Secretary of State. All of the members of the Committee were active, leaf dealers with export connections. They were much interested in the trade agreements that have been and are being negotiated with certain foreign countries, and the consideration to be given the export of leaf tobacco. The committee considered that these surveys were indicative of con- siderable possibilities of export expansion, and at a later meeing of the Board of Governors of this Association, a resolution was passed requesting that the Tobacco Unit be asked to make similar sur- veys for a, large number of additional countries, inasmuch as informa- tion contained therein had not heretofore been compiled by any Governmental agency for reference use by the industry. The informa- tion contained- in these surveys could have been available to the trade hy its own effort. It is, therefore, definitely recommended that the tobacco industry continue the type of analysis contained in these surveys and carry on essential research work on a much broader scope. Elsewhere there has been discussed the limited scope of research on tobacco by the Bureau of Agricultural Economics of the Departmnnt of Agriculture., and the reason therefor. Sums allocated to the Tobacco Division of the Bureau of Eoreign and Domestic Commerce are equally inadequate, and do not permit the widest cooperation with, industry in the collection and di-semination of data essential to development of foreign trade in tobacco. An industry which contri- butes so large an amount to Government income should at least be compensated by liberal research facilities for the development of its trade. -0O0- 106S1 -140- CHAPTER V THE CIGAR MANUFACTURING INDUSTRY SIMiABY This industry lies suffered from a declining volume of production since 1920 and a decrease in per capita consumption since 1905. Over-capacity, with its destructive competition, has been increasingly apparent. Since the amount of tobacco manufactured into cigars and cigarettes combined has increased steadily during the period, it is apparent that the princi- pal cause of the declining demand for cigars has been a switch in con- sumer preference to the highly advertised cigarette. There has been a continuous increase in the relative proportion of cheaper grade cigars produced since 1918 at the expense of the better quality groups. In 1918 cigars retailing at five cents, or under, amounted to but 18 percent of the total production; ,in 1935, the proportion had risen to 87.5 per cent. It is estimated that this trend, coupled with the de- clining volume of production, has approximately cut the total dollar volume of cigar sales in half in the last fifteen years. Tne probable cause of thxs trend to low priced cigars has been an in- creasingly active competition first, among cigar manufacturers, and secondly, with cigarettes. Competition has forced a progressive improve- ment in the average quality of these cigars. This, in turn, was made possible by lower leaf tobacco prices and increased efficiency of mainu- facture due to the introduction of cigar-making machinery. A machine which manufactures leaf tobacco into a finished cigar comparable to the hand-made product was patented in 1917. The increasing use of this machine since has revolutionized the industry. It has caused displacement of older, skilled hand cigar-makers oy c smaller number of younger mach- ine operators. It has resulted in a further displacement from the industry of men whose places have been taken by women at lower wage rates. Machine use has established a standard of competition such that hand manufacturers can survive only by paying pitifully meager wages to their employees. Paralleling the oroblem of wages paid by hand-made cigar manufacturers, the wage rates in effect throughout the machine-made cigar industry provided but a bare subsistence for the workers. Because of its cost, the machine has been available only to the large manu- j facturer with adequate financial resources. Small companies have been forced to the wall, Since 1921, the number of plants in operation has been reduced by more than half, while production in plants of over 40,000,000 cigars annual capacity has more than tripled. It is estimated that about half of all cigars produced in 1933 in the United States were machine-made. Bo obstacle to prevent 99 per cent of all cigars from being made by machine is apparent. Indeed, economies inherent in the use of the machine would seem to make this step inevitable. Nearly complete mechanization of the industry would probably result in the 10691 -141- further displacement of 15,000 more wage earners, and a further elimination of small enterprises. The reduction in total employment since 1919 has "been spectacular. In that year, the Census reoorted 114,300 wage earners in the industry; this number 54,600 in 1933. About 45,000 of these workers were displaced, it is estimated, because of decreased volume of production and approximately 15,000 because of the introduction of machines. The combined forces developed from industry decline and mechanization have produced a distress from unemployment that started almost fifteen years ago. These forces will continue until the industry is completely mechanized. Economic pressure from lessening volume and lower profits is responsible for present wage levels in the manufacture of the 2 for 50 and the 5<£ cigars. The wage now paid to labor is indicative of lack of a sense of responsibility in the industry as a whole. The surprising variation in labor costs between the "2 for 5^" (Section.!), part 2) and higher priced grades (Table XIII) makes this question per- tinent — can a "2 for 5rf" cigar be made and labor receive a livirg wage? The grower of cigar leaf tobacco has suffered from progressively lowered prices- since 1919. In 1932, the total revenue to growers in most dis- tricts wj;s a small fraction of that in many previous years. The price decline was probably a reflex of the ebbing demand for cigars. A slight recovery was apparent in 1933 and 1934, presumably due to the operation of the Agricultural Adjustment Act. In the interest of the farmer, also, the right of the 2 for 5

-j the national Indus- trial Conference Board in the following table* TABLE XII Year Weekly and Hourly Earnings in the Cigar Industry Compared with Those in 24 Principal Manufacturing Industries 1921 - 1931 Average Earnings in the Cigar Industry a/ Weekly (Dollars) Hourly (Cents) Average Earnings in the 24 Other Manufacturing Industries b/ svi. weexiy (Dollars) Hourly (Cents)' 1921 15.73 1923 16.06 1229 15.37 1931 13.00 31.8 32.4 31.3 27.6 23.91 26.93 28.81 22.64 3.30 54.3 59.2 56.5 10691 1 -159- a/ Census of Manufactures - Weekly earnings' figures obtained "07 dividing reported annual payroll by number of workers and then by 52. Hourly earnings estimated by dividing weekly earnings by estimated average hours worked per week. b/ Compiled by national Industrial Conference Board. See "TJages in the United States, 1914-1930 and 1931"; Supplement to IM.C.3. , Service Letters, April, 1933. It will "be observed that weekly wages in the cigar in- dustry throughout the psriod were far below those paid in the other industries. Hourly earnings, also,, showed a decline from 1921 to 1931; the decline, however, was not as consistent as in the case of weekly wages. Hourly earnings were far "below those paid in the 24 other principal manufacturing industries cited above. (c) Wage Hates and Product. irnings by Occupation, Sex and Grade of The special survey made ~by the Census in 1933 at the re- quest of the national Recovery Administration showed 11,545 wage earners compensated on an hourly basis and 40,727 compensated on a piecework basis. This piecework group consisted primarily of cigar makers. Some 1,706 of these wage earners worked on a combination of hand and machine work, but there were 12,001 cigar makers. Some 1,706 of these wage earners worked on a com- bination of hand and machine work, but there nere 13,001 cigar makers engaged entirely in machine production and 25,940 in hand production. Da.ta on these workers are pre- sented in the following table. TABLE XIII Average Maximum and Minimum Rates of Earnings of Cigar Makers on Piece T7ork Basis July 1, 1933 Grade of Cigars and Kind of Factories LIEN Hate per IOC High Low 7.83 7.31 12.33 12.02 13.03 14.92 26.68 24.01 44.33 00.O0 Average Earnings Per TTeek ill.: Low Cla.ss A Hand Class B Hand Class C Hand Class D Hand Class T! Hand 14.13 16.78 22.11 25.58 11.85 15.25 16.92 SG-71 21.89 10591 Table XIII (Cont'd) WOLIEE Grr.de of Clears and 3ate per 1000 . Average Srrnin~s Per '."'eel: ICind of Factories high Low High Low Class A i.Iaciiiiie, Hand Class B L'achine Hand Class C L'achine Hand Class D Hand Class E Hand Source: Compiled from special survey made by Census of Llejiufactures in 1933 at request of the national Hecover _r Administration, rational Recovery Administration files: Study Laterials of Tobacco Stud" 7 Unit, Labor. Information on male machine workers has not been given since onl; r 23 were covered b] r the survey. There were 3,422 male hand workers, 13,518 female hand workers and 11,973 female machine workers. .85 .72 5.73 4.83 .63 .53 9.12 O. oO 1.54 ' 1.02 14.70 11.20 24.04 19.94 39.22 51.93 13.52 10.71 11.60 3.90 10.89 9.75 13.57 11.11 14.76 15.77 15.34 12.34 13.07 15.22 24.54 13.54 > The inconseo;uential amount of production of Classes "3 n M D M and "E"" cigars has already been mentioned, the com- bined output in these classes forming less than 2 percent of all production. The figures on Class "A" production, forming about 86 percent of the total in 1933, are the most significant. Class H C", with 12 percent of all pro- duction in 1933, is to be considered. Keeping in mind the predominance of Class "A" production, it is evident that, in general, the average earnings per week for machine workers were higher than those for hand workers. The average earnings of male workers exceeded those of females. Workers were better compensated accord- ing to the quality of the cigars, but here again the small amount of production of higher priced cigars must be kept in mind. How relatively low the earnings of these cigar makers are may be seen by comparing them with those of wage earners in manufacturing industries in general. According to the Bureau of Labor Statistics, the per capita weekly earnings in 39 manufacturing industries, including cigars, during the month of June 1933, a date comparable to those above, were $17.99. (*) (*) U. S. Bureau of Labor Statistics, "Trend of E mployment n , June 1955, pp. 7-3. 10591 -161- Comparison will sho r r that average weekly earnings in all important manufacturing industries as a group were higher than the average maximum weekly earnings of cigar makers* Earnings of other employee in the cigar industry as deve- loped in the special Census survey the following table. 1933 are given in TABLE XIV FJIYBER OF WAGE EABEEHS, AVERAGE MAXIMUM AilD MINIMUM RATES OE PAY AID AVEEAGE HOURS FORKED PEE WEEK OK TILES WORK BASIS, I IT THE U1TITED STATES, JULY 1933 ■•■ Occu- pation Packers Machine Hand Strippers Machine Hand Eumbe r of Wage E arners Hen Women 60 152 46 S 1,979 12 3,036 107 2,350 Average Hat es Per Hour (cen ts) Men Women Hi<2;h Low High Low 41.5 37 32 ' 28 47 41 32 27 20 33 27 31.5 27.5' 24 Average Hours per Week 41.6 40.0 37.5 36.0 Selectors 356 57 49 32 28 42.5 Miscellaneous Machine 120 574 Hand 1,217 1,022 47 49.5 29 30.5 24 24 45.0 42.5 Total time workers 2,077 9,459 39.4 Source: Compiled from special survey made by Census of Manufactures in 1933 -at the request of the National Recovery Administration, national Recovery Administration files: Stud;'- Materials of To- bacco Study Unit, Labors. The same differential as between the sexes is apparent here. The difference in wage rates between hand and mac- hine woi'kers is not so consistent, but it is probable that earnings for the latter group exceed those for the former since machine woi'kers average 2 to 3 hours per week more employment. The following table, compiled from figures in the report of Rossmore, Bobbins end Company (for description see this section, part 1-c) , illustrates the same trend toward better pay in machine production, as was apparent from the Census stud" - . 10691 -162- taele ::y AVERAGE JAGE PES HOUR AITD PER TSTEEE FOR VARIOUS TYPES 0? EMPLOYEES MB PERIODS 110)1 CATED T^es of Work Entire Year 1929 Entire Year 1932 Average Average Average Average wage per wage per wage per wage per hour week hour week ( cents) ( dollars ) ( cents) ( dollars) Three Months End- ed Jul--- 31. 1933 Average Average wage per wage per hour week ( cents) ( dollars) Hand Factories Cigar Makers Strippers Other Processors Factory workers not included above 31.4 15.37 21.2 8.59 25. 6 C.79 22.1 11.15 17.9 7.61 19.9 7.51 37.5 19.08 2 5 '.6 10.70 31.1 1 1 • 8 G S7.7 1C.83 SI..?. 13.27 34.1 12.88 Machine Factories: Cigar Makers Strippers Other Processors Factory workers not included above 29.9 15.09 25.4 10.16 27.2 11.34 19.7 10.19 18.4 7.59 18.4 7.79 37.6 19.19 31.9 13.21 35.5 15.03 47.9 24.34 41.3 17.30 43.5 13.24 Source: Report of Rossmore, Rabbins and Co., Inc., ilovember 3, 1933, in ' reestablishment of a Code of Fair Competition (see text above) . The exceptionally low wage rates in this industry may in part be traced to the constantly declining demand for cigars. While production in other manufacturing indus- tries from 1920 onward was increasing, cigar production dropped 40 percent. Freed by loss of markets, competi- tion between manufacturers became intense, and repeated cuts were made in wage rates. Coupled with decreasing hours of employment, these cuts seriously impaired the average cigar worker 1 s earnings. The substitution of women at lower wage rates for men has been a common phenomenon in manufacturing industries wher- ever machinery requiring little muscular exertion has been devised. Employment of women exerts- a constantly depress- ing effect on wage rates. (d) Earnings by States The following table gives data developed by the special Census survey of 1933 for wage rates by sex and type of production by states. ■ 10691 -163- b7Wt.\rm • j\ r -Il"ir- AID MIPIISJM WEEKLY EARNINGS OP ■■cia&a .'/obkssls or piece wohk BASIS III SPECIFIED STATES, JULY 1, 1333 liCii California Colorado Connecticut Plorida Georgia Illinois Indiana IoT7a Loui si ana Mai ne Maryland Massachusetts Michigan Minnesota Missouri Mew Jerse^r Mew York Ohio Penns3'"lvania West Virginia Wisconsin Other States United States Number of Male Makers of All Cigars 152 13 335 2,958 5 247 43 42' 53 42 35' 169 33 41 Gl 42 1,071 245 2, 333 197 154 130 Average Earnings per Week for Han&Haade Cigars (Pollers) Clas 8,422 Low 11.20 12.67 16.02 '9.65 5.08 11.80 13.81 11.50 11.65 15.33 0.73 15.94 15.61 14.21 13.29 13.30 14.13 9.47 7.79 14.93 15.22 13.30 11.85 s A 13.19 12.67 18.27 12.07 9.25 15.63 14.39 14.00 13.50 17.52 10.47 16.64 16.07 15.97 14.45 13.41 16.53 11.33 11.36 15.04 16.19 15.16 14.13 Class C Iott Ki*h 15.31 17.68 a/ a/ 19.04 21.58 11.87 15.16 19.91 20.92 22.50 26.40 16.38 18.83 13.25 16.29 14.59 19.74 14.79 10.95 20.52 21.96 21.28 21.85 19.29 25.73 14.25 23.47 17.81 20.45 17.40 21.49 16.93 19.09 11.57 13.56 20.04 20.75 17.91 21.79 16.92 19.66 10531 -164- TA3LF XVI (Continued) "oiz,r lumber of Aver a •?;e Earn ings Per TTeek (Dollar s) Female "To rkers CI ass A CI ass C of All i. achine Hand I.iachi ne Hand Cigars High Lor.' High Low High Low LOW Ei^h California 361 10.00 10.00 10.60 12.37 _ _ 15. CS 16.18 Florida 2, 360 9.97 12.57 3.67 11.19 a/ a/ 11.04 13.78 Georgia 119 - - 5.45 7.85 - a/ a/ Illinois 60 12.00 12.00 11.25 12.17 - - 13.13 21.49 Indiana 520 10.50 11.50 9.47 9.83 - - 10.02 14.43 Iowa 20 22.00 28.00 9.76 14.42 - - 17.00 17.00 Lord si ana 532 10.99 12.60 5.08 9.29 a/ a/ 12.61 15.49! Maryland 198 - ~ 11.37 12.10 - 12.50 18.5(3 Massachusetts 20 15.02 16.50 10.53 10.87 13.73 14.78 14.03 15. 281 Michigan • 1,703 10.08 14.32 9.79 13.10 - - 11.93 15.38* Minnesota 34 - - 10.50 11.57 - - a/ a/ Missouri 267 - - 7.30 10.07 - - a/ a/ Few Jersey 3,049 10.70 14.81 9.79 11.69 13.20 16.42 10.47 14.02 ITew York 1,023 12.53 15.49 12.30 15.82 15.49 16.56 13.30 17.19 Ohio 999 9.03 10.77 7.50 9.67 11.90 11.90 13.82 15.31 Pennsylvania 5,944 9.64 13.57 7.50 11.23 13.19 13.70 11.43 15.37 Uisconsin 53 - - 16.09 16.09 - - 19.06 19.83 Other States 1,191 11.93 13.27 10.45 11.40 14.00 14.65 10.50 11.90 United States 18,518 10.71 13.62 8.90 11.60 13.77 14.76 12.34 15.34 a/ Included in "Other States" to avoid disclosing the data for an individual estc hi i skment. Source: Compiled from special survey made ty Census of Manufactures in 1933 at the request of the National pLecovery Administration. National Recovery Administration files: Study Materials of Tohacco Study Unit, Labor. It v;ill be observed from the above table that lov; as wage payments seem for the country as a whole, they were even lower for some of the principal cigar producing states. Attention is directed to Florida and Pennsyl- vania in particular. 10691 4. Mechanization As mentioned "before in this study, a machine that would, satis- factorily perform the cigar making operation and deliver b. finished cigar comparable to the hand made product was patented in 1917. This machine has practically revolutionized the cigar industry. Its effects on employment, on costs of production, and on the number of manufacturing concerns in the industry have "been profound. : The Bureau of Labor Statistics in 1931 made a study of the effect of mechanization on the industry. (*) The Bureau obtained from the manufacturers of the machines estimates as to the number in use from 1917 to 1931. It was estimated that each machine would produce 750,000 cigars per .year using an average of 4-1/2 em- ploj^ees per machine. In combination with production data from the Bureau of Internal Revenue and employment data from the Cen- sus of Manufactures, it was possible to estimate machine pro- duction, number of machine workers, and the number of hand work- ers displaced. The following quoted letter furnished by the Bureau of Labor Statistics more fully explains the methodology. U. S. DEPARTLfSKT OF LABOR BUREAU OF LABOR STATISTICS Washington .. Wheeling, W. Va. , Jan. 23, 1936. Commissioner of Labor Statistics U. S. Dept. of Labor Washington, D. C. Dear Sir: I have your letter of Jan. 23rd relative to a request by Mr. Hills of the M.R.A. for information in connection with Table 1 of my cigar article contained in the December 1931 Monthly Labor Review. The following procedure wa,s used in arriving at the estimates as shown in this table. 1. To begin with I first obtained from the makers of the machine (The American Foundry & Machine Co., I". Y. City, ':'. Y.) the number of these machines on lease and in operation, for each of the years from 1917 to 1931, inclusive. 2. The average estimated production per machine was arrived at after securing actual yearly production from companies operating the mac- hines, through discussion with the manufacturers of the machines, through labor unions, and from the cigar manufacturers themselves. Due allowance was' mace for the seasonal character of the industry, variations in the experience of the operators, and loss of time due to breakdowns of the machine. (*) "Technological Changes in the Cigar Industry and Their Effects on Labor", Monthly Labor Review, December, 1931, pp. 11-17. 10591 -156- I Column II "Estimated number of machine employees required". These estimates were based on the average number of employees required per machine, and were arrived at by a comparison of the number of operators and maintenance employees required in conjunction with the number of machines operated by a company. Column III "Estimated number of hand workers required for same pro- duction." The estimated average yearly production of the hand made cigar maker was arrived at as the result of the checking of produc- tion records and days worked where available from company records. Also the securing of reliable estimates from old time hand workers, and officials of the Cigar ilakers Union. Here again it was neces- sary to make due allowances for seasonal unemployment, other time lost, quality of work demanded, and variations in types of cigars produced. I might add that this stud"- was made in 1931 at the request of I.ir. Ornburn, President of the Cigar Makers Union. I trust that this will give T -ou the desired information. Very truly yours, ( si, pied) James P. Corker - ' The Bureau of Labor Statistics found 3,833 machines in use in 1931. Poor's Industry Service estimated 4,800 in use in 1933. (*) In the tables following, da.ta are given from the Bureau of Labor Statistics study, brought through the year 1933 by the application of similar methods to the estimate of 4,600 machine) in use daring that year. Eor reasons which will be discussed in detail later, attention should be given principal!"/ to the trends apparent in these tables rather than to the magnitude of the effects shown. tab: t ii -"-; 711 DISPLACE! £NT OE W0EK3HS SIITCE 1919 THROUGH lECHAUIZATIOH ABB THROUGH OTHER CAUSES Year 1919 1921 1923 1925 1927 1929 1931 1933 Total Machine Wage Workers Earners 114,300 119,000 103,800 103,000 94, 600 84, 200 68,200 54, 600 1,100 2,400 3,800 5,700 10,900 13,700 17,500 20,700 £/ d/ Hand Wage Earners Porkers Displaced by Machines e/ tl 113,200 109,500 105,000 97,300 83,700 70,500 50,700 33,853 1,300 2,900 4, 600 7,000 13,400 16,800 21,400 23,300 Total Wage '/age Earners Earners ■olus Di solaced Employees Through Other Di splaced Causes Since 19] 9 115,600 _ 114, 300 300 113,400 2,200 110,000 5,600 108,000 7,600 101,000 14, 600 89,600 25,000 79,900 35,700 (*) Poor's Industry Service, Tobacco Industry, 1933, .0691 -167- r>l Census of Manufactures. i Prom estimated nu*ber of rapines in operation. See text above. 0/ lots! we«e earners minus machine workers. lj Obtained + destine the ^^^.J^^ of hand workers estimated to adve Deen i«^ number of machine made cigars. e, Total .a S e earners plus workers estimated to have been displaced b y machines. in IS 33. f/ Cumulative differences from preceding column. Source: 1919 to 1931_ ~ Monthly Labor Pevie, December 1931, ^ IZ^ 19 35 - calculated by °"f*£™*£*l 500 cigar machines in operation try Service, 1935, Tobacco Industry, ol h,oju cig 'jron the above table, it is evident *^\f ^^naT" I hanisation with consequent displacement of hand workers bSn persistent since introduction of the maenxne. Tt is- of interest to note that displacement due to causes other than mechanization has apparently been the more poten ^ or ■ - ln creating unemployment Two P^^in" ^production, placement su, ? es themsel e . ££%£ ^ r than that tae and increase in efficiency 9* ™* following table corn- to introduction of cigar macmnes. The flowing pares ^.^.^•^J'^^l^^rS the ^variables ^r S eeT" indi;ate n deSr::.se ^volume of production as the more important factor in displacement. TABLE aTIII ^ TnlT „ r „.™ nl? HAirn EMPLOYEES HECESSA2Y TO PRODUCE a at Tn+al' Percent Decrease since 1919 in Year Per Cent Decrease in total %* c ^er of Hand Employees Annual Production since ^^t^tace All Cigars b/ 1919 a/ ijCC ^ . ■ 99.3 98.1 95.2 93.4 87.4 77.5 69.1 a/ Computedfrom Annual Heports of Commissioner of Internal Revenue. b/ Prom preceding table. 10691 1921 95.1 1923 98.3 1925 91.4 1927 92.2 1929 S2.2 1931 75.6 1933 60.8 err -168- The following table compares total production from 1915 to 1953 with estimated machine production as adduced from the Bureau of Labor Statistics survejr. The same trend toward increasing mac- hine production is evident. TA3L2 XIX 3STIMA.3ED MaCI-HIE Ai~D IIA11D MADE CI GAB PRODUCTION 1919 - 1933 Total Number of Estimated Estimated Per Cent Machine Large Cigars Machine Hand Pro- Made to Total Produced Production duction Production (millions) a/ (millions)b/ (millions)^/ 1919 • ■ 7,072 182 5,390 2.6 1921 6,726 -101 5,525 5.0 1923 6,950 . 532 . 5,318 9.1 1925 6,463 957 5,505 14.8 1927 6*519 1,325 4,694 23.0 1929 6,519 2,291 4,225 35.1 1931 5,348 2,913 • 2,435 54.5 1933 4,300 5,450 850 80.2 a/ Annual Report of Commissioner of Internal Revenue. b/ 1919 to 1931 — Monthly Labor Review, December 1931, p. 13. 1933 - calculated by analogous methods from estimate of Poor's Industry- Service, Tobacco Industry, 1933, of 4,500 cigar machines In opera- tion that year. c/ Total production minus estimated machine production. It has been previously stated in this report that the special survey of the Census of Manufactures in 1933 disclosed only 12,001 machine piece work employees in the industry. The above study would seem to show 17,500 in 1931 and 20,700 in 1933. The Bureau of Labor Statistics estimates for machine produc- tivity (750,000 cigars per machine per year) end. hand cigar maker productivity (75,000 cigars per worker per jrear) were apparently carefully chosen. It is recognized that the Bureau of Labor Statistics estimates were ba,sed on an average of 4-1/2 employees per machine, while the Census figures would probably cover only the 4 machine operators, but this factor alone is insufficient to account for the discrepancy. The explanation would appear to lie with the estimates as to number of machines in operation. Statements were made by machine cigar manufacturers, in connec- tion with the promulgation of the Cigar Manufacturing Industry Code, that many machines were idle or were not operated to capacity. This fact would explain the difference between the calculated number of machine employees and the number disclosed by the Census. 10691 -169-* The 12,001 machine piece work, employees shown by the Census surve]/- weald indicate 3,000 machines in operation (4 operators per machine). Talcing the Bureau of Labor Statistics estimate of 750,000 cigars per machine per year, these 3,000 machines should have produced approximately 2,250 million cigars in 1935. Total production in 1953 as reported by the 3ureau of Internal Revenue was 4,300 million cigars. Subtraction indicates that 2,050 million cigars were hand made in 1933. A check on the validity of the above figures is afforded by dividing the estimated 2,050 million production of hand made cigars by the Bureau of Labor Statistics estimate of 75,000 cigars per" year as the productivity of the average cigar maker. This would tend to show 27,000 hand workers emploj^ed in 1935, a figure in excellent agreement with the 26,940 reported by the Census. Accepting 2,250 million cigars as the machine made production in 1933, 52.3 percent of all cigars were made on machines during that 3^ear. Comparison of the Poor* s Industry Service estimate of 4,500 machines installed in 1955 with the indicated number of 3,000 in operation, would seem to show that the machine branch of the industry wp.s operating at about 55 percent capacity. This figure is in agreement with the estimate of Rossnore, Robbins and Co. in their report of Hovember 3, 1933 (see ;oart 1-c of this section) that the machine manufacturers covered by their survey.'- were operating at 70 percent capacity. It should be pointed out that these figures do not invalidate the trends shown in Tables XVII, XVIII, and XIX, hat rather in- dicate that the magnitude of the effects shown wc.s inflated. Thus total displacement of emplo3 r ees by machines would be less, and that hy other caxises (e.g. decline in volume of production) would be more than given in Table XVII. Total machine produc- tion and percent of machine production to total would be less than shown in Table XIX. Cigar banding and wrapping machines have recently been intro- duced and placed in operation. It is difficult .to measure the displacement of labor by these machines because: 1. Cellophaning of cigars is a comparatively new opera- tion and is not done b: r hand. 2. Placing cigars in the box is done by the operator of the machine and is really" s. division of labor from packing by hand. Generally speaking, one operator of this combined machine will wrap, band, and pack three times the number of cigars formerly banded bv the hand o-pera„tor. (*) (*) Monthly Labor Review, December 1931, -oo» 14-15. 10591 -170- itv labor by the wicanssiinrr and banding machine is not included in the above treatment of the cigar making machine. ULie question arises as to what may be expected of mechanization in the future? A survey of the costs of production of five cent cigars Has made in 1933 by the Census of Manufactures at the request of the National Recovery Administration. Eleven manufacturers of mac- hine made, combination hand and machine made, and hand ma.de cigars v/ere covered. These eleven manufacturers produced about 24.4 percent of all cigars made in 1933. The results of this survey are given in Table 1 of Appendix V of this report. Inspection of this table discloses the startling fact that al- though tobacco costing $14.80 per 1,000 cigars was used for the machine-? made product and tobacco costing only $11.52 per 1,000 cigars was used for the hand— made product, the total cost per 1,000 of the machine-made product was $25.68 as compared to $25. 6S for the hand-made product. This advantage in both price and quality in favor of the machine-made product would seem to provide sufficient incentive for future mechanization. How far could mechanization proceed? At present only Cla.sses "D" and n S" cigars are exclusively hand— made, and these groups comprise less tlian one percent of the total annual production. There would seem to be nothing to prevent 99 percent machine made production. The effect such a step uould have is obvious. About 12,000 mac- hine workers would be required to displace the remaining 25,900 hand cigar makers* host of these displaced workers, particular! those in advanced age groups, would probably not prove adaptable as machine workers, hale cigar makers would probably be nearly completely eliminated from the industry. On the other side of the ledger, it is to be sta.ted that the coi sumer would probably benefit to the extent of a better cigar at a lower price, and that the required new machine workers rr ould probably earn more per individual than the displaced banc 1 workeri However, these are small considerations in the face of the dis- tress which would probably confront 14,000 or more displaced vs. earners. Mechanization in terms of its effects on production is discussec in Section D, part 3, of this chapter. Effect of the Code on Labor The Code of Ea.ir Competition for the Cigar Manufacturing Indus- try, approved by the President June 19, 1934, provided that hours for all workers be limited to 40 per week, except, among others, "productive employees during two peak sea.sons per -rec.r, 10591 -171- •.: provided that the number of weeks and the number of hours per week in each season shall "be determined by the Code Authority, subject to the approval of the Administrator 11 . (*) With regard to wage rates for productive employees, the Code provided: "Ijo productive employee engaged in the production of stogies or ho .id made cigars to retail at not more than two for five cents shall be paid less than twenty- seven cents (27{£) per hour and no machine cigar operator engaged in the production of cigars made to retail at not more than two for five cents shall be paid less than twenty-nine cents (29(0 per hour. "IJo cigar makers in the Hand hade Industry, except as provided in Section 5, shall be paid at a rate of less than thirty cents (30<5) per hour; excepting in the South in which no cigar maker in the Hand Made Industry shall be paid less than twenty-eight cents (28^) per hour; provided, however, that cigar makers en- gaged in the production of cigars other than Class A and 3 cigars shall be paid at a vete of not less than four cents (4<*) per hour in addition to the rate established above. n lTo machine operator except as provided in Section 5 shall be paid at a rate of less than thirt} r -four cents (34^) per hour excepting in the South, in which no machine cigar maker shall be paid less than thirty-two cents ( 32^) per hour." (**) Provision was made that up to 25 percent of the total number of hand workers and up to 10 percent of the total number of mac- hine workers might be classed as "slow workers". Such employees were exempted from the minimum wage rate provisions of the Code, provided they were paid the same piece work rates as other em- ployees of the same class. (***) Despite the relatively low wages established by the Code, em- ployment conditions were much disturbed following the approval of the Code. From available information, York Count;' - , Pennsyl- vania, seems to have been the most unsettled. As a result of this condition the Code Authority was requested to make a sur- vey of the situation. A report was submitted in Ausust, 1934. (****) This report showed that of 2,505 cigar rollers (*) Article III, Section 1 of the Code of Fair Competition for the Cigar Manufacturing Industry. (**) Article IV, Sections 5, S, and 7 of the Code of Pair Competition for the Cigar Manufacturing Industry. (***) Article IV, Section 9, Code of Pair Competition for the Ciger Manufacturing Industry. (****) Report of 0. R. Strackbein and K. L. Cox, August, 1934 — National Recovery Administration files: Cigar Manufacturing Industry, Code Authority. 10591 -172- employed in that area only 537 were able to earn the minimum permissible weekly wage at the piece rates in effect. York County was probably affected to such a degree because of concentration on the cheap 2 for 5 cents cigar in that area. The entire section of the industry producing this priced cigar was similarly affected. The Industrial Advisory Board of the 1IM summarized the situa- tion in a memorandum of October 19, 1934 as follows: "The situation in the industry has been very unsettled for over a year. Substitutions to the P.H.A. wage scale were provided for them, but this was unsatisfactory. At the time the Cigo.r Code was approved, June 19, 1934, the manufacturers of 2 for 5 cent cigars in the York County district of Pennsylvania closed their factories because the]- could not conform with the minimum wage rates the Code provided. Some plants reopened and en- ployed only the fastest workers, which resulted in a strike. A ■ specieJL exemption was granted these manufacturers as to rollers and bunch makers. A study was made of conditions; it was found that with the manufacturers pacing wages below the Code they were still unable to make a profit, and some were losing money. ''The Code provides that 25 percent of the workers in the hand division may be classified as slow workers and not receive the minimum hourly rate, provided they are paid the same piece rate as other employees of the some class. A higher rate of exemption may be asked by the manufacturer and con be granted by the Administrator. In the York County district the origi- nal Order extended this exemption for 30 days, but no solution could be reached, so it was extended to November 10, 1934, making 90 days. A resolution was drawn by the Code Authority in an attempt to correct the situation. A hearing was held but no agreement was reached. The average wage paid cigar rollers is $9.00 a week, minimum wage in the Code is $10. GO. Manufacturers are making no profit and, if a higher wage has to be paid, the] r cannot stay in business and make 2 for 5 cent cigars. Tobacco should be aged for S months but the process- ing tax is increasing the cost of raw materials and the base price of tobacco itself is higher and many improved machines used are decreasing employees. If the Code is enforced, over 8,000 will "be thrown out of work; if it is not enforced it will have a bad effect on the wages and hours provisions of the Code ' "It is felt there is no practical solution to the problem; there has been a decrease in consumption in the -past 10 years which, combined with the above mentioned features, is almost certain to eliminate the 2 for 5 cent cigar business. The order will effect a continuance of the tolerance for 90 days, and the 10S91 -173- 7:e search and Planning Division of the IT. 3. A. shall determine what shall be done when the Order expires." (*) 3ecau.se of these considerations, the laoor provisions of the Code relating to bunchers end rollers in this branch of the Industry were suspended throughout the effective life of the Code. Conditions in the cigar manufacturing industry were never stable during the Code period. There is little to indicate that the wage rates and earnings of labor in the industry were materially changed from those reported in 1933. (**) (*) Memorandum of Industrial Advisory Board, October 19, 1934. nation- al Recovery Administration file, Cigar Itanufacturing Industry, Acvisory 3oards. (**) See Administrative Orders 467-33; 4-67-40; 467-46; 457-43 in Codes of Pair Competition, as approved, respectively- Voltimes XIX, page 519; XX, page 447; XXI, page 603; XXII, page 530. 10591 -174- D KAJOR INDUSTRY PROBLEkS 1. Declining:: Volume of Production The following table gives the total annual production of large cigars for the period 1919 to 1935. The peak production of 1920 was the culmination of a long, steady climb upwards from the time when cigars were first manufactured for sale in the United States. Production for the decade preceding 1920 average uneventfully around 7,100 million cigars per year. Production for the period 1921 to 1929 just as un- eventfully varied between 6,400 and 6.900 million cigars per year. TABLE XX (* ) AI7.IUAL PRODUCTION OF LARGE CI OARS IS THE UNITED STATES, 1919-1935 Annual Production Annual Production of Large Cigars of Large Cigars Year — (millions) 7,072 Year 1928 (millions) 1919 6,373 1920 8,097 1929 6,519 1921 6,726 1930 5,094 1922 6,722 1931 5,348 1923 6,950 1932 4,383 1924 6,598 1933 4,300 1925 6,463 1934 4,526 1926 6,499 1935 4,764 1927 6,519 The change began in 1930. Prom 1929 to 1933 production dropped from 6,519 to 4,300 million cigars per year. A slight recovery was evident in 1934 and 1935. Per capita consumption figures are more significant (Table XXI ) (*') Source: Taxpaid withdrawals of large cigars as reported by the Bureau of Internal Revenue. 10691 -175- TA3LE SO (*") PER CAPITA CONSUMPTION 0? CIGARS . AT FIVE YEAR INTERVALS, 1880-1-930 . Year 1880 1885 1890 1895 1900 1905 1010 1915 1920 1925 1930 Con sumption per Cap ita of Ci gars 49. 9 58, 1 67. 1 58. 9 73. 1 80. 2 73. 8 66. 4 76. 56. 3 47. 8 It is apparent that consumption per capita reached its peak in 1905. Since then, • excepting a partial recovery in 1920 it has declined persis- tently. , Not the least important result of declining demand is its effect on competition. Each manufacturer strives desperately to get a large enough share of the shrinking market to enable him to keep his head above water. The individual producer feels that it is better for him to accept orders at cut prices than to have no orders at all. There is always the seldom- realized hope that "things will get better". As a result, the consumer is frequently able to buy goods at a price under that which he would willingly pay. The total return to man- ufacturers decreases disproportionately to the decrease in demand. Labor rates are depressed. That these conditions have obtained in the cigar manufacturing industry will be developed in succeeding sections of this report. For a comparison of production statistics of the cigar manufactur- ing industry to production statistics relating to the tobacco industry as a whole and to other branches of the industry for the period 1926 to 1934 inclusive, see Table I of Appendix I to this report. 2. Trend Toward Lower-Priced Cigars Of equal interest with declining production as a factor causing the cigar manufacturer trouble is the decisive trend of demand toward lower- priced cigars. In 1918, Class "A" cigars accounted for only 18 percent of -total production; Class "B" production accounted for 58 percent; Class n C n , for 24 percent; and Classes "B" and "E", combined, for less than one-half of one percent. From 1918 to 1925, production of all other classes increased at the expense of Class "3". However, from 1925 to (*) U. S. Bepartment of Agriculture Circular No. 249, "American Tobacco Types, Uses and Markets", by Charles E. Gage, Page 63. 10691 -176- 1935, production of all other classes has declined to the benefit of Class "A" production, until today Class "C" is the only one of the high- er price groups to account for a significant proportion of total produc- tion. Classes "B", "D" and "E" combined represent less than 2\ percent of all production. The following table is self-explanatory. TABLE XXII (*) PERCENT PRODUCT [OK op large CIGARS BY CLASSES 1921-1935 Year "a" II 3 M »C" «D« "E" 1921 30.2 . 27.8 39.2 2.7 0.1 1925 41.6 17.6 38.7 2.0 0.1 1927 48.5 11.5 37.9 2.1 0.1 1929 54.9 8.8 34.2 2.0 0.1 1931 69.7 3.2 25.5 1.5 0.1 1932 78.6 1.2 18.8 1.3 0.1 1933 84.9 0.7 13.2 1.1 0.1 1934 15.4 1.3 12.3 0.9 0.1 1935 87.5 1.4 10.2 0.8 0.1 This trend becomes important when its effect on dollar volume of sales is considered. Assuming all Class "A" cigars sold at 5 cents each, Classes "B" , "C n , and "D" averaged sales prices of 7,12, and 18 cents apiece respect ively, and that all Class "E" cigars were sold at 20 cents apiece, it may be calculated (using data in Tables XX and XXIl) that sales returns for cigars drop-oed about 48 percent in the period 1921 to 1935. Perhaps equally important is the fact that profit margins 6n Class n A" cigars are much narrower than in the higher priced brackets. This factor must contribute to losses and general industrial uncertainty. A second trend has become apparent since 1933. A number of manufac turers of ten-cent cigars have reduced prices to two for fifteen cents. The results are apparent in an increase in production of Class "B n cigars at the expense of Class "C M (Table XXII ). Any attempt to assign causes for this general movement of demand to Class "A" cigars must be purely speculative. Low prices for leaf tobacco and the introduction of cigar making machinery have made possible the production of a low priced cigar of higher quality. Much of the loss in demand for cigars of Class "B n and "D" grade must be attributed to this factor. It is probable that cigarettes have had a further influence. A day' s supply of cigarettes for the average smoker costs about fifteen cents. Comparison of this with the costs of cigar smoking has undoubt- edly had the effect of making many a smoker "price-conscious", with a (*) Tax paid withdrawals of large cigars as reported by the Bureau of Internal Revenue. 10691 ■ft -177- consequent switch to lower priced "brands of cigars. The trend is of interest to the Government. Tax receipts from large cigars ('hough influenced by tax reductions in 1926) decreased from $51,077,000 in 1921 to $11,693,000 in 1935. ■ Reference to the different wages paid to workers producing the various grades of cigars has been made in a previous section of this chapter. (*) It is evident that the increased relative proportion of production of Class "A" cigars must have had a depressing influence on wage levels in the industry. The Code Authority for the Cigar Manufacturing Industry appointed a commission of two persons, one representing the Code Authority and one representing the Cigar Makers' International Union, to investigate costs of production of two for five cent cigars in York County^ Pennsylvania. The report covered eight representative factories in the district using hand labor only. (**) It was shown that the cost of the tobacco used varied from $2.50 to $3.91 per 1,000 cigars, but a uniform labor cost of 1 $4.20 per 1,000 for rolling and bunching (compositely) was in effect. The Bureau of Labor Statistics estimated that the average cigar maker produces approximately 75,000 cigars per year. (***) On the basis of a 50 work-week year and a 40-hour week, this would indicate a productivi- ty of about 37-1/2 cigars per worker per hour. Assuming that efficiency might be increased a third in these factories by use of the team-work system, the average output would be 50 cigars per worker per hour, or 2,000 per 40-hour week. This would give the average worker in such a plant a weekly wage of $8.40. A further comparison is invited. The study of costs of produc- tion of five-cent cigars made by the Census of Manufactures iB 1933 in- dicated that the average cost of the tobaccos used per 1,000 five-c«nnt cigars ranged from $11.52 for all-hand-made cigars to $14.80 for the machine-made product. This should be contrasted with the $2.50 to $3.91 range per 1,000 cigars of the two-for-five cent cigars mentioned above. Informed observers of the industry have declared, and the facts de- veloped above would seem to bear them out, that as presently manufactured a cigar cannot be made profitably to retail for under five cents if the farmer is to receive a fair price for his tobacco and the cigar worker is to be paid a fair wage. There is no evidence that the average cigar manufacturer is de- liberately exploiting his labor. Many manufacturers have evinced a true interest in their workers' problems, but there seems to be inevitably in every industry the cut-rate producer who will drive competition to its limit. The average manufacturer has Hobson' s choice, to conform or close his shop. (*) Section C, Part 3-c. (**). Report of O.R. Strackbein andK.L.Cox, August, 1934: National Re- covery Administration files, Cigar Manufacturing Industry, Code Authority. (***)Monthly Labor Review, December, 1931. 19961 -178- The end of increasing Class "A n production is in sight. Much fur- ther increase could take place only with the virtual elimination 1 of pro- duction of all higher priced cigars. A significant swing of public favor hack to the better quality groups seems unlikely. The trend over the last twenty years has been too decisive to make this seem probable. 3. Mechanization and Concentration of Production . ' The past and the probable future effects of mechanization on labor were discussed in this chapter (Section D, Part 4). It was pointed out that in 1933 about 52 percent of all cigars were machine-made, and that machinery was in place to -oroduce at least 25 percent more. Ho obstacle to further ^mechanization is apparent; indeed, price advantages inherent in the use of machinery are such that expansion seems inevitable. Mechanization has had as important an effect on production as it has had on labor. The use of cigar making machinery presupposes a considerable initial investment for equipment and royalties. An adequate factor location is required. Overhead costs are high. More efficiency can be provided if machines are installed in batteries; the skilled labor necessary to run ten machines costs but little more than the skilled labor cost to run one machine. Hand manufacture, on the other hand, requires little capi- tal; hand operations can be started in almost any place where floor space is available. All these factors combine to make the installation of machinery pos- sible only to the manufacturer with considerable capital at his command. The small hand manufacturer, forced to compete against superior efficien- cy, has seen his profits dwindle. In many cases he has been obliged to go out of business. Table XXIII illustrates this in graphic fashion. The number of companies in operation has been cut more than half during the period 1921-1934. Of more importance is the increasing pro- portion of output of the larger plants. In 1921 there were eleven factories producing more than 40,000,000 cigars each per year (Table I, this chapter). These factories represent- ed only 15.7 percent of all production, In 1934 the number of factories of this size had increased to 28, and they produced more tha n 54 percent of all cigars made during that year in the United States. The relative proportion of total output for every other factory group had decreased during the period. The position of the hand manufactufer is summarized in a report of the Labor Advisory Board after the final hearing on the proposed Code of Fair Competition for the cigar manufacturing industry. The Labor Board said: "A very important factor in the situation is the ability of the ma- chine manufacturers to force. the total mechanization of cigar pro- duction whenever the cost differential inclines sufficiently in their favor. Certain hand manufacturing centers, like York County, 10691 -179- to 05 Ci? o o Q » cu EH o EH O EM O SI el H 10691 co to 10 CM 10 CM to to to CO o co to r-t co CM CM o> CO CO CM to CM CM CO CM CM CO CM CO « CM to to to CO CO to CM CO CM to to CM CM CM to co CM CM o> CM CO IO CM CO i-l o CM CD CM co CM CM CO CM CO CO CO CO co o 3 ^ "* ^ o> to • • • • • to to CM CM to co o> a> •* • • • • to to «# CO CO Q to CO rH O to O to to • • • • • • to to CM CM en H CO rH t-l *# IO ^ to CD to to to to CM CO rH CO CO to ^ to co co 10 <# • • • • • • • • to •* to to to to to co O O O O O O O O O O ■ft • » O O ■t O « - «% ■t * O O O O O O 8 Q « t «t O % O O l-l m - ». •1 •1 CM «* CM 1 ■^ to rH 1 1 •t 1 1 1 1 O O 8 4* O O O O O O O O O O to O O O ft * * m m m •t O O u O O O O O © * O O O O O £ O O O •t « • •» • •» « O O p to rH CM to «* to rH CM 10 CM IO O CO l-i rH m •t CO to O to CM c- CO •* ■ «> CO to CM c- to CO a> C-. n * CO to CO CM to CO rH a> «» •» t- to CM to to CD to rH •> «% e- CD co O c- CO to c- n CO CD to CM 10 O c«- to «* ^ CO c- CM <^ •H t- to * •< O C- t~ t- •* CM CM ^ «• •* O CO rH CO to c-- to rH •» •> rH d. 3| 8P •H •P •P at «H s u u © ^ © P- d m Ph O © © u >5 Q at rt g w © •H «H 3 © >i a •H © ©• if -P -H O -d 3 i © ■8 § 3 rH 4 ■p &H t- rH to CD CD IO tO to CO to to CM CO tO tO o CM CO to CM -P •H t h0- o •» © rH EH tO o * to u en © rH ^ rH © CM O O) J rH P © O u ? o co -180- Pennsylvania, and other isolated producers with an established local trade, might survive f or a time, "but the threat to the hand industry is a very real one. Meanwhile, the hand industry in general is able to continue . . . (only) ... by keeping wages at a level below any reasonable living standards." (*; The Code Authority of the cigar manufacturing industry submitted a list of the 50 largest cigar manufacturers (**) known to that body. This Study was able to secure production statistics on 49 of these corpora- tions, divided into two groups as follows: corporations on which compar- able financial information was available and corporations on which pro- duction information alone was obtainable. A special group of four was selected as representative of the position of the largest corporations in the cigar manufacturing industry. A group of less than 30 companies, including the four largest con- cerns manufactured 43.1 percent of all cigars in 1926, and 53.6 percent in 1934. The group of four companies made 2.5 percent of all cigars in 1926 and 31.0 percent in 1934. The rest of the industry dropped from 44 percent in 1926 to 32 percent in 1934. Code authority records disclose the fact that production for all large corporations decreased 15.4 percent. Production for the remainder of the industry dropped 49.4 percent during the -period . This is signif- icant proof of the advantage of the large over the small producer. That the concentration of production in fewer, larger plants is due principally to mechanization can hardly be doubted. The old "tobacco trust" made determined efforts to capture the cigar markets from 1900 to 1910 but was never able to advance beyond 16 percent of the total (Sec- tion B of this chapter). Other efforts in other fields of tobacco manu- facture where machinery was available at the time were almost entirely successful. The trend toward concentration has become predominant only since the development of satisfactory cigar making machines. This seemingly inevitable trend toward concentration suggests a possible if unpleasant solution to many of the troubles that now beset the industry. The ultimate result of the tendency would seem to be concentration of practically all production in a few large, completely mechanized slants. The history of manufacturing industries controlled by a few large groups shows in general these extremes; ruthless, destructive price wars, or price leadership or agreement (net necessarily collusive). The former condition tends to burn itself out and give way to the lat- ter. The iron and steel industry and the cigarette industry are men- tioned as examples demonstrating marked price-stability. (*) National Recovery Administration files, Code Records Por Manu- facturing Industry, Volume 3, Part 1, p. 9. (**) National Recovery Administration files, Cigar Manufacturing Industry, Code Authority, letter of May 14, 1935. 10691 It -181- T&e o1«!B.y.nfthnfBC taring Industry may yet become stabilized along •"V « of the total sales. The decrea.se in total sales of tobacco products from 1929 to 1933 amounted to 25.3$, but the manufacturers' establishments suffered a decline in sales of only $65,000,000 of 8.3>o. (*) Sales by manufacturers usually include the mont desirable accounts with the best credit rating. The manufacturers' outlets did not suffer to the extent that the decline in the business of wholesalers indicated. Manufacturers actually increased the number of direct accounts at the expense of the wholesalers who could not meet the price competition. C. THE TOBACCO WHOLESALER The tobacco wholesaler performs extensive services to supply tobacco products to over 750,000 (**) retail outlets on a very narrow margin of profit. The widespread use of tobacco products requires the con- stant delivery of small amounts even to the humblest merchant with his sidewalk stand. The wholesaler services all but a few thousand of the total number of accounts which retail the bulk of all tobacco products. The small retailer is entirely dependent upon this whole- saler and his sub- .jobbers for his supply of tobacco products. ( *) Wholesale Distribution - Census of American Business, 1933. ( **) Census of Retail Distribution 1930 gives 1,543,000 as the number of retail outlets. It is estimated that more than half carry tobacco products. 10691 -187- D . .QQCT'ITIONS . IE THE RE TAIL TRADE The retail tdbacco trade has "been subject to the fundamental economic changes in distribution experienced over the last two decades. The nature of the competition involves, primarily, the economic conflict "between uni-product and multi-product distribution. For many years the survival of the independent retail dealer merchandising tobacco products exclusively has been doubtful. The trend of gross and net margins in tobacco chains has been downward for many years, in spite of the large increases in tobacco consumption concentrated in cigarettes. In 1926 and 1927, aggressive competition in retail selling developed through the entrance of the chain grocery into the cigarette selling field. This was a natural development as cigarettes began to be smoked by women. The chain grocers made the appeal of price on a quantity basis to the bargain instincts of women shoppers. The to- bacco chains and the independent tobacco retailers attempted to maintain a greater margin of profit and suffered a consequent loss of business to other outlets. In view of the growing competition and the narrowness of the profit margin, cigar stores retailing only tobacco products became less profitable; they added supplementary products and increased diversi- fication of merchandise such as razors, blades, candies, mints, clocks, watches, variety products and toilet goods. Cigar stores with fountains became sufficiently important to secure a separate classification in the Census. In a review by an important authority on the tobacco industry for the year 1930 the following statement appears: "The method of retail distribution of cigarettes still remains one of the industry's big problems. With the demand firmly established, there remains the question as to whether a product having such a universal appeal should be sold through specialized tobacco shops. The more logical develop- ment would seem to lie in making cigarettes available to the purchaser in the most convenient and perhaps in almost every convenient shop where everyday purchases are made. This tendency is appearing more pronounced, and there is every reason to believe a wholly satisfactory and profitable dis- tributing system will be evolved. " ( *) The Tobacco Industry , Chas. D. Barney & Co., 1930, page 22. 10691 -188- E . PRICE CONDITIONS in TEE tobacco trades pr ior to the code 1 . Vanisning Margins As indicated in Chapter 1, Section S of this report, tne tobac co industry emerged in January 1934 from one of the fiercest price wars in its history. The tobacco distributing trades probably suffered one of their worst years in 1933. Margins, already low, had been squeezed to the vanishing -point. It was not until the manufacturers raised their list prices from S5.i to $6.10 per thousand that retail prices became fairly well ei tablished. Retailers, when appearing in Washington at LIRA Code hearings urged (l) the necessity of -Drotection for the small merchant; (2) the benefits which they urged would accrue to labor through the maintenance of stabilized prices; and (3) the assertion that price orotection had been accorded to practically all other retail grades and should be granted to the tobacco trades. They petitioned the National Recovery Administration to approve Code provisions for resale price maintenance. 2. Retail Tobacco Chains in 1932 and 1933 The two large retail toba.cco chains felt the crushing effect of financial difficulties in 1932. Profit margins wilted in the intense competition among retail distributors. As a result, tne United Cigar Stores Company of America went into receiver- ship in August, 1932 and the Schulte Retail Stores Corporation faced an additional operating loss of more than ^2,000,000 in 1932 after a loss of 3300,000 in 1931. These tobacco chains continued to be harassed by severe price competition from the selling by other retailers of cigarettes and cigars as price leaders. United remained in bankruptcy, but the Schulte chain returned to a profitable basis of operation in 1933. F. PRICE REGULATIONS IN THE RETAIL TRADE The price regulation Code provisions (*) establishing minimum retail prices for cigarettes were made effective through Office Order 228 since the National Recovery Administration policy op- posed further price fixing provisions except in cases of emer- gencies. The Code proponents maintained that there was a con- stantly impending "emergency" within the industry and pointed back to the 1933 price war when the so-called "fifteen cent" brands of cigarettes were generally retailed almost at cost and were also sold below known costs by many chains and a few department stores. Minimum retail prices for the four -oooular brands and the ten cent brands were fixed by the emergency order (NRA Administra- tive Order "Jo. 466-4)and extended throughout the Code period or (*) Administrative Order Ho. 465-4, July 12, 1934, National Recovery Ad- ministration. 10691 ■l -189- until May 1, 1935, when a more permanent form of resale -orico maintenance in the form of loss limitation regulations cover- ing cigarettes, smoking tobacco, chewing tobacco and snuff were adopted. These regulations, because of the Schechter de- cision, were never put into operation. In Administrative Order No. 456-4 minimum retail prices of the most popular brands of small cigarettes were fixed at 13 cents per single pack, two packs for 25 cents and $1.20 per carton. In the case of the ten cent brands, minimum retail prices were _ fixed at 10 cents per pack, two packs for 19 cents, and 95 cents per carton. These prices were fixed in conformity with the generally prevailing prices through the regular retail tobac- co outlets. The small independent, as has been indicated, T>ays approxi- mately $1.11 per carton for the -nodular brands. The fixed re- tail price of 31.20 per carton allowed him a gross profit of 9 cents or aboui: 8fo on cost. The direct buyer receiving the ordinary trade discounts and paying ^1.076 per carton made a gross profit of 12.4 cents or about 11.5 per cent on cost. However, attention must be directed to the preferential dis- counts accruing to a number of these buyers. 1 . Effects of Price Regulations The Research and Planning Division, NRA, sought to measure the effects of the Code price regulation provisions on independent retailers, department stores and various chains through person- al interviews and through questionnaires sent out in collabora- tion with the Consumers Bureau of the National Emergency Coun- cil. The results were summarized in a special 'Study (*). (r ) Independent Retailers > " A detailed analysis of the results secured from question- naires which were filled out in the presence of enumerators connected with the Consumers Burea.u are included in Tables I to XII of the above mentioned report. In brief, only about 8£ of the independent retailers reported sales less than the minimum prices established under the price regu- lations in the Code. A few only admitted selling at a loss. The average weighted -nrice oer single pack sales of popular brand cigarettes before the Code regulation period was 13.5 cents against 13.5 cents after the regulations. In two -pack sales, the corresponding figures increased from 35.9 cents to 26.3 cents. The volume sold by indepen- dents increased 1.6$. In the case of the ten cent brands practically no price changes were required but the volume of sales of this type of cigarette showed an increase of 4 per cent. (*) Special Report. Effects of the Cigarette Price Regulations Under the Emergency Declaration for the Wholesale and Retail Tobacco Trades, December 18, 1934. National Recovery Administration Files. 10691 (b) Chain Cigar Stores The price reflation -orovisions of the Code generally re- quired no nrice changes in chain tohacco stores except a.: increase of one cent on cartons which had oeen retail- ing at $1.19. Tricing into consideration the normal sales decrease for chain cigar tales for the month during which the data' were secured, the chain cigar stores experienced an increase of 5.1 per cent in sales. The chain cigar stores probably secured the greatest "bene- fits from price regulations. They were relieved of the competition of lower orices from other outlets. Their gross -nrofit oi cigarettes was about 14 > on known replace- ment cost without consideration of any s-oecial discounts, free- deals, or allowances which they may have received from manufacturers of cigarettes. (*) (c) Chain .Drug Stores Reports from chain drug stores indicated that trices were relatively stabilized at the prices prevailing in chain tobacco stores, but thp.t this type of store was inclined to lower. prices to meet competition. They were in a bet- ter position to do so. Prices in some cases were as low as ten cents t>er pack for the standard brands. Some chains favored the use of cigarettes as "loss leaders". However, from all the data secured, the general opinion favored orice regulations. This appeared natural since tobacco products represented 14 per cent of their total sales in 19291 Stabilization insured them a gross profit of about 14 -oer cent on replacement cost, without taking into consideration any special discounts, free deals, or allowances. (d) Chain Grocery Stores Group I - Returns showing no significant price changes v-ere received from 14 grocery chains, representing approx- imately 9,800 outlets in 40 states. A comparison of the average volume of the 1934 August- Seotember sales to the May-June sales of 1934 showed a decrease of 8-b'o in volume of the popular brand cigarettes. However, a seasonal study of chain grocery stores showed a l^i oer cent decrease during the same period. It may reasonably be stated that cigarette sales increased about 5 per cent in this group which naturally favored price regulations since -profits probably equalled tnose made (*) Chain Stores, Allowances, etc., Tobacco Trade Federal Trade Com- mission to Senate Resolution No. 224, October 26, 1933. -191- by the aforementioned drug chains. Croup II - A group of 18,000 grocery outlets which were forced to make slight Increases in their prices showed a volume decrease of 18.3 per cent by comparison of May- June 1934 sales to August 1934 sales. However, 11 per cent of this decrease may he attributed to seasonal de- crease which probably resulted in a net decrease of 7.8 per cent in sales for the period reported. This group was noncommittal in respect to price regulations. (e) Department Stores Reports received from ten of the largest department stores in the New York City met ropoli tail area showed that six de- partment stores confined the sales of cigarettes to their restaurant departments. Cigarettes were carried merely as a convenience 'item and were sold at prices equal to or above the minimum established by the Code price regulations. However, four department stores which had sold cigarettes below prices prevailing in the regular tobacco outlets showed large revenue decreases. Examination of Table XVI of the Research and Planning report indicates that one de- partment store showed a volume decrease in excess of 75 per cent within two months after the Code minimum price regulations became effective. 2 . Price Spread Between Popular Brands and Ten Cent Brands The price spread between the popular brands and the ten cent brands under the minimum T ;>rice Code regulations resulted in a differential of three cents in the case of single pack sales ($.13 v.. $.10); six cents in sales of two packs ($.26 v. $.19) and twenty-five cents in carton sales ($1.20 v. $.95). Internal Revenue figures indicated that the average taxpaid withdrawals of the companies making ten cent brands for April, May, and June, 1934 equalled 15.3^ of total withdrawals for small cigarettes and that the August, September, and October, 1934 average showed an increase to 18.4$. While these figures are not conclusive, there is no doubt that the price differen- tials between these types of cigarettes during the period of Code regulation tended to imorove the position of the cheaper ten cent brands. 3. The Cigar Merchandising Plan The Cigar Merchandising Plan was included as Schedule 1 in the Codes for the Cigar Manufacturing Industry, the Wholesale Tobacco Trade, and the Retail Tobacco Trade. The provisions were stayed when the codes were approved but the stays were lifted by Administrative Orders on November 11, 1934. 10691 -192- The Cigar Merchandising Plan was an attempt by the industry to stop declining prices in the face of declining consumption and improved technology in production. The distri outing trades had "been recipients of larger and larger discounts "by the manu- facturers in attempts to increase sales. As a result, sales were made "below the intended resole prices which were stimu- lated on cigars due to Internal Revenue Bureau requirements for tax purposes . The Cigar Merchandising Plan was designed to correct these difficulties "by an elaborate system of. price fixing arrange- ments. The manufacturers filed the intended retail prices and discounts allowed with a price filing agency known as the National Tobacco Council, Inc. The wholesaler also filed his discounts. The schedules of maximum discounts were complicated due to attempts to distinguish between various types of dis- tributors such as jobbers, service jobbers, drop shipment pur- chasers, and chain store accounts. The retailer was forced to sell these cigars at the intended retail price set by the manufacturer subject, of course, to specified discounts for quantity purchases. (a) Operation of the Plan When consideration is given to the large variety of cigars, it is easily recognized that difficulties arose in connection with the technical operations of the plan and with its enforcement. Retail prices increased gen- erally and a sharp decline in consumption of cigars sel- ling for ten cents and upwards was immediately experienced Compliance was openly flouted. When the NRA codes be- came inoperative a tentative plan of revision was under consideration. G. RHjATIVB st ability of retail prices While department stores were the most serious price cutters, this competition was often magnified through the skillful direction of publicity to obtain tne full benefits of the "loss leader" prac- tice. No other consistent "loss-leader" outlets were reported, al though a few large chains reported that "in isolated instances" cigarettes were sold at losses. It must be remembered that most of the chain outlets had secured a sufficient volume of the retail cigarette trade to make it log- ical to convert this item to the profit side of the ledger. While in some instances prices were slightly below these established under the Code, attention must be directed to the varying costs of cigarettes for different classes of retailers. 10691 -193- H. PRICE REGULATIONS IN WHOLESALE TOBACCO TRADE Cigarette nrice regulations on the four popular "brands and the ten cent "brands were established by an emergency order under Office Memorandum No. 228 within a few days after the Code Was approved and extended throughout, the life of the Code. Minimum resale prices were established "by markups on the net price after deduction of the usual discounts- received from the manu- facturers. The wholesale markup of 3.1$ on the- manufacturer' s net price of $5.38 per thousand for the popular "brands established a price of $5.55 per thousand in sales to retailers .which was the gen- erally prevailing sales price charged by "accredited jobbers. In the case of the ten cent brands, the corresponding orices were $4.19 per thousand and ip4.32 per thousand. This 3.1/0 wholesale markup was divided in cases where both jobbers and sub jobbers v/ere involved, allowing the jobber 2.1 '■.. and the subjobber 1&. 1. Effects on the Sub -jobber - ' '. The industry continually questioned the right of the sub- jobber to recognition within the trade-. However, since the sub- jobber's only market for the purchase of cigarettes was the job- ber, it must be concluded that a sufficient number of jobbers must have used this means of distribution to justify the sub- jobber's economic existence. Complaints alleging injustice in allowing the sub-jobber only lfo of the wholesale markup caused the National Recovery Administration to make two adjvistments in the partition of the wholesale markup, ultimately allowing the sub-jobber 2.1/j and the jobber ifo which more nearly conformed with the former prac- tice of the trade. The results of the cigarette price regulations caused con- siderable hardships to the sub-joboers during practically the entire life of the Code. The final adjustments in his favor was made only a month before the Schecter decision. 2 . Compliance with Wholesale Price Regulati ons Considerable difficulty was experienced with compliance with the cigarette price regulation provisions in the Wholesale Tobacco Trade due to the existence of so-called "cash and carry" jobbers who catered to the sub-jobber tra.de and to retailers. In some cases large retailers were reclassified as sub-jobbers in an effort to circumvent the prices fixed for sales to the Retail Trade. (*) (*) Transcript of Hearing, Wholesale Tobacco Code. March 8, 1935. Nat- i onal Rec ov e ry Adrni ni st rat i on Ei 1 e s . 10691 -194- j- . SOLUTION 0? CODS PROBLEMS 1 - Possibili ty o f Con solidation The Codes for the Wholesale and Retail Tobacco Trades presented no problems that could not have been solved by Administrative order had the National Recovery Administration continued to function. Shortly before the Schechter decision, a plan was underway to create four master codes for all distribution func- tions, consolidating and simplifying the controls for all wholesale and retail trades. Under this plan, uniform labor and trade practice provisions for wholesale and retail tobacco would probably have solved all problems. 2 - Attempt to secure Voluntary Agreements Under the voluntary code program attempted by the revised NRA in June 19,^5, the Wholesale Tobacco Trade applied for the first voluntary agreement. The Federal Trade Commission approved a number of fair trade practice provisions. The NRA could not come to agreement on labor provisions; and the effort was aban- doned. 10691 -195- J - LaBOR IK TOBACCO DISTRIBUTION 1 • Hours and Wages in the Retail Tobacco Trade • The la.bor provisions in tne Code for the Retail Tobacco Trade were more favorable than in many other retail trades, includ- ing the general code for the retail trade. .With relation to hours of employment, the Code for Retail Tobacco ^rade was based largely upon store hours of the Retail Code (*) , class- ified according to groups A, B, and. C of selected store hours under the Retell Code, The employer could select either the 40, the 44, or the 48-hour week, thus. provided for his estab- lishment, remaining open up to 56 hours, 63 hours, and over 63 hours per week, respectively. The only deviation from • . these hours of employment found in the Code for the Retail Tobacco Trade was a further clarification designated as group D, whereunder retail tobacco establishments remaining open 84 hours or more per week had to provide a maximum work week of 56 hours ~oer emplo3 r ee. (**). With respect to minimum wages, the Retail Tobacco Trade ex- ceeded the general Code for the Retail Trade by $1.50 per week in each classification based on comparable store hours and population differentials. These higher minimum wages take on additional significance when it is remembered that keen competition exists within the drug trade which was sub- ject to .the lower wage provision of the general Retail Trade Code. / Furthermore, the general labor. prov isions applied only to retail tobacco establishments in towns and cities of 2500 and more population and were not applicable to thousands of other retail outlets whose principal trade was other than tobacco products. During the period of the Retail Code's formulation, it was estimated that a 10$ increase in payrolls of retail tobacco establishments would result. To what extent the increase was realized is largely .conjectural* Compliance with the hour and wages provisions of the Retail Tobacco Code caused very little difficulty. The report of the HRA Compliance Division on file in the Deputy Adminis- trator's File indicates that only fourteen complaints were on file as of March 30, 1935. 2. Hours and Wa.-r.es in the "■hole sale Tobacco Trade . Labor in the wholesale tobacco business, as in all whole- sale trades, is generally not a direct factor in competition. The labor supply is not limited nor hard to replace and its services are only indirectly related to the product offered for sale. The relationship between wages and prices in the (*) Code of Fair Competition lio. 60, Volume II, p. 32, Articles V and VI. (**) Retail Tobacco Trade, Code #466, Articles II, IV, p. 43 10691 -196- wholesaling business is r.o'; as close as in other Enterprises* Labor in the wholesale tobacco trade is as unorganized as practically all other wholesale trade labor. Computations* from the Census figures indicate that the number of full-time employees in 2,106 wholesale tobacco establish- ments decreased from 13,17? in 1929 to 10,815 in 1932 or 18$, the number of establishments (1,908 in 1933) showing only a slight decrease. This is of significance inasmuch as the sales reported for these ■'■ears h'j these outlets showed a decline from $858,329,000 to $526,405,000 or 33.7$. However, these figures do not include hundreds of o + her wholesale outlets distributing tobacco products. The Wholesale Trade Code Authority had a mailing list of approximately 6,000 names. ( a) Maladjustment -ith Other "Wholesale Trades . There was a maladjustment in wages as compared _, ith the Tfholesale Food and Grocery Code and the Thole sale Confectioners' Code. Minimum wages in the Wholesale Food and Grocery Code were $14.50 as corn-oared with $16 in the Wholesale Tobacco Trade and the maximum hours were 44 against 40 hours. The "hclesale Confectioners' Trade in- cluded provisions for minimum wages equal to the wholesale tobacco trade but the maximum hours were 56 instead of 40. These maladjustments are significant in view of the fact that the comparisons here shown, involve trades which do a considerable volume in wholesaling tobacco products. PART II - ADVERTISING FPJLCTICSS A. ADVERT I SI HG PRACTICES AS AFEEC . V DISTRIBUTION III T03ACC0. 1. Good- "Till and Competitive ..arfare . In considering the question: "Is Competition Getting Out of Hand", Hoy Dickinson, an editor of Printers' Ink inter- viewed John Benson, the president of the American Assoc- iation of Advertising Agencies (commonly known as the "4A ! s*) and quoted Ux» Benson in these words: "Unbridled and uncoordinated competition intensified under the stress of depression, may be the death of the trader. Attempts to get business at any cost and in any way have led to un- economic and unethical practices, which unless moderated, threaten to -out all business back to the dark ages in in- dustrial strife". (*) (*) Interview with John Benson, president of the 4A' s in article —Is Competition Getting Out of H and - Printers' Ink, (N.Y.)» issue of April 30, 1931. 10691 _1 G < - In October 1931, writing to Printers' Ink, George 7. Hill, president of the American Tobacco Company, saids " In the case of a compan7 such as the American Tobacco Company, maiufacturirig and exploiting an article of national and indeed " r orlc-""ide brand value, good-will is particularly import aa'ta In aoractical sense and wholly aside from the principles of accounting, the item of pod will on our bal- ance sheet is tremendously important to the management of this Compaq and (for) • ....sustained effort on sales.. • I believe with Roger Pabson t hat.. ... .henceforth, it will be the only thing of -ermanent value If I were asked what is the most valuable asset upon the balance sheet of the American Tobacco Company and tire most conservatively valued, I would unhesitatingly point to the item of good will". (*) This comment by Ux» Hill was in answer to an article dud- lished in Printers' Ink the week before in which Andrew W, Howe had compared good-will values of General Motors, the American Tobacco Company and the R. J. Reynolds Company, Mr. Howe had 'pointed out that General Motors (as of that date) carried the item.! of good-will on its balance sheet at $51,949,114.66; that other motor car makers carried their Tood-will as an item of $1; that the American Tobacco Com- pany "estimates the value of good-will which it has built up around Lucky Strike, Cremo, Dull Durham, etc., ''oj investing 1 Targe sums in advertising at $54,099,450.4^" and that the "millions of dollars that R. J. Reynolds has spent in adver- tising Camels, etc., have undoubtedly created a good-will that is worth many millions, yet this company places a bal- ance sheet valuation of $ 1 on its 'brands, trade_-names, good-will.'" Good-will "[apparently svjrvives some of its peculiar by- products. Eugene Porker, general advertising director of the International Magazine Company, indicated this in a speech to business and advertising groups in April of 1931. He said: "A few weeks ago, one of the execiitives of our company was talking to a prominent publisher about the power of advertising and' what it had done for American business. The publisher said: 'Look at the cigarette fellows, that they have done with advertising! Advertising can make the public believe that -our product is a good product and well worth the price asked. It cannot fix this belief and at the sane time make the public believe that all similar products are worthless." (**) * Letter on Good-Will by George ". Hill, Printers' Ink, (H.Y.) issue of October 29, 1951. ** Article - "Restrain Ycur Advertising or It will be Restrained for You." By: Eugene Forker, Printers' Ink (N.Y.), April 30, 1931. 10691 -198- This was in the year 1931. A two-year retail price war and advertising war among the cigarette manufacturers had ended by April 15, 1931. During the armistice, "before the Big Three and the smaller companies resumed the artillery fire of newspaper and magazine space, H. J. Moffet, vice presi- dent of United (chain tobacco wholesalers and retailers), told Roy Dickinson, an editor of -Printers' Ink, as quoted in. the April 15, 1931. issue: ,T I bellaeve that it will be a long time before there will be another price war of this kind. It is a much chastened industry.... Both chains lost money; many independents went broke; wholesalers lost money and so one of the silliest orice wars in history comes to an end." The struggle for dominance and twisted cleverness in adver- tising claims with the artillery salvos of price cuts had not been confined during this period to the tobacco companies alone. From 1926, there was evident a widespread breakdown of public confidence in advertising and in the business enter- prises behind the clamoring words. "Right now we are in the era of 1931 advertising," Frank Braucher, vice president of The Crcell Publishing Company, wrote in April of that year. "If 1931 advertising means what it appears to mean, it is highly competitive, high-explosive advertising. The kind of advertising which it seems to me, if carried to its logical conclusion, will destroy the effectiveness of advertising media. I It will destroy something that the advertiser needs. ...the be- lievability of advertising." (*) The conditions that for Mr. Braucher' s warnings became disastrously worse in 1932 and 1933. Four years later - in July 1935, S. Clay Williams, of the R. J. Reynolds Tobacco Company, filed a brief with the United States Senate Agriculture Committee, attacking feat- ures of the AAA Amendments 3ill then before the Senate. In his bried, lir. " T illiams pointed out that cigarette advertis- ing had multiplied sales and tobacco consumption more than a thousand percent during the last ^5 yesr s, and had brought increased r e turns to tobacco growers, to workers iniactories and to the Federal Government, besides giving the consumer more for his money than ever before. [Turning to the question of advertising, Mr* Tilliams made comments which derive additional significance from the heavy advertising expenditures of The Reynolds Company and other cigarette makers. He quoted Dr. Hordecai Fzekiel of the AAA, spe a king on the same program with- Secretary Wallace, as having told a group of processors: "I don't think any of us feel that tnere is much that could be saved to the farmer or consumer by cutting down the cost of processing. I don't be- believe, however, that the same can be said, to take one specific example, about advertising. * The Competitive Copy. Scourge. Article \)y Frank Braucher, vice president of The Crowell Publishing Company, Printers' Ink, May ?, 1931. 10691 -] 99- There certainly ccn "be,, a serious question whether the total amount sp^nt for advertising in the tobacco industry is in the interest either of the producer or the consumer of tobacco products. "Under whatever agreements you may discuss the ousines" of producing tobacco products, it seems to me I might conceivably r aise the question, are the funds that are sr>ent for advertising necessary? Is it competitive advertising? Does one company spend because the other company spend? Could a smaller amount be spend for advertising, could a larger amoitnt be returned to the producer, or a lower price set to the consumer which would enable a larger quantity of products to be moved into the consumer and so benefit the prodi^.cer?" Mr. Williams said in his brief: "Almost unbelievable as it may be, it seems that these, and other gentlemen high in the councils of the AAA have never realized what business men, newspaper publishers, magazine publishers, radio operators and others engaged in the various advertising fields and activities, know so well, aamely, that it is possible through advertising expenditures to increase or maintain consumption at such high rates as to put manufacturing on such volumes as will permit better wages for the worker, better prices for the producer of the raw material, and a lower, instead of a higher, price to the consumer. Suffice it to point to the record in the cigarette industry. "In 1911 — which was before advertising was used very ex- tensively in that industry — the total putput of cigar- ettes for consumption in this country was less than 10^- billion cigarettes. With the manufacturers entering upon a policy of heavy advertising shortly thereafter, the fig- ures on cigarette consumption for the ^ear 1930 reached 120 billions. — more than eleven times the output of 1911. "Meanwhile the .consumption of leaf tobacco in cigarettes had been stepped up from about 37-2- million pounds in 1911 to about 360 million pounds in 1930. Moreover the per pound return to the grower had been increased as had wages of workers in the factories, and despite an increase of $1.75 oer thousand in the Federal te.x rate, the consumer was getting more for his money than ever before." What was the total result of the enormous expenditures of money for advertising, special allowances, free deals; of the competitive price wars; and of the policies of the manufacturers as a vrhole? The question whether social < j - waste is present in these policies arises directly from the fact that once the Big Three had a 96.8 -percent control 10691 -200- of the cigarette market and in 1934 a wide gap has "been opened; that control had receded to 79,5 percent; Good will, "big space, the spending of more millions are the outstanding factors in the advertising story of the to- bacco indus try* Behind the scene of tob acco advertising stand important social and economic determinants in to- bacco distribution, the manufacturers' policies* So far. as statistics aro available in a field of business where the details of advertising expenditures are always peculiarly unavailable, this Chapter now turns': its inquiry to the factors making up advertising appropriations; the advertising costs of tobacco compared with costs for food* oil, motor and household products advertising; the extent of newspaper, magazine and radio' ad /erti sing over certain yes s for each of the groups; the trends and whims of the picturesque cigarette advertising copy which has- created something of a bizarre new literature in business. The social responsibility/- of the tobacco manufacturer is the screen updn which dance the shadows of his advertising appropriations. 2. .The Advertising Appropriation . Fnen it is reported, as in 1931, that in any one single I'ec.r .the four leading brands of cigarettes have spent approximately $25 t 000,000 for advertising, only a part of the story is told. The $25,030,000 figure is concerned with three items only in a requirement of some 41 different items of expenditure necessary for the efficient management of advertising departments as highly organized as those of the American Tobacco Company, The 3. J. Reynolds Toba.cco Company, Liggett & Myers Tobacco Company and others. In a series of six articles considering the keeping of records for an advertising department, Albert S. Haase, research counsel to the Association of national Advertisers, set down in Printers' Ink, July 18, 1935, the six (6) major groups entering into an advertising appropriation. These six groups follow the soundest practice in the ad- vertising profession and are the essential items of an advertising appropriation which is handled in part by the appointed advertising agency and in part by the advertising departments which are maintained 'oy the manufacturer in his own administrative offices. The backbone of an advertising appropriation intended for national circulation is made up of three classes of ex- penditures: The first, for magazine, the second, for news- papers; the third, for radio broadcasting. 10691 ._•"" i"! In cigarette advertising, it is custom for the manufac- turers to run casroaigne in metropolitan, small—town and rural newspapers on schedules calling for the use of from 200 to 2,000 newspapers. In the last few years, it has o een the custom to carry the radio broadcasting program over nation-wide networks, for intervals varying from daily announcements to elaborate programs once a week. Usually these cigarette campaigns reach intensity in a period of ten weeks in the newspapers, and the special copy appeal is carried over in the magazines for a -oeriod of perhaps four months without substantial change in theme. The radio broadcasting goes on from season to season and becomes a fixed nearly featiure of tobacco advertising, ( ?-) Items 11, 12 and 13 , The six groups of expenditures entering into an advertising appropriation are listed by Dr. Haase as follows: A, AKalFISTPJlTiVS EXPOSE I). TRADE CONTACTS B. 1, Salaries 2, Traveling Expenses 3, Rent 4, Heat, Light, Power 5, Telephone and Telegraph S, Office Equip, & Spl, 7, Postage & Express 8, Research, Service Fees 9, Association Dues 10, Miscellaneous CONSUMER CONTACTS 29. 30. 31. Business Papers House Organ Direct Hail Postage & Express Miscellaneous EXPORT 34. Space 55. Direct Ma.il 36. Miscellaneous 11. Magazine s 12. Newspapers 13. Radio Broadcasting 14. Direct Mail 15. Farm Papers 16. Car C a rds 17. Outdoor 18. Postage & Express 19. Miscellaneous C. DEALER HELPS "••' F. MECHANICAL 37, Artwork, Sketches 38, Photographs 39, Engraving 40, Miscellaneous G. MISCELLANEOUS 20. Store & Window Displays 21. Dealer Signs 22. Direct Mail 23. Stationery 24. Imprinting 25. Electros, Mats 25. House Organ 27. Postage & Express 28. Miscellaneous 10691 -202- Under the item of »G" (Miscellaneous) , in Dr. Haase's outline, it is becoming the custom in modern advertising departments, which are work- ing units as part of the Sales Department, to list special advertising allowances and the cost usually charged to the advertising department of such free goods as may he given in order to induce dealers to put in window and store displays* TThat part items 11, 12 and 13, in Dr. Haase's out- line, bear to the total advertising expenditures in the distribution of cigarettes and other tobacco "oroducts remains a closely cherished administrative secret in e ach of the mamif aoturers ' organizations. How much of the work is done by the advertising agencies employed, is also undisclosed but if the cigarette manufacturers follow usual practice, all of the items under "A" (Administrative Expense, • 1-10); all of the items under "C n (Dealer Helps) - exclusive of parts of items 20, 22 and 26; items 35 • and 36 under "E" (Export) are borne directly by the manufacturer. Items under "F" (Mechanical) are - in usual practice, divided. The art work and sketches for the photographs and engraving required for national advertising in the newspapers and mag- azines and for the larger or elaborate pieces of direct mail, are usually done the advertising agency employed, at cost, plus a sta.ndard commission of 15$, except where an agency may operate on a fixed com- mission based upon the net cost of this work. But all such art work and sketches and all such engrav- ing as may be required for sales promotion pur- poses through wholesalers or retailers incident to factory-produced direct mail, are direct charges against the factory or ma.nufacturer himself and are 'not always covered by an agency agreement. (b) The Nation's Bill for Advertising -. The cost of advertising for manufacturers of all classes throughout the United States has an average total of approximately $1,700,000,000 a year* This figure is based upon a study -made by the Association of 1'ational Advertisers, published in 1934. This study was under the direction of Albert E. Haase and made use apparently of the last available figures with respect to the value in all classification. 10691 The items in the advertising appropriations ana- lyzed fall into several classification. The first classification includes: magazines, national _ -203- nevrspaper advertising, national outdoor advertis- ing, national radio "broadcasting and national sec- tional and state farm journals. These are the media generally known as discount media, meaning * that they pay a generally uniform 15$ commission to the advertising agency as a salesman's com- pensation. The agencies are presumed also to "be the professional agent of the manufacturer using the space. The disccunt medis of this first classifi- cation, based uoon figures totalled for 1931 - 1932, accounted for $373,300,000 of the national advertising "bill. There is a second classification which includes "business papers, industrial publications, direct- ories and catalogs. Some of these publications give a commission to advertising agencies; others do not. Since the ordinary advertising agencies have no personal or selfish interest in placing space from, which they secure no income, it follows that the national advertising bill for these pub- lications runs to rather low levels. According to Dr. Eaase's figures, these media received $23,750,- 000 (in 1931) of national advertising. The third classification includes direct mail, window and counter displays, newspaper advertising (locally place;" ^oj wholesalers or retailers), local outdoor advertising, premium advertising, local radio broadcasting and local streetcar card advertising. The presumption here is that the cost is met, whether the work is ordered by the manufacturer himself or by an advertising agency » It is quite usual practice for the manufacturer to handle the items in this classification through his own advertising department, working in close cooperation with the sales department in the di- redtion of local or regional campaigns. When an advertising agency is entrusted with the work, several forms of compensation in the absence of media, commissions are added to the cost of tthe media. In Dr. Haase ! s sumuary of American advertising expenditures in this third classification, the following figures appear: Direct Mail $343,000,000 Window, Counter Displays 352,000,000 Local'. Newspapers (not comraissionable) 450,000,000 Premiums , 190,000,000 Local Radio 23,000,000 Street Car Cards 5,000,000 [These figures added to the other totals in com- missionable media in e ach of the three classifi- cations, jus^" enumerated, make a grand total of $1,700,000,000, as a fair sample of the nation's yearly advertising bill. ( C ) Is Tobacco's Share 50 to 60^? Items 11, 12 and 13 of Group 3 of Dr. Kaase»s outline of elements of advertising cost are roughs representative of 20$ of this nearly tv?o billion dollar total in the report of ' the Association of National Advertisers. Can an esti- mate be made for the tobacco industry? national circulation is the special requirement of the tobacco manufacturer; that being so, it would fol- low that tobacco expenditures for the same items would claim a much greater proportion that the national average of 20$. Let it be assumed, therefore (with the specific understanding that there are no disclosed statis- tics known to be available to tell whether the guess is near or far from the truth), that in the instance of tobacco promotion, the Haase items 11, 12 and 13 amount to 50^- or even 60f^ of the total tobacco industry appropriations. On that assump- tion, the linage estimates shown hereafter make comparisons of unusual significance. Store displays, counter displays and window dis- plays are of the highest value in the sale of any product as immediately consumed as is tobacco. For a good many "'■ears, the most valuable franchise in window display installation has been a contract with one of the leading cigarettd manufacturers for the preparation and the installation of window displays urging immediate purchase of cigar or cigarette. During the code hearings and the code administration hearings on the code for the Ad- vertising Display Installation trade, evidence was offered that, in connection \7ith each period- ic newspaper campaign for tobacco, supporting campaigns were immediately planned calling for the use of from 5,000 to 25,000 store windows through- out the country. Exclusive of the cost of litho- graphing these displays, the installation in each store represented- an -average cost of $2.50. (*) Evidence was also offered to show that in the in- tensity. of competition -for windows in excellent locations, it was always necessary to offer the (*) Transcript of Hearing, Advertising Display Installation Code. ERA files. 10691 10691 -205- retailer free goods for the use of his windows and that it was a common practice to offer as many as a thousand cigarettes for a week's dis- play.' The displays used "03" cigarette and cigar manufacturers have ranged from simple litho- graphic posters mounted on hoards, to elaborate mechanical window display devices costing $35.00 each to produce. ?:To estimate is available to in- dicate what other dealer helps such as electro- type and newspaper stereotyoes may be used in tobacco distribution. It is probably no consider- able amount. Margins are too narrow to permit independent ad- vertising on the 2^art of wholesaler or retailer to promote any special brand of cigarettes or cigars. This conclusion appears to Tue valid in view of the investigation made by the United States Congress and Federal Trade Commission into adver- tising allowances and special discounts. The prac- tice according to the testimony before the Pat man Committee, is for the manufacturer to give retail chain stores, an allowance of $1.00 per store for window displays, store displays and local ad- vertising. The Advertising Cost of Distributi on. Gilbert Eodges, 'member of the Executive Board of the Hew York Sun, speaking before the convention of the American Home Economics Association in Sew York, June 30, 1934, sought to determine the advertising cost of distribution throughout American industry* Mr. Hodges then said: "Let us take the year 1929, when everything was at the highest. The advertising expenditure that year has been e stima ted at $2, 000, 000 ,000. How that * s a huge sum* ir The total sales in 1929' were $142,000,000,000. "This means that $2,000,000,000 in advertising moved $142,000,000,000 in merchandise... less than la percent of our total sales." Mr. Hodges' 1^ percent takes into consideration, of course, the thousands of manufacturers who spend little or no money on advertising on -:heir own account but who through the manufacture of articles similar to nationally trade-marked and nationally advertised goods, enjoy the benefits of all advertising in their field. That ly- percent is useful as a yardstick of distribution efficiency but is not enough sales leverage to move such .roods as drugs, toilet articles and electrical appliances, to mention but a few. -206- An effort was made by the Association of National Adver- tisers in 1953 to determine the distribution costs of 312 manufacturers in 29 leading industries of the United States whose aggregate sales volume in 1931 was more than $1,000,000,000. (*) In this analysis, the total costs of distribution '-ere di v r de d into the following classifi- cations: 1« Direct sales costs. ( T hese costs included salesmen's salaries, bonus, commissions, traveling expenses and sales office expenses.) 2. Advertising and Sales Promotion. a. Including costs of space, mechanical production, such as art work and en- graving. b. Salaries and office expenses of in- direct selling, such as advertising department work* c. Samples. 3. Transportation. (Including out- freight, crateage, e:-Dress, long distance truck.) 4. Warehousing and Storage. a. This includes expense only on furnished goods properly chargeable to manufac- turers distribution, exclusive of whole- salers' costs.) 5. Credit and Colls ction Expenses. 6. Financial Expenses and Cash Discounts on Sales. 7. . General Administrative Expenses not otherwise included. 8. All other distribution costs. (Hot otherwise described.) (*) An analysis of distribution costs of 32 manufacturers published by the Association of rational Advertisers, Inc., 1933. 10691 -20?- B . TOBACCO OQUPAKSD TO OTHES I KDUSTHIiBS . In this. analysis of distribution costs, the resume presents some ••• striking comparisons with particular reference to the amount of money spent in the tobacco industry for advertising and sales pro- motion. Tor instance, taking the total cost- : of distribution as 100 percent, advertising and sales promotion in Drugs and Toilet Articles was reported to be 49.8 percent of the 1932 budget of the firms report- ing. The direct selling cost stood at 24.6$. In the Automobile field, direct selling cost constituted 50.8$ of the 1932 budget and advertising and sales promotion 16. 670. In gro- cery products advertising and sales promotion costs take second rank to direct selling costs, being 23.4$ for advertising and 36.5$ for direct selling costs. Jewelry and silverware shows a like story; 35.0$ for direct selling costs and 26.3$ for advertising and sales promotion. In petroleum products, direct selling costs are reported as 30.8$ of the 1932 1 udget and advertising sales promotion costs, 18.9$. The story changes immediately upon examining the tobacco products field. The 1932 budget taking the total cost of distribution at 100$ was absorbed to the extent of 48.6$ in advertising and sales promotion efforts. Direct selling accounted for 16.8$. The actual expenditures reported for 1931 showed 45. 0$ for advertising and sales promotion in that year with 17.7$ going into direct selling costs. In relation to net sales volume, based upon budgets for 1932, tobacco products stood second highest for advertising, and sales promotion costs; drugs and toilet articles leading, of course, with an expendi- ture of 18.69$. Tobacco 8 . 84$ Grocery Products 5.94$ >$ Petroleum Products 5.59$ It is interesting, therefore, to compare the cost of advertising and sales promotion efforts in moving tobacco products with the general average for the United States as reported by Mr. Hodges of lh per cent of total sales. 1. 1933-1934 Tobacco Linage . Another comparison is available ^hich shows how much more adver- tising effort is put behind the sale of cigarettes than is used for automobiles, foods, household appliances and oil and gasoline The source of the figures which are quoted is Printers' Ink which makes regularly a six-month compilation and a yearly com- pilation of newspaper linage by the country's 300 leading adver- tisers. 10691 -208 -"■ ■' In 1933, Ligett & Myer used 14,988,586 lines of newspaper dis- play space in measured newspapers and increased that amount to 19,585,349 in 1934. R. J. Reynolds Tobacco Company used 17,159,797 lines of news- paper display space in measured newspapers in 1933 and. 15, 875,- 063 in 1934. The American Tobacco Company used 12,092,407 in measured news- papers in 1933 and 15,475,371 in 1934. P. Lorillard Company used 1,267,351 lines in selected measured newspapers in 1933 and increased that amount to 4,225,455 in 1934. The total reported linage for Chesterfield, Camels, Lucky Strike and Old Golds in this Printers' Ink compilation amounts to a total of 55,161,238 lines for 1934. But at the syrae time, General Motors Corporation was adver- tising Chevrolet, Pontiac, Buick, Cadillac and its other pre- dicts in a total of 19,401,124 lines. Lever Brothers were selling Lux, Rinsn, Life B^oy in 10,590,- 375 lines and Ford Motor Company used 9,660,7i9 lines; the Chrysler Corporation 3,469,457. Standard Brands required 5,843,671 lines to advertise Fleischman's Yeast, Chase & San- horn Coffee and Royal Desserts; and the Sterling Products Company 3,964,496 lines to maintain sales of Bayers Aspirin, Castoria, Dr. Lyon's Tooth Powdor and its other products. General Electric used 1,327,935 lines and Coca Cola 658,261 lines of national newspaper display. The total for all is . 61,916,016 lines. 2. The Ten Magazine Leaders In any study of advertising as affecting distribution of tobacco products, it is of singular significance to find that in the list of the first ten leading advertisers of the United States in 1934, the highest rank in expenditures in newspaper display was by the Liggett & Myers Tobacco Com- pany. General Motors ranked second, R.J.Reynolds Tobacco Company, third; American Tobacco Company fourth; P. Lorillard Company tenth. With little difference in the products, with prices practically the same, with manufacturing costs practically equal and little variation in the cost of raw materials, the competition among these four tobacco companies limited' advertising to an intense competitive warfare for the establishment of a brand name, in customer preference. 10691 -209- 3 . Compar iso n of Advertising Expenditures . A comparison follows attempting so far as estimates are avail- able from Editor & Publisher and Printers' Ink, to show the excess of advertising effort in the sale of cigarettes as com- pared with the amount of money spent in national display space and radio time "by food products, gasolines and oil, and of miscellaneous products for home consumption. . (a) Newspaper Advertising. The most complete comparable figures available for news- paper linage by national advertisers covers the years 1933 and 1934. These have been taken from the compila- tions made at the end of each of these years by Printers' Ink. The 1935 totals are at this writing not yet avail- able. The amounts spent year by year from 1911, when cigarette advertising began its dominance in newspapers, are not reliably recorded in any trade source. More ex- tensive comparisons by dollar volume are, however, to be found in magazine expenditures. There are significant comparisons to be made from news- paper linage during 1933 and 1934. One such comparison is immediately recognized. A new industry with a product of immediate consumption came into newspaper columns in 1933 and engaged in a brisk and clamorous war for public preference, as in cigarettes, the manufacturers in this newly re-established industry — that of whiskies — fought for name and trademark acceptance. They had a problem, however, unusual to the whisky business; adver- tising, for instance, could not be done in states specif- ically prohibiting such sales promotion. Where advertis- ing was permitted, the citizen found whisky ads on page after page of his daily newspapers. The volume of space : " : had all the appearance of a campaign involving millions of dollars beyond other nationally advertised products; but, the total volume of the newspaper space used was approximately only one-fifth of that used by the four leading cigarette advertisers. The greatest amount of newspaper linage used by any single whisky distiller in 1934 was 2,599,668 lines. The greatest amount used by any single cigarette manufacturer was 19,000,000 lines. Where the least profit per unit of sale was possible, the greater was the expenditure for advertising. Gasoline and oils closely parallel cigarettes in stability • of price and narrow profit margins; each are products for immediate consumption. Here again the comparisons raise the question: If the linage used by gasoline and oil com- panies is adequate sales effort for name preference, good- will maintenance and desired volume of business, is there present in the total of cigarette advertising a component of surplus effort that can only be justified in a warfare 10691 -210- intended to achieve a monopolistic position? Or does the difference lie in the fact that motoring is a modern nec- essity — and smoking a habit that needs extraordinary "urge from without to maintain its place in consumption? In 1933, as in 1934, the largest user of newspaper linage in gasoline and oils was Socony — 2,560,000 lines in 1933; 2,940,938 in 1934. The second largest in 1934 was Sun Oil with 2,840,000 lines of newspaper display space. Standard Oil of New Jersey ran campaigns in 169 cities, using 1,474,313 lines to pursuade the motorist to look for Standard Oil Stations when his tank ran low. Shell oil got along with 1,720,503 lines in 70 cities. Food products offer another interesting comparison, An analysis is included showing the newspaper linage used "by Standard Brands, the H.J. Heinz Company; Kellogg Company and General Foods Corporation. Standard Brands shows a total newspaper linage of 5,843,671 for its products. But American Tobacco vised 15,000,000 in the same period for one product — Lucky Strike Cigarettes. To conclude this consideration of newspaper linage, there follow tabulations from published reports taken from news- paper sources by Printers' Ink. The first table shows the eleven leading newspaper users on a national basis among all the corporations of the nation. Of the first eleven, four are the leading cigarette manufacturers. The next compilation refledts the competitive advertising in the sale of cigars — relatively unimportant in the total. The next compilation is of whiskies; then gasoline and oil companies and finally food products. It has only been recently that newspaper linage has been checked and compiled for all newspapers throughout the country. Fig- ures from 1935 on will be available in that completeness. The figures here sho T "*n are not for all newspapers in the United States, but rather for what is known as the "A" list of essential newspapers in essential distributing of market centers. It may be presumed that the linage shown in these tables reaches a reader audience of more than 20,000,000 persons daily. (b). Magazine Advertising . Cigarettes, cigars and smoking tobacco yield rank in the advertising pages of the magazines to motor cars, cosme- tics, drugs, food and soaps. No cigarette manufacturer was among the first ten or the "Blue Chip" magazine advertisers in 1930, 1931 and 1932. Camel Cigarettes stepped into the "Blue Chip" ranks in 1933 and 1934; maintained its place in 1935 when it was joined by Lucky Strike. 10691 -211- TABLE 1 NEWSPAPER LINAGE 1934 1933 Lines Cities Lines Cities LIGGETT & MYERS TOBACCO CO. 19,585,349 14,988,586 Chesterfield 17,103,046 86 13,584,340 81 Granger Pipe 2,319,001 54 1,404,246 32 Velvet 163,302 7 - - Rank (l) GENERAL MOTORS CORPORATION. 19,401,104 - 13,202,769 - Chevrolet 7,887,860 88 4,517,302 83 Institutional 2,537,126 72 871,534 61 Pontiac 2,335,016 87 1,751,701 82 Buick 1,890,283 85 1,235,420 81 Oldsraobile 1,377,535 87 1,018,635 82 Frigidaire 1,182,084 79 1,451,829 78 LaSalle 492,273 77 1,451,829 78 Trucks, Cadillac ) masB up the rest Air Conditioning -Delco, etc.) Rank (2) R. J. REYNOLDS TOBACCO 15,875,063 - 17,150,797 - Camel R.J.Reynolds Tobacco Products Prince Albert 15,397,399 389,604 80,060 86 83 17 16,828,670 322,127 81 80 Rank (3) AMERICAN TOBACCO COMPANY - Lucky Strike 15,475,371 86 12,092,407 81 Rank (4) LEVER BROTHERS 10,590,375 412 11,306,513 318 Lux Rinso Luz Flakes Lifebuoy - (Rank (5) FCRD MOTOR COMPANY Rank (6) -212- #2. Lines 9,660,719 1934 1933 Cities Lines 183 5,312,345 Cities 187 CHRYSLER CORPORATION Ran]: (7) 8,469,457 133 7,057,967 139 PROCTER & GA!.fBLE Camay Chipso Ivory Soap Crisco Rank (8) 6,525,930 5,631,974 STANDARD BRANDS Fleischman Yeast Chase & Sanborn Coffee Royal Desserts, etc. Rank (9) P. LORILLARD COMPANY Old Gold Union Leader Rank (10) 5,843,671 4,225,455 30,790 STERLING PRODUCTS Bayers Aspirin Dr. Lyons Tooth Powder Phillips Milk of Magnesia California Syrup of Figs Midol Castoria Diamond Dyes (Rank (il) 10691 3,964,494 234 5,296,955 75 1,267,351 4,641,578 183 70 -213- TABLE 2 NEWSPAPER LINAGE TOBACCO PRODUCTS 1934 1933 Lines Cities Lines Cities CONSOLIDATED CIGAR CORPORATION Harvester 233,024 20 56,205 Dutch Masters 176,206 17 66,467 WAITT & BOND. INC. Blackstone 283,387 22 _ Totem 12,186 9 117,865 G.H.P. CIGAR C0 t . INC. El Producto 664, 47e 47 730,864 La Azora 176,184 14 30,228 CONGRESS CIGAR CO.. INC. La Pal ina 302,782 24 170,830 Recollection 120,334 16 109,291 BAYUK CIGAR. INC. Bayuk L, 260, 259 40 909,095 Mapaciiba - - 39,342 GENERAL CIGAR CORPORATION 1,452,084 - 1,325,706 15 9 52 13 20 9 34 4 White Owl Robert Burns Van Dyck 859,275 396,560 196,249 33 21 23 857,251 27,655 440,800 62 6 27 10691 -21U- TABLE 3 NEWSPAPER ADVERTISING - WHISKIES 1934 1933 Lines Cities Lines Cities SCHENLEY D ISTILLERS ' CORPORATION 2,590,668 53 68,582 16 Golden Wedding Cream of Kentucky- Mayflower , J?s. E. Pepper Old Quaker (And 16 other products) NATION AL DISTILLERS PRO DUCTS 2,360,201 53 186,923 41 Crab Orchard Brigadier Old Overnolt Tovm Tavern (And 8 other products) CONTINENTAL l I STILLING CORPOR ATION 1,830,065 39 33,481 11 Sweepstakes Dixie Bell Gin Snug Harbor (And 5 other products) FRANKFO RT DISTI LLERIES, INC . 1,542,952 PpuI Jones Four Roses (And 4 other products) 47 25,012 11 SEAC-RA:.!S DISTILLERS CORP.* PRODUCTS hiral: talker & s 1,540,847 9.3S.358 53 56 263,602 38 3 i an Cluh (And 4 other products) -215- #2 1934 1^33 lines cities lines cit e GOODSRMAN & WORTS, Ltd . 0. & W. Whiskey- London Dry G-in G. & W. Liquors 803,025 34 33,999 IO691 -216- TABLE 4 NEWSPAPER ADVERTISING - OIL COMPANIES 1934 1933 Lines Cities Line 8 Cities STANDARD OIL OF NEW JERSEY 1,474,313 169 1,140,575 170 SHELL OIL 1.7X.503 70 1,986,241 64 CONTINENTAL OIL 1,523,885 49 1,655,041 40 AMERICAN OIL 1,462,336 41 1,553,251 41 TIDEWATER on 1,414,626 45 1,028,830 38 GULF REFINING CWflPANY 1,291,505 61 2,425,076 51 SINCLAIR REFINING COMPANY 1,202,573 60 1,098,436 54 STANDARD OIL COMPANY OF CALIFORNIA 920,479 12 860,113 20 TEXAS COLtPANY PRODUCTS 561,422 77 1,441,475 70 STANDARD OIL COMPANY OF INDIANA 2,008,326 15 2,161,192 12 SOCONY VACUUM OIL CO., INC., PRODUCTS 2,940,938 67 2,560,840 50 SUN OIL COMPANY 2,840,762 46 1,737,056 42 10691 -217- TABLE 5 NEWSPAPER ADVERTISING - FOOD PRODUCTS 1934 1933 Lines Cities Lines Cities STANDARD BRANDS 5,843,671 Fleischman's Yeast 2,822,316 Chase & Sanborn Coffee 1,700,712 Royal Desserts 356,630 Royal Baking Powder 150,668 - 5,296,995 - 75 2,794,703 71 50 1,725,481 47 26 316,401 33 18 180,806 18 - 1,977,622 Mi 66 255,166 48 65 110,361 47 64 221,181 50 44 120,417 29 51 266,025 56 - 3,959,838 - 78 1,084,412 74 86 1,127,611 74 78 678,707 74 56 541,786 49 70 78,579 27 H. J. HEINZ COMPANY 3,634,429 Heinz Soups 1,242,162 Ketchup 540,154 Baked Beans 487,887 Rice Flakes 403,741 Condiments • 75,796 KELLOGG COMPANY Corn Flakes All Bran Rice Krispies Kaffee Hag Pep 3,379,918 1,015,806 993,595 618,321 294,548 271,262 GENERAL FO ODS CORPORA TION 3,339,776 Postum 713,290 Grape Nuts Flakes 483,948 Post Toasties 453,064 Calumet Baking Powder 412,092 Bran Flakes 393,586 Sanka 304,107 Certo 217,151 Grape Nuts 101,047 Scattered space for eleven (ll) other products* 49 80 66 65 74 24 72 53 3,306,421 152,111 182,537 886,524 553,814 379,317 284,695 225,171 119,880 48 75 68 65 65 22 68 42 THE WANDER CO'.ffANY Ovaltine 1,757,529 75 1,042,345 56 M -216- #2 1934 1933 Line & Citi Lines Cities NATIONAL DAISY 1.395,4 - Tj ,,23, 503 - Sheffield Farms Milk ■m,38' n 380,7 iO Krafts' Miracle- Whip Salad Dressing 210,431 24 760,611 44 Breyer's Ice Cream 165,97. 11 71,833 10 Other Products Include Kraft Cheeses NATIONAL BISCUIT COMPANY 1,333,156 1,557,992 Shredded Wheat ;i,4S4 87 733,446 82 Hational Bist~j.it 546,472 80 776,291 81 CONTINENTAL BAKING company Wonder Bread 1,043,27-* 44 1,567,134 39 THE 3JJAK2R OATS COMPANY . )22,021 759,996 Quaker Oats Cereal 570, Z7? 63 652,614 62 Aunt Jemima Pancake Flour 209,810 65 96,347 50 Quaker Oats 13 - - (Pour other products used up rest of total linage) BEST FOODS INC. 900,331 860,514 HelLman's Mayonnaise 406,154 44 432,607 39 Best Foods Mayonnaise 322,754 26 424, 374 21 Nucoa 153,547 16 - - Mustard 17,376 9 - - Condiments — — 3,033 3 SALADA TEA COMPANY 822,090 42 694,283 38 10691 10691 -219- #3. 1934 1933 Lines Cities Lines Cities B0RJ3EN SALES CO.. INC. 848,993 1,114,921 Borden's Milk 386,460 20 «. „ Condensed Milk 119,491 21 72,329 22 Farm Products 97,053 25 451, 886 16 Cheeses 26,324 9 570,204 36 (Six other products ©.ccount for rest of linage) < CAMPBELL SOUP COMPANY 560,615 65 522,023 20 HECKER H-d CO. INC.. 447,948 761,010 Hi -220- Of all American businesses advertising nationally, the sixteen which spent more than $1,000,000 each in 1934 and 1935 — as the country "began to merge from the depths of the depression were the following as reported "by National Advertising Records, Inc., in Editor & Publisher (N. Y. ), issue of January 18, 1936. 1935 1934 General Motors Corp. Chrysler Corp. Standard Brands, Inc. R. J. Reynolds Tobacco Co. Procter & Gamble Co. Bristol-Myers Co. Lever Bros. Co. Lambert Co. General Poods Corp. Campbell Soup Co. American Tobacco Co. General Electric Co. H. J. Heinz Co. Lamont Corliss & Co. Colgate-Palmolive-Feet Co. Sterling Products, Inc. $5,148,564 2,501,131 2,413,247 2,268,316 2,193,561 1,793,155 1,784,878 1,780,415 1,713,091 1 , 711 , 235 1 , 557 , 584 1 , 428 , 046 1 , 256 , 314 1,140,229 1,094,474 1,089,322 $4,569,644 2,194,684 2,710,843 2,799,654 2,936,182 1,390,898 2,239,453 1,965,819 2,248,592 1,929,433 780,228 1,628,630 1,171,444 1,177,044 826,537 917,787 In 1928, there were only eighteen manufacturers in the United States spending a million dollars or more in magazines of national circulation. In 1929, there were 25 in the million dollar class. In 1930, there were 29. In 1931, this number re- ceded to 23. In 1932, only sixteen corporations remained in the million or more class. Appropriations for national magazines were low again in 1933 — national advertising showing a general decline of twenty per cent. (*) The records of expenditures in national magazine space to tobacco companies is shown as follows: 1930 1929 American Tobacco Co. Axton-Pisher Tobacco Co. Brown & Wm. Tobacco Co. Liggett & Myers Lorillard, P. Co. Reynolds Tobacco Co. $1,545,474 367,164 288,943 1,376,910 834,621 1,425,975 $ 900,646 292,959 406,825 1,378,718 403,425 1,031,432 1932 1931 American Tobacco Co. Axton-Pisher Tob. Co. Brown & Williamson Tob. Co. Larus & Bros. Liggett 8c Myers P. Lorillard Co. R. J. Reynolds Co. 1 , 556 , 846 525,200 296,540 144,073 933,515 133,193 1,599,460 1,462,654 532,255 38,202 121,233 1,614,833 171,995 1,508,770 ( * ) Data from records of Checking Bureaus published in Printers' Ink 1930, 1931, 1932, 1933, 1934 and 1935. 10691 -221- Liggett & Myers Larns & Bros. Co. R. J. Reynolds To"b. Go. American Tobacco Co. Brown & Williamson To"b. Co. Axton-Fisher Tobacco Co. 1934 (First 6 months only) 273,268 129,072 1,357,474 346 , 359 237,378 275,360 1933 (First 6 months only ) 353,565 57,955 959,555 415,105 137,892 254,790 The ten '1 seeing magazine advertisers in 1930 (reported by Printers' Ink, Issue of January 22, 1931) were: General Motors Corp. Procter & Gamble Co. General Foods Corp. Standard Brands, Inc. Drug, Inc. Lambert phar. Co. Colgate-Palmolive-Peet Co. General Electric Co. Ford Motor Co. Lever Bros. , Inc. $7,099,275 4,512,500 4,248,871 3,400,181 3,049,887 3,027,892 2,969,717 2,708,109 2,224,855 2,008,577 "The total magazine advertising expenditure in the eighty- six magazines of the leading 150 ad- vertisers in 1930 was $116,435,914. The total expenditure for all magazine advertisers — in the eighty- six magazines checked for this siirvey — was $201,854,510. The 150 leading advertisers spent 57.68 per cent of the grand total. In 1929, the 150 leading advertisers spent $108,649,113 in the publications checked or 53.31 per cent of the total for all magazine advertisers, which was $203,776,077." The list changed slightly in 1931 and for 1932, showed these leaders: 10691 General Motors Corp. Procter & Gamble Co. Drug, Inc. Standard Brands, Inc. Lever Bros. Co. General Foods Corp. Lambert Pharmacal Co. Colgate-Palmolive-Peet Campbell Soup Co. General Electric Co. Chrysler Corp. H. J. Reynolds Tob. Co, American Tobacco Co. H. J. Heinz Co. Swift & Co. Pepsodent Co. Co. $5,221,786 3,389,920 3,203,750- 2,702,764 2,568,113 2,471,373 2,327,335 1,934,251 1 , 847 , 675 1,684,145 1,615,757 1,599,460 1,556,846 1,287,777 1,307,984 1,033,196 -222- For the year 1934 - continuing the comparison with tobacco com- panies — the leaders in each of several fields were approxi- mately: General Motors $5,446,000 Chrysler Corporation 3, 100, 000 Ford Motor Company 328, 000 Procter & Gamble 3, 200, 000 Bristol-Myers Co 1, 500, 000 General Foods 2, 250, 000 Standard Brands 3, 150, 000 Socony-Vaccuum 350, 000 Texas Company 500, 000 Standard Gil of K.J 450, 000 (c) Radio Braodcast Advertising . A careful reticence meets the effort to secure like detailed expen- ditures "by specific national advertisers for radio broadcasts. Ciga- rettes provide, however, a large and popular part of the national en- tertainment over the air. The Bureau cf Advertising of the American Newspaper Publishers Association estimated in an analysis published in May, 1935, that, on the average, national advertisers were devoting 23.4 percent of their total advertising appropriations in 1934 and 1935 for radio programs. Tobacco companies are, it is assumed, spending probably not to exceed 20^ of their advertising budgets on the radio. If the figures are all-inclusive of radio costs, none of the tobac- co companies spent, individually, a million dollars for radio in 1935. National Advertising Records, Inc., in Fditor & Publisher, January 18, 1936, announced this following list of the million dollar radio cam- paigns of 1934 and 1935. The $1.000.000 Broadcasters . (Following is a list of broadcast advertisers spending more than $1,000,000 each on the National, Columbia and Mutual Broadcasting system in 1935, as reported by National Advertising records.) 1935 1934 Procter & Gamble Coraoany $2, 104, 697 General Foods Corporation 1,948,509 Maxwell House Coffee Post Toasties Grape-Nuts, etc. Standard Brands, Inc 1,938,577 Chase & Sanborn's Coffee Fleischmann 1 s Yeast And other products Ford Motor Company 1, 928, 860 10691 $ 969,236 1, 450, 575 1,847,178 1,191,577 -223- 1936 1934 Colgate-Palmolive-Peet Co $1, 679, 037 $1, 333, 873 Sterling Products, Inc 1,422,640 1,448,651 Bayer Aspirin Dr. Lyon's Tooth Powder And other products American Home Products 1, 211, 568 898, 300 Kolynos Bisoldol, etc. Lady Esther Company 1, 100, 998 963, 836 Pepsodent Company 1, 098, 996 1, 642, 153 Radio advertising showed a 20$ increase in 1935 over 1934 sales of time. Gross time sales were reported in February, 1936 issue of Broad- casting as $87,500,000. The depression low for radio programs was $57,000,000 in 1933.' How close a rival radio has become of newspapers and magazines may be judged by comparing radio's $87,500,000 with a total of $165,000,000 for national, advertising in newspapers and $113,000,000 in magazines during 1935. Radio is constantly playing a more important part in tobacco advertising campaigns. 4. Recapitulati on Based on an analysis made of 367 national advertisers in 1934, the Bureau of Advertising of the American Newspaper Publishers' Association announced these comparisons in Editor & Publisher, issue of May 18, 1935: a. 367 national advertisers spent $223,216,520 in 1934 in news- papers, magazines and radio. b. 60 food companies spent $38,750,846 in these three mediums. c. 13 motor car manufacturers spent $29,930,032 in the three mediums . d. Drug companies spent $15,691,671 in the three mediums. e. Beverage groups spent $9,115,279 in the three mediums. f. Ten tobacco companies spent $33,949,000 in the three mediums. The average expenditure per advertiser in the three mediums in 1934, was $608,219. The average expenditure per tobacco advertiser on this basis, was $3,394,000. Another basis of comparison claims consideration. The Bureau of Advertising of the American Newspaper Publishers' Association, issued an analysis of 357 advertisers spending a combined total of $121,195,000 for the year 1932 (*). There was a sharp decline, all media considered, (*) Printers' Ink, page 29, issue of June 6, 1933. 10691 ■224- 1 of 20$ in 1932 from the expenditures of the year "before. Thirteen auto- mobile manufacturers are credited with an expenditure of $21,915,000 in 1931 — an average for each motor car manufacturer of $1,685,789. "In the toDs.cco group", says the survey, "nine companies spent $22,265,000 in 1932 compared to $28,235,000 in 1931." This gives an average of $2,473,888 per advertiser. The linage tabulations in this section have already s hown that except for the intensive campaigns he- hind Camel, Chesterfield, Lucky Strike and Old Gold, the advertising ex- penditures of other companies marketing cigars, cigarettes, smoking to- bacco are well below the average of moderate size national advertising campaigns. 5. Estimating the Total Cost . These statistics hint that one should perhaps lend a not too sus- picious ear to the rumors of advertising agency executives and special newspaper advertising representatives indicating that, at times, one or more of the Big Three has spent in excess of $18,000,000 a year in ad- vertising of all kinds. Such stories are the inspirational legends of + the advertising game; and they may merely indicate, to borrow a slogan from a recent Camel campaign, that: "It's fun (even for an advertising man) to be fooled." Twenty million dollar campagns are, however, not unknown to ad- vertising. Exactly how much Camel or Chesterfield or Lucky Strike has spent in any one year is not verifiable. If the good-will of $54,000,000 in The American Tobacco Company's statement, earlier quoted, is made up largely of advertising values added to name-brands, it is certain that expenditures enormously in excess of all industry averages have been the rule among the Big Three, revealing perhaps not only an economically sound competition for consumer preference as among brands but, on top of that an exuberant inter-company competition in advertis- ing, as advertising, for Whatever rewards and glory there may be in ad- vertising dominance through bigger s-oace and bigger and better claims. \7hen.it is considered that available statistics do not purport to cover more than 68 of the magazines published nor more than 300 of the 1,500 or more daily, seiii-weekly and weekly newspapers of advertising worth, even after all rumors and advertising circle statements are dis- missed, it is evident that the $33,940,000 does not represent the total of tobacco advertising. What part it does represent is as unknown as the exact position today of the flag that admiral Peary left on a cairn the day he discovered the North Pole. The annual re-port of S. Clay Williams to the stockholders of the S. J. Reynolds Tobacco Company in an account of his stewardship for 1932, as reported in Printers' Ink, called attention to a reserve of $8,149,445.72 for 1932 as compared with $2,403,710,79 for the year be- fore. Pour Million dollars of this reserve was "money that the com- pany appropriated for advertising in 1932 but which it did not spend. "(* (*) Printers' Ink, issue of January 19, 1933. 10691 Hi 225- Mr. Williams is further quoted: "This $4,000,000 of advertising accu- mulation charged against 1932 earnings is carried forward as a reserve and represents an additional amount available for advertising in 1932." C- WHAT IS THE COST? Eased on the assumption that the Haase items 11, 12 and 13 (*) are an actual 60fo of the total advertising cost in the tobacco industry, rather than the national average of 20^, the expenditures of ten tobac- co companies in 1934 for these three items calculated as $33,949,000 represented total advertising expenditures for the year of $56,580,000. (*) See Section ii, part 3. this chapter.^ / -C2o D . THE BjEECTS 0? APVEKPISI HS COMPETIT ION Advertising is a business and a profession of increasingly greater ' importance in the American scheme of distribution. The graphic arts are in the main dependent upon the volume of advertising in any one year for the operation of -printing, lithographing and engraving plants. Advertising linage in increasing volume has results that reach out in many directions. Advertising begets advertising. It is the voice of business competition. As the leaders begin to comuete for avail- able markets, the others follow in less conspicuous regional and • local c'amoaigns. The nopular slogan calls forth a hundred echoing imitations. Newspapers, magazines, radio, lithographers, engravers and printers acquire more business. Salesmen pack their sample grips; and the combat forces of competition are on the march. Em- ployment of workers; greater purchases of raw materials; brisker circulation of money are attendant results. S. Clay Williams has pointed out in his brief on the AAA the round of benefits that fol- low increased factory production through consistent advertising. There is no gainsaying the business-producing power of well-directed advertising. But there are other questions in the problem of sales exploitation beyond the mere volume of advertising as such. Beyond that demonstrable result, as behind a curtain, stands the question: How much social waste is present — if it be present — in these tobacco advertising campaigns in the light of the factual evidence making up the body of this Study? What is the ultimate economic result upon the consumer, the grower, the processors of all kinds and sizes? Is advertising being used in its true power and strength in terms of the social and financial responsibilities of an important industry? Today's gain is sometimes tomorrow's sorrow. The answer mast, however, await a full examination and appraisement of all the component factors of the problem. John Benson, president of the American Association of Advertising Agencies in 1931 (Printers' Ink, April 2, 1931) states: "The future of advertising will be along the line of reducing the cost of dis- tribution, as well as stimulating sales, and this will come about through making advertising more reliably and informatively serve the consumer." E. ADVERTISING ALLOWANCES . To all advertising expenditures should properly be added as part of a manufacturer's advertising and sales promotion costs, the special price concessions to favored wholesalers and retailers that business calls the advertising allowance. The advertising allowance has a twin of concealment and discrimination known as the secret rebate, the secret discount — items not shown on auditable invoices. In the -obacco industry, advertising allowances and special dis- counts proceed from the distribution policies that tobacco manu- 10691 -227- fa.cturers maintain in order to secure department store, chain store, and other favored wholesale or retail outlets. To judge the social, economic and financial effects of distribution, advertising must properly he considered not only in terms of copy appeal, space and media used but also in terms of allowances and soecial promotion discounts. The total is the exploitation cost. 1 . Tobacco products as lo s s-1 eaders . Elsewhere this Study has pointed out that few products lend themselves so readily to the loss-leader fori' 1 of retailing competition as do cigarettes and other tobacco products. So widespread had the practice of loss leaders been followed throughout the country that in making ap- praisement of the results upon retail trade, the National Code Authority for Retail Trade Code, No. SO, wrote this indictment: (*) . . - ■ "The period ending in 1933 saw the development of the so- Called 'loss-leader' to the ooint of absurdity. "A 'loss-leader' is an article of merchandise, ostensibly desirable, priced far below a normal figure - at times below invoice cost - to entice trade, in the expectation that customers so attracted to the store would purchase other and more profitable merchandise. "Some stores which used this method extensively relied uoon the naoural wants of their customers in other lines to stimulate other sales and recompense them for the * loss entailed in the profitless selling of the 'loss- leader'.. Others used 'loss-leader' merchandise of so low a quality that the customer's own common sense could be relief ur>on (with subtle stimulation of salesmanship) to switch the purchase to better - and more profitable goods. "One of the inevitable results of 'loss-leaders' merchan- dising was a wave of price wars. The offering of such a leader in a community would inaugurate a series of price cuts among the competing stores, terminating, more often than not, in sales far below cost. "The resulting losses wrought unfair competitive hard- ship uoon specialty stores and small establishments carrying a limited number of lines, since such an estab- lishment might be caught up in a orice war involving one of its few lines - perhaps its only line. This was partic- ularly true because nationally advertised branded lines, which form an important part of the stock of many such stores, were the favorite items of such 'loss-leader' merchandi sing . (*)B.eply of National Hetail Code Authority, Inc.; to Li tip'oti on Division, NFA, April 1, 1935. Litigation Division Piles, JIEA. )691 "The obvious effect of the 'loss-leader 1 was to disrupt fair competition. Resourceful stores could, by judicious price-cutting, drive weaker competitors out of business - preparatory to raising prices when the comoetition had been disposed of. "This was particularly true whenever a new store utilized this device to lure the patronage of a community away from the established merchants. " The competitive pressure in retailing backed up against the manufacturer and wholesaler in the form of insistent demands for lower and lower prices to meet or undersell competitive retail prices. "The manufacturer or wholesaler not only watched his volume decline; in addition, he was forced to grant price concessions to absorb part of the loss that was being forced on the retailer. This was one of tne fac- tors which forced the manufacturer to drive down wages of his own labor, in order to meet the demand for cheaper prices. " Further, this pressure on manufacturers and whole- salers was greatest when it was exerted by retailers and groups of retailers with large buying loower and plenti ful cash reserves, resulting in further increasing their competitive advantage." 2 . Effect Loss-Leader o n Retailers . Testimony as to the direct effect of tobacco as loss- leader advertising was presented to the House Ways and Means Committee in May, 1935 by many tobacco wholesalers and retailers. Addressing himself directly to the loss-leader provisions of the Retail Code, Siegfried F. Kartman made this statement: (*) "Tne grocery stores of this country, the food stores of this country, sold over $100,000,000 of tobacco products as loss-leaders. That tremendous sum cf ^100,000,000 represented only one per cent of the total volume of the grocery stores. So that tney could well afford to sell those tobacco oroducts at invoice cost or less "And yet, while that tremendous volume represented only 1.3 percent of their business, it represented over fourteen (14) percent of the total volume of tobacco products sold through- out the country with these two results: fourteen (14) per cent of the gross business of the tobacco dealers was taken away (*) Statement of Siegfried F. Hartman, Counsel for the Retail Tobacco Dealers of America and Code Authority for the Retail Tobacco Trade, be- fore the House Ways and Means Committee Record of Hearing, page 557. 10691 -229- from them, firsthand second, that with respect to the remaining tobacco products the retail dealers were able to sell, they were compelled to sell them in competition with the grocers at cost or less, and their profits were entirely eliminated. "Now you gentlemen can appreciate that it does not mean much to a grocery store to sell one per cent of its products at a loss, but it means a great deal to a tobacconist to sell sixty to seventy to eighty per cent of his product at a loss. And that is why this loss-leader practice which was so vicious particularly in the to- bacco trade, because of the susceptibility of tobacco products for use as loss-leaders, had such a demoralizing effect upon the in- dustry, and that is why the stabilization of tobacco prices as a result of these codes, worked such great benefits." 3 . Advertising Allowance s to Chains, etc. The effect of advertising allowances on wholesaling and re- tailing in tobacco and other fields has been under study in the Federal Trade Commission and in committees of the House of Representatives in investigations cf chain stores and the ac- tivities of the American Retail Federation. The story of advertising allowances in the tobacco field was prominent in the July, 1935 hearings. As summarized in Editor & Publisher, July, 27, 1935, these facts emerge: "Representative Wright Patman in inquiring into the advertis- ing practices of chain-store organizations has estimated the advertising expenditures of ten of the chain-store systems, whose representatives were active in organizing the retail fed- eration, at 340,000,000 a year. By exploring the operations of Atlantic & Pacific, the committee has accounted for ^6, 000, 000, "The Committee chairman says "Editor and Publisher" proposed to inquire of the witnesses whether there is an accounting to the firms from which advertising allowances are taken. No such accounting exists in the A. & P. System, it was disclosed. "Charles •?. Parr, assistant to the chief buyer for A. & P.'s 15,200 stores, was the source of the committee's information on much of what has been brought to light to date. The or- ganization's annual advertising bill, he said, is matched by the amount which is collected from food manufacturers, running about 56,000,000 a year. "F. W. Gundrey of the A. & P. purchasing staff stated that the total of advertising allowances and special quantity discounts for the year 1934 was -.iS, 105, 000 in round figures. 3rokerage allowances brought in $2,000,000 additional. These items are unrelated to prices or invoices. tt 'Flat sums were more common among the biggest companies. In various cases also, the allowances went up by a graduated scale -230- as volume increased. For the Hershey chocolate line for in- stance, there was a flgt allowance of $5,000 a month, or ■50,000 a year. Corn Products paid the same, as did Gold Medal foods (Bisquick and Vfheaties). Gulden's mustard was down for y3,00C a month for six months. "Liggett & Myers (Chesterfield cigarettes) was listed at $1 -oer store per month for seven months, which figures out to around £105,000 for the full A. & P. set-up of 15,200 stores. Luck;/ Strikes and Camels were not listed, although several less popular cigarettes contributed varying sums. "Wrigley's chewing gum allowed $7,000 a aionth or 384,000 a year. "General Foods Corporation, Inc., line, ,530,000 flat for ad- vertising allowance a month, or 5 per cent discount for ad- vertising." Allowances running as high as $12,000 a year for newsuaner adver- tising were revealed in a statement of allowances received by Liggett Drug Company, Inc., filed with the special House Commit- tee on The Investigation of the American Retail Federation. The total amount of allowances more than r>aid Liggett 1 s full ad- vertising bill, and left a substantial orofit, according to fig- ures furnished the committee in a letter from W. Watt, executive vice-president of Liggett, giving tne following statements: 11 (l) The total amount received by Liggett's in the form of compensation and allowances for window and counter displays during tne year 1934 -'ere $797,386.56. "(2) The amount received for the first six months of the year 1935 was 3379,941.23. "(3) The total amount exnended for advertising during the year 1934 was $838, 644. 13; for the first six months of 1935, £320,530.05. "(4) So far as we know, this company has not received an/ other benefits or advantages from these manufacturers or suppliers not available to the trade generally." A separate Liggett letter gave the company's total sales for 1934 as $44,064,394. The allowances for newspaper advertising are given in the accom- panying table, together with the trade and cash discounts shown on invoices. This is the evidence from one great chain. There are scores of other chains about which less is known. There are many great de- partment stores which set the -oace for selling practices and ad- vertising methods in their own regions — some of national influence, 10691 -231- TABLE 6 PRINTERS' IKK" Aug- 22, 1935 LIGGETT DRUG CO. PIC. Discounts shown on invoices Trade Cash Additional compenfcation and allowances for window and counter displays and advertis- ing Per Cent Jigar department: AMERICA*! TOBACCO CO. Minimum 10 per cent maximum 12 per cent AXTON-FISHER TOBACCO COMPANY 10 per cent, deals net 2 BAYUK CIGARS, Inc. 10 per cent Herbert Tareyton cigarettes; 5 per cent of purchases for Lucky Strike cigarettes; $25 per store making window dis- play for 1 week; Cremo cigars, $25 per store making window display for 1 week Head Play cigarettes: 25 cents per thousand purchased. 5 per cent purchases Bayuk PhiH ies BROWN & WILLIAMSON TOBACCO CORPORATION. CHRISTIAN PEPER TOBACCO CO. CONGRESS CIGAR CO. do do Minimum 10 per cent maximum 12 per cent CONSOLIDATED CIGAR CO. 12 per cent DE I SEL- WEMMER- GI LBERT CORPORATION Minimum 10 per cent maximum 13 per cent DIAMOND MATCH CO. Most items net; few, 15 per cent 2 5 per cent purchases except Wings cigarettes. 5 per cent purchases Listerine Cigarettes 5 per cent purchases La Palina listed over $75 per thousand; 3 per cent purcrsses La Palina listed under $75 per thousand except Minutes. 5 per cent purchases Dutch Masters 5 per cent purchases San Felice de luxe and panetelas. 62^- cents case on some items $1.25 case on others. -232- #2. Discounts shown on invoices Trade Cash ADDITIONAL COMPENSATION AND ALLOWANCES FOR WINDOW AND COUNTER DISPLAYS AND AD* VERTISING S. FRIEDER & SONS CO. GARCIA GRAND CIGARS, INC. I. LEWIS CIGAR MFG. CO. Net Per Cent (1) 2 Minimum 10 per cent, maximum 14 per cent 2 Minimum 20 per cent 2 and 12 per cent; maximum 22 per cent and 10 percent LIGGETT & MYERS TOBACCO CO. 10 per cent P. LORILLARD CO., Inc. do 2 2 "TULIP MORRIS & CO. , Ltd. do PENN TOBACCO CO. Minimum 10 per cent 2 maximum 10 per cent and 5 per cent 75 cents per thousand on purchases of Reynaldo Bankers. 7 per cent purchases Garcia Grande 5 percent purchases John Ruskin and Flor de Melba cigars, $1.50 per thousand purchases of La Provedora Cigars. $3,300 per month 5 per cent purchases Old Gold cigarettes 5 per cent purchases Muriel cigars 5 per cent purchases Polar cigarettes 92 cents per dozen • Union Leader humidor tin purchases. 4 p< i cent purchases Oxf rd Blues cigarettes 3 per cent purchases English Ovals, Players cJid Sn^lisn blend cigare- ttes. ijer cent purchases u-ilborc and Cambridge _ Lgarettes. -1 cents r>er thousand purchases of Tine cigare- ttes. 5 per cent purchases Kentucky Winners. 106^1 -233- #3. BERNARD SCHWARTZ CIGAR CORP, Ul SCHWARTZ J.W.VanSlyke & Horton _JlTT & BOND, Inc. ■ Discounts shown on invoices Trade Cash _Add.it ional Compen*?>ti^n on Allowances for Win- dow and counter Displays and Advertising. Per Cent Minimum net, maximum 12 per cent 5 per cent 10 per cent Minimum 10 per cent maximum 12 per cent (1) 2 WEBSTER EISENLOBR, Inc. do 5 per cent purchases R.G-.Dun cigars. 3 per cent purchases La Primadora cigars 2 per cent purchases. 5 per cent purchases of Blackstone cigars listed over $75 per thousand; 3 per cent on Blackstone cigars listed under $75 per thousand. 5 per cent purchases. 10691 Ifc^ _T 4- To judge the full extent of the practices revealed, a far wider and deeper research is needed for the benefit of all distribution, in tobacco and other products. As indicated in point 6 of distribution tendencies (introduction to this chapter), trie cigarette is a natural loss leader. But the statement must be made that in the use of tobacco as loss lead- ers, the great chains are not today the worst offenders. The chains have seen the profits possible from tobacco selling and they have built now so large a volume in tobacco that there is to- day a marked tendency on the part of the national and regional chains to require their managers to show operating profits in their tobacco departments. This is, in all liklihood, another indication that the national chains have, in reaching maturity in expansion, sought a relative stabilization in trices. However in areas of keen competition, the chains while not initiating the tobacco loss leader, will meet local price competition, producing temporary price demoralization. This question of loss leader selling must _be considered apart from the practice and the effects of special adver- tising and sales allov/ances. Throughout the distribution field, if an orderly and socially in- telligent solution for the ills is to be found, there is great and pressing need for a thorough examination and evaluation of sales and advertising methods. 10691 -235- CHAPTER VII THE IMPORTANCE OF THE TOBACCO MANUFACTURING INDUSTRY TO THE FEDERAL GOVERNMENT A3 A SOURCE OF TAX REVENUE It is not the province of this study to pass upon the various problems of taxation as illustrated "by this industry. Tobacco products, how- ever, furnish the Federal Government with so large a proportion of its excise receipts that certain facts on taxation are furnished herewith for a better comprehension of the industry. A. GENERAL The excise on manufactured tobacco is one of the oldest forms of federal taxation. It has been for many years a major source of internal revenue. The habit-forming characteristics of all tobacco products, and the constant growth in cigarette smoking among both sexes, are responsible for a strikingly steady in- crease in tax revenue since the World War, as evidenced in Table I following, showing total receipts from excise collections on tobacco products. In 1917 the excise per thousand on small cigarettes was increased from $1.25 to $3.05, or 84$, and again raised to $3.00 in 1919, another increase of 45^. The primary reason for the second in- crease was to compensate the Government for loss in liquor taxes. In 1918 at the higher tax rate, production of small cigarettes increased 32 o over the previous year. Similarly, the increase in excise rate in 1919 (February) did not prevent a 14fa increase in production over 1918. The depression period had relatively little effect (10$) (*) on federal tax returns from all tobacco products. In 1935, (fiscal year ending June 30th) tobacco taxes totaled 459 million dollars, and the first half of the 1936 fiscal year showed tax receipts from this source of 245 millions, or at the rate of about 500 millions for the 12 months' period. It is safe to state that small cigarettes, now taxed at 5^ per package of 20 represents, with a possible exception of taxes on liquor, the most profit- able source of tax revenue on any manufactured product. The trade magazine TOBACCO LEAF, as of July 5, 1935, quooes the monthly publication FORTUNE as believing that "not only is there an enormous unexploited field for cigarette consumption, but that we may expect a mathematical increase as the younger gener- ation reaches the other side of 40". It is unquestionable that present per capita consumption represents in no sense the limit of growth in cigarette smoking. This industry, therefore, in all probability will continue to be a major source of income to the federal government. (*) By comparing the years of 1931 and 1932. See Table I this chapter. 10391 -236- -2- TABLE I Receipts from Taxes on Major Classes 01' Tobacco Products For Fiscal Years ended June 30th, 1910, 1915, 1920, 1925 to 1935 inclusive, and July 1 to December 31,1935. Fiscal Years (I.ioney figures expressed in thousands of dollars J Tobacco : Small : Snuff : -Chewing k : Total 2/ Cigarettes : : •Chewing & ; Smoking 1910 $ 21,420 $ 7,921 $ 1,920 I 26,210 $ 58,118 1915 21,174 20,925 2,387 32,198 79,957 1920 55,424 151,262 6,949 74,664 295,809 1925 43,347 225,032 6,753 66,922 345,247 1926 38,319 254, 825 6,918 67,711 370,666 1927 23,544 278,928 6,907 65,070 376,170 1928 22,879 301,752 7,461 62,774 396,450 1929 22,548 341,951 7,127 61,159 434,444 1930 21,141 359,816 7,542 60,098 450,339 1931 18,025 358,915 7,190 58,377 444,276 1932 14,207 317,533 6,846 58,030 398,578 1933 11,305 328,418 6,405 55,450 402,739 1934 11,633 349,662 6,788 55,298 425,169 1935 11,693 385,459 6,511 54,372 459,178 Firfet half of 1936 1/ 6,536 207,724 3,124 27,471 245,710 1/ July 1, 1935 to December 31, 1935 %/ Includes also receipts from taxes on: Small Cigars, Large Cigarettes, Cigarette Papers and Tubes, Special Taxes, and Miscellaneous Collectidns. Source: Annual Reports of the Commissioner of Internal Revenue. 10691 -237- In 1914, revenue from tobacco' products represented 10.9$ of the total revenue receipts of the United States Govern- ment; and in 1935, 13.1$ (*). 3y further reference to Table I in Appendix 4, the propor- tion of income to the government from tobacco as compared to that from income taxes, liquor and other manufacturers' excise taxes, brings the contribution of tnis industry in- to strong relief. Ho other industry approached the tobac- co manufacturing industry in revenue receipts. The tax on motor vehicles, complete or parts, and on lub- ricating oil and gasoline, together, amounted to 265 mil- lion dollars for the fiscal year of 1935, as compared with 459 millions from tobacco. Liquor taxes in the same fis- cal year were 411 millions. Referring again to 1935, the percentage of tobacco tax collections to total internal revenue collections was 16.8$. B. ADDITIONAL TAX REVENUE FROM CUSTOMS RECEIPTS AND PROCESSING TAXES. Eor the calendar year of 1934, customs receipts from tobacco, unmanufactured and manufactured, were 2d million dollars, or 7 .-3$ of total calculated customs receipts. If this sum, togeth- er with 18 million dollars received from agricultural adjust- ment taxes (fiscal year) on tnis commodity be added to the ex- cise for the fiscal year of 1934, the total tax paid by the in- dustry exclusive of its contribution to income taxes is 465 mil- lion dollars, or 14.9v'> of the total revenue receipts of the United States Government for that period. Receipts from tobacco agricultural adjustment taxes for the fiscal year 1935 were 36 million dollars. The calculated cus- toms receipts for the calendar year of 1935 are not yet avail- able. Considering the increase in receipts from excise taxes on tobacco products in 1935 (34 million dollars), the total contribution of the industry for that year to the tax income of the United States is, without question, considerably in excess of that of 1934. C. STATE TAXATION (**) At the present time there are not less than 17 states imposing a special tax on various tobacco products, all of them imposing a tax on cigarettes. This tax ranges from 10$ of the retail price in the state of Georgia to i>& per package of 20 in the state of Arkansas. Six of these 1 7 states impose a tax on the retail (*) See Table I, Appendix 4, snowing revenue receipts from tobacco and other sources for selected years from 1914 to 1935 inclusive. Table II, Appendix 4, shows changes in rates of taxation for the same period of years, (**)3ased on information received from the Tobacco Merchants Association of the United States. See also Table 3, Appendix 4. 10591 -238- s&les of smoking tobacco, three on chewing' tobacco, and three on snuff. The 1934 receipts from cigarette taxes and per capita cigarette 3 lea in states taxing cigaretts alone are shown in Table 4 of Ap- pendix. 4. The per capita consumption of cigarettes in the United States for the fiscal year of 1934 was 921. In comparison with this figure, the Tobacco Merchants Association of the United States estimated for the same year the per capita cigarette consumption (as of that date) in fifteen tobacco taxing states as 531.4. While states taxing tobacco products are frequently subject to heavy losses of revenue by bootlegging of cigarettes from adjoin- ing states, there is no doubt that th^se fifteen tobacco taxing states, as a group, would show a larger per capita consumption with- out the additional state taxes imposed. Therefore, the imposition of these state taxes has a direct effect on the total number of cigarettes manufactured and consequently on the federal revenue from this industry. Sales taxes, both state and local, further complicate the problem. D. DISPARITY IN TAX METHODS Since 1917, cigars have been subject to a graduated tax (per thous- and) based on intended retail selling price (*). Similarly, "large" cigarettes, weighing more than three pounds per thousand, carry an excise higher than that on small cigarettes. Small cigars and both small and large cigarettes are taxed per thousand without reference to retail selling prices. Snuff, and smoking and chewing tobacco are taxed per pound. Whether for revenue purposes a graduated tax on classes of cigarettes should be considered — whether such tax would benefit tobacco farmer, manufacturer, labor, and the volume of consumption — cannot be determined by rule of thumb. Scientific determination of a taxing base must rest upon a full knowledge of many factors not heretofore disclosed to government — s\ich as ef- fect on growers of leaf tobacco, costs of production, advertising expenditures, the relationship of labor costs to manufacturers' net selling price. Here again — in the interest of producers and in the public interest — is there need for organized research. (*) See Table II, Appendix 4; also Chapter V, The Cigar Manufacturing Industry. 10591 .. -239- ■• CHAPTER VIII POSSIBILITIES FOR RESEARCH IN- -THE TOBACCO INDUSTRY A. T HE SCOPE OP RESEARCH IN THE T OBACCO INDUSTRY Research in the Tobacco Industry has "been confined to the relative- ly narrow limits established "by the immediate objectives of the indivi- dual concerns which have undertaken independent projects for the solu- tion of their problems, together with certain more general investiga- tions conducted by agencies of the federal government. The lack of co- ordination in the different efforts that have been made makes it diffi- cult to appraise the extent of the ground covered, or to obtain compre- hensive, authentic data en the major problems of the industry as a whole. The work that has been done failed to produce the type of information necessary to the solution of certain industry-wide problems which are comparatively new to the industry and to the economic and social struc- ture of the country. Moreover, the experience of other industries which have adapted broad-scale research programs indicates that there are ad- vantages to be gained from such programs even in the field of indivi- dual management problems. Prior to the depression, and during periods of large profits, in- dustry in general paid little attention to problems involving the intern- al relationships of its various functional s ub-divis ions, or its extern- al relationships with sources of -supply, channels of distribution, aad the general public. No realization existed of the integrated nature of these relationships, because the mechanism as a whole was working smooth- ly. It was only when difficulties occurred that maladjustments became apparent. The Tobacco Industry was no exception. The diversity of interest, and in some instances, the a ctive antagonism of interest between the component elements of the Tobacco Industry has made it difficult to obtain cooperative action, even though the economic desirability of such action may have been apparent. In recent years the problems of management have become increasingly broad in scope, with the result that a more comprehensive knowledge of all operating factors is essential to effective performance, including knowledge of certain trends and forces that may have presented no prob- lems a few years ago. In the tobacco industry, there is good reason to believe that a well-planned program of general industrial research will not only yield tangible returns, but is also necessary to the success- ful guidance of the industry in the complexities of the economic, social, and political changes that have taken place and that have yet to take place. It is impossible to enumerate all the specific areas in which re- search of this nature would prove valuable, but the following illustra- tions may indicate the extent of the territory open for exploration. 10691 -240- S. THE FIELD FOR COORDINATED INDUSTRY RESEARCH 1. The Curing of Tobacco. Bright Flue-Cured tobacco, as the name implies, is cured in the farmer's barn by radiated heat. In the process of curing, the temper- ature is under more or less accurate control, depending on the past experience and skill cf the individual farmer. There is no attempt whatever at humidity control. Fine quality tobacco in the field may be ruined in the curing process. This Unit has "been unable to discover any attempt at scientific research on this important problem. Burley and Maryland tobaccos are air-cured. The cigar types of tobacco are generally air-cured. The process of air-curing is carried on in the barn where the tobacco hangs and there is no application of artificial heat. The open-fire method on the dirt floor of the barn is used on Virginia fire-cured tobacco and on certain types grown in western Ken- tucky and Tennessee. Virginia sun-cured (Type 37) is racked in the field for curing. While the cost of flue-curing is higher than that of the other methods employed, the quality of the tobacco is decidedly improved by that method. Its better grades command a higher price for domestic use in cigarettes and for export trade than any other type of American- grown tobacco leaf. Without question, proper research should result in a general im- provement in the process of flue-curing. It is also of equal impor- tance that research be used to determine what methods of during are best adapted to the other types, including cigar leaf. There is a real possibility of improving the quality average of the tobacco crop, With the present trends in foreign markets, and the particular danger of less demand for the lower grades, quality constantly assumes more im- portance to the farmer. The general trend toward cigarette smoking, both at home and abroad, offers continuing opportunities for the use of mild American tobaccos. Burley represented (1934) 1.7$ of the estimated value of leaf tobacco exported (*). It is well with in the range of possibili- ties that an improved Burley might find considerable demand abroad. Opportunity for research may be further illustrated in the case of cigar leaf, where the average large s tocks of low grade leaf over- hanging the market might well be reduced by a more exact chemical de- termination of the factors governing quality. (*) Department of Commerce, Bureau of Foreign and Domestic Commerce, Tobacco Division, Bulletin Ho. 521, July 2, 1935. 10691 -241- -,&>* Primary- Leaf Market In Chapter' III on INTEGRATION WITH AGRICULTURE, under the topic of "The Auction and Loose-Leaf Market", there has "been discussion of the problems developing from the short marketing season and the speed of sales, both of them detrimental to the price paid the farmer. The speed of sales also prevents close scrutiny of grades of leaf "by "buyers. Further research on these subjects, and a definite consideration of the other methods of marketing, far less satisfactory than the auction sys- tem, are of immediate interest to the Department of Agriculture and to manufacturers and exporters. 3. By-Products . There is great need of experimental work in the manufacture of tobacco "by-products. 4. The Aging of Tobacco . Immediately after its purchase on the warehouse floor, tobacco is put "in order". It is dried and a definite amount of moisture added prior to packing in hogsheads for storage. Twice each year, the tobac- co "sweats" in the hogshead, once early in the summer and again in the early fall. This sweating process may ta.ke place for three successive years. A considerable amount of tobacco used in manufacture "both here and abroad is aged for improvement in quality in this way and for this period. A considerable amount of work has been done in the Department of Agriculture, sometimes jointly with state institutions, covering the chemistry of the various types of tobacco leaf in its green and dried forms, but scientific research to determine the exact character of the sweating process as tobacco ages in the warehouses of the manufacturers and leaf dealers is decidedly lacking. The inventories of the Big Three are said to approximate $300,000,000. Other than the insurance feature of stocking tobacco a- gainst an occasional crop of poor quality or small size, the amounts of these inventories are due to the aging of tobacco for improvement in qualitjr. It is not improbable that an exact determination of the changes taking place in the natural process of sweating would permit a real reduction in stocks on hand, by shortening the period now required for aging. Distinct changes of this character have been common in other industries. The possibility of temporary curtailment of leaf purchases must be recognized in -this connection. 5. Distribution Problems In that section of Chapter I entitled "Cigarette Selling Prices and Policies", the influence of the manufacturer on specific problems of of distribution has been outlined. The jobbers have emphatically ex- pressed their belief that cooperation with manufacturers is essential to the solution of certain present difficulties. It would be distinct- ly unfair, however, to lay all the troubles of tobacco distribution at the door of the manufacturer. 10691 -242- A joint research consideration of this problem includign all dis- tributing groups and the manufacturers would, without question, bring out information not now available, and of great value to manufacturers as well as distributors. There is no more important field for coopera- tion between branches of the Industry. The wholesalers are ready and waiting. 6. Labor The mechanization field study (*) conducted by this Unit shows wide variation in technc logical displacement. The problem of the re- lation of labor standards in this industry to those in other industries in the same areas needs further elucidation. 7. Foreign Marke ts (**) The need for study of foreign markets for tobacco is evident. This Unit, working in cooperation with the Tobacco Division of the Bureau cf Foreign and Domestic Commerce, has been of some assistance in pointing out to the Tobacco Association of the United States further possibilities of foreign markets, through detailed analyses of four European and four South American countries. 8. Relationships with C-overnment Not only for the purpose of presenting an accurate picture of the Industry in connection with taxation, but also in view of the desira- bility of working out an orderly and practical adjustment of relation- ships between government and industry, it is necessary that industry be in a poc.i ;\on to define accurately and in concrete terms its problems and requirements. The uncertainties which have existed fcr many years in the past with respect to what is permitted and what is forbidden under the Antitrust Laws, the question of the extent to which the federal government may be of assistance to industry in the solution of its problems, and the probability that further industrial legislation will demand the fullest authentic industrial information, — these con- siderations make it evident that for its own protection, cr for pore positive benefits to be received through cooperation with the federal government, industry is under the necessity of examining its position in as comprehensive a manner as possible. Many of the mistakes made under ERA which were detrimental to the interests of industry, might have been avoided had adequate research programs been established for some time before the advent of the codes. As stated in the Chapter on Taxation, tobacco tax collections rep- resented 16.6fo of total Internal Revenue collections in 1935. When compared with this contribution of the industry to government income, the amounts expended in the tobacco divisions of the Bureau of Agricul- tural Economics, Department of Agriculture and of the Department of Commerce, are pitifully small. The type and character of their work, insofar as it goes, is excellent. But the limitations imposed upon them by lack of available funds are most evident. Thorough exploration of all problems pertinent to the industry not only for the benefit of (*) See Chapter II, Section C. (**)See Chapter IV, foreign Trade in Leaf Tobacco. 10691 government "but for the grower and manufacturer, require greater appro- priations in the public interest. C- ASSOCIATI ONS IN THE INDUSTRY l a F unctional Organization and the Relationship of the Associa - tions to Research . The major functional divisions of the Tobacco Industry are repre- sented "by trade associations whose objectives and activities are based upon the common interests of each group. Before proceeding to analysis of the method by which a joint program of general industry research may be established, it is necessary to outline briefly the existing status of trade association organization, in order to indicate, first, the specific fields of interest represented, and second, the mechanism through which research may obtain sponsorship, direction, and support. (a) National Association of Auction and Looseleaf Tobacco Ware- house Associations. The association of the Auction and Looseleaf Warehouse group is con- cerned today with retaining as much as possible of the benefits of the NBA code period. (b) The Tobacco Association of the United States. The membership of this association is composed largely of dealers in smoking, cigarette, chewing and snuff types of tobacco, and ware- housemen, with a sprinkling of bankers, steamship companies, railroads, and storage and forwarding companies. The headquarters of the associa- tion shift with the place of residence of its president. Because of the fact that the larger American manufacturers have their own leaf buying organizations, the primary interest of this asso- ciation is in the export trade. The Tobacco Association of the United States ha.s never been con- spicuously active, but in 1935, because of the drastic decrease in de- mand for American leaf in the Far East, the association became more ac- tive and committees were appointed to study this and similar problems. (c) .Retail Tobacco Dealers of America, Inc. National Association of Tobacco Distributors, Inc. , Both wholesalers and retailers have associations under effective leadership. They developed, during the code period, into organizations of valuable help to their respective groups. They have continued their activities and have made progress in a study of their problems. (d) Tobacco Merchants Association of the United States. For many years the Tobacco Merchants Association of the United States has represented the interests of the Cigarette, Snuff, Chewing and Smoking Tobacco Manufacturing Industry -244- (e) Association of Cigar Manufacturers and Leaf Tobacco Dealers It will "be noted that this group contains dealers interested in cigar type tobacco leaf and cigar manufacturers. This association was very active during the 33BA code period. Hot long before the termina- tion of the AAA, conferences between that administration and a group representing this industry showed them to be far apart on' such subjects as parity prices, processing tax levels, and quality of cigar leaf stocks on hand. The growth of mechanization and the steady trend toward concentra- tion of production among a small number of corporations has naturally developed friction between machine-made and hand-made cigar manufac- turers, insofar as common association interests are concerned. D.- con CLUS I Oil The weakness of these associations, individually and as a group, is evident from the fact that there is no common council table. Trade associations would be the natural channel, in self interest, for the research indicated and for working out a common understanding of the broad problems underlying the industry. The outstanding need of the tobacco industry is for the estab- lishment of a general program of research as broad and thorough and as disinterested as ha.s been suggested in these pages, in order to place the industry on a scientific foundation. A way must be found to bring all the elements together in the public interest. HThat better solution of the problem could there be than the es- tablishment of a Tobacco Research Foundation, to undertake not only the major problems, some of which have been here so briefly outlined, but all the hundred and one auxiliary problems that organized research usually finds present. Science, economics, and business would thus find a common meeting ground with government, grower, manufacturer, distributor. Exact knowledge would displace rule of thumb methods; the multitude of dark corners need illumination. Into this research would go questions of taxation, problems of growing, curing aging and grading of tobacco, efficiencies of produc- tion methods, technological explorations and determinations, distri- bution and advertising problems, the development at home and abroad of new markets ar*d the reviving of old, the charting of future trends and future dangers that research foresight might point the way to avoid. These are the rough essentials of the work of a Tobacco Research Found- ation. It is almost inconceivable that an industry of this importance should have gone so many years without some form of coordinated re- search. 10691 -245- APPE1I DI.CES THE IOBACCO STUDY Appendix 4 (Taxation, Revenue Receipts, etc.) ?able No. Title 1 Total Revenue Receipts of the United States Government; Total Internal Revenue Collections, (showing revenue from tobacco tnxes and other major groups); and Total Customs Receipts, (showing import duties on tobacco and all other commodities). ?or Selected Years "between 1?35 and 1914. 2 Changes in Rates of Taxation on Tobacco Products from 1914 to 1935 (inclusive). 3 States Taxing Cigarettes and their rates of oaxation States Taxing Smoking Tobacco and their rates of taxation: States Taxing Chowing Tobacco and their rates of taxation States Taxing Snuff and their rates of taxation. 4 Receipts from Cigarette Taxes and Per Capita Cigarette Sales in States Taxing Cigarettes Alone 5 List of Statements 10691 * -21,6. H CJ r^s l>- •O r-110 CSJ os M I "a H Os M Wl 31 H 3ICSJ Os >-5|H I el r«"s K|CS1 Os OH SI >2! .OS COM (SI «'o WIKN Ov i^ H cvj I l I I so h Ks-or«-\ os S3 J- CSjif I bo H mcsj ir\ d- N^ lTv«) i-l r-- CSJ r— CSJ iH I rH r-l •OOsO .d- CSJ -O 3- so cu J-OOO SO i — r — r~— cvj i*n OS CSJ K\ iH OWOH d" Hd- I I i^-f«"veOO\ msoos in h O r csj CSJ i- CSJ o j*3F csj ho CSJ K" m csj csj Os M I — O UTSOs riSJHO h h csj ir> r^-csjosos «jjd-jd- csj csj csjosH csjh-O csjr^ isa |rfs OsCSJOsi-l C^-Os -O CSJ os>Oiri!-< r^w H^t >l O W K w tc « O W K CO gJKH < E-i CO co t£ m ss o o o &, a M w En CO CO b O E-> S- 1 CO U Ph Oh CO 3 M M H oouto co 3 W CO CO CE pssffi 5oo5 ►Jflf^t OCO CO s ».-:». MO o o h)oj)k^1 M - -247- < vSlTSNBp 4 TABLE II'(*) CHANGES 1 LT RAT ES OF TAXAT ION ON TOBA CCO PRODUCTS FROM 1914 to 1935 (inclusive) 1926 1919 1917 1914 (A) (B) (C) Large Cigars: Class: A (Per thousand) $2.00 $4.00 $3.00 ) B " » 3.00 6.00 4.00 ) C " " 5.00 9.00 6.00 ) 3.00 (D) D " " 10.50 12.00 8.00 ) E " " 13.50 15.00 10.00 ) Small Cigars (Per thousand) .75 1.50 1.00 .75 (E) Large Cigarettes (Per thousand) (No change) 7. 20 4.80 3.60 (E) Small Cigarettes (Per thousand) (Ha change) 3. 00 2.05 1.25 (E) Snuff (Per pound) (No change) .18 ..13 .08 (E) Chewing & Smoking(Per pound) (No change) .18 .13 .08 (E) Dates that rates "became effective: (A) From March 29 , 1926 (B) From February 25, 1919 (C) From November 2, 1917 (D) From July 1, 1901 (E) From July l t . 1910 (*) Source: Revenue Acts as enacted by the Senate and the House of Representatives of the United States of America. 10691 -248- APPENDIX 4 TABLE ."III STATES TAXING CIGARETTES AND THEIR RATES 0? TAXATION State Alabama Ari zona Arkansas Georgia Iowa Kansas Louisiana Mississippi North Dakota Ohio Oklahoma South Carolina South Dakota Tennessee 10691 Tax Rate 1 cent for each 5 cent or fraction retail selling price. 2 cents on each 20 cigarettes or fractional part thereof. $2.50 per thousand 10 -oer cent of tne retail price 1 mill on each small cigarette 2 mills on each large cigarette 2 cents on each 20 cigarettes or fractional part thereof. 2 mills on each cigarette sold 1 cent for each 5 cent or fractional part thereof of the retail selling price. lk mills on each small cigarette 2 mills on each large cigarette 1 cent on each 10 cigarettes or fractional "oart thereof. y Industry and Company Groups. Identical Plants - Cigarettes. Addendum, Part 2 — Average Hours Worked in One Week for 1933 and 1935 by Color, Sex and Combined Occupations and by In- dustry and Company Groups. Identical Plants - Cigarettes. Table 5B , Part 3 -- Average Hours Worked in One Week for 1933 and 1935 by Occupation, Color, and Sex. By Industry and Company Groups. Identical Plants - Smoking and Chewing and Snuff. Addendum, Part 3 — Average Hours 'Worked in One Week for 1933 and 1935 by Color, Sex and Combined Occupations and by In- dustry and Company Groups. Identical Plants - Smoking and Chewing and Snuff. Table 6A, Part 1 — Average Earnings in One Week for 1933 and 1935 by Occupation, Color, and Sex, by Industry and Company Groups. All Reporting Plants - Total Code Industry. Addendum, Part 1 — Average Earnings in One Week for 1933 and 1935 by Color, Sex, and Combined Occupations, and by Industry and Company Groups. All Reporting Plants - Total Code Industry, Table 6A, Part 2 - Average Earnings in One Week for 1933 and 1935 by Occu- pation, Color and Sex; by Industry and Company Groups. All Reporting Plants — Cigarettes. Addendum, Part 2 — Average Earnings in One Week for 1933 and 1935 by Color, Sex and Combined Occupations and by Industry and Company Groups. All Reporting Plants - Cigarettes. 10691 / -«i&C - Table SA, Part 3; — Average Earnings in One "week for 1933 and 1935 by Oc- cupation, Color and Sex; by Industry and Company Groups. All Reporting Plants — Smoking and Chewing and Snuff. Addendum, Part 3 — Average Earnings in One Week for 1933 and 1935 by Color, Sex and Combined Occupations and by Industry and Company Groups. All Reporting Plants — Smoking and Chewing and Snuff. Table 63, Fart 1 — Average Earnings in One Week for 1933 and 1935 by Occupation, Color, and Sex; by Industry and Company Groups. Identical Plants — Total Code Industry. Addendum, Part 1 — Average Earnings in One Week for 1933 and 1935 by Color, Sex, and Combined Occupations, and by Indus- try and Company Groups. Identical Plants — Total Code In- dustry. Table 6E , Part 2 — Average Earnings in One Week for 1933 and 1935 by Occupation, Color and Sex; by Industry and Company Groups. Identical plants — Cigarettes. Addendum, Part 2 — Average Earnings in One Week for 1933 and 1935 by Color, Sex arid Combined Occupations and by Industry and Company Groups. Identical plants — Cigarettes. Table SB, Part 3 — Average Earnings in One Week for 1933 and 1935; by Occupation, Color and Sex; by Industry and Company Group. Identical Plants - Smoking and Chewing and Snuff. Addendum, Part 3 — Average Earnings in One Week for 1933 and 1935 by Color, Sex and Combined Occupations and by Industry and Company Groups. Identical Plants - Smoking and Chewing and Snuff. Table 7A, Part 1 — Average Hourly Earnings in 1933 and 1335 bv Occupa- tion, Color and Sex; by Industry and Cornpany Groups. All Reporting Plants - Total Code Industry. Addendum, Part 1 — Average Earnings Per Hour for 1933 and 1935-, by Color, Sex, and Combined Occupations, and by In- dustry, and Company Groups. All Reporting Plants - Total Code Industry. Table 7A, Part 2 — Average Hourly Earnings in 1933 and 1935 by Occupa- tion, Color and Sex; by Industry and Company Groups. All Re- porting Plants - Cigarettes. Addendum, Part 2 — Average Earnings Per Hour for 1933 and 1935, by Color, Sex and Combined Occupations and by Industry and Company Groups* All Reporting Plants — Cigarettes. 10591 a- -267- Table 7A, Part 3 — Average Hourly Earnings in 1933 and 1935; by Occupa- tion, Color and Sex; "by Industry and Company Groups. All Reporting Plants - Smoking and Chewing and Snuff. Addendum, Part 3 — Average Earnings Per Hour for 1933 and 1935 by Color, Sex and Combined Occupations and by Indus- try and Company Groups. All Reporting Plants - Smoking and Chewing and Snuff. 'Table 7B , Part 1 — Average Hourly Earnings in 1933 and 1935 by Occupa- tion, Color, and Sex — by Industry and Company Groups, Ident- ical Plants — Total Code Industry. Addendum, Part 1 — Average Earnings Per Hour for 1933 and 1935 by Color, Sex, and Combined Occupations, and by In- dustry and Company Groups. Identical Plants — Total Code Industry. Table 73, Part 2 — Average Hourly Earnings in 1933 and 1935 by Occupa- tion, Color and Sex; by Industry and Company Groups. Identical Plants — Cigarettes. Addendum, Part 2 — Average Earnings Per Hour for 1933 and 1935 by Color and Sex and Combined Occupations and by In- dustry and Company Groups. Identical Plants — Cigarettes. Table 7B , Part 3 — Average Hourly Earnings in 1933 and 1935 by Occupa- tion, Color and Sex; by Industry and Company Groups. Iden- tical Plants — Smoking and Chewing and Snuff. Addendum, Part 3 — Average Earnings Per Hour for 1933 and 1935 by Color, Sex and Combined Occupations and by Indus- try and Company Groups. Identical Plants — Smoking and Chewing and Snuff. Table 8, Part 1 — Distribution of Employees in 1933 and 1935 by Number of Hours 'Worked in One Week for all Occupations Combined and for Selected Occupations. Total Code Industry — All Reporting Plants. (in BLS Files). Table 8, Part 2 — Distribution of Employees in 1933 and 1935 by Number of Hours Worked in One 'Week for All Occupations Combined and for Selected Occupations. Cigarette Industry — All Reporting Plants. (in BLS Files) Table 8, Part 3 — Distribution of Emoloyees in 1933 and 1935 by Number of Hours 'Worked in One Week for All Occuoations Combined and for Selected Occupations. Chewing and Smoking Tobacco and Snuff Industry — All Reporting Plants, (in BLS Files) 10691 Table 9 -263- Part 1 — Distribution of Employees in 1933 and 1935 "by Amounts Earned in One Week for All Occupations Combined and for Selec- ted Occupations. Total Code Industry — All Reporting Plants. (In 3LS Files) Table 9 Part 2 — Distribution of Employees in 1933 and 1935 by Amounts Earned in One Week for all Occupations Combined and for Se- lected Occupations. Cigarette Industry — All Reporting Plants. (In 3LS Files) Table 9, Part 3 — Distribution of Employees in 1933 and 1935 by Amounts Earned in One Week for all Occupations Combined and for Selec- ted Occupations. Chewing and Smoking Tobacco and Snuff Indus- try — All Reporting Plants. (In BLS Files) Table 10, Part 1 — Distribution of Employees in 1933 and 1935 by Aver- age Hourly Earnings for All Occupations Combined and for Se- lected Occupations. Total Code industry — All Reporting Plants. (In 3LS Files) Table 10, Part 2 — Distribution of Employees in 1933 and 1935 by Aver- age Hourly Earnings for all Occupations Combined and for Selected Occupations. Cigarette Industry — All Reporting Plants. (In BLS Files) Table 10, Part 3 — Distribution of Employees in 1933 and 1935 by Aver- age Hourly Earnings for All Occupations Combined and for Selected Occupations. Chewing and Smoking Tobacco and Snuff Industry — All Reporting Plants. (in BLS Files). 10691 -269- Appendix 7 DISTRIBUTION ' A. PRICE DISCRIMINATION 1 . Special Disc oun ts and Allowances (a) General Throughout the history of the tobacco industry, it has been repeatedly asserted that the retail chains and other selected outlets possessed an important advantage over in- dependent retailers because they receive large discounts and allowances not obtainable by their independent competi- tors. It has been claimed that these allowances make it possible for the chains and other outlets to sell tobacco products as "leaders" at prices which cannot be met by in- dependent tobacco retailers without loss. There is thus created in the minds of the consuming public the impression that similar low trices prevail on all merchandise which, it is alleged, is rarely justified by actual facts. Retail tobacco merchants, particularly the chain tobacco stores and the independent cigar stores have made vigorous protests against the practice, claiming that the large manu- facturers thereby actively encouraged price cutting and "Ioqs- leader" selling. They point to the extremely low margins on tobacco products and their inability to meet the resulting price competition and still remain in business. (b) Definition As used in this report and by the Federal Trade Commission, special discounts and allowances are defined as all those forms of discounts, exclusive of cash discounts, which are not shown by the manufacturers on the face of their regular invoices but which are subsequently paid or allowed by the manufacturers to chain stores, wholesalers or other outlets. ( c ) General Characteristics All such price concessions may be divided into three general categories: (l) volume or quantity; (2) advertising and promotional; and (3) all others. Variations in types of al- lowances extend from progressive discounts increasing with volume purchased, to straight cash refunds for which no ex- planation need be given. Credit and merchandise allowances are common. 10691 -270- 2. Extent of Special Allowa n ces (a) Cigarettes and Tobacco In a study made "by the Federal Trade Commission, it was shown that, in 1929, twenty manufacturers of cigarettes and tobacco from a total of 32 reporting ma.de allowances of about $1,578,000 or 2.66^ on total sales of $59 ,315,000; and in 1930, 21 of these manufacturers made allowances of more than $2,330,000, or 1.7$ on their total sales. However, on the total sales of all 32 reporting cigarette and tobacco manufacturers (amounting to $181,525,000 in 1929 and $219,934,000 in 1930), it was shown that .8 7 3 and 1.C6-: for 1929 and 1930 respectively, represented the percentages given in special allowances. (b) C igars In the Federal Trade Commission study, it was shown that in 1929, 51 manufacturers of cigars from a total of 77 reporting made allowances of more than $1,515,000 or 4.45$ on total sales of $34,029,000; and in 1930, 55 of these manufacturers made allowances of about $2,330,000 or 5.15$ on their total sales of $26,997,000. However, when the total sales of all reporting cigar manufacturers (345,451,000 in 1929 and £43,358,000 in 1930) were given consideration, it was shown that 3.33;i and 3.21$ for 1929 and 1930 respectively, represented the percent- ages given in allowances. 3. Accounts with Chains and Wholesalers (a) Cigarettes and Tobacco In 1930, 31 cigarette and tobacco manufacturers reported a total of 410 accounts with chains with 105 or approximately 25.6/0 receiving allowances. From a total of 790 wholesalers, only 101, or less than 13^, received these allowances. In 1929, from total allowances of $1,577,897 over $932,215 or 59;? of the allowances given went to chains and about $645,681 or 41$, to wholesalers. In 1930, f rom t otal allowances of $2,330,034, the chains received more than $1,914,000 or 82$ of the allowances and the wholesalers only $415,838, or about 183. (b) Cigarc In 1930, seventy-four (74) cigar manufacturers reported a to- tal of 386 chain accounts with 133, or 34.46$, receiving al- lowances. Seventy (70) cigar manufacturers reported a total of 386 accounts with wholesalers; of these 125, or 32.38)o, re- ceived allowances. 10691 -271- 4. Rates of Special Allowances ••(a) Cigarettes a nd Tobacco In 1930, sixteen (16) cigarette and tobacco manufacturers mak- ing allowances to a total of 105 chain store accounts reported that 73 received allowances under 5$; 20 from 5$ to 10$ to 15$; 2 from 15$ to 20$ and 4 accounts received in excess of 30$. In the same year, 20 cigarette and tobacco manufacturers making allowances to a total of 101 wholesalers reported that 87 re- ceived allowances under 5$; 13 received from 5$ to 10$ and only 1 received allowances ranging from 10$ to 15$. All customers accounts carrying allowances from 15,o up, with the one exception, ' were chain store accounts. A large percentage of accounts carrying allowances are in the group carrying under 5$. About 70$ of the chain accounts and 84$ of the wholesale accounts are in this group. (b) Cigars In 1930,' 49 cigar manufacturers making allowances to a total of 133 chain accounts reported that 77 chains received allowances under 5$; 39 from 5$ to 10$; 13 from 10$ to 15$; 1 from 15$ to 20$; 1 from 20$ to 30$, and 2 received 30$ or more. In the same year 39 cigar manufacturers making allowances to a total of 125 wholesalers reported that 100 received allowances under 5$; 16 received from 5$ to 10$; 8 received from 10$ to 15$ and only one received 15$ to 20%. Eighty per cent of the wholesaler accounts receiving allowances are in the "under 5$ group" against only 59$ of the chains. 5. Special Allowances to Different Chains In 1930, the cigarette and tobacco manufacturers and the cigar manu- facturers gave their largest discounts to the tobacco chains. The general conclusion drawn by the Federal Trade Commission was that "the highest rates of allowances are obtained by the chains with relatively small volume." This comment follows: "Among the 23 chains with the lowest volume of purchases in 1929, there are 7 reporting allowances of over '6 per cent on sales, whereas among the larger chains, there are only 2 re- porting as high a rate. The rates of discount secured by some of the larger chains are very low. Of the 12 chains with over $1,000,000 worth of purchases in 1929, there- were 4 show- ing allowances of less than six tenths of 1 per cent. The al- lowances of The Great Atlantic and Pacific Tea Company, aggre- gated slightly over 1 per cent of the total sales (33 million) made to it by these manufacturers, and those of the Kroger Gro- cery & Baking Co., with $10,000,000 worth of purchases were only a trifle higher than those of The Great Atlantic & Pacific Tea Co.******* "In 1930 there were 13 chains with over $1,000,000 worth of 10691 -272- purchases reported, as compared with 12 in 1929. Six of these 13 chains obtained allowances of less than 1 per cent and 3 of them of less than three tenths of 1 per cent." (*) A story different in detail appears in the report of the House of Representatives' Special Committee on the Investigation of the American Retail Federation in reference to E. R. 8442. This Com- mittee secured other testimony which indicated that in 1934 the Liggett Drug Company, Inc. received allowances from twenty of the largest manufacturers of tobacco products. (**) This drug store chain received special allowances of 5% on purchases of the following brands of cigarettes: Lucky Strike, Old Gold, Wings Listerine, Polar, Marlboro, Cambridge, Time and Kentucky Winners. The same chain received 5$ on purchase of the following brands of cigars: Bayuk Phillies, La Palina, Dutch Master, San Felice, John Raskin, Flor do Melba, Muriel, R. G. Dun, Blackstone; and 7/o in the case of Garcia Grande cigars and 3',- in the case of La Primadora cigars. Moreover, the American Tobacco Company, in addition to the 5$ on Lucky Strike, also allowed the chain $25.00 per store for making window displays for one week. The Liggett & Myers Company allowed the chain $3,300.00 per month for displays. This same chain was also granted special allowances ranging from 2$ to 9$ by several other manufacturers af tobacco products. The great preponderance of special allowances received by the Liggett Drug Company, Inc., amounted to 5$. The testimony of the Great Atlantic and Pacific Tea Company showed that they had received $1.00 per store per month for seven months in 1934, from the Liggett & Myers Tobacco Company — an amount com- puted to be in excess of $100,000 (***) 6 . Speical Allowances on Miscellaneous Merchandise and Smokers' Accessoria l As reported by the Federal Trade Commission, manufacturers of mis- cellaneous merchandise such as candy, chewing gum and sundries, rep- resented less than 13y> of the total manufacturers re-oorting and al- so of the total manufacturers making allowances in 1929 and 1930. These allowances also accounted for less than 9$ of the sales of all reporting manufacturers and less than Iftfo of the total sales of manufacturers making allowa n ces. Howev er, they represented mo re (*) Federal Trade Commission report on Special Discounts and Allowances to Chain and Independent Distributors, Tobacco Trade, October 26, 1933, Page 92. (**) Hearings before the Special Committee on the investigation of the American Retail Federation, H. R. 8442, 74th Congress, first session, Vol. ¥o. 2, July 31, August 8-9, 1935, oage 75. (***) Remarks of Hon. Wright Patman, Congressional Record, 74th Congress, ,. First Session, July 29, 1933. 10691 -273- than half of the total allowances ($3,305,266 from a total of $6, 417, 162) given by all reporting manufacturers in 1929 and slight- ly more than 46fo of the total in 1930 (§3,196,581 from a total of $6,928,992). The group of manufacturers of smokers' accessories making allowances reported total allowances of 318,774 in 1929 and of $12,487 in 1930 - sums, however, that amounted roughly to 5fi of sales to these tobac- co distributor outlets in both years. 7. Special Allowances to Selected Retailer s not Purchasing Directly from Manufacturers . Special allowances by the manufacturers to retailers are by no means limited to direct buyers. Manufacturers' agents attempt to secure promotion of their products at point of sale and often show a will- ingness to contribute towards the expenses of a wide variety of pos- sible services. Tobacco retailers are constantly attempting to se- cure special allowances for advertising a manufacturer's goods either by window, floor, or counter displays. Evidence tends to indicate that these advertising services are often only vaguely re- lated to any measurable work or effort on the part of the retailer. Such allowances therefore usually involve discrimination and become powerful weapons in unfair competition with other members of the trade. The extent of free deals and allowances made by tobacco manufacturers to non-direct buyers is not known, but the practice has been prevalent in varying degrees for many years, depending upon the severity of the competition between manufacturers and their efforts to maintain their own individual competitive position. B • LEADE RS AND LOSS LEADERS L. Definitions Few factors bearing upon the distribution of tobacco products are of more general interest than the "leader" and "loss leader" prac- tices. The two terms are loosely used and have indefinite meanings but they are variously considered in the distributive trades to des- cribe merchandise sold below net invoice cost; or goods sold at net purchasing cost plus operating cost, or simply goods sold at prices below "regular prices." The term ^loss leader" as applied in the tobacco industry relates to sales below "lowest reasonable cost, which is taken to mean the cost for an important portion of the retail distribution of tobac- co products showing an average cost lower than for any other sig- nificant portion of retail distribution on which the usual ser- vices are given." (*) Throughout the NRA Code experience, the industry usually took the position that retail sales below the "regular prices" charged by the tobacco chains and the independent tobacco retailers were "loss (*) Cost of Retail Distribution of Tobacco Products published by Merchan- dising Pact, Inc., 110 E. 42nd St., N, Y. C, 1934, page 2. 10691 -274- leader 11 ' sales; and in the case of wholesalers, that the same defi- nition applied to sales made belov; prices charged by the accredited wholesale tobacco dealers. 2 . Adaptability of Tobacco Products as L os s Lea ders Tobacco products, -particularly- the popular brands of cigarettes, make excellent "convenience items" which can be purchased at the most convenient outlet without need of shopping around for the types and qualities desired. Cigarettes are sold in small units and the stock turnover is very high. Small capital investment is involved. Cigarettes can be handled in any type of retail outlet since little space, no special equipment, no skill in selling are required. Plence tobacco products, particularly cigarettes, rank with tooth pastes, soaps, razor blades, canned soups and vegetables as excel- lent "loss leader" items (*). 3 . History of Loss L e ader Sellin g Ho information has been secured on the history of "loss leader" selling in the tobacco trade earlier thar. 1911. Immediately after the dissolution of the American Tobacco Company in that year, the ' United Cigar Stores Company led the way in "price wars" although some -orice -cut ting had occurred in other branches of the retail trade. In 1913, the drug chains started a "price war" aimed at the United and the independents. During the World War prices re- mained stabilized but price-cutting was resumed at intervals thereafter. In 1927 the Great Atlantic & Pacific Tea Company introduced .popular brands of cigarettes for sale at cut prices in its 15,000 stores and other chain grocers followed. Intermittent outbursts of ex- treme pricecutting by department stores and other outlets followed. In 1928, for various periods of time, prices of "fifteen cent" brands sold at two packs for twenty-one cents in some sections of the country. Price-cutting by various outlets has been recurrent in the history of the industry, particularly since the dissolution of the American Tobacco Company. That the manufacturers have insti- gated and participated in price-cutting is unquestionable. The price war of 1933 when the popular "fifteen cent" brands sold down to ten cents per oacic at trie regular cigar stores was accompanied by a decrease in the manufacturers' list price from $6.85 to $5.50 per thousand. Authorities agree that this was an attempt by the large manufacturers to regain their competitive position against the progress being made by the ten cent brands then gaining foot- hold in the cigarette market. Retailers using tobacco products, particularly cigarettes, as "loss leaders", are motivated by the effectiveness of price appeal. In many retail establishments where tobacco products are only a small fraction of total sales, the loss can be more easily absorbed by wider margins on other products. The nature of the competition in- (*) See Chain-Store Leaders and Loss Leaders, Report of the Federal Trade Commission to Senate Committee. Document No. 51 - 1935. 10691 -275- volves primarily the economic conflict between "umi -product and . multi -product distribution. Chain cigar sotres and independent cigar stores, although they have changed character somewhat by the addition of other lines of merchandise, trap themselves when attempting to follow a "loss leader" policy. Frequently bank- ruptcy has been the result. 4 . Effects of L oss Leader Selli ng The experience resulting from the "loss leader" selling of cigar- ettes has not shown the same characteristics of other "loss leader" merchandise; with other merchandise, the consumer links price-cut- ting with deterioration in quality. Cigarette manufacturers have, however, maintained quality and have forced the distributing out- lets to absorb the ill effects of price-cutting. In the case of cigars, loss leader selling has been more vulnerable and has oc- casionally resulted in a decrease in size of cigars and a depre- ciation in quality. Manufacturers of cigars often grant .exclusive franchises to whole- salers in certain territories. The wholesalers, in turn, grant ex- clusive rights for 'sale of the particular manufacturers' brands in the territories allotted to them. It frequently nappens that some retail trade pirates who do not have the privilege of selling the particular brands but who are operating within the territory secure small quantities of the cigars through round-about methods of their own, and advertise them for sale at cut prices. Obviously, immediate repercussions arc felt by all other retailers who regularly sell these brands, and oressure is brought upon the wholesalers for lower prices. As an instance of the pressure, some cases, wholesalers have sold cigarettes at a rnarkap of only. 5/8 of ■ one per cent. (*) "Now and again" says . Reavis Cox, "the jobbers in a city get together and more or less tacitly agree to do away with some disliked prac- tice or institution. For examole, they may decide to do away with sub-jobbers by giving them a discount no greater than that allowed retailers; or they may decide simply to keep all prices up to agreed levels. "Ordinarily, however, the principal purpose of such organizations seems to be to goad tne manufacturers into taking action to main- tain resale -orices. At times, they content themselves with repeated demands for the elimination of persisitent price cutters from the direct lists of manufacturers; at other times they demand the elim- ination from the direct lists of distributors who, they maintain justly or not, are not really entitled to the designation 'jobber'". ( **) (*) Effect of Cigarette Price Regulations, Division of Research and Planning, HEA, Dec. 18, 1934, Appendix A-7, page 2. (**) The Tobacco Industry, Reavis Cox, Columbia University Press, 1933, page 258 10691 APPENDIX 8 TABLE 1. — LIST OF CODES IN THE TOBACCO INDUSTRY References are to Codes of Fair Competition, as approved: Government Printing Office. Code of Fair Competition for the Auction and Loose Leaf Tobacco Ware- house Industry, Volume XVIII , Page 694. Code of Fair Competition for the Cigarette, Snuff, Chewing, and Smoking Tobacco Manufacturing Industry, Volume XXI, Page 95 . Cede of Fair Competition for the Petail Tobacco Trade, Volume XII , Page 35. Amendment to the Code of Fair Competition for the Retail Tobacco Trade, Volume XII . Page 35 . Code of Fair Competition for the Cigar Manufacturing Industry, Volume XII , Page 61. Amendment to Code of Fair Competition for the Cigar Manufacturing Industry, Volume XVII , Page 155 . Amendment to Code of Fair Competition for the Cigar Manufacturing Industry, Volume XXII , Page 451 . Code of Fair Competition for tne Wholesale Tobacco Trade, Volume XI. Page 275. Amendment to Code of Fnir Competition for the Wholesale Tobacco Trade, Volume XVI., Page 283 . TABLE 2. — FINISHED CODE HISTORIES IN THE TOBACCO INDUSTRY. National Recovery Administration files: Auction and Loose Leaf Tobacco Warehouse Industry. Cigar Manufacturing Industry. Cigarette, Snuff, Chewing, and Smoking Tobacco Manufacturing Industry. Wholesale Tobacco Trade. 10691 ■277- Appendix 9. - Foreign Trade in Tobacco Table Number 1, A series of charts and tables in photostat form (58 photostatic sheets\ covering the exports of leaf tobacco and tobacco products from the United States to each of seven foreign coun- tries. These photostats are in National Re- covery Administration files, Tobacco Unit, Ex- ports. The countries covered are: Switzerland Sweden Mexico Nicaragua Brazil Argentina Denmark ]?or each country named, the following information is shown (each subject comprising a separate chart) : Statement of rates of imports Unit values and ad valorem equivalent Quantities in metric tons, with values in francs An analysis of imports from years 1926- 1934 inclusive, for each type of leaf, namely Burley, Dark Fired, Maryland, etc. oO 10691# OFFICE OF THE NATIONAL RECOVERY ADMINISTRATION THE DIVISION OF REVIEW THE WORK OF THE DIVISION OF REVIEW Executive Order No. 7075, dated June 15, 1935, established the Division of Review of the National Recovery Administration. The pertinent part of the Executive Order reads thus: The Division of Review shall assemble, analyze, and report upon the statistical information and records of experience of the operations of the various trades and industries heretofore subject to codes of fair competition, shall study the ef- fects of such codes upon trade, industrial and labor conditions in general, and other related matters, shall make available for the protection and promotion of the public interest an adequate review of the effects of the Administration of Title I of the National Industrial Recovery Act, and the principles and policies put into effect thereunder, and shall otherwise aid the President in carrying out his functions under the said Title. I hereby appoint Leon C. Marshall, Director of the Division of Review. The study sections set up in the Division of Review covered these areas: industry studies, foreign trade studies, labor studies, trade practice studies, statistical studies, legal studies, administration studies, miscellaneous studies, and the writing of code his- tories. The materials which were produced by these sections are indicated below. Except for the Code Histories, all items mentioned below are scheduled to be in mimeo- graphed form by April 1, 1936. THE CODE HISTORIES The Code Histories are documented accounts of the formation and administration of the codes. They contain the definition of the industry and the principal products thereof; the classes of members in the industry; the history of code formation including an account of the sponsoring organizations, the conferences, negotiations and hearings which were held, and the activities in connection with obtaining approval of the code; the history of the ad- ministration of the code, covering the organization and operation of the code authority, the difficulties encountered in administration, the extent of compliance or non-compliance, and the general success or lack of success of the code; and an analysis of the operation of code provisions dealing with wages, hours, trade practices, and other provisions. These and other matters are canvassed not only in terms of the materials to be found in the files, bu + . also in terms of the experiences of the deputies and others concerned with code formation and administration. The Code Histories, (including histories of certain NRA units or agencies) are not mimeographed. They are to be turned over to the Department of Commerce in typewritten form. All told, approximately eight hundred and fifty (850) histories will be completed. Thir number includes all of the approved codes and some of the unapproved codes. (In Work Mate- rials No^ 1§, Co n tents of Code His to ries , will be found the outline which governed the preparation of Code Histories.) (In the case of all approved codes and also in the case of some codes not carried to final approval, there are in NRA files further materials on industries. Particularly worthy of mention are the Volumes I, II and III which constitute the material officially submittt - 1 to the President in support of the recommendation for approval of each code. :\.