Standard Oil, Part III

Standard Oil, Part III

So in 1909, a Missouri circuit court ruled that Standard Oil

engaged in monopolistic practices. Standard Oil appealed.

Upon taking office in 1909, President William Howard Taft had

continued the antitrust cases begun by Teddy Roosevelt, adding

that he would enforce the Sherman Antitrust Act.

Taft, like TR, had no problem with big business as long as it

behaved itself, and he recommended that ”good” trusts with a

capitalization of $100 million or more incorporate under a new

federal law, thus exempting them from suits brought by states.

A law embodying his ideas was introduced in both houses in

February 1910 but it failed to pass because it would have

destroyed the Act.

Taft launched 75 suits in 4 years, compared with 47 suits in 7

years by Roosevelt. But he seemed to misunderstand the whole

basis behind the antitrust act.

It”s interesting to note that before the Supreme Court ruled on the

Standard Oil case a future Justice, Louis Brandeis, wrote a letter

to the editor for “Survey” magazine.

“Is there not a causal connection between the development of

these huge, indomitable trusts and the horrible crimes now under

investigation?.Is it not irony to speak of the equality of

opportunity in a country cursed with bigness?”

And so it was that on May 15, 1911 the Court ruled against

Standard Oil by an 8 to 1 vote. At the time Harper”s magazine

noted that the case, along with a few others, had “been awaited

with countrywide suspense and attention.For months the

financial markets have virtually stood still awaiting their

settlement.”

Actually, in doing some research on the numbers, this definitely

was the case. Between March 1 and May 15 the Dow Jones was

in a range of less than 4%, 81.32 to 84.53. On May 15 the Dow

closed at 82.71. The next day it rose to 84.63.

The Supreme Court upheld the Missouri decision to dissolve

Standard into some 37 subsidiary companies. But in its ruling

the Court announced a new “rule of reason” by which it could

decide whether a restraint of trade was “reasonable” or not and

what restraints of trade were allowable.

Put another way, the restraint of trade outlawed by the Sherman

Act is not to apply to every contract or combination in restraint

of trade, but only to those that do so unreasonably. In other

words, the Act was weakened.

Chief Justice Edward D. White wrote:

“[The Sherman Act was designed to prohibit] all contracts or acts

which were unreasonably restrictive of competitive conditions,

either from the nature or character of the contract or act or where

the surrounding circumstances were such as to justify the

conclusion that they had not been entered into or performed with

the legitimate purpose of reasonably forwarding personal interest

and developing trade, but on the contrary were of such a

character as to give rise to the inference or presumption that they

had been entered into or done with the intent to do wrong to the

general public and to limit the right of individuals.”

[Actually, when you read it slowly, very slowly, it makes perfect

sense.]

The lower court had found Standard in violation of the Act and

had ordered its dissolution. As historian Bernard Schwartz

writes, “Yet, while the Court upheld the dissolution ruling, the

government had to accept an interpretation of the Sherman Act

which greatly reduced that law”s effectiveness. The Court ruled

that Standard”s practices constituted ”unreasonable” restraint of

trade prohibited by the Sherman Act, rather than the type of

”reasonable” restraint which the Act permitted. Thus was born

the most curious obiter dictum (incidental remark) ever indulged

in by the Court – the so-called ”rule of reason” in antitrust cases.”

The rule of reason was almost entirely the handiwork of Chief

Justice White, what Justice Holmes called “the Chief Justice”s

greatest dialectical coup.” In practice it made prosecutions under

the Sherman Act far more difficult. At the same time, it

increased the judicial role in antitrust cases and ensured that the

law, “based though it might be on enactments by Congress,

would still be primarily judge-made law.” [Schwartz]

Justice Harlan offered the lone dissent, one later labeled “a

passionate outburst seldom if ever equaled in the annals of the

Court.”

To Harlan, the Court”s action was an example of “the tendency

to judicial legislation.(the) most alarming tendency of this day,

in my judgment, so far as the safety and integrity of our

institutions are concerned.” In this case, the Court was led “to so

construe the Constitution or the statutes as to mean what they

want it to mean.” The result was “that the courts may by mere

judicial construction amend the Constitution or an Act of

Congress.”

Justice Holmes told a law clerk about the White opinion: “The

moment I saw that (the ”rule of reason” clause) in the circulated

draft, I knew he had us. How could you be against that without

being for a rule of unreason?”

Author Charles Geisst concludes: “Standard Oil”s sins were too

great when weighed against its benefits to continue to exist as it

had. The company was ordered to break up, liquidating its stock

and returning the funds to its shareholders. The individual

companies went their respective ways, free to compete against

each other when the holding company no longer existed. The

federal government had successfully dissolved the largest and

most profitable business enterprise ever created.”

Although Standard was physically broken up, Rockefeller

maintained his one-quarter ownership in the business, only this

time it was one-quarter of thirty-some new companies. J.P.

Morgan was said to have remarked, “How the hell is any court

going to compel a man to compete with himself?” The new set

of companies continued to dominate the markets well into the

1930s. Because of their size and vast network of suppliers and

distributors, the prices they set for their industries became the

norm. Smaller competitors broke ranks at their own peril.

Years later, in the 1950s, a group of scholars at the University of

Chicago took a hard look at the history of antitrust law. The

group came to be known as the Chicago School. One of them,

John McGee, studied Standard Oil to determine whether the

charges leveled against it in the original government suit were

justified. Author Geisst writes:

“McGee concluded that (they) had not used predatory pricing in

order to become a monopoly. His conclusion ran against the

common assumption that Rockefeller cut prices drastically in

order to force out his competitors.The fact that Rockefeller”s

customers feared his wrath if they did business with someone

else was central to the entire issue, but the net effect was that

predatory pricing was not involved. This was especially

important because predatory pricing had been a fundamental

assumption of antitrust until that time. If a company was a

monopoly, then it must practice predatory pricing. How else

could it have accumulated dominant market power? Obviously,

Rockefeller was able to accomplish it in other ways – for

example, making shipping more of a problem for his competitors

through arrangements he made with the railroads themselves.”

In other words, while predatory pricing was one of the sins, one

couldn”t conclude that all monopolists practiced them.

And so our little history of Standard Oil is over. Hopefully you

have found it informative, especially in light of the ongoing

Microsoft saga.

Sources: “Monopolies in America,” Charles Geisst

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

Morison, Commager, Leuchtenburg

“A History of the Supreme Court,” Bernard Schwartz

“The Presidents,” Henry Graff

Brian Trumbore