“.monopolies are odious, contrary to the spirit of a free
government, and the principles of commerce; and ought not to be
suffered.”
–Maryland Constitution of 1776
In light of the ruling by U.S. District Judge Thomas Penfield
Jackson that Microsoft had violated some provisions of the
Sherman Antitrust Act, I thought it would be a good idea to go
back and take a look at the genesis of the Sherman Act.
First, the business environment in the United States back in the
1870s and 1880s was dominated by the “trusts.”
The trust movement grew out of the period of fierce competition
following the Civil War. In an interesting commentary, perhaps,
on today”s environment on Wall Street, there was the following
commentary on America”s railroads back in the 1800s.
“Competing railways cut freight rates between important points,
in the hope of obtaining the lion”s share of business, until
dividends ceased and railway securities became a drug on the
market. The downward trend of prices from 1865 to 1895,
especially marked after 1873, put a premium on labor-saving
machinery, on new processes of manufacture, and on greater
units of mass production. Pooling – ”gentlemen”s agreements”
between rival producers or railroad directors to maintain prices
and divide business, or even to pro-rate profits – was
characteristic of the period after 1872. But on the whole it was
found so difficult to maintain these rudimentary monopolies that
a ”gentlemen”s agreement” came to be defined as one that was
certain to be violated.” [MCL, see below].
The Interstate Commerce Act of 1887 tried to end pools, but the
railroads created devices to frustrate its provisions. The trust was
one such device.
In a trust, affiliated companies handed over their securities to be
administered by a board of trustees. A Standard Oil lawyer,
Samuel Dodd, actually invented the mechanism in 1882. “A
trust may be said to exist when a person, corporation, or
combination owns or controls enough of the plants producing a
certain article to be able for all practical purposes to fix its
price.” Or maybe put more succinctly, “A trust is somethin” for
an honest, ploddin”, uncombined manufacturer to sell out to.”
[Mr. Dooley].
Standard Oil was the first trust and we will cover this in greater
detail in the future. For now, we advance to the late 1880s.
The American public began to demand effective regulation of the
trusts. But the problem of regulation was complicated by the
federal form of government. Corporations are chartered by the
states, not the nation. While most state constitutions prohibited
monopolies, the prohibitions were largely ineffective. Since a
corporation chartered in one state can do business in every other
state, it could avoid onerous restrictions of state laws in one state
by incorporating in easier ones ( back then, like Delaware and
New Jersey).
The people in America weren”t as concerned with corruption or
dishonest business practices as they were by the fear that our
natural resources (see Standard Oil) were being ruthlessly
exploited and rapidly exhausted by men who only cared about
their own fortune.
By 1890, 27 states and territories had enacted anti-monopoly
legislation and 15 had constitutional provisions against them.
Thus, the stage was set for the Sherman Antitrust Act.
The election of 1888 had been an interesting one. Republican
Benjamin Harrison lost the popular vote to the incumbent
president, Democrat Grover Cleveland, 47.9% to 48.6%, but
Harrison won the electoral vote 233 to 168. [Cleveland then beat
Harrison in 1892, both in the popular, 46% to 43%, as well as in
the electoral college, 277-145].
The historian Henry Graff notes that the Sherman Act actually
fulfilled a campaign pledge made by Harrison. He was all for
economic competition while abhorring monopolies, a sentiment
he expressed on inauguration day when he was presented with
the gift of a watchdog, an enormous Siberian bloodhound. The
dog, said Harrison, “looks very much like an overfed
monopolist.” [Ba-dum-dum.]
So it was only a matter of time that the public would demand
change and Congress enacted the Sherman Antitrust Act on July
2, 1890. The law was the joint product of Senators Sherman of
Ohio, Edmunds of Vermont, Hoar of Massachusetts, and George
of Mississippi. The legislation passed Congress by an almost
unanimous vote.
John Sherman”s name is forever part of our corporate history
because he spent the most time on the bill. [Actually, I have
absolutely no idea why he got the honor as opposed to Hoar.
After all, The Hoar Act makes more sense, doesn”t it?] Sherman
did have a very distinguished career in Washington. He was
Rutherford B. Hayes”s Treasury Secretary from 1877-1881, as
well as serving numerous terms in the senate. And yes, he is the
younger brother of William Tecumseh Sherman.
The central provisions of the Act are contained in the first two
articles:
1. 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.
2. Every person who shall monopolize, or attempt to
monopolize.any part of the trade or commerce among the
several States, or with foreign nations, shall be deemed guilty
of a misdemeanor.
President Harrison hoped the Sherman Act would prompt lower
prices with freer competition. But Harrison did little to enforce
it. At the same time, Congress failed to appropriate funds to
investigate the trusts.
The first important case involving the interpretation and
application of the antitrust law was the government”s case
against the whiskey trust (U.S. v. Greenhut), which was
summarily dismissed by the Supreme Court.
In 1895, the Federal Government attempted to dissolve the
powerful sugar trust. In this case, United States v.E.C. Knight
and Company, the Court held that the mere control of 98% of the
sugar refining of the country did not in itself constitute an act in
restraint of trade. Chief Justice Fuller wrote:
“Doubtless the power to control the manufacture of a given thing
involves in a certain sense the control of its disposition, but this
is a secondary and not a primary sense; and 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. Commerce succeeds to manufacture, and is not a
part of it.”
Getting back to Microsoft, Judge Jackson ruled that they had
“violated Section 1 (above) of the Sherman Act by unlawfully
tying its Web browser to its operating system.”
Additionally, “Microsoft maintained its monopoly power by
anticompetitive means and attempted to monopolize the Web
browser market, both in violation of Section 2.”
Next week, we”ll take a look at Teddy Roosevelt and the
Sherman Act.
Sources: “The Presidents,” Henry Graff
“The Growth of the American Republic, Vol. II,”
Samuel Morison, Henry Steele Commager,
And William Leuchtenburg
“A History of the American People,” Paul Johnson
Brian Trumbore
