The Government Reacts to Big Business: The Sherman Antitrust Act

As with railroad legislation, the first antitrust laws originated in the states, but they were southern and western states with relatively little industry, and most ofthe statutes were vaguely worded and ill-enforced.

Federal action came in 1890 with the passage of the Sherman Antitrust Act. Any combination “in the form of trust or otherwise” that was “in restraint of trade or commerce among the several states, or with foreign nations” was declared illegal. Persons forming such combinations were subject to fines of $5,000 and a year in jail. Individuals and businesses suffering losses because of actions that violated the law were authorized to sue in the federal courts for triple damages.

Where the Interstate Commerce Act sought to outlaw the excesses of competition, the Sherman Act was supposed to restore competition. If businessmen joined together to “restrain” (monopolize) trade in a particular field, they should be punished and their deeds undone. “The great thing this bill does,” Senator George Frisbie Hoar of Massachusetts explained, “is to extend the common-law principle. . . to international and interstate commerce.” This was important because the states ran into legal difficulties when they tried to use the common law to restrict corporations engaged in interstate activities.

But the Sherman Act was rather loosely worded—Thurman Arnold, a modern authority, once said that it made it “a crime to violate a vaguely stated economic policy.” Critics have argued that the congressmen were more interested in quieting the public clamor for action against the trusts than in actually breaking up any of the new combinations. Quieting the clamor was certainly one of their objectives. However, they were trying to solve a new problem and were not sure how to proceed. A law with teeth too sharp might do more harm than good. Most Americans assumed that the courts would deal with the details, as they always had in common law matters.

In fact, the Supreme Court quickly emasculated the Sherman Act. In United States v. E. C. Knight Company (1895) it held that the American Sugar Refining Company had not violated the law by taking over a number of important competitors. Although the Sugar Trust now controlled about 98 percent of all sugar refining in the United States, it was not restraining trade. “Doubtless the power to control the manufacture of a given thing involves in a certain sense the control of its disposition,” the Court said in one of the greatest feats of judicial understatement of all time. “Although the exercise of that power may result in bringing the operation of commerce into play, it does not control it, and affects it only incidentally and indirectly.”

If the creation of the Sugar Trust did not violate the Sherman Act, it seemed unlikely that any other combination of manufacturers could be convicted under the law. However, in several cases in 1898 and 1899 the Supreme Court ruled that agreements to fix prices or divide markets did violate the Sherman Act. These decisions precipitated a wave of outright mergers in which a handful of large companies swallowed up hundreds of smaller ones. Presumably mergers were not illegal. When, some years after his retirement, Andrew Carnegie was asked by a committee of the House of Representatives to explain how he had dared participate in the formation of the U. S. Steel Corporation, he replied, “Nobody ever mentioned the Sherman Act to me that I remember.”

Table 17.3 Major Congressional and Supreme Court Decisions Concerning Corporations