Economics

What Was The Sherman Antitrust Act?

The Sherman Antitrust Act was the first act to outlaw monopolistic business practices in the US.

The Sherman Antitrust Act is noted in history as the 1st act to illegalize monopolistic business activities in the US. The historic statute was approved by Congress in 1890 during the tenure of President Benjamin Harrison. The act was named in honor of John Sherman who introduced it in Senate and who also had expertise on the regulations of commerce. The statute was approved by a vote of 51-1 in the US Senate and 242-0 in the Lower House. The Act was geared towards preventing the artificial rise of prices triggered by the restriction of supply. Activities by a monopolist to artificially protect the monopolistic status is criminal under the act as are nefarious arrangements to establish a monopoly. The Sherman Act had the intended purpose of preserving a competitive marketplace and in doing so protect consumers from abuses. The act has been invoked broadly over time to prohibit the merging of entities with the potential of harming competition including cartels or monopolies.

Background

The late 19th century was characterized by the growth of business conglomerates otherwise known as trusts in the commercial sector of the US. This period is often termed as the Gilded Age, where rapid technological innovation and industrialization, political partisanship, and mass migration were witnessed. The corporation developed as the main form of business organization in the US while a managerial revolution reformed business operation and raised productivity. By early 20th century, industrial productivity and per capita income in the US had risen to rival those of all other nations except Britain. Despite the impressive economic strides, the nation was grappling with serious social challenges from corruption, wealth inequality, unscrupulous speculators, and shady business practices.

Rise Of Trusts

Trusts grew in popularity during the Gilded Age where stockholders in some companies would transfer their shares to one set of trustees. The stockholders would then get a certificate allocating them a particular share of the total earnings of the jointly administered companies. Such arranged trusts emerged to dominate several major industries. Trusts enabled large-scale merging, centralized control, and the pooling of patents. The massive capital gave corporations the ammunition to fight foreign businesses and allowed them to expand and drive hard bargains with the workforce. The trusts also began to exert influence in politics. The Standard Oil Company was among the earliest trusts, and it was the brainchild of John D. Rockefeller. By 1904, over 5,000 independent concerns had consolidated into roughly 300 trusts. In the sector of telegraphy, Western Union arose as a monopoly. In the 1860s Cornelius Vanderbilt began operating an 800-kilometer rail line after he consolidated 13 different railroads. The singe line linked New York to Buffalo, and he subsequently acquired lines heading to Detroit, Chicago, Michigan, and Illinois to create the New York Central Railroad. The development of these trusts had the effect of destroying competition. The public and the competitors, in turn, grew hostile towards these arrangements. The consumers decried the high prices while the competitors complained of being shut out from certain industries due to the intentional monopolistic practices of the corporations.

Provisions

The act’s original text featured three divisions. The 1st section illegalizes not only trusts but any other contract or conspiracy to restrict inter-state or foreign commerce. The 2nd section declares a person who engages in the activities described in the 1st section as a felon. The third section extends the stipulations of the 1st section to the District of Columbia as well as US territories. The 1914 Clayton Anti-Trust Act stipulated additional activities that had been discovered to fall out of the Sherman Anti-Trust Act's scope. These impermissible activities include acquisitions and mergers which significantly reduce market competition, tying arrangements, price discrimination between various buyers if such discrimination tends to establish a monopoly and exclusive dealing agreements. The 1936 Robinson-Patman Act subsequently amended the Clayson Act. This amendment stipulated specific anti-competitive engagements in which manufacturers practiced price discrimination against distributors.

Constitutional Basis For Legislation

Congress was empowered to approve the act by virtue of its constitutional authority to regulate commerce between states. Federal courts can therefore only invoke the Sherman Act to practices that either significantly affects or restrains interstate trade or commerce within the District of Columbia. The plaintiff must exhibit that the particular conduct in question took place during the flow of interstate trade or has a substantial effect an activity which occurs in the course of interstate commerce.

Legacy

The Sherman Antitrust Act met with great public approval. The act's implementation, however, faced stumbling blocks as it had not defined concepts such as monopolies, collusion, and trusts. Few businesses were thus prosecuted under its provisions. One of the notable cases under the act was the Northern Securities Co. vs the United States. The Northern Securities Company had in 1901 formed as a trust controlling the Great Northern Railway and the Chicago, Burlington and Quincy Railroad as well as the Northern Pacific Railway and several other associated lines. The formation of the trust raised eyebrows as it had the potential to monopolize railroad traffic in the western territory of the US and become the world's largest company. The country's Supreme Court ruled on a 5-4 to dissolve the trust asserting that the stockholders of the Northern Pacific Company as well as those of the Great Northern company had created a monopoly. The Act also informed the Supreme Court's decision on the 1911 case of United States v. American Tobacco Company. Four firms had been established from the assets of the American Tobacco Company making the monopoly an oligopoly. The ruling split the company into four competitors. The Sherman Antitrust Act paved the legislative way for more particular statutes including the 1914 Clayton Anti-trust Act. The act also signified the intention of American lawmakers to regulate business practices more strictly.

Criticism

Critics have debated on whether the act benefits the public and improves competition or whether it is mainly beneficial to inefficient firms at the expense of more inventive ones. The act is particularly opposed by Alan Greenspan in an essay titled Antitrust. Greenspan suggests that the act has harmed society rather than being beneficial and it has further discouraged innovation. At the time Greenspan penned the essay he was a mentoree of Ayn Rand who also opposed the act terming it a violation of property rights. The criticism against the antitrust law is mostly associated with conservative politics. Richard Posner and Robert Bork, both conservative judges, have voiced their concerns regarding the law.

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