August 8, 2016
Coca-Cola, Cronyism, and the War on Drugs
It is well-known trivia that the original formula for Coca-Cola contained cocaine, but the lesser known history of Coca-Cola has other interesting components involving the government, cronyism, and the War on Drugs.
The first federal drug law was the Harrison Narcotics Act passed in 1914, which criminalized the unlicensed sale of cocaine and opium products. But this is not why cocaine was removed from Coca-Cola. In fact, the cocaine alkaloid was removed from the formula for coke in 1903 due to pressures from negative press against cocaine use. To avoid angering and alienating a consumer base, the company removed the narcotic component of their product.
This is what we capitalists refer to as a “market regulation,” by the way, for all of you who believe that government is needed to regulate the reckless excesses of the free market. The only criminal charge ever brought against Coca-Cola for its formula, in fact, was in 1911 when the US Department of Agriculture believed that the company was “marketing and selling an adulterated beverage that was injurious to health because it contained a deleterious ingredient, namely, caffeine,” according to the chief of the Bureau of Chemistry.1
That’s hardly the interesting part of the story, though. Coca-Cola did not eliminate the use of the coca leaf in their formula because it was a necessary flavoring ingredient. However, the Harrison Narcotics Act made the coca leaf a regulated substance, and the importation of it was strictly regulated by the federal government who also decided to what use a licensed importer could put the product.
Early Government Favors for Big Pharma
This resulted in two companies — Merck & Co., Inc. and Maywood Chemical Works — being granted monopoly license for the importation of raw coca leaves (they were only allowed to import the raw materials as a means of keeping the manufacturing process from taking place in foreign countries). Merck was allowed to import coca leaves from Peru and Java for the purpose of extracting the cocaine alkaloid and processing it into analgesics. Maywood was given permission to import the leaves to extract and destroy the cocaine alkaloid for the production of the non-narcotic “Merchandise #5” which is the coca leaf-based flavoring ingredient still used in Coca-Cola today. This made each company a government-granted monopoly, one for painkillers and the other as the sole supplier to the Coca-Cola Company.
The pharmaceutical cronyism was ramped up in the 1930s when the government wanted to horde surplus supplies of pain medicines — both cocaine and opium based — to supply war-time allies. In 1933, when Franklin Roosevelt signed an executive order that required all citizens to turn in their privately owned gold, the US gold supplies were moved from the Treasury vaults to Fort Knox. With the vaults empty, the head of the Federal Bureau of Narcotics, Harry Anslinger, decided to fill them with narcotics, giving a nice little contract to Merck & Co. Incidentally, this was a violation of the 1931 Geneva Convention which gave national quotas to countries for the acceptable amount of drug stocks that could be kept. The FBN excluded national security stockpiles from these calculations.
Maywood’s license as a coca leaf importer may be even more interesting, though. By the 1930s, Coca-Cola was massively popular, which is why the US government was willing to grant them an exception for obtaining a regulated product (even without the narcotic element, the coca leaf itself was a regulated substance). As early as the 1930s, other competitors such as the S.B. Penick Company tried to get permission to purchase coca leaf flavoring ingredients from Maywood, but all such requests were declined by Anslinger. The federal government was officially working to suppress potential Coca-Cola competitors.
By the United States’s entry into World War II, Coca-Cola was lobbying for and receiving even more special exceptions to government regulations that its competitors did not enjoy. In 1942, a Coca-Cola executive sat on the board for sugar rationing and obtained special exemptions from the restrictions, which allowed them to open up sixty-four new bottling plants while other prospective soft drink producers had difficulty obtaining ingredients due to government trade restrictions.
In 1949, the company assets of Maywood were seized by the government because it was founded by a German — Dr. Louis Schaefer — and was owned by “the enemy.” Maywood’s stocks were to be put up for auction by the Office of Alien Property, and the only prospective buyer was the S.B. Penick Company who had been for years denied the legal right to purchase coca leaf flavoring ingredients. Thus, Ralph Hayes, a Coca-Cola executive, wrote to Harry Anslinger to seek intervention to protect its monopoly.
An Intricate Web of Government Monopolies
This cronyism did prevent the nationalization of the Maywood company, since they had been cooperative with the government during the war (so cronyism beat nationalization, in this case). But Coca-Cola’s monopoly on coca ingredients was still safe.
During the Cold War, Coca-Cola was helped by the US government in its global expansion, as a manner of marketing the company as an (ironic) example of American “capitalism” and its superiority to communism. Germany and France, for example, tried to impose legal restrictions on Coca-Cola’s expansion in their country. Anslinger responded by personally acting as the mediator with foreign governments on behalf of Coca-Cola. He even used global drug policy as justification to get the Foreign Relations Division of the Office of Political Affairs to “discourage [foreign countries from] the import of coca leaves for the purpose [of soft drink production] as much as possible.”2
In 1959, Maywood Chemical Works was absorbed by the Stepan Company which retains a monopoly license on the importation of coca leaves to this day (it now produces the flavoring extract and the cocaine alkaloid for pharmaceutical purposes, making it the only licensed importer of coca leaves), and Coca-Cola remains the only company with the privilege of obtaining non-narcotic coca leaf flavoring ingredients.
It should be clear that the early days of Coca-Cola demonstrate that the company was able to prosper competitively in a free market without having to resort to government privileges. Furthermore, its early years demonstrate the adaptability of a private company to respond positively to consumer pressures without government oversight, by the removal of the narcotic component of its drink eleven years before the legal prohibition of cocaine. But Coca-Cola’s success as the mega-company it is today is due, at least in part, to special privileges granted by government during World War II, and the suppression of potential competitors in the early years of Harry Anslinger’s anti-drug policies. As a result, Coca-Cola is the product of corrupt cronyism and a unique beneficiary of the War on Drugs, and this remains true today.
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