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Government Regulation of Business

GOVERNMENT REGULATION OF BUSINESS

GOVERNMENT REGULATION OF BUSINESS. Since colonial times, government has regulated business. The need for more responsive and effective business regulation was at least part of the reason for the fight for independence and the establishment of the federal government. As the U.S. economy became more industrialized and the United States grew to be a world power in the nineteenth century, the federal government passed business laws that favored social reforms over the interests of big business. In the twentieth century, government involvement continued to expand until the 1970s, when both business and the public began to call for less regulation. At the beginning of the twenty-first century, the ruinous effects that utility deregulation had on California's economy and the corporate accounting scandals that came to light in late 2001 raised the possibility of a new era of federal intervention into business practices.

Business Regulation and the Birth of a New Nation

In 1649 the British Parliament passed the Navigation Acts to regulate trade with and within the North American colonies. During the first one hundred years these trade laws were in effect, the British did little to enforce them. Colonial Americans north of Maryland profited from a thriving trade with other colonies in North America and the West Indies. The British, who exported cotton from the southern colonies, dominated commerce in that region.

By 1764, however, England had incurred significant war debts, and the British Parliament decided to finance this debt by enforcing the long neglected Navigation Acts, which tipped the balance of trade in England's favor. In that same year, the Currency Act banned the American colonies from printing their own paper money, which they had been doing since 1690. As a result, the colonies were forced to pay debt in gold and silver. Reserves of these precious metals were quickly drained, and a depression ensued. Economic conditions were worsened by a series of new taxes that further serviced England's war debts. In 1765 the Stamp Act taxed most legal and printed documents, as well as dice and playing cards. The Townshend Acts of 1767 levied duties on glass, pigment for paint, paper, and tea.

For nearly a century, the American colonists had been able to develop and regulate their economic system. Suddenly the British Parliament began to impose a series of regulations that the colonists had no part in formulating. The regulations themselves, the lack of legislative participation, and the manner in which these rules were enforced in the colonies sparked resentment that flamed to open hostility as the British responded to colonial protests with ever-stricter regulations and methods of enforcement. The northern trading centers, which had enjoyed the greatest degree of independence, were hardest hit by England's new policies, and Boston soon became the center of opposition to British rule. By 1771 the trade deficit with Britain grew to £2.86 million. In response to the economic hardship these regulations created and the authoritarian manner in which the rules were enforced, the Revolutionary War broke out in 1775 at Lexington and Concord, Massachusetts.

During the colonial period, provincial legislatures capped wage and commodity prices, and master craftsmen had to secure municipal licenses. After the Revolutionary War, the new state governments continued most local regulation and, in addition, imposed tariff duties. The central government that was created under the Articles of Confederation from 1781 to 1789 lacked certain basic powers to regulate commerce between the states and to enforce contractual obligations. These flaws were among the factors that led to the current form of federal government created by the U.S. Constitution, which vested the U.S. Congress with authority to regulate interstate commerce. The adoption of the Constitution ended state tariff regulation and imposed a moderate federal system of protection, with discriminatory tonnage taxes favoring American ships and subsidies for New England's fisheries.

From State Regulation to Federal Regulation

Aside from wars and its fluctuating tariff policies, the federal government at the beginning of the nineteenth century was chiefly important to business in guaranteeing a uniform national currency and security for contracts, making gifts of land, and offering the protection of the due process of law. During this century, states actively began to promote business. Incorporation by special act was relatively easy, and starting with New York State in 1811, manufacturing was encouraged by "general" incorporation laws requiring only the payment of a small fee. State courts soon gave corporations the benefit of limited liability. Pennsylvania in particular bought stock in scores of manufacturing and transportation enterprises. Many of the states went into banking and canal construction. Subsequently, railroads received much state and local assistance and often had directors representing the public interest.

In 1824 the Supreme Court strengthened the federal government's power to regulate interstate commerce with its decision in Gibbons v. Ogden, which involved the authority to license shipping. Steamboat operator Thomas Gibbons had secured only a federal license to run his business in New York State waters, which were controlled by a monopoly created through a state licensing system. A member of this monopoly, Aaron Ogden tried to shut down Gibbons's business by suing him for failing to have the proper New York State licenses. The Court ruled in favor of Gibbons and declared that commerce involved not only buying and selling but also transportation and navigation. By giving Congress the sole authority to regulate interstate transportation, this decision cleared the way for the United States to create a national transportation system that has continued to benefit business.

By 1860 only a few transportation and banking enterprises remained in state hands. As the railroads enabled Americans to travel more easily from state to state, new state regulations were enacted to protect the interests of local businesses. Stricter licensing laws kept out-of-state doctors, lawyers, and even barbers from competing with local practitioners. Laws governing the quality of major export products protected the reputation of a city or state. Regulation of railroad rates was attempted to benefit local shippers, but here the states ran into trouble with the commerce power of Congress.

In 1866 the Fourteenth Amendment secured citizens against the deprivation of property or equal protection of the law without due process. By the 1880s the amendment was being interpreted by the Supreme Court to mean that property included the return on such intangible assets as stocks or bonds and that due process meant judicial review of the substance of law. This interpretation rendered the state regulation of national business completely ineffective and further encouraged federal action to correct problems in interstate commerce. This power permitted a long series of railroad regulatory acts, starting in 1887, that were generally advantageous to shippers. In the twentieth century, these acts would leave the railroads in a weak position in competition against the automobile and airplane.

Antitrust Law

The 1880s saw the advent of the trust, which enabled a handful of businesses to gain nearly complete control over many commodity-based industries. The founder of the Standard Oil Company, John D. Rockefeller, was the first to achieve monopoly-like domination over an industry. He had gained this power under his company's so-called Trust Agreement. In 1882 the public learned of this agreement, and the term "trust" entered the American vocabulary as a word signifying monopoly. At one point Standard Oil controlled more than 90 percent of the nation's petroleum refining. The huge profits that Standard Oil earned under its Trust Agreement drew the attention of other investors, and by 1887 there existed the Cotton Oil Trust, the Linseed Oil Trust, and the Distiller and Cattle Feeders Trust, which was also known as "The Whisky Trust." The way trusts concentrated wealth and economic power in the hands of a few business tycoons so alarmed the American public that Congress passed the Sherman Antitrust Act in 1890.

Despite this legislation, almost fifty other trusts were formed by 1897. The Supreme Court dealt a serious blow to the federal government's ability to enforce the Sherman Act with its 1895 decision in United States v. E. C. Knight Company, also known as the "The Sugar Trust Case." The Court took the position that refining sugar was an activity confined to a specific locale and that the federal government therefore could not use its power to regulate interstate commerce as a means to break up the trust. The Court ruled against the federal government although E. C. Knight controlled nearly 98 percent of the sugar refining industry and was able to set the retail price of sugar throughout the entire country.

Efforts to curb trusts languished until Theodore Roosevelt was elected to the presidency in 1904 on a trust-busting platform. By that time 185 trusts had been formed; their creation had been aided by an 1889 New Jersey law that allowed companies chartered in that state to hold the stock of other companies. Similar legislation was enacted in several other states including Delaware and Maine, and trusts took the form of holding companies. One such holding company was the Northern Securities Company, which monopolized railroad transportation from the Great Lakes to the Pacific Coast. Roosevelt successfully invoked the Sherman Act to break the monopoly, which was dissolved by order of the Supreme Court in 1904. When the Court ordered the dissolution of the Standard Oil and American Tobacco trusts in 1911, it ruled that these trusts placed "unreasonable restraint" on trade. This implied that the Court would tolerate "reasonable restraints," and monopolistic-like business entities continued to grow. Congress passed further antitrust legislation with the Clayton Act in 1914, which outlawed unfair methods of competition. The act created the Federal Trade Commission to enforce this legislation. Business eventually responded to this type of regulation by creating conglomerates that diversify holdings instead of concentrating them in a single sector of industry.

Regulation and Deregulation in the Twentieth Century

At the turn of the nineteenth century, the public's dismay at business practices fostered further federal regulation. In 1906 writer and social activist Upton Sinclair published The Jungle, a novel that exposed the unsanitary practices of the meatpacking industry. The public furor created by this book motivated the federal government to pass the Pure Food and Drug Act (1906), which Congress continued to strengthen throughout the first half of the twentieth century.

Social activists also promoted the cause of child labor reform, which was embraced by the Congress and presidents. The first child labor laws were passed during the administration of President Woodrow Wilson (1913–1921), but they were struck down by the Supreme Court. Similar laws passed in 1919 and 1935 were also ruled unconstitutional by the Court, which held that Congress had overstepped its authority by directly placing controls on state and local commerce. An amendment to the Constitution protecting children against abusive labor practices was passed by Congress in 1924 but failed to gain state ratification. The 1938 Fair Labor Standards Act, which regulated child labor and afforded other worker protections, finally stood up to constitutional scrutiny by the Court in 1941.

President Franklin D. Roosevelt's New Deal legislation, enacted in an effort to revive the U.S. economy suffering from the stock market crash of 1929 and the ensuing Great Depression of the 1930s, effectively made the federal government the nation's chief regulator of business and the economy. Roosevelt's legislation reformed the banking system and securities industries, which had practically collapsed during the decade. He tried to jump-start the economy through massive government employment programs, many of which served to improve the country's business infrastructure. The massive military expenditures needed to fight World War II, however, were what provided the economic stimulus needed to end the depression. Apart from building and maintaining a national highway system, military spending continues to be the federal government's greatest direct involvement with the business community.

As the twentieth century wore on, regulation by federal or state act with subsequent judicial interpretation was largely replaced by control through administrative orders of commissions. Between 1887 and 1940 the federal government created a score of commissions and boards governing aspects of business and labor, and from about 1900 on, the states followed suit. The most important of the national agencies came to be the Federal Trade Commission, which had broad regulatory powers over corporate practices. On the whole this change in regulatory enforcement pleased business. Commissions came to be staffed by members of the enterprises they regulated, who understood the problems involved. Appearance before a commission was quicker, cheaper, and generally more satisfactory than the slow and costly processes of legal proceedings in state or federal court.

The federal government had been continually expanding its role in regulating business since the Sherman Act. After ninety years of almost uninterrupted growth, the 1970s proved to be a transitional period for federal regulation. The start of the decade saw the creation of three new federal regulatory bodies: the Occupational Safety and Health Administration (OSHA), the Environ-mental Protection Agency (EPA), and the Consumer Protection Agency. From 1971 to 1974 the government directly intervened into the private sector with a series of wage and price controls designed to curb inflation that had been plaguing the U.S economy since 1965. However, inflation, combined with social programs and business regulations often criticized as excessive, and the huge federal budget deficits incurred to finance these programs and regulations resulted in political pressure that ended the expansion of federal business regulation. By the end of the decade, several regulatory agencies, including the Interstate Commerce Commission and the Civil Aeronautics Board, had been abolished, and the airline, telecommunications, railroad, trucking, and television and radio broadcasting industries had been deregulated.

The 1980s and 1990s saw further deregulation. Consumers as well as business have benefited from this trend, but there have been notable failures. Deregulation of the savings and loan industry led to a series of bank failures in the late 1980s that cost the federal government more than $1 trillion. In 2001, deregulation of California's power industry created electricity shortages, raised wholesale and retail prices, and forced two of that states largest utility companies to declare bankruptcy. The energy trading company, Enron, along with other energy brokers, which were all created because of deregulation, has been accused of conspiring to manipulate California's power supply and creating the state's energy crisis.

In December 2001 Enron became the center of another scandal when its bankruptcy, the largest to date in the nation's history, revealed that the company had used deceptive accounting practices to inflate its earning reports and stock price. This was the first in a series of corporate bankruptcies to involve fraudulent bookkeeping that shook an already weak stock market in 2002. To restore investor confidence, the federal government exercised its regulatory authority to promote greater scrutiny of the securities, accounting, and power utility industries.

The accounting scandals of the early twenty-first century recall the business scandals of the late 1800s and early 1900s when antagonism between business and government regulators became ingrained. Despite this antipathy, the two sides have, in fact, benefited from each other. Government regulations ensuring the enforceability of contracts and property rights are such basics that business in the United States could not function properly without them. Likewise, without the economic growth created by private business, the U.S. government could not sustain itself. Although the current system of federal and state regulations may sometimes be self-contradictory, and, in addition, confusing to the business community, it is a relatively loose one, leaving the United States as one of the nations whose business welfare depends most on the decisions of private entrepreneurs.

BIBLIOGRAPHY

Laffont, Jean-Jacques, and Jean Tirole. Competition in Telecommunications. Cambridge, Mass.: MIT Press, 2000.

Lai, Loi Lei, ed. Power System Restructuring and Deregulation. New York: Wiley, 2001.

Macey, Jonathan R., Geoffrey P. Miller, and Richard Scott Carnell. Banking Law and Regulation. 3d ed. Gaithersburg, Md.: Aspen Publishers, 2000.

Peritz, Rudolph J. R. Competition Policy in America, 1888–1992: History, Rhetoric, Law. New York: Oxford University Press, 1996.

Singer, Jonathan W., and Keneth E. Montague, eds. Broken Trusts: The Texas Attorney General Versus the Oil Industry, 1889–1909. Vol. 12, Oil and Business History Series. College Station: Texas A&M University Press, 2002.

Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington Jr. Economics of Regulation and Antitrust, 3d ed. Cambridge, Mass.: MIT Press, 2000.

JohnWyzalek

See alsoConstitution of the United States ; Enron Scandal ; Interstate Commerce Laws ; Interstate Highway System ; Pure Food and Drug Movement ; andvol. 9:Women in Industry (Brandeis Brief) .

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