The Sherman Act, Part II

The Sherman Act, Part II

As we briefly touched on in Part I, the problem with the Sherman

Antitrust Act of 1890 was that the legislation had few teeth.

There was no government oversight by any agency, making

challenges to the Act rather meaningless. Market historian

Charles Geisst comments further:

“The Sherman Act still could not come to grips with some of the

more subtle devices used to dominate certain industries. One

was the central position that bankers had assumed on the

American industrial scene. This was accomplished by sitting on

the boards of many companies – some in the same sorts of

industries – or on the boards of client companies. One of the

banker”s main functions was to sit on as many boards as

possible, ensuring an influence out of all proportion to the actual

importance of the banks themselves.”

In the presidential election of 1900, Republican incumbent

William McKinley beat the Democrat / Populist William

Jennings Bryan, 52 to 46 percent, and 292-155 in the electoral

vote. McKinley”s first term vice president was Garret Hobart.

Hobart died late in the term of heart disease and at the

nominating convention in 1900, the name of Teddy Roosevelt

kept popping up, TR having emerged as a famous hero of the

Spanish American War. Said party insider Mark Hanna, if

Roosevelt were nominated, “only one heartbeat” would separate

that “damned cowboy” from the White House. And wouldn”t

you know it, just six months after McKinley”s second

inauguration, he was assassinated in Buffalo, New York by

anarchist Leon Czolgosz. [McKinley was shot on September 6,

1901 and died one week later.]

It”s a little off the track but it”s interesting to note McKinley”s

last public comments. He was in Buffalo to deliver an address at

the Pan-American Exposition, a convention designed to promote

peace and commerce in the Western Hemisphere. In his speech,

he urged a new economic policy of commercial free trade,

arguing that the U.S. could not forever sell the products of

American industry abroad without also buying the products of

other countries.

“The period of exclusiveness is past.the expansion of our trade

and commerce is the pressing problem.” He then argued that

such expansion must take place under conditions of world peace.

“Commercial wars are unprofitable.”

Enter Theodore Roosevelt. Historian Richard Abrams comments

on this new era.

“The administration of Theodore Roosevelt was in some respects

the first modern presidency. It is with Roosevelt that the most

distinctive twentieth-century characteristics of the executive

office emerged as more or less permanent traits..He extended

presidential initiatives in policymaking to the domestic scene on

an unprecedented scale, putting forward reform proposals for

congressional action and using executive orders to promote

major innovative programs.”

Roosevelt sought to persuade the nation that the federal

government had a legitimate responsibility to regulate business

activities (as well as the regulation of the country”s natural

resources, one of his greatest achievements).

In the matter of commerce, by 1900 state governments seemed

incapable of overseeing the nation”s industrial and financial

affairs due to the growing interstate and global character of

economic activity. The time was ripe for the rise of “The

Regulatory State.” Historian Abrams:

“The country”s rapid industrialization since mid-century had

suddenly enriched thousands of Americans who had come from

modest and, in some cases, lower-class families. In fact, the

wealth of the Rockefellers, Carnegies, Hills, and Harrimans

substantially dwarfed the family fortunes enjoyed by the

country”s older, self-conscious ”aristocracy,” such patrician

families as the Adamses, Schuylers, Peabody”s and Roosevelts.

And along with the wealth went power.” [Now just stop for a

moment. See any parallels to today and the rise of dot-com

wealth vs. Old Economy corporations?]

In one of his early addresses to Congress, Roosevelt declared,

“The power of Congress to regulate interstate commerce is an

absolute and unqualified grant, and without limitations other than

those prescribed by the Constitution.”

The dispute was over how one defined the legal reach of the

phrase “interstate commerce.” The Interstate Commerce

Commission had been created in 1887 but the Supreme Court

had repeatedly overrode the intentions of the legislative branches

of American government in antitrust matters. [See Part I wherein

the Supreme Court held that the “mere control” of 98% of the

sugar refining business did not in itself constitute an act in

restraint of trade.]

So Roosevelt sought to reinvigorate the Sherman Act,

announcing, “As far as the Anti-Trust Laws go, they will be

enforced.and when suit is undertaken it will not be

compromised except upon the basis that the Government wins.”

In 1902 TR shocked Wall Street by instructing Attorney-General

Philander Knox to prosecute Northern Securities Company

(NSC) for violation of the Sherman Act.

The previous year, financier J.P. Morgan had concluded

the reorganization of the steel industry by buying out Carnegie

and consolidating several other major steel producers into the

new billion-dollar U.S. Steel Corp. The next year, he set his sites

on the railroads.

Seeking to monopolize all rail traffic between the Great Lakes

and the Pacific Coast, Morgan joined with titans J.J. Hill, E.H.

Harriman and others to form NSC. This combined the assets of

Northern Pacific, the Great Northern, and the Chicago,

Burlington and Quincy systems.

From author Jean Strouse: “Morgan was stunned. His lawyers

had put together Northern Securities with a careful eye on the

antitrust law. He thought the President should have conferred

with him, given him a chance to resolve their differences and

make whatever adjustments might be in order, before publicly

branding him an outlaw.”

Morgan hurried to the White House (along with insider Mark

Hanna) to dissuade Roosevelt. Morgan told Roosevelt that if

they had done anything wrong, “send your man (Knox) to my

man (one of his lawyers) and we can fix it up.” TR retorted:

“That can”t be done,” and Knox explained: “We don”t want to fix

it up, we want to stop it.”

After Morgan had left, Roosevelt remarked to Knox, “That is a

most illuminating illustration of the Wall Street point of view.

Mr. Morgan could not help regarding me as a big rival operator,

who either intended to ruin all his interests, or else could be

induced to come to an agreement to ruin none.”

By a 5 to 4 vote, the U.S. Supreme Court upheld the

government”s prosecution and overruled its previous decision in

the E.C. Knight case, thereby stopping a process of consolidation

that Harriman et al proposed to continue until every important

railway in the country came under their control. Roosevelt

commented:

“It was necessary to reverse the Knight case in the interests of

the people against monopoly and privilege just as it had been

necessary to reverse the Dred Scott case in the interest of the

people against slavery.”

Some say TR acted against NSC less from his concern about

monopoly, than from his concern about how the public might

react to uncontrolled corporate arrogance.

“(Revolutionary upheaval was as likely to be inspired from) an

attitude of arrogance on the part of the owners of property and of

unwillingness to recognize their duty to the public” as by

socialist or anarchist revolutionaries (the latter two being of

major, legitimate concern during this period of time).

Historians argued that the NSC decision “aroused consternation

in financial circles, proved to the nation that industrial magnates

were not immune from the law, and enormously enhanced the

popularity of the President.” [see below, MCL.]

Roosevelt won the election of 1904 in a landslide over Alton

Parker, 56 to 38 percent, the greatest plurality yet achieved.

Encouraged by this mandate, TR turned with new enthusiasm to

the enforcement of his trust policies.

“In the first two years of his second term, big business was

further discredited by the muckrakers” (journalists) attacks on

Standard Oil, the beef trust, and the railroads, by the shocking

disclosures of the New York insurance investigations of 1905, by

the discovery that the sugar trust had swindled the government

out of $4 million in customs duties by false weights, and by the

panic of 1907.”

Altogether there were 45 prosecutions under the Sherman Act,

but, in truth, little was really accomplished. In virtually all cases,

the damage had been done and the trusts often reemerged.

As to the relationship with J.P. Morgan, Roosevelt reached an

informal gentleman”s agreement with the House of Morgan. He

avoided court action against Morgan companies in return for

their co-operation. Roosevelt came to conclude that the mere

size and power of a combination did not necessarily render it

illegal: there were ”good trusts” and there were ”bad trusts.”

Author Strouse opines on the subject:

“(Morgan and Roosevelt) were essentially ”big rival operators,”

each convinced that he had the country”s long-term best interests

at heart, and ready to use any means in his considerable arsenal

to bring about the future he had in mind. One of them was

President of the United States, looking forward to imperial

dominance abroad and intent at home on publicly subjugating the

”mighty industrial overlords of the country” to governmental

authority. The other was a private banker who looked

exclusively to economic efficacy, confident that military and

political questions would take care of themselves if the United

States had stable markets and steady productive growth.”

“From Morgan”s point of view it was wildly irresponsible of ”the

politicians” to interfere with the delicate financial mechanisms

over which he was unofficially presiding as the balance of

economic power shifted from the Old World to the New.”

[Note: Strouse wrote this in 1999. I wonder if she was thinking

at all about Microsoft as well as the Old Economy vs. New

Economy debate?]

Next week, the case against Standard Oil.

Sources: “The Presidents,” Henry Graff. [Essay by Richard

Abrams]

“The Growth of the American Republic, Vol. II”

Samuel Morison, Henry Steele Commager,

William Leuchtenberg

“Wall Street: A History,” Charles Geisst

“Morgan: American Financier,” Jean Strouse

Brian Trumbore