The Other Sherman’s Legacy

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History abounds in ironies, and never more so than in the capriciousness with which it hands out enduring fame. Consider Sen. John Sherman, Republican of Ohio. His older brother, William Tecumseh, marched through Georgia into immortality in a single autumn. John served six years in the House of Representatives, thirty-two in the Senate. He was one of the country’s ablest Secretaries of the Treasury and was a major contender for the Republican nomination for President three times. He ended his political career as Secretary of State under McKinley. Yet today he might be remembered only for bringing the term fence mending to American politics were it not for one piece of legislation, the Sherman Antitrust Act.

Part of the irony is that Sherman, a firm friend of business, supported the legislation that immortalized him more out of political necessity than real conviction. Both politically and economically Sherman was deeply conservative, and he would have been horrified had he lived to see what one historian has described as how the Sherman Act helped awaken “Congress to the realization of the vast power wrapped up in the Commerce Clause.”

The Sherman Act would have been unthinkable twenty-five years earlier. But in the quarter-century following the Civil War, the American economy was transformed, and the power of those at the top of the economic pyramid grew swiftly to what many felt were dangerous proportions.

As with much nineteenth-century economic history, the railroads lay at the heart of the matter. There had been only 35,000 miles of railroad track in the country in 1865. By 1890 there were 167,000 miles, knitting the country together and making an integrated national economy possible for the first time. This made economies of scale in manufacturing more important than ever. Bigness was efficient. American industry not only grew by a factor of ten in these years but consolidated into larger and larger units as well.

At the end of the Civil War most factories were individually owned and managed. In 1865 there was not a single industrial concern listed on the New York Stock Exchange, where the stocks of the nation’s biggest companies were traded. By 1900, however, forty-six industrial companies were trading on the Big Board, and many of them had come to dominate their industries by merging with smaller companies.

At first state incorporation laws made mergers difficult and kept companies small. Companies were forbidden to own stock in other companies. Then Samuel C. T. Dodd, on the legal staff of Standard Oil, devised a way around this. Dodd pointed out that if one company’s board members were appointed trustees to hold and vote the stock of other companies, the same effect was achieved as in an actual merger. Standard Oil became the first “trust” in 1882. The need for a trust arrangement soon disappeared when the state of New Jersey, in search of easy tax revenue, passed very liberal incorporation laws making holding companies legal. Companies flocked to incorporate there, and the trust form of corporate organization soon disappeared; but the name trust , one of the great bogeymen of American politics, lives on.

While the industrial trusts made many people nervous, railroads, not Standard Oil, were the big business that people encountered in everyday life. Most of the railroad mileage was held by a few very large companies that did not hesitate to use their powers as the sole haulers of freight to pursue their economic self-interests. Where a railroad held a monopoly, it charged what the traffic would bear and invariably favored large customers over small ones with rebates and other favors. Where railroads competed with others, they often formed pools to divvy up business and keep rates high. All this was bitterly resented, especially by farmers and other small businessmen. They demanded action to curb the power of the railroads.

The first response by Congress to the clamor to do something was to establish the Interstate Commerce Commission, in 1887, to regulate the railroads. The commission was, in its early years, singularly ineffective and, in any case, did not apply to industrial trusts.

As the trusts multiplied in the 1880s, many states passed legislation to regulate them, but this was hopelessly inadequate with regard to corporations of national scope because only the federal government had power over interstate commerce. The Sherman Act, passed a hundred years ago this July, was the result.

This uniquely American piece of legislation swept through a pro-business, Republican-controlled Congress with only a single dissenting vote and became law. Undoubtedly it passed so overwhelmingly because it lacked specifics. With splendid vagueness it stated that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal.” Further, it made it a crime to “monopolize or attempt to monopolize, or combine or conspire ... to monopolize any part of the trade or commerce among the several states.”