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Trust-Busting

TRUST-BUSTING


Prior to the birth of the United States, English common law provided few restrictions over business activities. By the mid-nineteenth century, U.S. courts had adopted a "rule of reason" in deciding cases involving accusations of restraint of competition. If the restraints applied broadly, they were often considered illegal. If more limited in time or geographic extent, restraints were allowed. Still, a laissez-faire approach to business persisted, meaning little governmental interference existed over business practices.

Following the American Civil War (18611865), industrialization grew at a brisk pace. With construction of a national railroad system, the cheaper transportation greatly expanded markets, and productivity grew. As competition heightened, the individually owned and managed companies sought means of protecting or expanding profits. State incorporation laws, however, strictly controlled mergers, forbidding companies to own stock in other companies. Therefore, one answer was to simply collaborate with competitors to set prices and control production. A form of such cooperation involved trusts in which one corporation would be created to oversee management of the stocks of cooperating corporations. Standard Oil became the first such trust in 1882. Trusts fixed prices and drove out new competition through price wars. Business consolidations in various industries, such as tobacco, beef, whiskey, and sugar, led to concentrations of capital and control by only a few people. Consumer protection was not the objective of what legislative and judicial oversight existed. Rather, the focus was on protection of new businesses trying to enter markets. The freedom to contract dominated all legal considerations. Eventually, trust became a general term applied to national monopolies.

Public demand for government intervention into trusts also rose dramatically through the 1880s. In response states adopted various laws, but these proved inconsistent and not applicable to interstate commerce. Congress responded in 1890 with passage of the Sherman Anti-Trust Act, the first major national legislation addressing business practices. The act prohibited trusts and other forms of group action potentially restraining interstate or international trade. Though strongly worded by considering all restraint of trade through cooperation unacceptable, the act was vague, leaving enforcement to the courts and executive branch of government. For example, President Grover Cleveland (18931897) was not inclined to enforce the act, believing trusts were a natural result of technological advances and stabilized the nation's economy by eliminating waste. The Supreme Court even ruled in 1895 that manufacturing was not considered interstate commerce, thus leaving many key industries free to continue operating under trusts.

By the time of President Theodore Roosevelt's (19011909) first term of office, a few hundred large companies controlled almost half of U.S. manufacturing and greatly influenced almost all key industries. The trust-busting movement began in 1904 with the Supreme Court's decision in Northern Securities Co. v. U.S. to break up a railroad trust. Over 40 antitrust lawsuits were filed under Roosevelt. Roosevelt, though becoming known as a "trustbuster," actually sought to reach a middle ground in government oversight of corporate activities. He, as did his successor William Howard Taft (19091913), provided the political resolve to use the Sherman Act to provide greater social accountability of businesses. But Roosevelt did not intend to end all corporate mergers, only regulate those considered grossly unresponsive to consumer needs.

Major Supreme Court decisions in 1911 ordered the break-up of Standard Oil, a corporate giant controlling railroads, sugar, and oil, and the American Tobacco Company. The decisions sanctioned the federal government's role to oversee marketplace economics. The rulings, however, reaffirmed the Court's use of the "rule of reason" to determine when trusts are anti-competitive. Such subjectiveness and unpredictability for future rulings led to public pressure for more effective trust-busting laws. Congress responded with the 1914 Clayton Anti-Trust Act prohibiting companies from charging different buyers different prices for the same products, contracts restricting business with competitors, mergers between competing companies, and companies buying stock in competing companies. These actions were to significantly lessen competition or lessen the creation of monopolies considered to be illegal. Importantly, the act exempted unions, by claiming human labor was not a commodity; certain farm organizations were also exempted. Associated with the Clayton Act was the 1914 Federal Trade Commission Act, creating the Federal Trade Commission (FTC) to tackle unfair business practices. Congress gave the FTC legal powers to issue cease-and-desist orders to combat unfair business activities.

With the economic boom years of World War I (19141918) and the 1920s, political interest in regulating business greatly diminished. The New Deal era of the early 1930s actually encouraged industrial collaboration to propel economic recovery from the Great Depression (19291939). Not until Congress passed the Robinson-Patman Act in 1936 and President Franklin D. Roosevelt's (19331945) attack on monopolies in the late 1930s was trust-busting reintroduced. The act strengthened price discrimination prohibitions designed to protect small businesses from larger competitors. Eighty trust suits were initiated in 1940. In 1950 Congress passed the last trust-busting law, called the Celler-Kefauver Antimerger Act, thereby closing some Clayton Act loopholes.

From the 1950s into the 1970s government aggressively pursued trust-busting. An example was the FTC's successful loosening of the Xerox Company's control of the photocopy industry. Trust-busting in the 1980s and 1990s, however, focused more on policing bad conduct rather than breaking up monopolies. Notable trust-busting included the break-up of American Telephone and Telegraph (AT&T). Accused of restricting competition in long-distance telephone service and telecommunications equipment, AT&T lost control over Western Electric, the manufacturing part of the company, and various regional operating telephone companies. President Ronald Reagan (19811989) reduced the FTC budget as a historic wave of corporate acquisitions occurred in the mid-1980s. By 1990 the states began to increasingly address illegal mergers, and soon federal interest grew again in examining competitive practices. President Bill Clinton (1993) increased the budgets of the Justice Department's Antitrust Division as 33 lawsuits were filed in 1994. The most important antitrust case of the 1990s involved the Microsoft Corporation, accused of various monopolistic activities. As yet another wave of mergers swept the United States in the late 1990s, the age-old question persisted: does government have a legal right to limit commercial power? The U.S. public continued expressing largely conflicting attitudes over industrial combinations, as it had throughout much of history.

See also: American Tobacco Company, Clayton Anti-Trust Act, Monopolies, Monopoly, Northern Securities Case, Sherman Anti-Trust Act, Standard Oil Company, Tobacco Trust, Trusts (Business)


FURTHER READING

Freyer, Tony Allan. Regulating Big Business: Antitrust in Great Britain and America, 18801990. New York: Cambridge University Press, 1992.

Peritz, Rudolph J. R. Competition Policy in America, 18881992: History, Rhetoric, Law. New York: Oxford University Press, 1996.

Sklar, Martin J. The Corporate Reconstruction of American Capitalism, 18901916: The Market, the Law, and Politics. New York: Cambridge University Press, 1988.

Sullivan, E. Thomas, ed. The Political Economy of the Sherman Act: The First One Hundred Years. New York: Oxford University Press, 1991.

Wallace, James. Overdrive: Bill Gates and the Race to Control Cyberspace. New York: J. Wiley, 1997.

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