look to Congress for this help, and hope that our plight will make itself felt in time to keep us in business.

Mr. RIEHLMAN. How many small independent operators are there in the market?

Mr. WOOD. You mean manufacturing cigarettes?

Mr. RIEHLMAN. Yes.

Mr. WOOD. About five.

Mr. BALLINGER. You are not only advocating that there be a graduated tax on cigarettes, but you are making the point that the present excise taxes are too high? Let us say we started with 7 cents, and then grade it on up from there. You could not produce the 10-cent package

of cigarettes with an excise tax of 7 cents. Mr. WOOD. No; we could not.

Mr. BALLINGER. So that that would have to be revised downward. Mr. WOOD. Yes.

Mr. BALLINGER. And then graded up from a lower point.

Mr. WOOD. That is right, sir.

Mr. BALLINGER. Does your company also make smoking tobacco? Mr. WOOD. We make very little smoking tobacco.

Mr. BALLINGER. You make very little smoking tobacco. All right. The next witness will answer my question then.

Mr. RIEHLMAN. Thank you very much for your testimony, sir.
Mr. WOOD. Thank you, gentlemen.

Mr. BALLINGER. Mr. Bloch, please.

Will you give your full name for the record, Mr. Bloch?

STATEMENT OF JESSE A. BLOCH, CHAIRMAN OF THE BOARD OF DIRECTORS OF BLOCH BROS. TOBACCO CO., WHEELING, W. VA.

Mr. BLOCH. My name is Jesse A. Bloch. I am chairman of the board of directors of the Bloch Brothers Tobacco Co. of Wheeling, W. Va., which is a tobacco manufacturing concern, our principal products being Mail Pouch, a scrap chewing tobacco, Kentucky Club and other smoking mixtures, and Melo-Crown stogies. Our company is a member of Associated Tobacco Manufacturers, an association of 19 smaller tobacco companies in the United States which constitute substantially all of the independent tobacco manufacturing interests which are left in this country. I am appearing for our company and for the association, and I am here today because companies like ours have their backs to the wall, and I am convinced that all of us will pass out of the picture in the near future unless something is done to give us a chance to compete with the big tobacco companies that now control almost all of the profitable tobacco manufacturing business in this country.

Mr. BALLINGER. You mean including pipe tobacco?

Mr. BLOCH. Yes.

I have spent my whole life in the tobacco manufacturing business, in which I started on a full-time basis over 48 years ago. I have known most of the people in the business throughout the years, and I have had a chance to observe the way the industry has developed at first. hand. The things I want to tell this committee are things that I know of my own knowledge, supplemented by other facts and figures that are matters of public record in the Government departments and the courts. The conclusions I propose to present to this committee are

my strong and sincere convictions, based on the many years I have worked in and thought about this industry. Some kind of action to help the small-business man is absolutely essential, in my judgment. We have come to the point where we must have help from the Government, and our need is so urgent that unless this help comes now, it will come too late.

Three big companies have achieved nearly complete control of the tobacco industry. These companies are the American Tobacco Co., Liggett & Myers Tobacco Co., and the R. J. Reynolds Tobacco Co. Today they have over 85 percent of the cigarette business of this country. The smoking tobacco and chewing tobacco business, in which they are also predominant, has become so tied in with the cigarette business that the smaller smoking and chewing tobacco manufacturer, like our company, has no chance to compete on an even basis with the big companies, whose smoking and chewing tobacco business is a relatively small part of their total business.

Mr. BALLINGER. What percentage of the smoking and chewing tobacco industry do the big companies control?

Mr. BLOCH. Well, that would be just a guess, Mr. Ballinger. I have those figures, but I did not bring them. However, I would say they control 70 percent.

Mr. BALLINGER. If you find that to be in error, you may correct your statement later, with the permission of the chairman.

Mr. BLOCH. I would say off-hand that that is correct. Those figures are obtainable from Government records.

Mr. BALLINGER. I just wondered; because you said they control 85 percent of the cigarette market, and I just wanted to know what was the situation as to the control in the other markets.

Mr. BLOCH. The smoking and chewing tobacco business is a relatively small part of their total business.

How the big companies use the power of their cigarette brands in such a way as to make it impossible for the independent smokingtobacco manufacturer to compete on anything like terms of equality with the smoking-tobacco business of those big companies, is something which I shall try to develop for this committee, but before I do, I think the committee might want to hear a brief review of the history of the tobacco industry in the United States, without which it is difficult to understand the present problem of the smaller manufacturers. Until 1890 the tobacco industry in the United States was a highly competitive field, occupied by hundreds of small manufacturers. There were thousands of brands of tobacco products on the market, and keen competition among them-in cigarettes, smoking tobacco, chewing tobacco, and cigars. The public had the benefit of price competition, because this was an industry exclusively of smaller independent businessmen.

In 1890, a group, headed by James B. Duke, promoted a merger of five of the more successful units in the industry, and started a combine to obtain monopolistic control of the entire industry. Other units were acquired by purchase, and many factories were closed down after they were purchased, thereby centralizing manufacturing control. Tobacco manufacturers who were bought out were required to sign contracts not to engage in the tobacco business in the future. Some manufacturers who were unwilling to sell were deliberately forced to the wall. The American Tobacco Co. was the corporation through

which all these activities were centralized, although its ownership of some of its units were concealed from the public.

By 1900 this trust had acquired strong working control of the whole tobacco industry in the United States, except cigar manufacturing, which then was carried on by hand and not readily susceptible to consolidation. The trust next undertook to extend its operations to England, where it ran into the competition of a similar trust which had been formed under the name of The Imperial Tobacco Co. of Great Britain and Ireland, Ltd. The struggle between the American and British trusts spread into other countries, but it was terminated by an agreement arrived at between the two trusts, which signed a contract in 1902 providing that the American Co. would stay out of the British Isles, the Imperial Co. could stay out of the United States, and the two companies together would form a third great combine called British-American Tobacco Co., Ltd., which they would own jointly, which would handle their tobacco-manufacturing business elsewhere in the world. Thus a world-wide tobacco trust was formed and put into highly successful operation.

In the United States, the American Tobacco Co. bought substantially all of the leaf tobacco from the farmers at its own price. It acted as the American buying agent for Imperial and British-American, so for practical purposes the farmers in the United States had only one bidder for their crops. The American Tobacco Co. by 1910 controlled 80 percent of the American cigarette market, and had substantially similar control over the smoking- and chewing-tobacco markets. It acquired retail stores for the marketing of its products and was in virtual control of the entire tobacco industry of the United States when the Government brought suit in 1907 under the Sherman Antitrust Act to dissolve the trust. The facts stated above, and many more, were brought out in this suit, and in 1911 the Supreme Court of the United States directed that the combination be dissolved. A dissolution plan was proposed by the company, under which its cigarette and smoking and chewing tobacco brands were divided among four companies, the American Tobacco Co., Liggett & Myers Tobacco Co., R. J. Reynolds Tobacco Co., and P. Lorillard Co. This plan was put into effect in 1912.

Under the dissolution decree, the stock in each of these four companies, except American, was distributed to the stockholders of the American Tobacco Co., so that at the outset there was a community of ownership in the four companies, in which Mr. Duke and his associates were the controlling factors. Furthermore, the men who had been the ranking officers of the trust and its branches became the ranking officers of the four separated companies, and as a practical matter, business continued substantially as before, only under a different corporate structure.

Between 1912 and the middle 1920's, P. Lorillard Co. receded to a comparatively subordinate position in the industry, and the other three companies shortly after their emergence from the trust had become, and still are, the three giants of the industry. The most important development in the industry in the years after 1912 was the rise of the cigarette business and the decision of these three companiess each to concentrate on a single brand rather than to diffuse their efforts on a number of brands.

During the First World War cigarettes started their phenomenal growth. In 1910 there were less than 9,000,000,000 cigarettes manufactured in the United States. Almost all of them were either the Turkish or Egyptian-type cigarette like Melachrino, or the straight Virginia-type cigarette like Piedmont. Then during the war a new type of cigarette was started, made of a mixture of Virginia tobacco and Burley tobacco, which had not been used in cigarettes before, with a certain amount of Turkish and Maryland tobacco blended in. This type of cigarette has today become substantially the only important type of cigarette in the American market, 85 percent of which is taken up by three brands-Lucky Strike made by the American, Chesterfield made by Liggett & Myers, and Camel made by Reynolds. Each one of these companies makes a leading tinned smoking tobacco, of which America's leading brand is Half and Half, Liggett & Myers is Velvet, and Reynolds' is Prince Albert. They also make leading brands of less expensive smoking tobacco, and of chewing tobacco.

By the middle 1920's, these three companies had arrived at identical selling prices for all of their leading brands of tobacco products, and this price identity between these three companies has kept them from competing with each other, and has allowed them to develop the tremendous resources and profits and market control which they have today. As the late George Washington Hill, who was president of the American Tobacco, has said, this price identity has been at the root of the success of that company. Price identity at the factory has been kept stable by the insistence of these three companies that the retail and wholesale price of their products likewise be kept identical, as they consistently have been.

The Lucky Strike, Chesterfield, and Camel brands are absolutely indispensable to a wholesaler or retailer who is doing any tobacco business at all. No one can walk into a drug store or grocery store which handles cigarettes, and find these brands not for sale. This has given the manufacturers of those brands a leverage with which an independent manufacturer cannot compete. When the American Tobacco Co. wants to promote one of its brands of smoking tobacco, it uses the power of its Lucky Strike brand to get that smoking tobacco brand promoted, and when necessary it has the profits from its Lucky Strike business to use as a subsidy in promoting its smoking tobacco brands.

Mr. BALLINGER. Just a minute, Mr. Bloch. You mean to say they will not sell their cigarettes without their smoking tobacco? Is that your point? A tie-in contract?

Mr. BLOCH. I have heard that that has been done, Mr. Ballinger, and I think it is true. Especially during the scarcity of cigarettes, I think that was the situation. It is hearsay, of course, but I think it can be proven. They have a leverage, and I think they have used it. Mr. BALLINGER. I mean, do their salesmen ever tell you that? Mr. BLOCH. Yes.

Mr. BALLINGER. They have come back and told you that that is the reason they could not make a sale, because the market has been preempted?

Mr. BLOCH. Well, not as to the question of whether we could make a sale of our product; but that was directed to pushing the brands of the three leading companies. I know personally of cases where a job

ber had stocked Prince Albert tobacco in order to get cigarettes that he did not want to carry. He left them in the warehouse for months, until they went bad. Because he had to have cigarettes.

Mr. BALLINGER. Did you ever complain to the Federal Trade Commission about that practice?

Mr. BLOCH. No; it is pretty hard to get a jobber to testify.

Mr. BALLINGER. You could not get the proof, but the Federal Trade Commission might.

Mr. BLOCH. Well, they might.

As I say, when the American Tobacco Co. wants to promote one of its brands of smoking tobacco, it uses the power of its Lucky Strike brand to get that smoking tobacco brand promoted, and when necessary it has the profits from its Lucky Strike business to use as a subsidy in promoting its smoking tobacco brands. The independent manufacturer of smoking tobacco does not have this weapon or asset, and if he also manufactures cigarettes, he ordinarily has losses on his cigarette business to absorb rather than profits to use as a subsidy. It has been an impossible situation for the independent manufacturer, who now has come to the end of his rope.

In 1940, the Department of Justice brought another suit under the Sherman Antitrust Act, naming American, Liggett & Myers, and Reynolds, and their top officers, as the principal defendants. This case was tried in Lexington, Ky., in 1941, the trial lasting about 5 months, and resulted in these three companies and their top officers being convicted and being given maximum fines. The cases were appealed, and the convictions were affirmed by the circuit court of appeals and the Supreme Court of the United States, the latter decision coming in June of 1946.

In the Lexington trial, many facts about the industry were brought out which had never been generally known before, and in fact this was the first time, at least since 1911, when a complete picture of the operations of the Big Three companies had been spread before the American public. Some extremely interesting facts about their operations were disclosed. It is impossible to give anything like a complete picture of those operations in my testimony today, but there are one or two aspects which I want to touch on briefly.

The story of price competition in the cigarette industry during the 1930's, particularly the story of the rise of the economy-brand cigarettes which retailed at 10 cents, and the way they were suppressed, is going to be covered in detail by another witness-how the price of the major cigarette brands was raised in 1931, when the Big Three companies controlled over 90 percent of the cigarette market-how this unjustified price increase gave the smaller independent manufacturers a chance to start some price competition with economy-brand cigarettes-and how the major companies killed the economy-brand cigarettes which were threatening their business.

I do not want to go into many statistics, but I do want to illustrate some things about the growth of the major companies, and the decline of the independent companies, where the figures tell a better story than words could tell.

In 1910, there were 531 cigarette factories in the United States. By 1939 this number had shrunk to 75, and by 1948 it has been reduced to 53.