Federal Government Through The Sherman Act example essay topic

To the people of the United States, a nation who's governmental policies, it is generally assumed favour competition, the great merger movement came as an incredible shock. With the dangers of monopolies staring them in the face, Americans watched the merger movement unfold, bringing with it a change from what was once a nation of freely competing individually owned enterprises into a nation dominated by a small number of giant corporations. Public response to the consolidations inevitable rising of prices and securing of their monopoly positions by extracting rebates from the railroads and restricting competitor's access to raw materials led to the launching of investigations throughout government. The result of which is an extensive but disorganized body of antitrust legislation on the federal statute books.

Theodore Roosevelt sensed the political value of prompt federal action and revived the Sherman antitrust act in 1904 with the prosecution of the northern securities holding company. It was under Woodrow Wilson's administration, which also saw the benefit of trust busting, that congress passed the Clayton Antitrust Act in 1914 along with the federal Trade commission. Both of which were intended to remove ambiguities in existing antitrust law by making more specific rules against monopoly and restraints of trade. While this prompt action reduced the anxieties of the public the question to be asked is whether or not it did much to protect the competitive structure of American Industry. According to Kolko, Roosevelt's and the other official's efforts at trust busting were insincere, and did little to alter the concentration of control in American industry. Kolko argued that most of the government regulation actually worked in favour of the large corporations.

Robert H. Bork also noted the failings of the federal policy, but his explanation for this was the "diverse, mutually incompatible legal traditions on which it was based and the confused economic reasoning of the federal judiciary". In order also to assess the extent to which the antitrust policy was successful in curbing big business we must show how successful the government was in preventing the erection of barriers to entry. While the government had quickly moved to eradicate agreements that restricted buyers and suppliers from working with competition it dealt with vertical integration far more ambiguously, even though it accomplished the same thing. While I have mentioned some explanations for this differential treatment I cannot explain the contradiction with just the arguments of Kolko and Bork. The real reason was structural, the separation of power and authority between the federal government and the states. This effected how the Sherman act was enforced, the federal policy was much more effective with the loose combinations, leaving the states with their charter powers to tackle the tight combinations.

During the early years of the merger movement in the late 19th century the states had two different legal traditions with which to enforce competition and regulate the American business industry. The first of these traditions came in a body of common law decisions, which enabled judges to refuse to sanction those conspiracies, or contracts, which they felt, were in restraint of trade or had intentions to monopolize. State legislatures, in response to the vast increase in trusts and holding companies throughout the 1880's and 1890's, set out to bring theses decisions together in a series of antitrust laws. Violation of these laws led to criminal prosecution. The second tradition the states could draw on was their right to Charter Corporation.

This meant that the states could control the way the incorporated enterprises ran their business, through this if needed states could control also the stock issues and indebtedness of the corporations and if needed even forbid mergers. This meant that the latter of these two traditions was by far the most powerful. This is clearly illustrated in the fact that most antitrust cases brought forward by the states in the late 19th century were prosecuted because the corporation involved in the combinations had acted outside their charters, had acted ultra virus. This power of the charter also helped to prevent the erection of barriers to entry. An example of this can be seen in the antitrust law Texas passed in 1889 making it illegal for one corporation to own stock in another. When coupled with the law that firms chartered in the state were confined to one line of business vertical integration was in effect also prohibited.

This was the case for the vertically integrated Standard oil when it attempted to dominate Texas petroleum, leaving instead new competition like Shell and Texaco to enter. Yet, not all states had the economic power of Texas and were rendered helpless to deal with these big corporations. It was for this reason that the states turned over the responsibility for dealing with these large corporations to federal government. The power of the federal regulators was not as strong as states as they had no federal incorporation law like that of the states, instead it could only draw on the common law prohibitions which had been stated in the Sherman antitrust act of 1890.

The act contained two main provisions"; section 1 outlaws restraints of trade by agreements, combinations, and conspiracies in interstate and foreign commerce. Section 2 outlaws monopolization of such commerce; and covers attempts or conspiracies to monopolize". The first case prosecuted under the Sherman act was against Jellico mountain coal. This loose combination of coal miners and dealers in Tennessee and Kentucky the government claimed had conspired to raise coal prices. The Combination, the Nashville coal exchange, was found in violation of the Sherman act as such loose combinations been considered in restraint of trade under common law. While the case of loose combinations seemed relatively easy to deal with, the federal government were far less effective in dealing with the tight combinations such as holding companies.

One year after the Jellico case the government tried to prosecute the Distilling and cattle feeding Company, yet judges on three separate occasions ruled that the without evidence that the corporation derived its dominance from illegal acts and or restraints imposed on other firms, it could not be held in violation simply due to its market share and size. This realisation that the tight combinations were more effectively dealt with by charter powers of the states rather than the federal government through the Sherman act was further emphasised by the decision of the supreme court in the 1895 E.C. Knight case. This again was a case involving a tight combination, the American sugar refining company, which was a chartered corporation in the state of New Jersey. The government was trying to force the combination to dissociate from the E.C. Knight Company along with three other acquired refineries. Yet the government lost the case on the basis that manufacturing was not commerce and so the acquisitions were not in violation of the Sherman act. While some felt that this decision was an attempt to render powerless the antitrust laws, the reinterpretation of the case by Charles W. McCurdy shows that it was in fact recognition by the court that it was not them but the states that could most effectively deal with tight combinations through their charter powers.

McCurdy pointed out that the courts wanted to protect that power. In addition the congress held exclusive power to regulate interstate commerce and the state could not do so even if the congress refused to exercise this power. Therefore if the courts had accepted that manufacturing for interstate distribution was interstate commerce the power the states had to regulate these corporations would have been lost and the states charter powers dramatically weakened. In the years between 1898-1904 the nation saw its biggest ever consolidation movement. During the years 1898 to 1904 more than 3000 mergers were effected. In the four years 1903, companies accounting for almost one-half of U. U manufacturing capacity took part in active mergers, most vertically integrating.

This has been referred to as the vertical merger wave. Most states at this time were economically unable to cope with the excesses of these big businesses. It was time for the federal government to step up again. Roosevelt did so in 1902 with the first successful prosecution of a tight combination, the Northern Securities Company, under the Sherman act. The court in the Northern Securities decision had taken the literal interpretation of the Sherman act, used against loose combinations, one step further. It decided that, if the railroads had of transferred control of their business to an association or an individual instead of creating the Northern securities company, they would have been in violation of the Sherman act.

They had used the holding company to achieve the same end so therefore it too had to be considered an illegal combination. This literal application of the Sherman act to tight combinations led Justice White and Holmes to bring up the important constitutional issue of whether congress had the right to control stock acquisition by and in state chartered corporations just because they took part in interstate commerce. Whites opinion was no. Furthermore with the right to control what an owner could do with his property does not come the right to control the amount and the nature of the property that might be acquired. This kind of control was only permitted in the case of corporations being controlled by the body, which had chartered them. The solution to this dilemma came in the form of Justice Brewers proposed "rule of reason".

This "rule" acknowledged the application of the Sherman act to tight combinations but did not automatically hold them illegal. At this time also there was support for a federal incorporation law. This support was coming from both Roosevelt's government and also those in the business community who, knowing that regulation was inevitable, it would be a way of getting around the state statutes and the Sherman act. This only further strengthened Gabriel Kolko's case as mentioned earlier. In March 1908 William P. Hepburn introduced a piece of antitrust legislation to congress.

The bill found opposition from all sides, there was also concern about the increases power the federal executive would receive from it. In light of all the opposition Roosevelt moved to dislocate himself from the bill. The consequences of this were that the bill failed and so to did the push for federal incorporation. The time came again for the application of "the rule of reason" in order to come to the decisions given by the supreme court in 1911 against the Standard oil Company and the American Tobacco Company.

The rule was used to apply the Sherman act to " acts or contracts or agreements or combinations which operated to the prejudice of the public interests by unduly restricting competition or unduly obstructing the due course of trade or which, either because of their inherent nature or effect or because of the evident purpose of the acts, etc., injuriously restrained trade". Standard oil and American Tobacco were the only companies that the Supreme Court dissolved. The merger movement had called for the application of the Sherman act to the state chartered consolidations, but with this literal interpretation came the threat of rendering all consolidations illegal. The rule of reason resolved this problem by focusing primarily on outcomes and dividing consolidations into two groups. The first of these consolidation groups were those whose inherent nature or effect was to retrain trade, in other words loose combinations. They had been ruled illegal since 1890, and the Sherman act was to be applied literally to them.

The second group of consolidations were those formed by merger, they did not automatically fall into the category of illegal. In order to find these incorporated consolidations in violation of the Sherman act, it must have been shown that their "evident purpose" was to restrain trade. This meant that, as in the case of Northern securities, a consolidation whose evident purpose is to restrain trade was to be considered just as illegal as loose combinations under the Sherman act, as the outcome for both was the same. The fact that the combination may have been state chartered was irrelevant because the state could not charter corporations, which were in violation of federal law. The problem to be solved now was how to prove that the evident purpose of the combination was to restrain trade. We have already seen from the case of the Distilling and Cattle Feeding Company that a firm could not be held in violation of the Sherman act simply by the fact of its existence- its size and market share.

The case therefore was to be built on the testimony of competitors who had been hurt by the dominant firms actions. Yet again the excesses of big business could not be curbed. Consolidations quickly learnt that by adopting a policy of live and let live whereby they would concentrate on erecting barriers to competition by intracorporate means they could avoid prosecution. A good example of this is the antitrust case against U. S Steel. The Chairman of U. S Steel, Judge Gary, had put an end to all exclusive dealing arrangements and rebates and instead followed a policy of vertical integration to achieve market control. This meant that in the case there were only testimonies from competitors saying that the company was genuine.

An economist was called in by the government who testifies that U. S Steel could still restrain trade while at the same time maintain friendly relations but his testimony was dismissed. Therefore without the condemning evidence from the competitors the government lost the case on the basis of not showing that combinations evident purpose was to restrain trade as stated by the second part of the rule of reason. In 1914 the Clayton Act was passed in an effort to tighten the reins on trusts. This second law tried to deal with vertical mergers as well as horizontal ones. It was premised on the assumption that Sherman act and its provisions were too broad and that more specific rules prohibiting monopoly and restraints of trade were needed. Among these specific rules was price discrimination, which would reduce competition.

Along with the Clayton Act came The Federal Trade Commission Act of 1914, which outlawed "unfair methods of competition", it also established the Federal Trade Commission. While Congress had finally come to reform the nations antitrust laws with these Acts it did little more than ratify the existing pattern the courts had followed in antitrust enforcement. Nowhere in this legislation was there an attempt to resolve the difficulties of federal regulation of the state chartered incorporations internal activities. In neither of the acts was the rule of reason altered in fact in their substantive provisions they focused, in the same way as the rule of reason, on the relations between corporations instead of the internal activities.

In the Federal trade commission Act it was left up to courts to determine what exactly constituted unfair methods of competition, in fact this was the case for most U. S antitrust policy, it was mostly formulated by judges. So in order to fully understand the strengths and weaknesses of the antitrust policy one must understand the judicial process. As we have seen the aims of the judges were not always consistent, in one case the aim of their antitrust policy was to prevent artificial price increases while in other cases the aim was the maintenance of small business. Bork could not have been more correct when he suggested that judges were guilty of confused economic reasoning. Yet it must be said that the judges at this time were not looking to express a comprehensive economic philosophy, rather they were trying to deal with the changing economic organisation while at the same time meet the public demands for action. The development of antitrust legislation in the United States was born out of a fear concentrated economic power in the hands of just a few giant corporations.

Yet the decisions issued by the courts in the antitrust cases from 1865-1940 were inconsistent and confusing. The main problem faced was structural. How was the Federal government to regulate interstate corporations when it did not posses the power to charter them? The answer that they came to was the rule of reason. While this rule helped in the prosecution of cases such as the Northern securities, the giant corporations were quick in finding ways to side step it, as in the case of U. S Steel, by adopting a live and let live policy. Ironically the rule of reason also worked to the detriment of those smaller firms hoping to use it to disable the giant corporations.

As sometimes the best way these smaller firms could compete with the larger ones was by the exclusive dealing arrangements now made illegal by the rule. Big businesses it seemed were not to be curbed by the antitrust legislation. In fact the enforcement of this legislation against the big consolidations resulted in them abandoning their time consuming preoccupations with restraints of trade and instead to redirect their energies into improving their competitive positions by intracorporate means. Big business, its seems, was destined to remain big!

Bibliography

Naomi. R. Lamar eaux. The great merger movement and antitrust policy. 1895-1904, ca muni press 1988 Charles R. Geist, Monopolies America, Empire builders and their Enemies from Jay to Bill Gates. Mark's. Masses, Competition and monopoly legal and economic issues. Gary M. Walton and Hugh Rock off, History of the American Economy, Eight edition pp 389 Jonathan j. Bean, Beyond the broker State, federal policies toward small business. Markets, The United States in the twentieth Century, edited by Grahame Thompson.