Act passed in 1890 that made monopoly and restraints of
trade illegal.
In the United States a sharp conflict of opinion has existed
over the relative merits of business monopolies. Many believe
that government policy toward business monopolies has been
something less than clear-cut and consistent. Even to the present day, the major thrust of federal legislation and policy has
focused on maintaining and promoting competition.
Historically, the U.S. economy, steeped in the philosophy
of free, competitive markets, has been a fertile ground for the
development of a suspicious and fearful public attitude toward business monopolies. This fundamental distrust
emerged following the Civil War when local markets widened
into national markets as transportation infrastructure improved, resulting in the growth of big business. Increasing
mechanization of production and increasingly widespread
adoption of the corporate form of business enterprise were
important forces giving rise to the development of trusts, or
business monopolies, in the 1870s and 1880s. Trusts developed in the petroleum, meatpacking, railroad, sugar, lead,
coal, whiskey, and tobacco industries, among others, during
this era.
In certain industries—the oil and steel industries, for example—market forces failed to provide adequate control to
ensure socially tolerable behavior on the part of the company.
High tariffs eliminated foreign competition and economies
of scale vanquished domestic competition, and workers, paid
low wages, suffered as a result of this lack of competition. To
correct this situation, two techniques of regulation were
adopted as substitutes for or supplements to the market.
First, in those few markets where economic realities preclude
the effective functioning of the market (that is, where the
market tends toward a “natural monopoly”), the United
States established public regulatory agencies to control economic behavior—by setting utility rates, for example. Second, in most other markets, social control has taken the form
of antimonopoly or antitrust legislation designed to inhibit
or prevent the growth of monopoly.
Acute public resentment of the trusts, which developed in
the 1870s and 1880s, culminated in the passage of the Sherman Anti-Trust Act in 1890. The act made monopoly and restraints of trade—for example, collusive price fixing or the
dividing up of markets among competitors—criminal offenses against the federal government. Either the Department
of Justice or parties injured by business monopolies could file
suits under the Sherman Act. The courts could dissolve firms
found in violation of the act, or injunctions could be issued
to prohibit practices deemed unlawful under the act. Fines
and imprisonment were also possible results of successful
prosecution. Further, parties injured by illegal combinations
and conspiracies could sue for triple the amount of damages.
The Sherman Act seemed to provide a sound foundation for
positive government action against business monopolies.
The case against business monopoly centers on the contentions that business monopoly causes a misallocation of resources, retards the rate of technological advance, promotes
income inequality, and poses a threat to political democracy.
The defense of business monopoly revolves around the point
that interindustry and foreign competition, along with potential competition from new industry entrants, makes
American industries more competitive than generally believed. Also, supporters believe that some degree of monopoly may be essential to the realization of economies of scale
and that monopolies are technologically progressive.
The cornerstone of antitrust policy consists of the Sherman Act of 1890 and later the Clayton Act of 1914. In summary, the Sherman Act specifies that “Every contract, combination . . . or conspiracy in the restraint of interstate trade . . .
is . . . illegal,” and that any person who monopolizes or attempts to monopolize interstate trade is guilty of a misdemeanor. The only successful prosecution under the Sherman
Anti-Trust Act in the nineteenth century occurred not against
big business, but against labor unions during the Pullman
Strike of 1894, when 100 percent of the railroad workers
agreed to strike. In 1895 when the U.S. Supreme Court heard
the case of E. C. Knight Co., the sugar producer—the most
prominent use of the act against big business in the nineteenth century—the Court ruled that this company, although
controlling up to 98 percent of the market, did not violate the
antitrust law because competition still existed. During the administration of President Theodore Roosevelt (1901–1908),
the government finally won 45 cases against big business by
using the Sherman Anti-Trust Act; during the administration
of President William Howard Taft another 90 cases were successfully prosecuted, including one against Standard Oil in
1911. Congress reinforced the Sherman Anti-Trust Act with
the passage of the Clayton Anti-Trust Act, which included
fines or imprisonment for individuals who violated the act.
—Albert Atkins
References
Shepperd, William G. The Economics of Industrial
Organization. Englewood Cliffs, NJ: Prentice-Hall, 1979.