Ivar Kreuger and the 1932 Collapse of the Match Monopoly

At around eleven in the morning on 12 March 1932, Krister Littorin and Karin Bökman let themselves into a fifth-floor apartment at 5 avenue Victor-Emmanuel III in Paris. Littorin was a managing director of Svenska Tändsticks AB and had known his employer since their student days at the Royal Institute of Technology in Stockholm. Bökman was the secretary who handled his correspondence. They had come to collect Ivar Kreuger for a meeting with bankers at the Hôtel du Rhin, where the terms of a rescue loan were to be settled that afternoon.

Kreuger was lying fully dressed on the bed with a 9 mm Browning pistol beside him, shot once through the chest. He had bought the weapon that morning at a gunsmith's on the rue de la Paix. On the writing desk lay three letters. One, addressed to Littorin, ran to four lines: "I have made such a mess of things that I believe this to be the most satisfactory solution for everybody. Goodbye now and thanks. I.K."

He was fifty-two years old, and at that moment he controlled companies that made roughly three-quarters of the world's matches and held the sovereign debt of fifteen European and Latin American governments.

From Kalmar to the Kahn System

Ivar Kreuger was born on 2 March 1880 in Kalmar, a small port on Sweden's Baltic coast where his family owned two modest match factories. He took degrees in mechanical and civil engineering at the Royal Institute of Technology in 1900, at twenty, and then spent seven restless years abroad — New York, Johannesburg, Mexico, Toronto — working as a draughtsman, a structural engineer, and briefly as a steeplejack's assistant on high steel.

What he brought home in 1907 was a licence. In the United States he had worked with the Kahn system of reinforced concrete, a patented arrangement of trussed steel bars that let builders pour load-bearing frames faster and cheaper than masonry allowed. Sweden had no such technology. In 1908 he founded the construction firm Kreuger & Toll with the engineer Paul Toll, holding the Scandinavian rights, and won contracts by making a promise no competitor would match: a penalty clause payable to the client for every day the building ran late. Kreuger & Toll put up the Stockholm Olympic Stadium for the 1912 Games and the Nordiska Kompaniet department store on Hamngatan, and in neither case did the penalty fall due.

Construction gave him cash flow and a reputation for delivery. Matches gave him something better.

Building the Trust

Sweden's match industry was fragmented, technically advanced, and export-dependent. Safety matches had been invented there — Johan Edvard Lundström patented the phosphorus-free design in 1855 — and the country's mills supplied a large share of world demand through a scatter of family firms competing one another's margins away. Kreuger's first consolidation came in 1913, when he merged twelve producers into Förenade Svenska Tändsticksfabriker. His second, in 1917, folded that group together with its principal rival to create Svenska Tändsticks AB, which the English-speaking world came to know as Swedish Match.

Domestic consolidation was only the premise. Over the following decade Kreuger bought or built factories in Norway, Germany, Austria, Hungary, Poland, Belgium, Britain, Brazil, and the United States, and by 1930 his group held interests in around 250 plants across some 40 countries (Partnoy, 2009). Matches suited the strategy unusually well. They are cheap, consumed continuously, produced by a simple process, and — critically — taxed or licensed by almost every state that issues them. A government that wanted revenue from matches had to decide who was permitted to sell them.

Kreuger's insight was to make that decision purchasable.

Loans for Monopolies

Post-war Europe was short of dollars and long on unfunded budgets. Governments needed hard currency; Kreuger could raise it in New York on terms no finance ministry in Warsaw or Bucharest could obtain directly. His offer was a long-term loan at a modest coupon, usually six per cent, secured against a state match monopoly leased to a Kreuger subsidiary for a term of twenty-five to fifty years.

Poland took the first such loan in 1925. France followed in 1927 with the largest advance a private individual had ever made to a great power, and Germany in 1929 with the largest of all.

Across fifteen governments the advances came to roughly $387 million — a figure equivalent to a substantial fraction of the reparations transfers then moving across Europe under the Young Plan. Kreuger negotiated the German loan personally in Berlin in October 1929, during the week the New York market broke, and Time put him on its cover on 28 October, the day before the selling climax that became Black Tuesday.

He was asked more than once to explain his method. To a Swedish journalist who pressed him on it he gave an answer that his biographers have quoted ever since: "Silence, more silence, and even more silence."

The Architecture of the Accounts

Kreuger financed the sovereign loans by selling securities to American savers, and he sold those securities on the strength of a dividend record that no industrial company of the period could plausibly have earned. Kreuger & Toll paid out at annual rates around 20 to 25 per cent through the late 1920s and never missed a payment while he lived. American buyers took this as evidence of the monopolies' profitability. It was in substantial part evidence of fresh capital being recycled to existing holders.

Holding the structure together was a chain of subsidiaries whose accounts consolidated into one another in ways no outsider could unpick. International Match Corporation, incorporated in Delaware in 1923, was the American issuing vehicle. Continental Investment Corporation, domiciled in Vaduz, Liechtenstein, was the entity through which Kreuger booked revaluations of assets that other parts of the group had sold to it. Intercompany transfers generated reported profits at one end of the chain and obligations at the other, and Swedish disclosure law of the period required a parent company to publish little more than a single-page summary balance sheet.

Kreuger declined to submit the group to a consolidated independent audit, and no exchange on which his paper traded required one. Auditors who worked for individual subsidiaries were given individual subsidiaries. Board members received figures he had prepared. Torsten Kreuger, his brother, later wrote that Ivar kept the only complete picture of the group in his own head, and the forensic accountants who reconstructed the books after 1932 came to the same conclusion (Shaplen, 1960).

America Buys In

Kreuger's American distribution ran through Lee, Higginson & Co., a Boston house founded in 1848 with a reputation for probity that predated the Civil War. Donald Durant, a Lee Higginson partner, sat on the International Match board, travelled to Stockholm, and vouched for Kreuger to the firm's clients. Between 1923 and 1930 Lee Higginson and its syndicate placed a succession of debenture and participation issues, and by the end of the decade Kreuger & Toll certificates were among the most widely held foreign securities in the United States, distributed through retail brokers to schoolteachers and small-town depositors who had never heard of Kalmar.

Lee Higginson's own due diligence amounted to reading what Kreuger gave it. In 1929 the firm's Stockholm representative asked for supporting detail on the Continental Investment position and was told the information was confidential for reasons of competitive sensitivity. He did not press. The house had by then earned substantial fees and had staked its name.

Credit Tightens

Everything in the structure depended on the ability to refinance. Kreuger's assets were long — fifty-year monopoly leases, factories, sovereign paper of borrowers such as Romania and Yugoslavia — while a growing share of his liabilities was short.

That mismatch became lethal in 1931. The failure of Creditanstalt in Vienna in May froze Central European credit and impaired the very governments whose match payments serviced his debt. Germany imposed exchange controls in July. Britain left gold on 21 September, and Sweden followed six days later, which raised the krona cost of the dollar obligations he had contracted. New issuance in New York had effectively ceased. Kreuger began covering maturities by pledging securities he held, then by pledging securities held by group companies, and finally by pledging collateral that did not exist.

In late 1930, working alone in his Stockholm villa on Villagatan, he had forged 42 Italian government treasury bills with a face value of 500 million lire, roughly $142 million, complete with the signature of an Italian official named Giovanni Boselli and a purported secret monopoly agreement with Rome. He produced them as collateral in 1931 to support the group's borrowing. No Italian match concession had ever been negotiated. The bills sat in his safe until after his death.

Kreuger died four months before the index reached the low of 41.22 shown above, into a market that had already fallen about eighty per cent from its 1929 peak and had no appetite for refinancing anything.

The Ericsson Audit

What ended him was an ordinary piece of corporate diligence. In 1931 Kreuger agreed to sell a controlling interest in the Swedish telephone manufacturer LM Ericsson to the International Telephone and Telegraph Corporation, run by Sosthenes Behn, for about $11 million in cash — money he needed urgently. ITT, unlike Lee Higginson, sent its own accountants to examine the books of the company it was buying.

They found that a large part of Ericsson's liquid assets consisted of claims on other Kreuger entities, including short-dated paper that could not be collected. Behn demanded rescission of the contract and the return of his cash. Kreuger, in New York in February 1932, could not produce it. He sailed for Europe on the Île de France on 4 March, arrived in Paris on 11 March, and was found dead the next morning.

News of the death reached New York on the afternoon of 12 March. Kreuger & Toll participating debentures, which had traded around $5 that week, fell within days toward a few cents, and Lee, Higginson & Co. — which had sold them to the American public for nine years — did not survive the year as a securities house.

What Price Waterhouse Found

The Swedish government engaged Price, Waterhouse & Co. to establish what the group had actually owned. Their investigators worked through 1932 on accounts that had never been consolidated, and the results were published in stages.

Reported profits for the years examined were found to be substantially fictitious. Assets had been written up in intercompany sales; the Italian bills were forgeries; sums shown as owed to the group were owed by companies the group itself controlled and had funded. The accountants' summary judgement became the most quoted sentence in the history of the auditing profession: the manipulations, they wrote, "were so childish that any auditor of ordinary intelligence could have detected them" had anyone been engaged to look (Flesher and Flesher, 1986).

American investors lost on the order of $250 million. Swedish losses fell on Skandinaviska Kreditaktiebolaget and on the Riksbank, which extended emergency credit to prevent the domestic banking system following the group down; the state ultimately took a hand in reorganising Swedish Match, which survives today. Torsten Kreuger was convicted in Sweden in 1933 in connection with a separate share promotion and spent the rest of his long life arguing that his brother had been murdered.

The Audit Requirement

Congress was already drafting securities legislation when Kreuger died, and the Senate Banking and Currency Committee took testimony on the collapse in January 1933, with Donald Durant explaining to Ferdinand Pecora's investigators what Lee Higginson had and had not verified before selling the paper. His answers — that the firm had relied on the figures Kreuger supplied, and had not obtained an independent examination of the consolidated group — did more for the case for mandatory audit than any argument the accounting bodies had made in thirty years of lobbying.

The Securities Act of 1933 required a registration statement containing a balance sheet and profit-and-loss statements certified by an independent public accountant. Accounting historians have argued that the Kreuger collapse was the decisive event in converting the independent audit from a voluntary practice of the better-run companies into a legal condition of access to the American capital market (Flesher and Flesher, 1986). Consolidated statements, auditor independence from management, and confirmation of assets with third parties all hardened into requirements in the same period, and the structures Kreuger exploited — the unconsolidated offshore affiliate booking gains on assets sold to it by its own parent — reappeared six decades later in the special purpose entities that concealed Enron's leverage, against a body of rules that exists because of him.

There is a persistent minority view, first pressed by Torsten Kreuger and revived periodically since, that the group was solvent in March 1932 and was destroyed by a bankers' panic and a rigged post-mortem valuation. Frank Partnoy's account, drawing on the Swedish archives opened later in the century, treats the forged Italian bills as settling the question: a solvent man does not manufacture $142 million of sovereign collateral in his own handwriting (Partnoy, 2009).

What Kreuger understood better than his bankers was that a set of accounts is a claim about the world that somebody has to check, and that for nine years nobody with the standing to check his did. He had said as much himself, in a line his associates remembered: everything in life, he told them, is founded on confidence. He had meant it as a principle of finance. It read afterwards as a confession of method — the man who lent to fifteen governments had borrowed, all along, against nothing but the willingness of Boston brokers and Stockholm bankers to take his word.

The apartment on avenue Victor-Emmanuel III was cleared within the week. In the safe at Villagatan, investigators found the 42 Italian bills, still bearing Boselli's signature in Kreuger's hand, in an envelope he had never needed to open.