SHERMAN ANTITRUST ACT

SHERMAN ANTITRUST ACT was passed by Congress and signed into law by President Benjamin Harrison on 2 July 1890. Introduced and vigorously promoted by Senator John Sherman (R–Ohio), the law was designed to discourage "trusts," broadly understood as large industrial combinations that curtail competition. Its first section declares "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade" to be illegal. The second section makes monopolistic behavior a felony subject to imprisonment ("not exceeding three years") and/or fines (not exceeding $10 million for corporations and $350,000 for private individuals). Civil actions may be brought by both the government and private parties. The act vests federal district courts with primary jurisdiction, and assigns the U.S. attorney general and "the several United States attorneys" chief enforcement authority.

Trusts were seemingly ubiquitous in the 1880s: thousands of businesses combined to control product pricing, distribution, and production. These associations were formed, among other reasons, to counter uncertainty created by rapid market change, such as uncoordinated advancements in transportation, manufacturing, and production. While many of these trusts were small in scale and managerially thin, the most notorious were controlled by industry giants such as Standard Oil, American Tobacco, and United States Steel. These large-scale, long-term trusts were seen as coercive and rapacious, dominating markets and eliminating competition.

The trust "problem" varied in the late nineteenth century, depending on who was describing it. For some, trusts perverted market forces and posed a threat to the nation's consumers—only big business gained from restricting free commerce and manipulating prices. (Some proponents of this view admitted, however, that the rise of the trusts corresponded with a general lowering of prices.) Popular journalists such as Henry Demarest Lloyd and Ida Tarbell stoked this distrust, arguing that trusts held back needed goods in order to make a profit under the ruse of overproduction. Others stressed the threat trusts posed to individual liberty by constricting citizens' ability to freely enter into trades and contracts. Many considered the threat to small businesses an assault on American values. Trusts were also seen as the cause of profound political problems. The money of men like Jay Gould and John D. Rockefeller was thought to corrupt politicians and democratic institutions, a view growing out of an American tradition equating concentrated power with tyranny and despotism. Fighting the trusts offered a way to combat new and pernicious versions of prerogative and corruption.

Prior to 1890, trusts were regulated exclusively at the state level, part of the general police power held by municipalities and states. States tackled the trust problem in various ways. Some attempted to eliminate collusion through the use of regulation; fifteen antitrust laws were passed between 1888 and 1891. More frequently they tried to limit business behavior without enacting legislation. State judges were receptive to arguments, raised by state attorneys general, that trusts violated long-standing legal principles; the common law provided a useful tool in battling "unreasonable" restraints of trade. However, several states, like New Jersey, Delaware, and New York, passed incorporation statutes allowing trusts and holding companies within their jurisdictions with the goal of attracting businesses.

Pressure to enact a federal antitrust law came from many quarters. Farmers and wage laborers, for example, saw industrialists as the major threat to their political and economic power; national control of trusts, under the banner of social justice, promised to increase their bargaining position. Small companies lobbied heavily for a federal antitrust law because they welcomed the chance to limit the power of their large competitors—competitors who disproportionately benefited from revolutions in distribution and production. Many were simply dissatisfied with state regulation, arguing that only the federal government could effectively control unfair business practices. Interestingly, evidence suggests that the trusts themselves were in favor of central regulation. They may have hoped a national law would discourage state antitrust activity, or, more cynically, serve as a useful distraction while they pursued more important goals. The New York Times of October 1890 called the Sherman Act a "humbug and a sham" that was "passed to deceive the people and to clear the way" for other laws, like a high protective tariff, that clearly benefited businesses.

When it was introduced, the Sherman Act raised serious objections in Congress. Like the Interstate Commerce Act of 1887, it was one of the first national laws designed to control private business behavior, and its legitimacy was uncertain. Concerns were allayed by three arguments. First, the law was needed: states were unable to fight trusts that operated outside their borders. Second, it was constitutional: antitrust activity was a legitimate exercise of Congress's authority to regulate interstate commerce. Finally, defenders argued that it did not threaten state sovereignty. The act, instead of preempting state antitrust activity, merely supplemented it.

Although the act passed by overwhelming margins in both the House (242–0) and Senate (52–1), many battles were fought between its introduction and final passage. The Senate Finance and Judiciary committees heavily revised the original bill, and both chambers added and withdrew numerous amendments. Senator Sherman, for example, supported an amendment exempting farm groups and labor unions from the law's reach, and Senator Nelson W. Aldrich (R–Rhode Island) proposed that the law not be applied to combinations that "lessen the cost of production" or reduce the price of the life's "necessaries." Some historians argue that the debate leading up to the Sherman Act reflected an ideological split between proponents of the traditional economic order and a new one. Congressmen divided sharply over the value of free competition in a rapidly industrializing society and, more generally, over the value of laissez-faire approaches to social and economic problems. Not surprisingly, the final language of the Sherman Act was broad, allowing a good deal of enforcement discretion.

The Sherman Act's effects on trusts were minimal for the first fifteen years after enactment. Indeed, large-scale monopolies grew rapidly during this period. There was no concerted drive to prosecute trusts, nor was there an agency charged to oversee industry behavior until a special division in the Justice Department was created in 1903 under President Theodore Roosevelt. (The Bureau of Corporations was formed the same year within the Department of Commerce and Labor to gather industry information.) "Trust busting," however, was not neglected during this period. States continued to pass antitrust laws after 1890, many far more aggressive than the federal version. More importantly, federal courts assumed a leader-ship role in interpreting the act's broad provisions, a role that they have never abandoned.

Supreme Court justices openly debated the act's meaning from 1890 to 1911, an era now known as the law's formative period. Two prominent justices, John Marshall Harlan and Chief Justice Melville W. Fuller, differed over the scope of federal power granted under the act, specifically, how much authority Congress has to regulate in-state business behavior. Fuller's insistence on clear lines of distinction between state power and federal power (or police powers and the commerce power) re-flected his strong attachment to dual federalism and informed decisions such as United States v. E. C. Knight Company (1895). For Fuller, manufacture itself is not a commercial activity and thus cannot be regulated under Congress's commerce power. According to this view, the federal government has no authority over things that have merely an "indirect" effect on commerce. Harlan's alternative position—that monopolistic behavior is pervasive, blurring distinctions between in-state and interstate activities—held sway in cases like Northern Securities Company v. United States (1904) and Swift and Company v. United States (1905). This understanding significantly broadened Congress's commerce power and was accepted conclusively by the Court in the 1920s under the stewardship of Chief Justice William Howard Taft in Stafford v. Wallace (1922) and Board of Trade of City of Chicago v. Olsen (1923).

In addition to disagreements over the reach of federal power, the justices differed over the intent of the act itself, namely what types of trade restraints were forbidden. The Court concluded that the section 1 prohibition against "every" contract and combination in restraint of trade was a rule that must admit of exceptions. Justices advocated prohibitions by type (the per se rule) and a more flexible, case-by-case analysis. A compromise was reached in Standard Oil Company of New Jersey v. United States (1911) known as the "rule of reason": the Sherman Act only prohibits trade restraints that the judges deem unreasonable. Some anticompetitive activity is acceptable, according to the rule. The harm of collusion may be outweighed by its pro-competitive ramifications.

The rule of reason may have solved an internal debate among the justices, but it did little to eliminate the ambiguity of federal antitrust enforcement. Indeed, internal Court debate before 1912 convinced many observers that the act invited too much judicial discretion. Proposals to toughen the law were prevalent during the Progressive Era and were a central feature of the presidential contest of 1912. The Clayton Antitrust Act of 1914 clarified the ambiguities of the law by specifically enumerating prohibited practices (such as the interlinking of companies and price fixing). The Federal Trade Commission Act, passed the same year, created a body to act, as President Woodrow Wilson explained, as a "clearing-house for the facts … and as an instrumentality for doing justice to business" (see Federal Trade Commission). Antitrust law from that point on was to be developed by administrators as well as by federal judges.

The reach of the Sherman Act has varied with time, paralleling judicial and political developments. Sections have been added and repealed, but it continues to be the main source of American antitrust law. Civil and criminal provisions have been extended to activity occurring out-side of the United States, and indications suggest its international reach may become as important as its domestic application.

BIBLIOGRAPHY

Bork, Robert. The Antitrust Paradox: A Policy at War with Itself. New York: Basic Books, 1978.

Hovenkamp, Herbert. Enterprise and American Law, 1836–1937. Cambridge, Mass.: Harvard University Press, 1991.

McCraw, Thomas K. Prophets of Regulation. Cambridge, Mass.: Harvard University Press, 1984.

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

Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins Press, 1954.

Troesken, Werner. "Did the Trusts Want a Federal Antitrust Law? An Event Study of State Antitrust Enforcement and Passage of the Sherman Act." In Public Choice Interpretations of American Economic History. Edited by Jac C. Heckelman et al. Boston: Kluwer Academic Press, 2000.

Wiebe, Robert H. The Search for Order, 1877–1920. New York: Hill and Wang, 1967. Reprint, Westport, Conn: Greenwood Press, 1980.

KimberlyHendrickson

See alsoBusiness, Big ; Corporations ; Monopoly ; Trusts .

The general government is not placed by the Constitution in such a condition of helplessness that it must fold its arms and remain inactive while capital combines, under the name of a corporation, to destroy competition. … The doctrine of the autonomy of the states cannot properly be invoked to justify a denial of power in the national government to meet such an emergency, involving, as it does, that freedom of commercial intercourse among the states which the Constitution sought to attain.

source: From United States v. E. C. Knight Company (1895), Justice Harlan dissenting.

That which belongs to commerce is within the jurisdiction of the United States, but that which does not belong to commerce is within the jurisdiction of the police power of the state.…Itis vital that the inde pendence of the commercial power and of the police power, and the delimitation between them, however sometimes perplexing, should always be recognized and observed, for, while the one furnishes the strongest bond of union, the other is essential to the preservation of the autonomy of the states as required by our dual form of government; and acknowledged evils, however grave and urgent they may appear to be, had better be borne, than the risk be run, in the effort to suppress them, of more serious consequences by resort to expedients of even doubtful constitutionality.

source: From United States v. E. C. Knight Company (1895), Chief Justice Fuller, majority opinion.