relevancy in our own time of transition to a
American system
freight shipments railroads felt compelled
globalized and digitized economy? Pursuing
toward competition to grant to industrial monopolies and other
these inquiries takes us first to the congres-
powerful customers. The law prohibited
sional debates and early court decisions
rather than behind-the- railroads from engaging in price discrimina-
interpreting the law, and then to the recent
scenes market
tion – from charging lower prices to powerful
Microsoft case more than a century later.
customers simply because they demanded
Although a great deal occurred between
manipulation by
them. Still, ferocious pressure continued.
these two chapters of economic history, both
powerful private
The railroads’ solution to the demands of
are set in periods of tempestuous industrial
their customers was to join together in price-
change in the United States and, thus, are
interests.
fixing cartels themselves. By the turn of the
particularly instructive episodes of antitrust
20th century, the flight from competition to
enforcement.
combination spread far beyond railroads. Gi-
ant cartels as well as corporate mergers between competi-
The Railway Problem
tors were reshaping and consolidating industries through-
out the economy – from oil refining and steel production
to wooden match and crèpe paper manufacture.
With few exceptions, everyday life in the latter half
of the 19th century lacked the telephone, the
electric light, and the automobile. Rather, it depended
on the horse-drawn wagon and carriage, the kerosene
lamp, as well as the new and rapidly expanding network
of railroads. Indeed, there was great celebration on the
day a “Golden Spike” was driven to complete the first
transcontinental railroad in 1869. The idea of a single
railroad stretching across the continental United States
sparked the imagination of citizens used to stage coach
travel and the mail service carried by relay teams of horse
riders known as the Pony Express.
Other national railroad lines followed and, together
with regional roads and feeder lines, they soon connected
32
The Rise of Standard Oil
increase of size ... cannot be arrested.” Even the pro-
gressive-minded journalist Lincoln Steffens remarked:
“Trusts are natural, inevitable growths out of our social
The most famous example involved an accountant
and economic conditions . ... You cannot stop them by
from northern Ohio named John D. Rockefeller. By
force, with laws.”
1859, oil had been discovered in Ontario, Canada, and in
Others saw it differently. They believed that only
western Pennsylvania. Most crude oil from both fields
legal reform could assure a modicum of free competition
was sent to refineries in northern Ohio for processing
and a fair distribution of wealth and power among larger
into useful forms like kerosene. In less than 15 years,
and smaller firms. As pressure for reform mounted, some
Rockefeller had become an enormously successful busi-
states took legal action against trusts, as they became
nessman because he controlled the Ohio oil refineries
universally known. But efforts by progressives to break
and, with them, the entire industry. He used this control
up trusts failed because, like Standard Oil at the time,
as leverage over the railroads, already financially weak-
they could simply move to less reform-minded states
ened by their own proliferation and intense competition.
with more permissive commercial laws.
Their condition allowed Rockefeller the leverage to
As it became clear that states could not or would
obtain not only lower
not curtail the
rates for transport-
growth of trusts
ing his Standard Oil
of all types,
Company products
Congress held
but also a portion of
hearings on how
every dollar his rivals
it might address
paid the railroads.
the issue. In
He extracted these
1888, Senator
payments by ap-
John Sherman of
proaching each rail-
Ohio introduced
road and threatening
his anti-trust
it with the loss of his
bill and
business, which was
declared:
quite substantial and,
The popular
thus, critical in an
mind is agi-
industry whose thin
tated
with
profit margin made it
John D. Rockefeller, inset upper left, was the most famous businessman of his day, seen by foes as greedy problems that
dependent on traffic
and powerful. Rockefeller lived to see his Standard Oil Company broken up by federal decree. Upper may disturb
right: a stock certificate for Standard Oil. Center: Standard Oil refinery in California, 1911.
volume.
social order,
As a result, independent oil companies were crushed,
and among them all none is more threatening than
many of them selling out to Standard Oil. In 1892, the
... the concentration of capital into vast combinations.
Ohio attorney general won a court order to dissolve the
... Congress alone can deal with them and if we are
Standard Oil Company, but Rockefeller simply moved to
unwilling or unable there will soon be a trust for every
New Jersey, turning it into the first “trust”– a company
product and a master to fix the price for every necessity
controlling formerly independent competitors by holding
of life.
their stock certificates. The old trusts were different
Still, there were some in Congress who differed with
from today’s holding companies, whose stock portfolios
Senator Sherman. They sided with Carnegie and Stef-
are diversified across industries and, thus, do not raise
fens as well as Rockefeller, who would later testify be-
concerns about monopoly power in particular markets.
fore the United States Industrial Commission: “It is too
Although few companies actually adopted the form of
late to argue about the advantages of industrial combina-
a “trust,” the term rapidly became the catchword in pub-
tions. They are a necessity.”
lic debate over the government’s role in a time of such
In particular, the two men from Ohio – Sherman and
industrial concentration. Some saw increasing industrial
Rockefeller – disagreed sharply over the prospect and
concentration as natural and beneficial. Steel baron
the wisdom of turning the tide of increasing industrial
Andrew Carnegie said that “this overpowering irresist-
concentration. Rhetorically, they were both speaking in
ible tendency toward aggregation of capital and
favor of “free competition.” But free competition held
33
different meanings for them. For Senator Sherman, it
Anti-Trust Act more clearly, uniting to declare that all
signified competition free from domination by private
price-fixing cartels were illegal:
economic power. It meant that free markets require limits
... we can have no doubt that [cartels], however reason-
on monopolies, cartels, and similar economic restraints.
able the prices they fixed, however great the competition
Rockefeller believed in competition free from govern-
they had to encounter, and however great the necessity
ment regulation and called for an absolute freedom of
for curbing themselves by joint agreement from com-
contract.
mitting financial suicide by ill-advised competition,
Thus, in 1890, social concerns about massive industrial
[are prohibited] because they ... deprive the public of
transformation, economic concerns about the monopolies
the advantages which flow from free competition.
and cartels that threatened free markets, and political
With overt price-fixing cartels clearly illegal, the rail-
concerns about the fundamental “liberty of the citizen”
roads turned to mergers as the way to eliminate competi-
in a nation where trusts might become very powerful
tion between them. Thus, the second landmark case to
motivated Congress to pass the Sherman Anti-Trust Act.
test the statute was brought by the U.S. attorney general
In the American system, legislation typically serves as
to break up the Northern Securities Trust, the result of
the beginning of social change. Thereafter, laws are ap-
a merger engineered by the financier J. P. Morgan. His
plied and policies interpreted
group had come to control
by the courts, where the sharp
the faltering Northern Pacific
divide between the two sons
Railway, which competed
of Ohio, Sherman and Rock-
along 9,000 miles of parallel
efeller, continued to play out
track with the Union Pacific,
for decades.
amongst whose owners was
Rockefeller. To end the cut-
The Supreme
throat competition between
the two railroads, Morgan
Court Upholds
persuaded the two ownership
groups to merge by exchang-
the New Law
ing their railroad stock for
trust certificates. The federal
government brought suit to
dissolve the trust.
Two landmark antitrust
In 1904, a bare majority
cases involving railroads
of the Supreme Court ap-
soon reached the Supreme
proved the government
Court, the first in 1896. In
action to break up the rail-
United States v. Trans-Missouri
road trust. Four of the nine
Freight Association, the U.S.
justices dissented, insist-
attorney general sued a rail-
ing that the merger, like
road cartel whose 18 members
any commercial contract,
argued that they were merely
was simply a sale of prop-
setting reasonable prices to
erty. For them, free com-
avert ruinous competition.
petition meant the right
Although the railroads’ argu-
to sell or exchange one’s
ment persuaded the lower
business free from govern-
courts, a divided Supreme
19th-century political cartoonists had a field-day attacking Rockefeller, here ment intervention, regard-Court held the cartel illegal
caricatured as “King of the World,” sitting on a barrel of oil.
less of its actual impact on
and announced that only the competitive process could
the market. The Court majority, however, insisted that
set reasonable prices. The Court majority also observed
free competition calls for attention to the impact on the
that such “combinations of capital” threatened to “driv[e]
market. Crucially, it determined that the Anti-Trust Act
out of business the small dealers and worthy men whose
prohibited this particular merger because the resulting
lives have been spent therein.” A few years later, the
trust necessarily eliminated competition between the
Court factions reaffirmed the validity of the Sherman
railroads and created a monopoly. The Court declared:
34
structure on paper had come to resemble. Yet there were
The mere existence of such a combination and the pow-
others who pointed not to Rockefeller’s ruthlessness but
er acquired by the holding company as its trustee, con-
to his success in creating an efficient distribution network,
stitute a menace to, and a restraint upon, that freedom
and to the benefits to consumers of decreasing prices for
of commerce which Congress intended to recognize and
petroleum products in those years. But in the end it was
protect, and which the public is entitled to have protected.
a question of competition on the merits, not competitive
If such combination be not destroyed, all the advantages
success by any means. Indeed, Nobel Laureate Douglass
that would naturally come to the public under the oper-
C. North has recently written that the success of free mar-
ation of the general laws of competition ... will be lost.
ket economies depends on the belief that participants will
have a fair opportunity to succeed.
Even as the Sherman Act played out in the railroad
industry, Rockefeller’s Standard Oil Trust continued to
wage a relentless assault on the petroleum industry. His
Antitrust Law and the
vision of a unified and efficient network of petroleum
production and distribution entailed a methodical pro-
Modern Age
gram of intimidation that left his rivals with
no choice but to sell out for pennies on the
The
dollar.
success of
More recent critics of the Anti-Trust Act
But in1902, President Teddy Roosevelt
point to as many as five merger waves,
took action that would make his reputation
the first beginning in the late 19th century.
free market
as a “trust-buster”: On his instruction, the
For example, General Motors Corporation
U.S. attorney general filed suit to break up
and the now-defunct AT&T and U.S. Steel
economies
Standard Oil, whose predatory conduct had
corporations resulted from mergers that
come to symbolize the entire trust problem.
successfully consolidated the automobile,
depends on the
Court cases can take a long time, but in 1911,
telecommunications, and steel industries for
the Supreme Court finally held that Standard
belief that
the better part of the 20th century. In the
Oil had illegally monopolized the petroleum
critics’ view, the Anti-Trust Act, in spite of its
participants will
industry. Simply put, its success had not been
affirmation by the Court, did not reverse the
fairly won. The result was a decree to dis-
trend toward industrial concentration and,
have a fair
solve Standard Oil into 33 separate companies
with it, the increasing consolidation of eco-
known as “baby Standards.”
nomic and political power that had originally
opportunity
The Anti-Trust Act was a resounding suc-
moved Congress to act in 1890. Yet since
cess, or so it seemed. Price-fixing cartels
to succeed.
the1970s, in spite of the enormous authority
were stopped in their tracks and the notorious
and prestige of corporations in American life,
Northern Securities and Standard Oil
the Justice Department and the Federal Trade Commis-
trusts were no more. The Washington Post
sion in both Republican and Democratic administrations
would declare on May 18, 1911, that the
have accepted their statutory responsibility to review all
Supreme Court decision “dissolves the once sovereign
large mergers and often insisted on changes to reduce
Standard Oil Company as a criminal corporation. ...
their anti-competitive effects. Indeed, the AT&T
[H]onest men will find security from alarms and indict-
monopoly of telephone service was broken up during
ments, while dishonest men will see in it the certainty
Ronald Reagan’s first term.
of punishment. ... [I]t has given the country assurance of
Still, it is particularly hard to ignore the fact that even
justice and progress in its industry.”
after a century of trust-busting, legal mergers have con-
But in retrospect the success was not so clear. First, the
solidated the oil industry into a sector now dominated by
break up of Standard Oil permitted its shareholders to
a few large multinational corporations. Indeed, the argu-
retain ownership and control of the 33 baby Standards.
ment that concentration is good continues. Moreover,
Thus they were not independent companies, except in
times have changed, many argue: Global competition
name. Furthermore, in congressional hearings several
reduces the tension between the benefits of large-scale
years later, evidence showed that their profits had actu-
enterprise and the harms of industrial concentration.
ally increased, suggesting the break up had certainly
Others insist that tensions have not lessened but rather
not diminished their economic power, whatever their
shifted from the national to the international stage, as
35
evidenced by disputes adjudicated by the World Trade
innovation. But behind Gates’s public persona was a
Organization and similar groups.
corporate strategist whose tactics of competition some
Nonetheless, thanks to Senator Sherman, the commit-
have likened to those of John D. Rockefeller. Microsoft
ment to prohibit price-fixing has remained resolute: In
Windows is clearly the dominant operating system for
1999, for example, the federal government concluded
personal computers (PCs) just as Standard Oil was the
its case against an international vitamin cartel when its
dominant distribution system for the petroleum indus-
members agreed to fines approaching $1 billion and to
try. In the U.S. government case against Microsoft, the
imprisonment of the corporate managers involved. As a
United States District Court in Washington, D.C., found
general matter, there is an international consensus about
that Microsoft retained its dominance by intimidating
the economic evils of price-fixing cartels as unjustifiable
computer companies as powerful as Intel and IBM and as
restraints of competition. More than 100 countries have
frail as Apple Computer into withholding from consum-
enacted competition laws modeled on the Sherman Anti-
ers products that had the potential to challenge Microsoft
Trust Act – from the European Union and its member
Windows software.
states to Japan and Zambia.
Various tribunals ultimately found that Microsoft il-
In the United States, the Anti-Trust Act has both
legally monopolized the major market for PC operating
enunciated and strengthened an endur-
systems. Unlike Standard Oil, however,
ing commitment to opening markets to
Microsoft was not broken up. It was
new technologies and new groups. No
ordered to cease discriminatory pricing
longer do a few wealthy businessmen like
and product access policies, and to share
Rockefeller and Carnegie, Vanderbilt and
basic information about its Windows
Dupont, dominate commercial enterprise
PC operating system needed for rivals
and control economic opportunity. As
to compete more effectively and freely
the 20th century progressed, the inven-
with Microsoft in the market for applica-
tive energies bubbling at the core of the
tions software on the Windows platform.
American economy were unleashed to
In the European Union case, the
create new centers of innovation and
Commission imposed similar restrictions
entrepreneurial activity, whether in Hol-
as well as a fine of 497.2 million Euros.
lywood, on Madison Avenue, or across the
Microsoft settled numerous suits world-
Internet from California’s Silicon Valley to
wide, both public and private, at a cost
its counterparts in the environs of Austin
Senator John Sherman of Ohio, whose
of additional billions of dollars.
and Boston.
“Anti-Trust Act” of 1890 became the law of the
As a result, the ethos of the infor-
land. Since then, it has been used by the
mation technology industry changed.
U.S. government and by the courts to curb
The Microsoft Case
corporate monopolies.
Companies began to engage more freely
in research that competes fundamentally
with Microsoft technology. Indeed, Microsoft has re-
The dialectic of concentration versus competition
cently embarked on a new course of patent cross-licens-
continues, even as it mutates into new forms. It
ing that is a radical departure from its history of sharp
should come as no surprise that our own time of dramatic
competition. While it is too early to assess the ultimate
technological and economic transformation has given rise
impact of Microsoft’s shift toward cooperation, what is
to a second great monopolization case: Since 1990, Mi-
clear is that the Sherman Anti-Trust Act has retained its
crosoft Corporation, the software manufacturer, has been
legal relevance and has already had a substantial role to
investigated and sued by the U.S. federal government
play in regulating the commerce of the Information Age.
and 20 U.S. states, as well as by the European Union and
Has the Anti-Trust Act made a difference in the
numerous private plaintiffs. Notably, the Anti-Trust Act,
United States over the past century? The answer is
a 19th century statute, was still at the heart of the U.S.
clearly yes with respect to overt price-fixing cartels and
cases seeking to curb Microsoft’s allegedly anticompeti-
with respect to the most flagrant examples of predatory
tive conduct in high technology industries at the cusp of
commercial monopolies. But the effect on corporate <