Monopolies and Trusts

By the late nineteenth century, big businesses and giant corporations had taken over the American economy. Consumers were forced to pay high prices for things they needed on a regular basis, and it became clear that reform of regulations in industry was required. The loudest outcry was against trusts and monopolies. Trusts are the organization of several businesses in the same industry and by joining forces, the trust controls production and distribution of a product or service, thereby limiting competition. Monopolies are businesses that have total control over a sector of the economy, including prices.

Trusts are problematic for several reasons. Monopolies develop from trusts and give total control of a specific industry to one group of companies. Owners and top-level executives of monopolies profit greatly, but smaller businesses and companies have no chance to make money at all. Trusts also upset the idea of capitalism, the economic theory upon which the American economy is built. In a capitalist society, all businesses have an equal opportunity to thrive based on competition. When monopolies and trusts exist, competition cannot.

The first trust

John D. Rockefeller (1839–1937) formed the first trust in 1882 with the establishment of the Standard Oil Company. Rockefeller knew America depended on oil for its daily existence. Families and businesses used it to heat their homes and buildings; factories needed it to run their machines. By establishing his trust, Rockefeller forced consumers to pay whatever price he wanted to charge for his oil. America was growing weary of this situation.

In response to public unrest, President Benjamin Harrison (1833–1901; served 1889–93) passed the Sherman Antitrust Act in 1890. Named after the U.S. senator John Sherman (1823–1900) of Ohio , this new law made trusts and monopolies illegal both within individual states and when dealing with foreign trade.

Although the law was a step in the right direction, it was not enough to stop the wealthiest men in America—like Rockefeller—from ending their unethical business practices. And because these wealthy men contributed large sums of money to political campaigns, the government was reluctant to enforce the Sherman Antitrust Act.

Railroads formed another major monopoly. (See Railroad Industry .) Individual railroad companies knew that industry and farmers alike depended upon them to transport their products across the country. When it became clear that undercutting each other by lowering shipping rates was only hurting themselves, the companies joined forces and formed a monopoly called the South Improvement Company. The railroad companies set a fixed shipping price for those businesses doing more shipping, and such businesses paid a lower rate as a sort of reward. This policy made shipping goods by railroad too expensive for small businesses and farmers, yet their alternatives were limited.

The trust-busting president

It was not until Theodore Roosevelt (1858–1919; served 1901–9) became president that the Sherman Act was enforced with any regularity. Roosevelt was a president of the people, and he strongly believed in the government regulation of business so that healthy competition could take place. He was so determined that he became known as the “trust-busting” president.

Roosevelt's administration began more than forty lawsuits against companies, but the truth was, he was more in favor of regulating trusts than he was of dissolving them. He believed the Sherman Antitrust Act was foolish because in his mind, there were good trusts and bad trusts, and he believed they should be dealt with on an individual basis. But when Congress refused to enact his suggestions for the federal licensing and regulation of interstate companies, he had no choice but to enforce the act.

In 1914, President Woodrow Wilson (1856–1924; served 1913–21) established the Federal Trade Commission, a government department designed solely to protect the public from unfair business practices.

From 1902 to 1904, journalist Ida M. Tarbell (1857–1944) exposed Rockefeller's unethical business practices and his entanglement with the railroad monopoly in a nineteen-part series published in McClure's magazine. Tarbell's work gave the American public the evidence it needed to demand that action be taken against Rockefeller. On May 15, 1911, the government ordered Standard Oil to separate into thirty-four smaller companies, each with its own board of directors. The first American trust was broken.

Modern trusts

Antitrust laws are still aggressively pursued in America's modern economy. In May 1998, the United States filed a suit against Microsoft Corporation. The United States charged that the computer software company abused monopoly legislation in the way it handled its operating system and Web browser sales. After two years of litigation, Microsoft was found guilty of violating the Sherman Antitrust Act. The judge ordered Microsoft to divide itself into two units: one to produce the operating system, the other to produce software.

Microsoft appealed the verdict, and in November 2001 it reached a settlement with the U.S. Department of Justice . Instead of dividing the company into two separate units of operation, Microsoft was ordered to share its application programming interfaces with third-party companies. It would also be required to appoint a panel of three people who would have unlimited access to Microsoft's systems, records, and source code for five years in order to ensure that the company complied (acted in agreement) with the settlement. Nine states and Washington, D.C. , fought against this settlement, claiming that it did not go far enough to fight the Microsoft monopoly. But on June 30, 2004, the U.S. Court of Appeals approved the settlement. The case has been publicly criticized for not imposing harsher consequences. Others criticized the government for even pursuing Microsoft on terms of business monopoly. They claimed the suit was the result of government joining with smaller competitors against Microsoft to obstruct the bigger company's ability to profit. These critics believe antitrust laws go against the concept of a free marketplace, where all businesses share an equal chance to succeed.

Another prominent case involved telecommunications company AT&T. For much of its history, AT&T and its Bell System (named after inventor and scientist Alexander Graham Bell [1847–1922]) operated as a legally sanctioned monopoly. The logic behind such a monopoly was that the technology would operate more efficiently as one system, rather than have numerous systems pieced together across the country. In addition to telephones , the company also controlled the telegraph system.

An antitrust lawsuit was filed against AT&T in 1949 that resulted in a 1956 decision limiting the company's activities to the regulated national telephone system and government work. As technology improved, the government allowed other, smaller companies to compete in the area of long-distance telephone service. By the mid 1970s, consumers had several choices when looking for long-distance telephone carriers.

The federal government decided this limited competition was not enough, and it filed an antitrust lawsuit against AT&T in 1974. In January 1982, the company agreed to rid itself of the Bell operating companies that provided local telephone service. The change took place in January 1984, at which time the Bell system became AT&T, with seven regionally controlled and operated Bell companies. The company went from $149.5 billion in assets to $34 billion, and from more than one million employees to 373,000.

In 2000, AT&T announced it would restructure into separate companies: AT&T, AT&T Wireless, and AT&T Broadband. The following year, AT&T Broadband merged with Comcast and became the Comcast Corporation. In January 2005, AT&T merged with SBC Communications to become the industry's premier networking and communications company.