The Rise and Fall of Cocaine Cola

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The phenomenal Coca-Cola Company has always fascinated me. This hundred-year-old organization has a history of internecine corporate intrigues, shenanigans by its wealthy families and ongoing conflicts with the government. By taking a brief look at its history as well as two of the skirmishes between Coca-Cola and Washington, the first in 1906 and the second in 2000, we can see how our country has changed in the last century.

The story of this multi-national corporation began in the 1880s, when the dispensation of medicine was only loosely monitored. An Atlanta druggist named John Pemberton frequently concocted potions to relieve his customers’ ailments. His inventory included alcohol, opium, morphine, cannabis and two ingredients that were being touted in medical journals at the time: caffeine and cocaine. In 1819, caffeine, a mild stimulant, had been extracted from West African kola beans and scientists’ experiments with coca leaves had, in 1855, isolated the drug cocaine, which became widely used as a local anesthetic.

Eventually, John Pemberton’s various experiments culminated in a liquid tonic consisting of cocaine, caffeine and alcohol. To offset its bitter taste, these ingredients were dissolved in a sugar-flavored caramel colored syrup. Not only did it taste good, it also cured aches and pains, primarily that universal malady, the hangover, or, as the Swedes call it, "The pain in the hair roots." Pemberton’s soda fountain soon became crowded with hangover sufferers demanding the new tonic. As they watched, clutching their temples, the boy behind the counter would add carbonated water to a 7-oz glass partially filled with the new syrup. After gulping down this bubbling elixir, most customers would order a second glass and often a third, and, voila! the "morning after" symptoms were gone.

Word of this magic beverage, that Pemberton’s bookkeeper had named "Coca-Cola", spread rapidly throughout the city of Atlanta. But Pemberton’s health was failing, and he had also become addicted to morphine, so when Asa Candler, owner of an Atlanta drug store chain, offered him $2,300 for the Coca-Cola syrup formula, he accepted. Candler soon created a company to mass-produce the syrup in order to meet the urgent demand of Atlanta pharmacies.

Coca-Cola’s popularity continued to grow and most soda fountains in Atlanta were soon advertising the drink for sale. Also, many new soda fountains opened, so many that a visitor referred to Atlanta as "the city of fountains" with "fountains on almost every street corner and in all major office buildings." Soon Candler was shipping his syrup to other cities and his company would eventually evolve into one of the globe’s most prosperous organizations. Isn’t it interesting that a hangover would be the impetus for one of the world’s largest corporate successes?

It has been estimated that John Pemberton’s original "Coke", as it was nicknamed, contained almost 9 milligrams of cocaine per glass. But caffeine increases the effect of cocaine and most customers usually drank more than one glass of Coke; sometimes several throughout the day. Three Cokes would provide roughly 30 milligrams of cocaine, which compares with the 20 to 30 milligrams normally "snorted" in a day by a contemporary cocaine user. So it shouldn’t be a surprise that Atlanta’s soda fountains soon became almost as popular as its saloons.

Sales of fountain Cokes were also aided by one of the nation’s periodic flirtations with Prohibition. In Atlanta, Prohibition only lasted from July 1886 to November 1887 but during that brief period soda fountains acquired thousands of new customers. When the saloons did re-open, they didn’t immediately recoup their former patrons and it was reported that some went out of business. Unlike bartenders, soda jerks were not consistent in their mixing of drinks, with some using only one-ounce of Coke syrup per glass while others, incredibly, poured up to four ounces.

Coca-Cola was enjoyed by people "of all walks of life, but most abundantly by office workers, brain workers who took a glass before work, another at lunch, and several more in the evening." Corner newspaper boys, salesmen and delivery boys were among the fountains’ best customers, drinking Cokes throughout the day. One delivery boy, who lost his job and was unable to buy Cokes for several days, appeared at his doctor’s office "in a very nervous, almost collapsed condition, claiming that he knew something was the matter with him." A local doctor said that his partner was "very strangely affected by drinking Coca-Cola. If he takes a glass, he can’t find his way home."

In 1906, Congress passed the Pure Food and Drugs Law, which required manufacturers to list ingredients on product labels. Although some ingredients were classified as "habit forming" and "deleterious", Congress refrained from making any ingredient illegal. As a concession to the new law, Asa Candler, a teetotaler and deeply religious man, began using "decocainized" coca leaves so that the cocaine in his product was reduced to a negligible amount. Candler also drastically lowered the percent of alcohol in his product. But he insisted that caffeine was an essential element of Coke and, since it was not classified as a "deleterious" substance, he would not alter the amount called for by the drink’s formula.

Dr. Harvey Wiley, head of the government’s Bureau of Chemistry, had long campaigned for the Pure Food and Drugs Law and he would use it to promote his career. Wiley, in order to attract the most publicity, immediately launched a crusade against the highly visible Coca-Cola Company. Dr. Wiley wanted to take legal action because he claimed that the company’s product contained caffeine, a dangerous drug that was a hazard to consumers. But there were at least three problems with Wiley’s claim: 1) He had never tested the product so he didn’t know if it actually contained caffeine; 2) There was no factual evidence that anyone had actually been harmed by consuming caffeine; and 3) There was no law against selling caffeine, so the company was doing nothing illegal.

At first the federal government refused to allow Dr. Wiley to take legal action against Coca-Cola, but by cleverly supplying the media with inflated and false reports of hazardous health problems caused by caffeine, he finally got the go-ahead. Government agents seized 40 barrels and 20 kegs of Coca-Cola syrup in Chattanooga and thus began a court case with legal maneuverings, charges and countercharges that would last almost a decade. The case was given the unintentionally comical name: "The United States vs. Forty Barrels and Twenty Kegs of Coca-Cola."

Wiley believed that, even if he might not win in court, the unfavorable publicity generated would force the company to remove the offending drug. As he said, "It is remarkable what the fear of publicity will do." Dr. Wiley also thought the exorbitant cost of the legal proceedings would eventually bring the company to its knees. Indeed, the process might have bankrupted a small or even medium sized company. But Wiley had picked a well-financed organization with a resolute management that was unwilling to make further concessions to the federal government.

The trial finally began on March 13, 1911, in Judge Sanford’s Chattanooga court. The government was able to afford the best attorneys and the most celebrated expert witnesses. But Coca-Cola matched the government dollar-for-dollar with its attorneys and experts. Coke’s expert witnesses consistently refuted the government’s expert witnesses. Whenever Wiley would issue one of his distorted press releases, Coca-Cola would immediately refute it with its own persuasive press release. George Stuart, a well-known Evangelist testifying for the government, claimed that excessive use of Coca-Cola at one girl’s school led to "wild nocturnal freaks, violations of college rules and female proprieties, and even immoralities." Coke’s attorneys objected and the evangelist’s testimony was withdrawn. When the Women’s Christian Temperance Union claimed that the caffeine in Coke was dangerous for children, Coca-Cola pointed out that their drink had less caffeine than coffee or tea.

Coke refused to be intimidated by either the government or adverse publicity. The company had not broken any laws and had behaved ethically, so it stood firm and in the end, Judge Sanford ruled in Coca-Cola’s favor. The government reacted by adding caffeine to the list of "habit-forming" and "deleterious" substances. It also conducted a special Senate investigation of Dr. Wiley, claiming he had paid expert witnesses excessive amounts for their testimony. Although Wiley was finally cleared of any malfeasance, the attendant media publicity tarnished his reputation to the point that he was forced to resign his government position.

The decision was appealed all the way to the Supreme Court where it was overturned and the case was sent back to Judge Sanford. But, now, with Wiley gone, the government and Coke were able to negotiate an out-of-court settlement with each side making minor concessions. However, many Washington politicians were annoyed that a private company had the money and the effrontery to go one-on-one with the machinery of government and triumph over it.

Now bureaucrats began to wonder what the long-range consequences would be if corporations could amass large amounts of cash. Businesses had been paying income tax since 1909 and in 1913 individuals were also required to pay taxes on their income. In 1914, primarily as a result of large corporations like Coca-Cola, Congress implemented another tax on companies, which was unusual to say the least. In order to understand the concept of this new tax, you have to think like a Washington bureaucrat. To them, it is bad enough that companies make a profit from their efforts but it is totally unacceptable for companies to make enough profit to be able to create a surplus of cash.

To prevent this undesirable condition the "Accumulated Earnings Tax" was designed. This hefty tax would be imposed on all cash held by corporations in excess of what they needed for normal operations, as determined of course, by a government formula. Cagey bureaucrats knew that corporations would probably pass the excess cash on to stockholders in the form of dividends to avoid the new tax. But, as the individual stockholders would have to pay taxes on the dividends, the government would accomplish one of its most cherished goals: taxing the same income twice. However, corporations could not use the dividends paid as deductions from income on their tax returns. So the Accumulated Earnings Tax was a bureaucrat’s dream come true: double taxation and no deduction.

Congress passed several tax laws during in the early 1900s, among them a tax on "Excess Profits": a term that reveals the government’s attitude toward the free market. Begrudgingly, this tax was repealed in 1921. But Coca-Cola was stung again when Congress passed a 10% tax on the sale of soft drinks. However, the company streamlined its operations in order to accommodate the tax and was able to continue selling cokes for a nickel. Coke continued to prosper and the Candlers became one of the wealthiest families in the nation. Asa Candler accomplished a major coup when he bought the Coca-Cola formula for $2,300 but, later, he would make a foolish and costly mistake.

Candler was approached with the idea of bottling Cokes so customers could enjoy them in their homes. But he was not enthusiastic about this concept. After all, there were soda fountains all over town; this was before suburbs, so Cokes were easily accessible to everyone. Also, electric refrigerators were rare at that time and most people were still using wooden iceboxes that didn’t cool very well or cool for an extended period. So, for one dollar, Asa Candler sold the exclusive rights "in perpetuity" to bottle Coke using the Coca-Cola trademark and to sell bottling franchises. He was happy because bottlers would have to buy his syrup and he had no idea that bottling franchises would create a coterie of new millionaires.

Coca-Cola’s rapid growth prompted a purchase offer from a syndicate fronted by Ernest Woodruff, president of a bank that would later become the Trust Company of Georgia. In 1919, negotiations with Candler began and, finally, a sale price of $25 million was agreed upon. The Candler family relinquished its ownership, although family members retained huge blocks of stock. Converting $25 million from 1919 purchasing power to today’s equivalent places the Candlers in a bracket comparable to Microsoft’s Bill Gates. The Candlers were now one of the world’s wealthiest families.

Robert Woodruff, Earnest’s thirty-three year old son, was appointed President of Coca-Cola in 1923 and remained heavily involved with the enterprise until his death in 1985. With Robert Woodruff at the helm, Coca-Cola became one of the world’s largest multi-national corporations and, in the process, the Woodruff family also took its place among the world’s wealthiest.

But if the Candlers and Woodruffs made millions, they also gave away millions. They helped build hospitals, schools, churches, colleges, museums, and cultural centers, and their unique philanthropy continues to this day. Emory University alone received over $200 million.

The Coke family (company, bottlers, Candlers and Woodruffs) has always been a generous benefactor to minorities. It has a tradition of providing scholarships for needy talented black students. The United Negro College Fund is another ongoing recipient of Coke’s largess. The Atlanta University Center, with its six black colleges, has received $8 million. And the Martin Luther King, Jr. Center was established with a gift of $1 million.

Coke’s uniform personnel policies have always been a model of fairness. Black Americans can be found in every level of management. Blacks also own many of its bottling companies. And the company stipulates that minorities be used in its advertisements and insists that its suppliers include minority-owned businesses.

Nevertheless, in 1999, a group of black employees accused Coke of discriminating against them in pay, evaluations and promotions. The 1964 Civil Rights Act required that claimants must prove that an employer had "an intent to discriminate", but the Equal Employment Opportunity Commission, staffed by bureaucrats not elected by or answerable to the voters, "reinterpreted" the language of the Act. The EEOC, contrary to legal precedence, places the burden of proof on the accused. Claimants have nothing to lose and there is always a chance for a large monetary settlement. And everybody wants to "get over."

The EEOC uses unbelievably arbitrary criteria to determine a company’s guilt. They rely primarily on statistics; i.e., if 20% of the labor market is black and only 13% of a company’s managers are black, it is an indication of discrimination. Another criterion is a company’s failure to hire an unqualified candidate who, in the EEOC’s judgment, is trainable. Also, it is discrimination if a company does not "race-norm" its evaluation criteria so under-represented groups can get a leg up.

These are just a few of the bizarre rules applied by this predatory agency. And even if the charges are spurious, companies must bear the cost of disproving them. The charges against Coke would not have held up if they had been judged by rational objective criteria. And I do not believe a judge or even the Supreme Court would have found Coke guilty of discrimination based on such frivolous statistics. But, although Coca-Cola’s management vehemently denied the charges, it chose not to defend the company in court. It capitulated and, in April of 2000, the company agreed to a settlement of $192.5 million dollars! The largest racial discrimination settlement in history.

Within hours after these terms were tentatively agreed upon, former O.J. Simpson attorney, Johnnie Cochran Jr., filed another race-discrimination lawsuit against the company claiming that four black women had been passed over for promotion, paid less than their white colleagues and forced to do demeaning tasks. Cochran demanded a settlement of $1.5 billion. An attorney assisting Cochran said, "I think that’s a small price for Coke to pay to correct 20 to 30 to 40 years of discrimination."

Again, Coke’s management caved-in and one magazine described the outcome of Cochran’s lawsuit this way: "The allegations of these 4 Black employees were never proven in a court of law. Nonetheless, their clever lawyers managed to extort over $475,200,000 from Coke without ever setting foot in a court of law! Incidentally, the plaintiff’s lawyers walked away with over $20,000,000 in legal fees."

Finally, and most wrenching of all, Coca-Cola agreed to allow a 7-member external watchdog group oversee its salaries, promotions and performance evaluations. This group includes two former members of the Clinton administration: Alexis Herman, Secretary of Labor and Bill Lann Lee, Assistant Attorney General, Civil Rights Division, Department of Justice. Additionally, the company agreed to implement sensitivity training classes and develop policies and procedures that would aggressively promote diversity. Furthermore, the company agreed to spend an astounding $1 billion over the next five years to boost business opportunities for minorities. This effort encompasses various projects including the creation of a "Diversity Leadership Academy" in Atlanta, and a "Supplier Mentoring Program" for the "training and facilitation for non—White-owned businesses."

Joseph Lowery, President Emeritus of the Southern Christian Leadership Conference, said this of Coke’s concessions: " I think we have to give the protesting employees credit for serving as a catalyst for this new venture by Coke. I think it will be a model for corporate America in the new century." Unfortunately, Mr. Lowery is probably correct, and his assessment indicates a profound change in corporate philosophy since1900. Those early captains of industry, like Asa Candler, would never have allowed insolent bureaucrats and mercenary lawyers to misrepresent their actions or sully their reputations. But today’s craven executives pale by comparison. These toadies simply go along to get along.

Gail Jarvis [send him mail] is a CPA living in Beaufort, SC, an unreconstructed Southerner, and an opponent of big government.

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