The Law To Make Free Enterprise Free


Pools gave way to trusts, the first of which, established by Standard Oil in 1879, became a model for subsequent business combinations. Each party to the trust surrendered his stock-voting power to trustees, receiving trust certificates in return. Thus the nine trustees of the Standard Oil Trust, without the investment of a dollar, obtained absolute power over the nation’s oil industry. The pattern set by Standard Oil was so widely followed that the name “trust” became a byword for any large industrial combination even after the trust device had been abandoned.

Prior to the Sherman act the federal government had no power to prevent predatory business activities. Therefore, the states themselves began an ineffective attack on the trusts in state courts. In 1887 Louisiana prosecuted the Cotton Oil Trust. In 1889 California prosecuted the Sugar Trust; in 1890 Nebraska prosecuted the Whiskey Trust. The attorney general of Ohio sought to repeal the charter of the Standard Oil Company of Ohio.

In 1892 the supreme court of Ohio ordered the local oil company to sever its connections with the Standard Oil Trust. The order was never effectively enforced. But these state attacks on it made the device so risky that corporate organizations looked for some other form of combination that could not be prosecuted under state law. New Jersey provided the model, by amending its incorporation statute to permit one corporation to own the stock of another. From then on it was easy.

Corporations A, B, and C would give 51 per cent oftheir stock to holding company X. Holding company X would in turn give 51 per cent of its stock to holding company Y. Thus holding company Y, with only about 25 per cent interest in the operating companies, controlled them completely. Y would transfer enough stock to Z, at which point Z needed only 12½ per cent to control the industry. And so on until fantastic pyramids were built up. No state could attack these pyramids because they were legal in the state of incorporation. Only Congress could interfere with this process.

In July, 1888, John Sherman, senator from Ohio, introduced the resolution that led to the passage of the Sherman act. He had been Secretary of the Treasury under President Hayes and was known as an expert in finance and taxation. He was big business-minded and an ardent advocate of high tariffs. In this important respect, he was opposed to the very interests that were demanding antimonopoly legislation. In the farm belt the tariff was called the mother of monopoly. Sherman could have no part in such radical doctrine. His resolution reconciled that contradiction very neatly. It asked the Finance Committee to report on a bill that would

tend to preserve freedom of trade and production, the natural competition of increasing production, the lowering of prices by such competition, and the full benefit designed by and hitherto conferred by the policy of the government to protect and encourage American industries by levying duties on imported goods.

In other words, Sherman contended that the increased production by local industry protected by tariffs would more than offset the increased prices due to the tariffs, if domestic competition was free and unrestrained.

The Sherman act as it reads today was passed in the Senate 52 yeas to 1 nay, and signed by President Harrison on July 2, 1890. No votes were cast against it in the House.

The act is unexampled in economic legislation. In effect it says: “We want competition in the United States and we will leave it to the federal judiciary to determine, case by case, just what action constitutes a restraint on competition.” That this law could be passed by a conservative Republican Congress whose most influential leaders were closely associated with big business is remarkable in the extreme. Many writers have argued that the act was a hypocritical piece of legislation, designed as a political sop to the farm belt, and that no one expected it to be of any consequence. For example, Senator Nelson W. Aldrich, who was known as J. P. Morgan’s floor broker in the Senate, voted for it.

Such facts are sometimes cited to support the view that the original passage of the bill was only an attempt to placate western senators in exchange for votes on higher tariffs. But this interpretation has been completely refuted by Hans B. Thorelli in his recent book, The Federal Antitrust Policy, the most complete and objective analysis of the history of American monopoly policy. Thorelli concludes that a majority of congressmen were sincere and that the Sherman act represented for men of both parties the symbol and the image of what they sincerely desired the American economy to become.

By that I do not mean that the Republican supporters of lhe act would have welcomed the breakup of great American combinations into smaller units. At the same time, they would have instinctively rejected the system of domestic and international cartels that had been growing up in Germany and spreading to France from 1870 on, which would surely have become the American pattern if the Sherman act had not been passed.