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Northern Securities Case


The American economy changed substantially following the American Civil War (18611865). Cottage industries, artisan production, and small-scale manufacturing declined, and a new, larger, factory-based manufacturing sector grew. Operating under relatively relaxed state business laws, financiers and manufacturing moguls became rich, often by suppressing the competition.

This led to a concentration of capital in just a few huge corporations, especially in transportation and heavy industry. The giant manufacturing and mining companies that survived the period of cutthroat competition soon folded into nationwide monopolies known as trusts. In a trust, the companies transferred their properties and stocks to a board of trustees who ran the companies in a way that avoided competitionfor instance, by dividing the markets up to protect regional monopoly. Such business arrangements substantially restricted the opportunities for new competitors.

During the 1870s the rapidly expanding railroads required long-term capitalization to meet their high fixed costs on a scale never before seen in U.S. business. The railroad companies sought cooperative pooling arrangements to stabilize markets and profits. Despite the ideology of free enterprise so prevalent during these years, the railroads, the steel industry, and the oil industry feared cutthroat competition much more than they feared government intervention. When the passage of the Interstate Commerce Act in 1887 prohibited pooling, railroads turned to other forms of consolidation. Workers, consumers, farmers, and small independent businessmen often faced high transport costs due to the lack of rail competition. Their reaction was frequently to demand antitrust laws.

Embracing the economic philosophy that public interest is best served by free competition in trade and industry, Congress passed the Sherman Antitrust Act in 1890 to guard against "combination(s) in restraint of trade." Congress sought to prevent unreasonable concentrations of economic power. However, vagueness in the terms "restraint" and "monopolization" placed the burden on the president and judiciary to determine how to enforce and interpret the act.

Existing monopolistic business trends continued through the 1890s. Between 1897 and 1904 more than four thousand companies melded together to form not quite 300 corporations. Meanwhile, the Sherman Anti-trust Act was of little use, as the courts initially interpreted the Act as applying mainly to labor union activities "in restraint of trade." The courts held that manufacturing was not commerce and that consolidation was considered a viable means to stabilize costs. In addition, the courts ruled that the Act did not apply to stock transfers.

Under President Theodore Roosevelt (19011909), the Sherman Antitrust Act began to be used against corporate mergers. Roosevelt, who was concerned that the blatant favoritism that the government had displayed towards the corporations might result in the radicalization of labor, argued that the federal government should have the power to control big businesses through regulatory boards. Soon after Roosevelt assumed office, a case emerged involving four rail lines serving the northern plains.

Three of the four railroads were owned by prominent New York financiers. J. P. Morgan (18371913) owned the Northern Pacific which ran from Minneapolis to the Pacific Ocean. James J. Hill (18381916) owned the Great Northern with a similar route. Edward H. Harriman (18481909) owned the Union Pacific running from Omaha to Ogden, Utah. All three of them wished to control the Burlington railroad which ran across Illinois and provided ready entry into Chicago.

In 1901 Morgan and Hill cooperated to purchase the Burlington and plotted to drive Harriman out of business. Harriman quickly maneuvered, purchasing the majority of Great Northern stock. To salvage his ownership Hill began buying back the shares which, in turn, led to a sudden escalation in Great Northern's stock. Other investors did not understand what was the driving force behind the price escalation, so they began rapidly dumping other stocks to purchase Great Northern stocks. A panic on Wall Street followed, bankrupting thousands of unsuspecting investors.

A standoff between the three financiers led to a negotiated agreement. To prevent hostile takeovers the agreement established the Northern Securities Company, a holding company to control stocks of the Northern Pacific, Great Northern, and Burlington. The new company in which Morgan and Hill held controlling interest was worth approximately $400 million. Such a merger, through a holding company, was thought to be a viable means of cooperation without violating interstate commerce or antitrust laws.

Roosevelt became keenly interested in the developments pertaining to the agreement between Morgan, Hill and Harriman. Attorney General Philander Knox was assigned to look into the arrangement. In March 1902 the United States filed suit against the holding company in a federal district court in St. Paul, Minnesota, charging violation of the Sherman Antitrust Act. Lawyers for the railroads argued that the intent of the company was not to restrain trade but to prevent hostile takeovers. They asserted that the railroads rarely competed for the same business despite running parallel tracks. Furthermore the Northern Securities Company did not actually run the railroads, but merely held stock in the companies that did. Hence the company was not actually involved in interstate commerce. They argued that the act should not be applied to situations that only involved transfer of ownership.

Accustomed to a more cordial relationship with presidents, as soon as Morgan learned of Roosevelt's intention to prosecute the case, he and two conservative senators hurried over to the White House and declared to the president, "If we have done anything wrong, send your man to my man and they can fix it up." (Brinkley, 642) Despite these pleadings, Roosevelt held firm and the district court ruled that the company essentially eliminated any motive for competition as far as the public was concerned. The court ordered the Northern Securities Company dissolved.

In appeal to the Supreme Court, the railroads claimed forced dissolution would essentially deprive them of their Fifth Amendment property rights. The government countered that the holding company essentially concentrated control of transportation trade over a vast area of the nation under a single entity. In March 1904, the Supreme Court sided with the government's argument and affirmed the lower court's ruling in a 5-4 decision. The holding company constituted an unreasonable restraint of trade as prohibited by the act. Only Justice Oliver Wendell Holmes dissented from the decision. Holmes asserted that essentially all railroads are monopolies since only a single company runs on a particular set of lines. Therefore he could find nothing unreasonable concerning the holding company. These disagreements simply reflected an economic trend toward larger corporations with greater powers. Critics of the ruling complained that mere possession of great power should not automatically make someone suspect and some forms of price fixing may actually be reasonable.

The Supreme Court decision demonstrated to the business world that the Sherman Antitrust Act could be an effective tool used to combat business activities that restrain trade, including monopolies and trusts. The Act thus became not only the first, but also the most important antitrust legislation in the United States. The character of industrial business organizations and particularly railroads changed. Roosevelt became known as the "Trustbuster." With large corporations becoming a fixture in the American economy, this episode inaugurated a lengthy history of government oversight through antitrust enforcement.

See also: Monopoly, Sherman Anti-Trust Act


Asch, Peter. Industrial Organization and Antitrust Policy. New York: Wiley, 1983.

Audretsch, David B. The Effectiveness of Antitrust Policy Towards Horizontal Mergers. Ann Arbor, MI: UMI Research Press, 1983.

Brinkley, Alan et al. American History: A Survey, 8th ed. New York: McGraw Hill, 1991.

Brozen, Yale. Concentration, Mergers, and Public Policy. New York: Macmillan Publishing Co., 1982.

Kolko, Gabriel. Railroads and Regulation, 18771916. Princeton, NJ: Princeton University Press, 1965.

Martin, Albro. Enterprise Denied: Origins of the Decline of American Railroads, 18971917. New York: Columbia University Press, 1971.

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