The Sherman Anti-Trust Act of 1890

1. Historical Background: The Sherman Anti-Trust Act and the body of case law that it has generated over the past 100+ years should be seen in the broader context of the traditional concern that government has always had with monopolies. Prior to the 19^th century, governments typically granted monopoly rights over some portion of the economy in return for a cash payment. In England, this practice was stopped by Parliament with its famous 1624 Statute of Monopolies that took away the power of the Crown to grant monopolies. This action was essential for an efficient economy to develop in England. A point well documented by Douglass North and Robert Paul Thomas in their great book The Rise of the Western World.
   
   In the 19^th century (c. 1830 - 1875) what modern Americans now call an "economy" emerged. Prior to roughly 1840 there was no such thing as big business! The first "big" businesses were the Railroads. Prior to the railroads the largest businesses were the textile mills in New England. The railroads fundamentally changed how people lived and worked. They were the first form of mass transportation. The rapid spread of the telegraph after 1844 resulted in the first form of mass communication. For the first time in human history action could be coordinated at great distances in real time! Businesses could run year around and the pace of human life literally speeded up! The railroad, the telegraph, and an abundance of cheap coal revolutionized the American economy and American life. Alfred Chandler's great book The Visible Hand documents these changes in great detail.
   
   The emergence of what we now call an "economy" in the 19^th Century was not well understood by people living at the time. Some simple basics of competition had been well understood since Adam Smith's time but the nature of industrialization and the competition between large factory based businesses was not well understood. Competition was cutthroat with large output, quick sales, and small profits. For example, Railroad leaders grappled throughout the 19^th Century with their competitive environment with its unique economics and only "solved" their problems late in the Century through consolidation.
   
   Pools, Trusts, and Holding Companies seemed to many business leaders to be the solution to the "curse" of cutthroat competition. The aim was to control price competition through cooperation and coordination of rival businesses. All these mechanisms were, in effect, forms of monopolization. In the case of Standard Oil John D. Rockefeller "solved" the problem by merging with his rivals and bringing their more capable managers into his organization.
   
   
2. The Invention of the Trust: On 2 January 1882 the Standard Oil Trust was formed. Attorney Samuel Dodd of Standard Oil came up with the idea of a Trust. A Board of Trustees was set up and all the Standard properties were placed in its hands. Every stockholder received 20 Trust certificates for each share of Standard Oil stock and all the profits of the component companies were sent to the nine trustees who determined the dividends. The nine Trustees elected the directors and officers of all the component companies. This allowed the Standard Oil to function as a monopoly since the nine Trustees ran all the component companies. Later, Standard pioneered the Holding Company which had the same effect as a board of trustees.
   
   
3. Congressional Action: By 1888 public discontent was so strong that both political parties put anti-trust planks into their Presidential platforms. Legislative action was a foregone conclusion. The Sherman Anti-Trust Act was passed by a 51 - 1 vote in the Senate on 8 April 1890 and by a unanimous vote of 242 - 0 by the House of Representatives on 20 June 1890. The bill was signed into law by President Benjamin Harrison on 2 July 1890.
   
   
4. The Sherman Anti-Trust Act was a popular piece of legislation but it was poorly drafted and very vague. The act did not define "restraint of trade", "combination", or "monopolize". These terms may appear to be obvious to the layman but were not so to the Courts who were charged with enforcing the Act. As a result, the Courts have been free to interpret the Act. This problem was well stated by Chief Justice Stone in 1940:

    The prohibitions of the Sherman Act were not stated 
   in terms of precision or of crystal clarity and the Act itself 
   does not define them.  In consequence of the vagueness of its 
   language, perhaps not uncalculated, the courts have been left 
   to give content to the statute, and in the performance of that 
   function it is appropriate that courts should interpret its 
   words in the light of its legislative history and of the 
   particular evils at which the legislation was aimed.

5. The problem with Justice Stone's argument is that the legislative history of the Sherman Act is not simple nor clear. There is no question that nearly everyone wanted to outlaw monopolies and create competition. However, there was serious disagreement about what part of the Constitution -- the Commerce Clause, the Judicial Clause, or the taxing power -- was the legal basis for outlawing illegal restraints of trade. In addition, in the Senate, there were two completely different bills at one point.
   
   The result has been that Anti-Trust law changes according to the prevailing mood of legal opinion. Because legal opinion is in part a function of the politics of the day, Anti-Trust law has always been one of the most politicized portions of the legal code. What was illegal in the early 20^th Century may not be illegal today. Other than a general agreement by everyone that monopoly is generally not a good idea, Anti-Trust law shifts constantly in time. Something that Microsoft Corporation is now discovering.
   
   
For further information see Antitrustlaws.org.

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