Antitrust Legislation

Antitrust Legislation. Opposition to concentrated corporate power occupies a noteworthy if ambiguous place in American history. Ever since Congress passed the Sherman Antitrust Act of 1890, public consensus supported antitrust values in principle, even as repeated disputes arose over their application in particular cases. Such inconsistency paralleled the nation's unfolding experience with big government and managerial capitalism; the shifting significance of small business and organized labor; the growing importance of economic experts; and the central policy‐making role of lawyers and courts, particularly the U.S. Supreme Court. A popular faith in competition governed antitrust development. What “competition” meant, however, and who benefited, was subject to change.

Gilded Age Beginnings.

The antitrust movement originated as managerial capitalism burgeoned near the end of the nineteenth century. Following the Civil War, technological innovation and mass marketing fostered the development of large‐scale corporate combinations, leading to a separation between owners and managers. In this new form of corporate enterprise, managers increasingly acted as the principal decision‐makers. The rise of big business spawned corporate mergers as well as loose cartel arrangements and other trade restraints. (A cartel is a secret agreement among supposedly competing businesses to establish a monopoly by price fixing or other means.) While some states successfully limited both forms of combination, New Jersey enacted a law in 1889 permitting the formation of holding companies and facilitating the formation of corporate combinations controlled by managers. Because the New Jersey law conflicted with other states' laws, its critics demanded federal action.

The Sherman Act was a product of countervailing market and political pressures. Small business and farm groups, eager to limit the growth of large corporate combinations, supported federal action in principle. Big business interests and their lawyers, by contrast, were divided over the possible results of a more uniform national antitrust policy. Fearing that federal power might be used against it, organized labor opposed federal antitrust legislation. Popular opinion, at the time and ever since, reflected these divergent sentiments. Americans profoundly distrusted giant concentrations of corporate wealth and power, while at the same time they yearned for the consumer benefits that bigness often seemed to facilitate; people were also anxious about the apparent lack of legal accountability of huge, “soulless” corporations. Congress responded to those conflicting desires and interests with a law embodying several general provisions: Section 1 of the Sherman Act banned “[e]very contract, combination or conspiracy” that restrained interstate or foreign trade of commerce; Section 2 prohibited individual firms from monopolization and attempted monopolization. The act's enforcement relied upon the state and federal courts. Federal or state prosecutors, as well as private litigants, could win treble damages by proving violations of the law.

The Sherman Act's general provisions invited diverse interpretation. During the first decade of the law's operation, the Supreme Court encouraged corporations to adopt the holding company approach. (A holding company is a corporation that owns a controlling share of the stock of one or more other firms.) In 1895 the high court held that the E.C. Knight Company, a holding company that monopolized sugar production in the United States, did not violate the antitrust law. The Supreme Court and state courts also decided, however, that loose cartel practices were illegal under both the Sherman Act and state laws. The Court's simultaneous enforcement of rules against cartel practices and its toleration of holding companies facilitated a great turn‐of‐the‐century merger wave. By 1903 most of the nation's largest firms were holding companies in which decisions were generally left to managers. Meanwhile, the Supreme Court and lower federal judges increasingly applied the Sherman Act against organized labor, enabling employers to defeat strikes and boycotts.

The Progressive Era.

After 1900, demands for stricter antitrust enforcement increased. In the Northern Securities Case (1904), Theodore Roosevelt's administration became the first to prosecute successfully a holding company. This victory brought an end to the first merger wave. Federal officials, corporate leaders, economists, Wall Street lawyers, and Supreme Court justices soon concluded that a more flexible “rule of reason” should govern merger cases. Adopting a rule of reason as the basic doctrine governing merger cases, the Supreme Court in 1911 struck down predatory pricing practices that Standard Oil and American Tobacco were using to crush smaller firms.

Louis Brandeis, a prominent lawyer who championed small business and opposed big corporations, favored employing the rule of reason to allow for loose collusion among small enterprises, while urging the breakup of giant corporations. In taking this position, Brandeis adopted an Americanized version of European cartel policy. But in 1911 the Supreme Court frustrated Brandeis's hopes, outlawing loose cartel arrangements even among smaller companies.

Woodrow Wilson's victory in the 1912 Presidential election brought the enactment of two new antitrust laws. The Federal Trade Commission Act of 1914 created an administrative agency with broad powers to prevent “unfair methods of competition.” The terms “unfair” and “competition” remained sufficiently general, however, that judicial interpretation was inevitable. Similarly, the 1914 Clayton Act included provisions condemning the anticompetitive implications of price discrimination, exclusive arrangements, interlocking directorates, and stock‐purchase mergers, particularly holding companies. The Clayton Act also contained language that seemed to prohibit injunctions against labor. However, the Supreme Court construed both laws so narrowly that the advocates of more vigorous antitrust enforcement grew frustrated. The Justice Department prosecuted single‐firm monopolies, oligopolistic competition among a few managerially centralized big corporations characterized most leading industries. Still, the federal government's persistent prosecution of price fixing violations did enhance competitive opportunities for small businesses. Farmer cooperatives and exporters, by contrast, benefited from antitrust legislation.

The New Deal Era and Beyond.

As the twentieth century progressed, antitrust legislation achieved mixed results. The Norris‐LaGuardia Anti‐Injunction Act of 1932 decisively exempted labor organizations from the antitrust laws. Yet following the early New Deal's unsuccessful experiment with federally authorized cartelization under the National Recovery Administration, antitrust enforcement became more vigorous. Small business benefited from various fair‐trade laws. In antitrust cases heard by the Supreme Court under Chief Justice Earl Warren (1953–1969), the Court favored smaller business as it curtailed many horizontal and vertical mergers. Simultaneously, however, corporate managers, created conglomerates of competitively unrelated firms joined together primarily for investment purposes. The Hart‐Scott‐Rodino Act of 1976 added antitrust provisions that permitted the Justice Department's Antitrust Division to pursue a more proactive policy against mergers with antitrust implications. The Supreme Court's and the Antitrust Division's embrace of free‐market theories during Ronald Reagan's administration in the 1980s, however, turned the Hart‐Scott‐Rodino Act to the benefit of new forms of financially driven vertical mergers. The court, moreover, expanded the application of the rule of reason to permit what previously had been treated as clear‐cut violations of the antitrust laws. By the 1990s a reaction against the more extreme free‐market enthusiasm of the 1980s arose, creating new possibilities for the future of antitrust enforcement.

Bringing antitrust law into the computer age, the Department of Justice won a landmark case against the software giant Microsoft in 2000. Microsoft appealed, however, and the final outcome remained uncertain.
See also Business; Corporatism; Federal Government, Executive Branch: Other Departments (Department of Justice); Gilded Age; Industrialization; Labor Movements; Laissez‐faire; New Deal Era, The; Petroleum Industry; Progressive Era.

Bibliography

Thomas K. McCraw , Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, and Alfred E. Kahn, 1984.
James May , Antitrust in the Formative Era: Political and Economic Theory in Constitutional and Antitrust Analysis, 1880–1918, Ohio State Law Journal 50 (1987): 257–395.
Martin J. Sklar , The Corporate Reconstruction of American Capitalism, 1890–1916: The Market, the Law, and Politics, 1988.
Neil Fligstein , The Transformation of Corporate Control, 1990.
Tony Freyer , Regulating Big Business: Antitrust in Great Britain and America, 1880–1990, 1992.
Rudolph J.R. Peritz , Competition Policy in America, 1888–1992, 1996.

Tony A. Freyer