Ivar Kreuger: His Life and Work
I
THE life and death of Ivar Kreuger provide ample justification for the use of superlatives. Here we had a man acclaimed on all sides as the greatest constructive financial genius of our generation; praised by statesmen and bankers as the apostle of enlightened capitalism in a world tending, in sheer despair, to put ever more faith in communism; a man whose views were quoted by the most distinguished economists in support of their own. At his death by his own hand on March 12, a whole world united in doing homage to him. The Economist described his death as a Greek tragedy. ‘Here was no mere gambler on a gigantic scale in the world’s bourses,’ wrote the editor, ‘no mere “promoter” in quest of personal profit at the expense of sucking dry the enterprises to which he laid his hand. By the death of Kreuger the world has lost a man of great constructive intelligence and wide vision, who planned boldly, yet on a basis which seemed to be protected by carefully devised safeguards, and who for once seemed about to combine with the profits of private enterprise a real contribution to the welfare of nations.’
A fortnight after his death, the late Ivar Kreuger was openly accused of having falsified accounts. Three weeks later it was generally understood that falsifications had been going on for years. Four weeks after the suicide it was officially confirmed that Kreuger had been guilty of the grossest frauds; that he had forged securities on a gigantic scale; and that he had swindled investors to the tune of about 750 million dollars, and possibly more.
To use the Economist’s own words, he was a gambler in the world’s bourses, and he had sucked dry his enterprises with a thoroughness which lacks parallel. A man, evidently, whose life would provide unlimited copy for articles in the sensational press, under five-column headings.
His modesty, his Spartan simplicity, his total disregard for the material things of life — all these, we were told, were myths created by his well-organized press bureau. The publicity vultures rushed to the body, seeing their chance to reap profit by a campaign of vilification. The ‘secret Kreuger’ was now to be revealed in newspaper articles and books of questionable veracity but with suggestive details, by authors who had never known anything about Kreuger, but who had fawned upon him while he was alive and dangerous. It seems to be a grim law of nature that the greatest idols, when they fall, attract the fattest worms, wallowing in slime and putrefaction.
And here the writer of this paper must be allowed to make a personal note. He yielded to none in his admiration for Kreuger while Kreuger was still alive. He believed, and still believes, that Kreuger, if he did not fully alleviate, at least postponed, the financial crisis in Central Europe, and that his influence in restoring the financial morale of France and Germany can hardly be overestimated. The writer also believes that many of the frauds can be explained in the light of the general commercial and financial morality of the day. He realizes, of course, that Kreuger was guilty of such crimes that even present standards of morality are outraged. To suppose that he committed them in the hope of achieving personal gain seems utterly absurd. In a subsequent section an attempt will be made to explain some of the temptations which fell in Kreuger’s way — temptations which induced him to do the deeds which we now unite in condemning.
To-day, when the full extent of the frauds has been revealed, there are many who are wise after the event. They like to assure readers and listeners that they had their suspicions. The writer readily admits that he was not one of these. As long as Kreuger lived, the writer not only did not suspect him of doing anything remotely fraudulent, but implicitly believed every word Kreuger said, down to the smallest detail. In the light of recent discoveries, of course, there are any number of occurrences which now appear suspicious. The writer feels it important to make this personal explanation, since he would like it to be understood that it is not his purpose to stand as an aloof critic of all that has passed, but to assist in a post-mortem of a life in which the whole world, so to speak, has been involved, and to help in analyzing not only Kreuger’s astounding career, but the blind faith which he inspired in his associates, his subordinates, and his acquaintances.
II
It has been said that it would well repay a man with a criminal mind to spend the first thirty years of his life in building up a reputation for absolute integrity and straight dealing, in order to make great coups later on. ‘The ablest men that ever were,’ wrote Bacon, no mean authority on commercial morality, ‘have had all an openness and frankness of dealing, and a name of certainty and veracity: but then they were like horses well managed, for they could tell passing well when to stop or turn; and at such times when they thought the case required dissimulation, if they then used it, it came to pass that the former opinion spread abroad, of their good faith and clearness of dealing, made them almost unsuspected.’ This is a quotation which would not be out of place on Kreuger’s tombstone. The secret of his success, the secret of the world-wide confidence which he enjoyed, was that he was never caught telling a lie. No one was ever able to prove that he told an untruth. His word appeared to be his bond, with the result that he could make what now seem to be the most unlikely assurances and be implicitly believed. Bacon said such men would be ‘almost unsuspected.’ Kreuger carried it a stage further. He was completely unsuspected.
To say that his personality was magnetic is to beg the question unless one defines exactly what one means by this word ‘magnetic’ when applied to Kreuger. It cannot be done briefly. His manner was charming. With his slight stoop, he seemed so diffident and shy that one could hardly associate his activities with the rough-and-tumble of the market place. Until his worries began to get the better of him he was usually good-tempered, and he had a kind word for everyone. In his conversations with friends, — or rather acquaintances, for he had no friends in the proper sense of the word, — one immediately became impressed with his quick and wide grasp of even the most complicated problems. He always thought at least four moves ahead. He had the happy knack of putting into words, of clothing in dramatic form, as it were, the most abstruse thoughts, which, up to that time, had been but vague and inchoate ideas in the minds of his listeners. His manner was urbane and courteous, and he belonged to the chosen few who suffered fools gladly.
These characteristics are enough to explain why he dominated the very ordinary assembly of men who were directors of his companies. An obtuse man insisting upon understanding everything as he went along, or an intelligent man with anything like as quick a grasp of detail as Kreuger himself, would have meant a very abrupt end to his career. His associates on the boards of the Swedish Match Company, the International Match Corporation, and Kreuger & Toll were — one realizes it now — conspicuous mediocrities. Your mediocre man is like a horse with blinkers: he can only look at the immediate piece of road along which the driver is forcing him. If he looks aside and becomes scared, the fault is not his but the driver’s.
While Kreuger seemed to hate the limelight and apparently detested being described as the Match King, the very nature of his deals and the efficiency of his press bureau tended to keep his name to the fore. It was always Ivar Kreuger who handled the big deals, and subordinates who might, have rendered valuable assistance ware never mentioned. He was seen lunching with Tardieu. He was photographed shaking hands with Poincaré. He had been heard whispering to Snowden. His lieutenants might be allowed to negotiate loans to lesser states, such as Esthonia or Lithuania, but they never got any publicity for themselves out of it. That was reserved for Kreuger and his deals. Not one of his associates or subordinates was allowed to communicate directly with the press regarding company matters. That he did himself, or through his press agent acting under his orders. As far as the outside world was concerned, the Kreuger group of companies was entirely a one-man show.
III
When, early in 1931, the first suspicions began to be entertained that Kreuger’s financial structure might not be able to survive the present crisis, he attempted to switch over some of the tremendous confidence he enjoyed to leading members of his staff. ‘Mr. Kreuger has fully realized the impossibility of devoting personal attention to details in his vast concern,’he stated in a confidential memorandum circulated at that time, ‘and the importance of obtaining men of sound judgment and high qualifications as his lieutenants and helpers. With his exceptional flair [sic] for human ability and character he has succeeded in surrounding himself with men of unusual qualifications and experience, each in their respective departments. To these assistants, once tried and found good, he gives a wide margin of independent authority, whether it is a department director in the head office or a manager of a distant concession or branch office abroad.’
This statement is interesting for two reasons. In the first place, it stresses the point that Kreuger was an unusually sound judge of character. He was able to make use of almost every man who came into contact with him, because Kreuger relied upon the fact that almost every man who did so was trying to make use of him. There can have been but few men who had such an uncanny faculty for finding out the weak spots in a man’s character. The different temptations of the world are as numerous as the men who succumb to them. Those pregnant verses in St. Matthew involuntarily occur to one’s mind: ‘Again, the devil taketh him up into an exceeding high mountain, and sheweth him all the kingdoms of the world, and the glory of them; And saith unto him, All these things will I give thee, if thou wilt fall down and worship me.’ One man, Kreuger realized, loved honor, social prominence, and a reputation as a great business man. Kreuger gave these to him in full measure and earned his undying gratitude and loyalty, not necessarily in the sense that the man would do anything immoral or even illegal to help Kreuger, but in the sense that no matter what Kreuger did the man could not bear to suspect him of evil intent. Another man would want money and the opportunity to rule his fellows. A third would want security. Another, again, would want . . . But there is no need to continue. Temptations are as innumerable as the sands on the seashore.
But this confidential memorandum is interesting for a second reason. The brief passage quoted above strikes at the very roots of the weakness of Kreuger’s whole financial structure. Reversing his own previous press campaign, Kreuger was trying to show that his companies were decentralized and that much of his authority was delegated. The exact contrary was the case. Nobody dared move a finger without Kreuger’s specific authority. When his directors asked the Swedish Government for assistance in February of this year, the Prime Minister was thunderstruck to find that not a single one knew anything at all about the real position of the company. While all were working directors, they did not know the company’s eash position. They did not know the immediate financial commitments and had to be reminded of them by cable; they could not prepare even the sketchiest of balance sheets without Kreuger’s personal presence. When the auditors came in at the instance of the authorities and asked alxmt Kreuger & Toll assets, the directors did not know where they were; they believed the securities shown in the balance sheet were to be found in some of the strong boxes, of which they knew there w’ere about a score, reserved in Kreuger’s name in different banks up and down Europe.
Would any man of proved ability and intelligence have accepted such a state of affairs? Is it not rather evidence of the loyalty of simple-minded men in the judgment of a revered chief, upon whose actions depended their social positions, their reputations, their daily bread?
A revered chief he was. Even after the debacle, after the full extent of the swindle was known, one of the bankers who had suffered most at Kreuger’s hands said to the writer with tears in his eyes, ‘Kreuger has ruined me and my bank. But I cannot hate him. I still think he was a charming and lovable personality. As a delightlul companion I shall miss him to the end of my days.’
IV
It was, then, by virtue of his intellectual superiority that he ruled his directors. But this does not explain how Kreuger managed to impress his intellectual equals, or why he should have been treated with such respect by the great financial magnates and leading politicians of the day. Here we must look at that halo of mystery with which Kreuger had succeeded in surrounding himself. Very few knew anything at all about him, except that he had never failed in anything to which he had set his hand. This is so important in judging his career that it must be reiterated, even at the risk of wearisome repetition. Publicly, he had never failed. His life and activities were divided into water-tight compartments, and he took great care that no single person was admitted to more than one of these at a time.
Up to the year 1926, he had been engaged in the match industry, and running a financial business as a sort of side line, so to speak. It was an interesting business, like many other businesses, but not sufficiently interesting to attract the attention of leading statesmen. It was not until his spectacular negotiations with the French Government in 1927 that he came, properly speaking, into the limelight at all. France was in grave financial difficulties. The New York money market appeared closed to her — a most serious matter, as it was an essential part of Poincaré’s reconstruction plan to repay Morgan’s 8 per cent loan. Kreuger then stepped in and supplied the French Government with a loan at a little over 5 per cent, which was a much lower rate than anyone else would then have asked of France.
Even if Kreuger had lost money on this particular transaction, — and he did not, — it would have been worth his while. With it he had definitely arrived. He had negotiated on equal terms with the French Government. He had, so to speak, bearded Morgan in his den, and had done it successfully. He was an equal with the great ones in Olympus. After that there was no looking back. He was the man who never failed.
This financial coup is sufficient to explain Kreuger’s hold on the public imagination, and the extraordinary confidence which he enjoyed in official and banking circles from that time until his death. The fact that his companies paid enormous dividends — 25 per cent being paid annually on Kreuger & Toll shares between 1919 and 1928, and 30 per cent thereafter — was an added point in his favor. Nothing soothes the still small voice of suspicion so effectively as a high dividend, paid with cheerful regularity. Percy Rockefeller, who visited Sweden in 1925 to inspect Kreuger & Toll, reported that he was never more impressed than with that organization. ‘ It seemed almost too good to be true,’ he said.
V
The time has not yet come to write a just, full-length life of Ivar Kreuger. The people who have been impressed with his ability, and those who have been embittered by the losses in which he has involved them, are so numerous that a historian would be hard put to it to avoid coming under their influence. The chief points in his career are generally known, and only brief reference will be made to them here, in order to provide ourselves with a background for a study of his character.
We know that he went to the United States of America, where he served his first apprenticeship as a constructional engineer, and that he made his first money selling real estate; that he worked in South Africa on the same lines, and that finally, in 1908, at the age of twenty-eight, he returned to Stockholm to settle down as a contractor. He soon got an opportunity to impress the Swedish public with the fact that he was the man who never failed. When he obtained an order to put up a large building he inserted a double-barreled penalty clause by which he, as builder, would have to pay a fine for every day the work was late, while the client bound himself to pay a bonus if Kreuger finished work before the date stipulated in the contract. Builders were notoriously dilatory, so the client had not the slightest objection to signing the bonus clause. But Kreuger got his bonus. In 1911, in coöperation with Mr. Paul Toll, he formed the contracting firm of Kreuger & Toll, which, as we have just seen, amazed competitors by the energy and rapidity of its methods.
And here we must note another important point which will help us to understand Kreuger’s career: the firm of Kreuger & Toll he looked upon peculiarly as his child. Kreuger & Toll’s cash and his cash were one and the same thing. He managed the company without consulting anyone, even though Kreuger & Toll was a public company and its shares were introduced on the Stockholm Stock Exchange.
The war naturally created many opportunities for quick profits, but Kreuger was apparently not satisfied with the mere making of money. In 1917, Kreuger & Toll became a financial company pure and simple, its contracting operations being segregated under the leadership of Toll. The share capital was then increased to 6 million kronor (1 million kronor in 1911 when the company was formed), and doubled to 12 million kronor a year later to finance the acquisition of 60,000 shares in the Swedish Match Company — an amalgamation of all Swedish match factories, organized by Ivar Kreuger, and based on a match factory which had been in the Kreuger family for a considerable number of years. This was the real beginning of his career, although his more spectacular match-monopoly transactions did not begin until about 1922.
In the year 1923 he formed the International Match Corporation to take over certain interests of the Swedish Match Company in the United States. When his position had thus been consolidated by the formation of these three pivotal companies, he had only to forge ahead. In 1925 he made his loan to Peru; in 1926 he advanced a million pounds to Greece; in 1927 he advanced 6 million dollars to Poland and 75 million to France; in 1928, 2 million dollars to Ecuador; in 1929 another million dollars to Ecuador, 36 million to Hungary, 22 million to Yugoslavia, — he was obviously gathering steam, — 6 million to Latvia, and 30 million to Rumania; in 1930 another million pounds to Greece, 6 million dollars to Lithuania, a million to Danzig, 2 million to Bolivia, 67 million kronor of German Young Bonds, 125 million dollars to Germany, 7,600,000 kronor to Esthonia, and $2,500,000 to Guatemala. In the same year negotiations were initiated for a further loan of $32,400,000 to Poland and one of 10 million dollars to Turkey, making a total of about 300 million dollars in two years.
Outside the Central Banks, he was the most powerful financial force in the world. Though many of the international loans granted between 1925 and 1930 were ill-advised and injurious, even such a high authority as Sir Arthur Salter agrees that the Kreuger loans were not. On this score Kreuger’s high reputation for constructive finance is fully deserved.
VI
His methods, too, earned, and deserved to earn, the highest praise. In another confidential memorandum privately circulated last year, Kreuger explained how his match loans were secured: —
‘It has always been a difficult problem how to establish effective contact between foreign financing houses which have issued loans for a government and the government itself,’ he began. ‘When formal measures of control are introduced, the situation may easily become hateful to the people in the borrowing country. Under the system adopted by the Kreuger concern, the security — that is, the concession — is in the hands of the lender himself. There will thus never be the question of a control from the outside. Furthermore, those who in respective countries are responsible for the management of the industrial concession maintain contact with the government as part of their daily routine.
‘A country establishes a fiscal match monopoly,’ he went on to explain, ‘which conveys the sole right of producing, importing, or selling matches, as the case may be, to the State. This monopoly is then leased to the Swedish Match Company (or some connected company) for a certain period (say, for instance, thirty-five years), against the annual payment of a royalty which usually increases with the increased consumption of matches. The conditions of the transactions are fully set out in a contract between the State and the Match Company, a contract which is ratified by Parliament in the country in question and thus forms a part of the established law of that country.
‘It is the royalty thus agreed upon which, in addition to the direct and unconditional obligation of the foreign government, forms the security of the Kreuger loans to the country. The amount of the loan is generally so calculated that the annual debt services (interest plus sinking fund) shall be covered by the amount of the annual royalty payable, with a margin of, say, 25 to 50 per cent, sometimes more. It is usually laid down that the industrial company shall make the royalty payments to a blocked account in a bank, the government receiving the surplus available, if any, only after the full amount required for the debt services has been transferred to the fiscal agents. It has been found that by this mechanism the problem of transferring funds abroad for the payment of debt services to foreign creditors has been facilitated, the industrial company being able to assist in supplying the foreign exchange needed.
‘The great advantage of this system is that the Kreuger concern itself, through the match concessions, administers the revenues pledged as security for the loans; by introducing better machinery, by reorganizing selling methods, by rationalizing, in a word, the concern may be able to make the concession more profitable, thus enhancing the value of the security. Considering that the annual royalty payments form the basis of the loan, it may even be said that the loan in itself is nothing but an advance of future royalty payments.’
One does not yet know to what extent Kreuger’s match-monopoly transactions were all profitable. It is said that many were not, and that he overreached himself on several occasions in recent years. He had to live up to his reputation of being the man who never failed. In many cases, one is told, he simply agreed to the monopoly in order to keep the Russians out. Indeed, Soviet competition seems to have been his bugbear, and he is reported to have lost large sums by selling matches in certain countries at less than cost in order to make Soviet competition impossible. It should be noted, however, that these suppositions have not been proved as this paper is being written.
There is a very strong presumption that they are correct. They accord with the general idea that in some ways Kreuger’s mind was unbalanced for some time before his death, and that his judgment was frequently at fault. It is definitely known that even before he returned from New York on his last ill-fated voyage the directors of his two chief companies had become so concerned at the manner in which things were developing that they had practically decided to ask Kreuger to go for a long cruise, ‘for reasons of health,’in order to get to the bottom of his many complex transactions. It has been suggested that he suffered from a terrible disease which was gradually sapping his mind. This, again, is a supposition, for which, up to the present, there is not the slightest proof.
But the match-monopoly loan system, as a system, was extremely sound. Kreuger’s monopolies can best be compared to the commercial monopolies of Elizabethan and Restoration times. But he had developed them to a pitch of efficiency which dazzled the public and impressed the shrewdest financiers. They realized that here was a safe method of financing poverty-stricken states in need of capital. ‘The Company has . . . demonstrated the possibilities of expert institutional lending as distinct from direct subscriptions from individuals to particular foreign issues,’ stated the Westminster Bank (London), ‘and much more will doubtless be heard of this method in the future.’ The problem of reconciling security for the lender with the susceptibilities of twentieth-century governments had been solved.
Despite the Kreuger debacle, it seems certain that this method of financing will be resumed, because, in the particular manner in which Kreuger applied it, it was the conception of a genius. It was ridiculously simple and marvelously effective. The L. M. Ericsson Telephone Company (under Kreuger control) has used this method in order to obtain telephone concessions, and American telephone and telegraph interests are also availing themselves of it. Kreuger always held that an ordinary loan to a foreign government of uncertain financial reputation was very unsafe: all the government had to do was to ‘forget’ to remit. But there can be no default on Swedish Match loans unless governments and parliaments take deliberate action to break their contracts — unless, in short, they seize the bank account of the monopoly institute. It is an important distinction.
VII
Kreuger, at the time of his death, controlled about 75 to 80 per cent of the world’s match industry. On the continent of Europe there were only three countries in which he had not either a full monopoly or control over a substantial section of the market — that is, Spain, Italy, and Portugal. Russia was also beyond his range. But apart from these countries the world’s match industry lay at his feet.
In France, his first negotiations with Poincaré for a complete match monopoly in return for a loan of 75 million dollars had failed because, it is said, he directed his press campaign in favor of the scheme at members of the right, who would have supported, and did support, Poincaré in any case, instead of at members of the left, who were always against Poincaré and who badly needed convincing. After some time, however, the Kreuger-Poincaré alliance convinced the Chamber, and they accepted Kroner’s scheme in somewhat modified form.
His loan to the German Republic was contingent upon ratification of the Young Plan by the German Reichstag. He went to The Hague as an independent power, and discussed matters, on equal terms, with representatives of the Great Powers. If he had not given way to French pressure and taken up Young Bonds for about four million pounds on his own account, the whole Young scheme might have broken down.
Never before, or in so short a time, had a financier attained such a high reputation. He was identified with a large part of Swedish finance and industry. He controlled one third of the country’s wood-pulp production. He was interested in her iron-ore mines. He was believed to have plans for obtaining world control of a certain type of iron ore. He was deeply involved in Swedish real estate. Stockholm film theatres and Swedish films were financed by him. He owned Sweden’s only gold mine. He owned three important newspapers in Stockholm. He controlled at least one big bank in Sweden, and numerous others on the Continent. He was reorganizing the whole system of German mortgage banking. He was involved, heavily involved, in telephones, and, in cooperation with Morgan, hoped to control a large part of the world’s telephone industry. He owned valuable sites in Paris, Berlin, and elsewhere.
Offers of short-term money poured in upon him from all over the world. Leaders of industry came to Stockholm to see him. Ministers of Finance came from the Continent and stayed in his flat. He was the acknowledged leader of European reconstruction, and one recoiled instinctively from the mere thought that his work might be cut short by death.
VIII
What induced him to manipulate his accounts, to pledge securities to which he had no title, and to forge government bonds? Was he a swindler for the sake of swindling? Did he simply want to be a great man no matter what the cost? If he really was the greatest financial genius of the age, and if he saw more clearly than others how sound finance could help European recovery, did he consider this task so essential that nothing must be allowed to stand in his way?
We must not forget that his 1929 accounts, while by no means correct, were probably no more incorrect than those of many successful companies. It was the collapse of the Wall Street bubble and his loan to Germany of 125 million dollars which ruined him. He did foresee the Wall Street collapse and remarked in conversation with the writer, in July 1929, that he thought the predominance of Wall Street over European bourses was gone for a generation or more. But he did not foresee that the depression would last so long; he thought the tide would turn early in 1931. If it had turned, the greater part of the ‘holes’ in the 1930 Kreuger & Toll accounts would have been covered, and Kreuger might still be alive and hailed as a great financier.
In considering these manipulations, readers must bear in mind the point which we made earlier in this paper. In Kreuger’s mind, no doubt, Kreuger & Toll was still his private property. He owned practically all the shares carrying control, and as long as he paid his 30 per cent dividend — thus he might well have reasoned — no man could interfere with his plans and schemes. Moreover, when loss was met or large expenditure was incurred which Kreuger did not feel could be charged against the company, he gave orders that it should be debited to him, to his personal account. Surely, he might argue, that showed his regard for the position of the company. And to a certain point an outside observer may agree. It is only when one learns that this private debt amounted to about 30 million pounds that one begins to have doubts.
And yet there are still some who insist that Kreuger was acting in good faith. They are convinced that the forged Italian bonds have some reality behind them — that money has actually passed. They are certain that the Spanish loan contract is genuine and not a forgery. This serves but to illustrate the grip which the Kreuger legend has obtained on otherwise sane and sound minds.
The grossest Kreuger frauds must, it seems, be ascribed to the German loan; to the Wall Street collapse; to the impossibility of his admitting honest failure; to the fact, that he was a sounder judge of the distant than of the near; and to his sensitiveness to home criticism. There is no country on earth which is more critical of its sons than Sweden. Every country has its negative elements whose sole aim in life appears to be to prevent any compatriot from rising to greatness, or, having risen in spite of their efforts, from remaining long a popular favorite with an untarnished reputation. Sweden is richly endowed with negative men of this type. Ever since the French deal, Kreuger had been too big a man to criticize publicly, even in Sweden, but he knew, all knew, that if he made the slightest confession of weakness the whole regiment of critics would sharpen its bayonets and rush to attack. The Wall Street crash had possibly made his position uncomfortable at the end of 1929, but he could well afford to carry on as if nothing had happened. Perhaps Kreuger weighed all the possibilities of disclosing in his 1930 accounts that his position had weakened substantially as a result of the world crisis. While no one in London or New York would have thought any the worse of him for that, he realized that it would have loosened an avalanche of criticism in Sweden.
It has been said that Kreuger cared little for social recognition. The writer has every reason to believe the exact opposite to be true. Kreuger never felt happier than when he could employ a count or baron in one of his companies. That is the only way one can explain the relative ease with which titled persons found well-paid and often sinecure posts in his employ. That the total absence of any sort of social recognition in Sweden irritated him and hurt him is quite certain. An important Court function, to which every person of consequence in Stockholm was invited, Kreuger did not attend, because the precedence accorded him was totally unrelated to his world-wide prominence. Instead, he remained doggedly at work in his office, in one of his bitterest moods.
How far had this Swedish refusal to accept Kreuger at his international valuation embittered his life? How far did it bring on that megalomania which, in the end, resulted in his brooking no criticism and accepting no advice? These points may help to solve the Kreuger riddle. One must not overlook the purely Swedish background for the tragedy.
That his head was turned by the unstinted praise he received is undoubtable. The press must bear its share of responsibility for that. As a working journalist, the writer is bound to make this admission. Some of Kreuger’s colleagues have related how he cut short their objections at board meetings. He would listen to no views counter to his own. When it was suggested to him that he might be going too far, he replied that his American friends had the fullest confidence in him. They, after all, were putting up the money.
This is an important point. The Swedish directors felt, and Kreuger confirmed their impression, that the Americans, because they were advancing the bulk of Kreuger & Toll funds, were closely controlling the company’s activities. ‘Whenever Kreuger got to New York,’ said one of the directors, ‘the representatives of American banks were waiting for him on the landing stage, offering him all the money he needed, without question. Kreuger came back and told us about it to illustrate the confidence he enjoyed over there. We could do nothing with him.’ The Americans, on the other hand, as nonresident directors of Kreuger & Toll, equally logically relied on their Swedish colleagues to exercise the necessary control. As a result, Kreuger was subject to no control whatever, and when an attempt was made to get him into harness he resented it like a spoiled child and talked pettishly of plots against him.
IX
Given his sensitiveness to home criticism and home atmosphere, his megalomania, his feeling that he was one of the great of the world, and the fact that his loan of 125 million dollars to Germany was a profound mistake, one is better able to understand the temptations which induced him to manipulate his 1930 accounts. The elaborate defense he made of his German loan in a confidential memorandum circulated early in 1931 proves conclusively that he realized it had weakened his position: —
‘When in 1928 the Kreuger group granted the 5 per cent loan at the nominal amount of 75 million dollars at the issue price of 93½ to the French Government, many were astonished that Mr. Kreuger had such faith in the solidity of France, which at the time was still grappling with the difficulties of the stabilization period. Subsequent events have shown that. Mr. Kreuger was right in his judgment. In 1930 the French Government redeemed the whole loan at 103½ plus accumulated interest. . . . To-day it is sometimes said that the Kreuger concern has invested too large sums in German mortgage banks; it has participated in the issue of the Young Loan, and it has itself granted a loan of 125 million dollars to the German Government. It is obviously the opinion of the Kreuger concern that, whatever may happen to reparations, Germany will be able to repay the loans due to private individuals.’ On a very long view Kreuger’s faith in Germany was probably quite justified. On a short view it was not.
The forged Italian bonds, the nonexistent cash deposited in nonexistent banks, the duplicated and reduplicated assets — all these one could understand as the last resort of a man fighting for his life, and believing that the trade depression would shortly end and fill up the holes in his balance sheet. The fact that the first Italian bond ‘fell due for repayment’ in November 1931 seems to show that Kreuger believed the worst of the depression would have been over by that time, that the world would have been well on the road to recovery, and that the increasing value of his assets would have permitted him to replace the forgeries by more solid securities. At the risk of becoming wearisome it must be stressed anew that the money to finance the last installment on the German loan would never have been forthcoming if Kreuger & Toll’s 1930 accounts had not made a really good showing. It was necessary for Kreuger & Toll, Swedish Match, and International Match to report high profits and to pay high dividends. The financial hurricane was raging, and it was necessary to use good bait in order to land one’s catch.
X
What seem more difficult to understand are his manipulations in previous years. But here again we must remember that Kreuger & Toll’s lending operations had never attained such substantial dimensions as in 1929 and 1930. Constant issues of capital had to be made on a falling market. The word ‘had’ is used in its imperative sense, because Kreuger signed loan contracts without having the money at hand, and was thus forced to make capital issues at any price. While other companies needing fresh capital were paralyzed, owing to the apparent impossibility of floating new issues, Kreuger forged ahead, but at a heavy price.
The Kreuger group of companies, indeed, made much larger issues of capital after the Wall Street debacle than before. On the one hand, Kreuger saw his assets shrinking as the result of the decline in the value of all securities. On the other, it was essential for him to show satisfactory accounts in order to enable him to raise the money to finance his grandiose schemes, He, personally, was not making a large profit. He believed he was the savior of Europe. He had a mission. His new issues, therefore, had to be successful; so he bought rights in his own shares with a view to forcing up prices. If all the shares and debentures were not taken up, he bought them himself, for account of one of his companies, so as to be able to say that his issues had been oversubscribed. If the general market trend was unfavorable when his issue was due, he bought key securities, such as United States Steel in New York, or Royal Dutch in Amsterdam or Paris, in order to create a more favorable atmosphere.
He probably sustained enormous losses on these irregular transactions, and one can only explain them as the product of a warped mind, seeing only the distant aim and not distinguishing between right and wrong in a determined attempt to achieve that aim. He paid dividends out of the proceeds of his new issues, because real profits were not sufficiently large to pay anything like a 30 per cent dividend on Kreuger & Toll shares or debentures, or 15 per cent on Swedish Match. But the high dividend had to be paid if his capital issues were to succeed. And the capital issues had to be successful to enable Kreuger to keep his promises to borrowing governments. He was the man who never failed. Thus one thing led to another, in a never-ending chain of deception and deceit.
Whether there were incidental manipulations in previous accounts is a matter of considerably less interest. Most companies manipulate their accounts in one way or another, not in any criminal sense, but with a view to avoiding income tax, or to mislead competitors, and so on. It would be futile to criticize Kreuger for this. It is the system itself which is at fault and which must be condemned. One hears it said that the mere fact that Kreuger had established such a large number of secret subsidiaries should have been sufficient to show he was a swindler. Any assumption of this kind is ridiculous. Many financial and industrial companies of the highest reputation have established secret subsidiaries in Liechtenstein, Holland, Switzerland, Luxemburg, and other places, with a view to avoiding taxation. As long as public opinion the whole world over tacitly sanctions — nay, positively approves — two standards of financial morality, one for the income-tax collector and one for the shareholder, it would be absurd to criticize Kreuger for doing what the majority of public companies are doing and are being praised for doing.
Whether the Kreuger & Toll and Swedish Match directors knew anything was wrong in the sense that we know it to-day, it is quite impossible to say. They probably did not. They relied on the auditors, and these have quite obviously been at fault. No system of auditing can altogether prevent fraud or forgery, but it seems reasonable to say that if the system of auditing in Sweden had not been deplorably lax the Kreuger & Toll affair would not have assumed anything like the dimensions it did. The average Swede is no more and no less dishonest than any other person, but it would seem that the opportunities for dishonesty are greater in Sweden than in many other countries, owing to the absence of adequate checks. A distinguished Swedish publicist states as a fact that there are, relatively speaking, four times as many embezzlements in Sweden as there are in England. To the extent that the whole Swedish auditing system shall be overhauled, the Kreuger debacle will have served a very useful purpose.
But about Kreuger himself the final word will not be written for a long time. As yet, not even the police or the accountants advising them know the exact position. They do not know how far back the accounts have been manipulated. They do not know exactly how the money has been lost. They may never know the real motives which actuated Kreuger. The grave has closed mercilessly over them.