The Sherman Act of 1890 finished the era of truly free market in the United States of America, although, ironically, it has been directed at protecting the freedom of competition. It may seem obvious that the law that limits the competitors cannot be protecting the competition, but, nevertheless, this law became the foundation of what we know today as the American antitrust legislature.
The Sherman Act prohibits all kinds of all contracts, combinations and conspiracies in restraint of trade, and monopoly in interstate and foreign trade. On paper it seemed to be perfect for protecting smaller participants of the market from being eliminated by the larger ones; in reality everything turned out much worse. The main flaw of the Act is that it is unacceptably vague for a law according to which people have to act. It can be interpreted in any way depending on the need of the government official who does it, enabling the state effectively apply pressure to business in almost any circumstances. It has been even reflected in a bitter joke: if you sell for the lower price than the rest, you are charged with rapacious competition; if you sell for the same price as the others, you are charged with cartel conspiracy; if you sell at a higher price than all the rest, you are charged with overpricing.
And it is true, as well as the disastrous results on business. Who can one properly direct one’s business to if one doesn’t know and has no way to know when he is acting according to the law and when not? The Sherman Act is a shameful page of the American legislature that has been causing harm for more than a hundred years now.
The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to prohibit abusive monopolies, and in some ways it remains the most important.
Trusts and Monopolies
A trust was an arrangement by which stockholders in several companies transferred their shares to a single set of trustees. In exchange, the stockholders received a certificate entitling them to a specified share of the consolidated earnings of the jointly managed companies. The trusts came to dominate a number of major industries, and were, in effect, monopolies.
A monopoly is a situation in which there is a single supplier or seller of a good or service for which there are no close substitutes. Economists and others have long known that unregulated monopolies tend to damage the economy by (1) charging higher prices, (2) providing inferior goods and services and (3) suppressing innovation, as compared with a competitive situation (i.e., the existence of numerous, competing suppliers of the good or service).
The most infamous of the trusts was the Standard Oil Trust, which was formed in January, 1882. At that time, Standard Oil and its affiliates controlled more than 90 percent of the oil refining capacity and most of the oil marketing facilities in the U.S. Trusts were also established in numerous other industries, some of the largest of which were sugar, tobacco, railroads, steel and meatpacking.
The idea of the trust was conceived by Samuel Dodd, an attorney for Standard Oil. In the case of this company, a board of trustees was set up and it was given control of all of the Standard Oil properties. Every stockholder received 20 trust certificates for each share of Standard Oil stock. All profits from the component companies were sent to the nine trustees, who set the dividends. The nine trustees also selected the directors and officers of all the component companies. This allowed Standard Oil to function as a monopoly.
Trusts used a number of techniques to eliminate competitors, including (1) buying them out, (2) temporarily undercutting their prices, (3) forcing customers to sign long-term contracts (4) forcing customers to buy unwanted products in order to receive the products they wanted and (5) dispatching thugs to use intimidation and violence when all other means of persuasion failed.
The Sherman Act
John Sherman (1823-1900) was the younger brother of the American Civil War general William Tecumseh Sherman. He became a U.S. senator from Ohio and served as a chairman of the Senate finance committee. He also served as a member of the U.S. Cabinet, including Secretary of State under President William McKinley and Secretary of the Treasury under President Hayes. Sherman was an expert on the regulation of commerce and was the chief author of the Sherman Antitrust Act.
This ground breaking piece of legislation was the result of intense public opposition to the concentration of economic power in large corporations and in combinations of business concerns (i,e., trusts) that had been taking place in the U.S. in the decades following the Civil War. Opposition to the trusts was particularly strong among farmers, who protested the high charges for transporting their products to the cities by railroad.
The Sherman Antitrust Act was the first measure enacted by the U.S. Congress to prohibit trusts (or monopolies of any type). Although several states had previously enacted similar laws, they were limited to intrastate commerce. The Sherman Antitrust Act, in contrast, was based on the constitutional power of Congress to regulate interstate commerce. It was passed by an overwhelming vote of 51 to 1 in the Senate and a unanimous vote of 242 to 0 in the House, and it was signed into law by President Benjamin Harrison.
The first part of Section 8 of the U.S. Constitution (with the interstate commerce clause underlined) states:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
To borrow Money on the credit of the United States;
To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; . . .
The Sherman Antitrust Act (the full text of which can be found here) authorized the Federal Government to dissolve the trusts. It began with the statement: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." And it established penalties for persons convicted of establishing such combinations: ". . . shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court."
For more than a decade after its passage, the Sherman Antitrust Act was invoked only rarely against industrial monopolies, and then not successfully. Ironically, its only effective use for a number of years was against labor unions, which were held by the courts to be illegal combinations.
This was the result of intense political pressure from the trusts together with the loose wording of the Act. Its critics pointed out that it failed to define such key terms as combination, conspiracy, monopoly and trust. Also working against it were narrow judicial interpretations as to what constituted trade or commerce among states.
Five years after its passage, the Supreme Court in effect dismantled the Sherman Antitrust Act in United States v. E. C. Knight Company (1895). The Court ruled that the American Sugar Refining Company, one of the other defendants in the case, had not violated the Act despite the fact that it controlled approximately 98 percent of all sugar refining in the U.S. The Court's explanation was that the company's control of manufacturing did not constitute control of trade.
President William McKinley launched the trust-busting era in 1898 when he appointed several senators to the U.S. Industrial Commission. The Commission's subsequent report to President Theodore Roosevelt then laid the groundwork for Roosevelt's attacks on trusts and finally resulted in the successful employment of the Act.
In a seminal 1904 decision, the Supreme Court upheld the Federal Government's suit under the Sherman Antitrust Act to dissolve the Northern Securities Company (a railroad holding company) in State of Minnesota v. Northern Securities Company. Then, in 1911, after years of litigation, the Court found Standard Oil Company of New Jersey in violation of the Sherman Antitrust Act because of its excessive restrictions on trade, particularly its practices of eliminating competitors by buying them out directly and by driving them out of business by temporarily slashing prices in a given region.
In this historic decision, the Supreme Court established an important legal standard termed the rule of reason. It stated that large size and monopoly in themselves are not necessarily bad and do not violate the Sherman Antitrust Act. Rather, it is the use of certain tactics to attain or preserve such position that is illegal.
The Court ordered Standard Oil to dismantle 33 of its most important affiliates and to distribute the stock to its own shareholders and not to a new trust. The result was the creation of a number of completely independent and vertically integrated oil companies, each of which ranked among the most powerful in the world. The consequent vigorous competition gave a big impetus to innovation and expansion of the oil industry as a whole.
In 1914 Congress passed two measures that provided additional support for the Sherman Antitrust Act. One was the Clayton Antitrust Act, which elaborated on the general provisions of the Sherman Act and specified a number of illegal practices that either contributed to or resulted from monopolization. It explicitly outlawed commercial practices such as price discrimination (i.e., charging different prices to different customers), the buying out of competitors and interlocking boards of directors. The other was the establishment of the Federal Trade Commission, an agency with the power to investigate possible violations of antitrust laws and to issue orders forbidding unfair competitive practices.
Antitrust enforcement waned during the booming 1920s, but it was revived during the administration of President Franklin Delano Roosevelt and additional acts were passed to bolster the government's antitrust powers. The Robinson-Patman Act of 1936 strengthened the Clayton Act by prohibiting large sellers from offering different prices to different buyers if it resulted in harm to even a single small firm. The Celler-Kefauver Act of 1950 further strengthened the Clayton Act by preventing one firm from merging with a competitor by purchasing its physical assets if it resulted in a substantial lessening of competition.
The most successful application of the Sherman Antitrust Act during the second half of the 20th century was the breakup of the American Telephone and Telegraph (AT&T) monopoly, which was agreed upon in early 1982 and went into effect on January 1, 1984. This enforcement had profound effects not only on the telecommunications industry but also on the economy as a whole.
The Act was also used in the attempt to attempt to rein in the allegedly abusive monopolistic practices by Microsoft Corporation, with a trial that began in 1998. However, many observers feel that the government failed to take sufficiently strong corrective measures despite winning both the original trial and an appeal. This is widely attributed to politics rather than the merits of the case.
Created June 17, 2004. Copyright © 2004 The Linux Information Project. All Rights Reserved.