Index

7  Returning to Tobacco for Currency?

William Krehm

The proof of the pudding is in the eating. But what is the corresponding test for the GDP, compounded as it is with useful goods and disasters? No surprise then that the plight of the states in the world’s richest and loneliest superpower should be making the front pages of the financial press. Thus The Wall Street Journal (2/04, "Once Tobacco’s Foe, States Are Hooked On Settlement Cash" by Gordon Fairclough and Vanessa O’Cannell):

"They are poised to try to rescue the country’s biggest cigarette companies in one of their darkest hours. State governments, once the tobacco industry’s fiercest foe, now find themselves in an unusual position. In 1996, Washington state Attorney General Christine Gregoire sued: ‘The tobacco industry has targeted our kids, withheld safer products and deliberately misled the public about the safety of smoking,’ Ms. Gregoire said at the time. Opening the door for a slew of additional litigation, the state suits shattered the aura of invincibility that had surrounded the tobacco companies.

"Now, however, Ms. Gregoire and other state attorneys general may go to court to protect Philip Morris USA, the maker of Marlboro. At issue: an Illinois state judge’s order that Philip Morris, owned by Atria Group Inc., post a $12 billion bond to appeal a massive defeat in a class-action lawsuit. Altria said the bond requirement could force it into bankruptcy court.

"Ms. Gregoire, more importantly, said ‘it could deal a significant, unnecessary financial blow to the states.’

"The very states that won huge tobacco settlements in 1997 and 1998 became hooked on the money which for many states is staving off budgetary catastrophe. The Illinois court order threatens the tobacco cash flow and has sent the states scurrying to switch sides.

"Under the tobacco settlements of the late 1990s, major manufacturers agreed to pay over 25 years to settle lawsuits. The companies also agreed to a series of restrictions on the way they sell cigarettes. The settlements have given state governments a huge additional interest in the continued financial health of the tobacco industry in these days of widening state budget deficits. Many states have also relied increasingly on cigarette-excise taxes.

"Philip Morris, for its part, is aggressively playing on the states’ dependence. The company is warning the states that it may not be able to pay $2.5 billion due them by April 15.

"Several states had planned to issue bonds backed by expected tobacco-settlement payments. Virginia’s treasurer, Jody M. Wagner, yesterday put on hold the sale of $767 million in such bonds scheduled to close on Thursday. ‘We spoke with the underwriters, and they told us they couldn’t proceed with closing this deal. The state had planned to use the bond money to revitalize its slumping tobacco-growing regions.

"With the possibility of the Philip Morris money not arriving, several state attorneys general were preparing to enter the fray. Illinois ordinarily requires a bond equal to the entire trial judgment."

The Wall Street Journal (15/04) reports that Judge Nicholas Byron of the Madison County Circuit Court has relieved Philip Morris of the need to increase its previous bond.

"The bond requirement stems from a $10.1 billion verdict late last month in a suit over Philip Morris’s low-tar cigarettes. In the first class-action alleging such labels mislead smokers into thinking that such cigarettes are less harmful, the same Judge Nicholas Byron had ordered the company to pay $7.1 billion in compensatory damages and an additional $3 billion in punitive damages. The judge tacked on $1.8 billion in fees for the plaintiffs’ lawyers.

"Various states have recently taken legal action to enforce marketing action that the settlements imposed on cigarette makers. New York, which is hoping to sell bonds based on tobacco-settlement payments to deal with its budget woes, last week enacted one of the nation’s toughest laws restricting smoking in public places. But there is a broad alignment of economic interests between cigarette makers and the states. Considering both cigarette taxes and the settlements, ‘the states make more money from each pack of cigarettes sold than anyone else,’ said Tommy J. Payne, executive vice president of Reynolds, the nation’s No. 2 cigarette maker.

"Between November 1998, when the tobacco industry signed its main settlement with 46 states, and 2002, cigarette-makers paid those states more than $21.6 billion. An additional $5 billion is scheduled this year. States have increasingly come to rely on this money as they struggle to cope with their worst crisis in 20 years.

"In the 1990s, states became accustomed to plentiful tax revenues, in part because of the rising stock market."

Elsewhere in this issue we examine the quandary of those who were determined to reform the stock market, on which the present casino economy is so utterly dependent. To lift this economy out of the gutter, it feels that it must revive Wall St. Now the view is prevailing that straight morality must be watered down with a little opportunism, since it is impossible to bring back the prosperity of the latter nineties without the questionable craft of those who blew its iridescent bubbles. The only alternative is to rethink how we got into this mess, and go back to where we were learning how to organize a more humane and workable society.

Could it be that the next step along the path that we are embarked on would be for the states to accept payment for their settlement with the cigarette companies in cigarettes and retail them to the public at a discount? Or flog dubious stock market shares by special arrangement with Wall St.? If you dig deep enough in history you will find antecedents for almost anything you are looking for. For lack of gold and silver in the early Middle ages taxes in certain Balkan provinces were paid by selling children to the state as slaves. That would certainly have helped them avoid costly family allowances. In the early colonies tobacco leaf served as currency. If the state abandons its age-long monopoly of money-creation to Wall St. so that it can gamble bigger and better, just about anything can follow.

William Krehm

— from Economic Reform, May 2003

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