Federal Antitrust Legislation

Excerpt from the Interstate Commerce Act of 1887

Public Law 49-41, February 4, 1887

Enrolled Acts and Resolutions of Congress, 1789–

General Records of the United States Government, 1778–1992

Record Group 11

National Archives

Excerpt from the Sherman Antitrust Act of 1890

U.S. Code, Title 15, Chapters 1-7

Published by the Office of the Law Revision Counsel of the U.S. House of Representatives

In the second half of the nineteenth century, the largest industries in the United States enjoyed tremendous growth under the direction of a few very rich and powerful men. Financial investors J. P. Morgan (1837–1913) and Jay Gould (1836–1893), oil businessman John D. Rockefeller (1839–1937), railroad chief Cornelius Vanderbilt (1794–1877), and steel boss Andrew Carnegie (1835–1919) all built huge, highly profitable corporations that were more extensive and complex than any that had previously existed in the country. These men exercised a great amount of influence over the business world and national affairs, and the American public opinion of them was strongly divided. Those who applauded the manufacturing advances the wealthy businessmen introduced to the country referred to them as captains of industry, while those who criticized them for their dishonest business practices and poor treatment of workers called them robber barons.

Competition was fierce among the industrialists. When two companies produced the same product or service, each was forced to lower their prices or improve their product in order to keep their customers. This greatly reduced profits and created unstable market conditions. As the industrialists built their businesses, therefore, the strongest among them tried to gain control over their competition. Sometimes they started price wars by setting their own prices very low, forcing others in the industry to reduce prices as well. Eventually, the lack of profit caused smaller businesses to collapse. In some instances the large corporations made agreements with other well-established businesses, dividing up territories between them or merging so they could set higher prices without interference. In this environment only the largest corporations could survive, and thus most of the nation's money and power came to rest in the hands of a small group of elite businessmen.

By the 1880s the big industrialists were, in many ways, more powerful than the state and federal governments. Because there was no central banking system to control the nation's economy, the industrialists and financial investors had the power to cause financial panics and change the prices of gold and other commodities with their buying and selling. When the industrialists joined together, they could name their own prices for their services, such as railroad shipping rates, or goods, such as oil or steel. Sometimes their joint efforts destroyed independent businesses, farmers, and labor unions. The government had almost no power to stop the big corporations. It had long held a laissez-faire (non-interfering) attitude toward the economy, and almost all large corporations invested in large gifts of stock or money to influential politicians to keep them pro-business. The U.S. public became alarmed. Nineteenth-century Americans considered free market competition an essential part of a democracy (government by the people). They demanded that the government and courts take action to block single businessmen from gaining so much control over the industries. The first two federal legislations that resulted from this call for reform were the Interstate Commerce Act of 1887, which regulated businesses that spanned across state lines, and the Sherman Antitrust Act of 1890, which prohibited monopolies and any unreasonable limiting of competition within an industry.

Many Americans believed the railroad industry presented the biggest problem. During the 1880s new railroad construction occurred at a very fast pace. Competing lines raced to put down track in order to lay claim to the best areas of the country, whether railroad service was needed in them or not. The railroad network became overbuilt, with more trains running than there were freight and passengers to travel on them. The cost of railroad operations was high, and as the companies could not afford to lose customers to competitors, they often used dishonest means to stay in business. There was little governmental control over the industry, and, since the railroads usually let legislators and politicians ride the trains for free, many feared the officials would not be inclined to enforce any order.

Railroad rates were extremely unstable. In regions where there was little competition and one company dominated, that company often charged its customers very high rates. In areas where competition was intense, the railroads reduced their rates and then raised rates in other less competitive areas to compensate. They offered rebates (return of part of the payment) to large-volume shippers, which hurt the smaller businesses that did not get money back. Often the railroads entered into agreements among themselves to fix rates at a high level. They also sometimes charged more to ship freight a short distance in order to offer lower rates to big shippers for longer hauls.

The lack of railroad regulation especially hurt farmers who relied on the railways to carry their crops to urban markets. The high cost of shipping could use up their entire profit on a crop and put them into deep debt. In 1867 angry farmers banded together to found an organization known as the Grange, and in the 1870s they convinced five states to pass what were called Granger laws, regulating railroad rates through state commissions, groups of people appointed to carry out the laws. These state commissions, however, were ineffective against the powerful railroads because, as railway networks continued expanding their services across state lines, an individual state's power to regulate the railroads lessened. and the federal government did not regulate interstate commerce (trade that crosses the borders between two or more states).

Other industries also had to deal with the issue of competition. Some businesses merged, or joined together, with their competitors to set prices and control production. In the 1860s a number of pools were formed. Pools were agreements among rivals to share profits or divide up territories in order to maintain higher prices. The major trend in the 1870s was toward combining—a process in which companies purchased other companies and folded them into one large organization.

Most state laws strictly controlled mergers, forbidding companies to own stock in other companies. In order to get around these laws, trusts were created in the early 1880s. A trust was an agreement made between stockholders in several companies to transfer the shares they owned of their company to a set of trustees who represented the entire group of companies. In return, the stockholders received a document promising them a certain share of the combined earnings of the jointly managed companies. In effect, the trust became one central company composed of all the participating companies. By controlling most or all of an industry, trusts could set prices and drive out new competition through price wars. The first trust was established by John D. Rockefeller's Standard Oil Company in 1882. The Standard Trust was so successful that trusts in many other industries soon followed. As many of these trusts succeeded in taking over most of the business within their industry, eventually the term came to be applied to national monopolies (a monopoly is the exclusive possession of, or right to, manufacture a product or provide a service).

By the 1890s, after hundreds of mergers and combinations, there were only six huge railroad systems left out of the hundreds that had been formed and J. P. Morgan owned four of them. Morgan also put together a huge steel combination, U.S. Steel, the largest corporation the country had ever seen. Standard Oil took over hundreds of smaller companies and folded them into its trust. Public resentment against these and similar actions grew. In 1889 Kansas enacted the first state antitrust legislation, and the effort soon spread across the South and West. By 1900 twenty-seven states had created laws prohibiting or regulating trusts, but many trusts dealt in interstate commerce and thus could not be controlled by the state commissions. For example, when the state of Ohio moved against the Standard Oil Company in 1892, the trust simply re-formed under the more business-friendly laws of New Jersey. Pressure mounted for the federal government to take action, but the trusts donated heavily to political campaigns, bribed legislators, and were in a position to help or harm many politicians. Additionally, many politicians believed the big corporations did the nation an important service and hesitated to impose any restrictions on them.

Things to remember while reading the excerpts from the Interstate Commerce Act and the Sherman Antitrust Act:

• It was not fully clear who had the authority to regulate the interstate commerce of the railroads, but the U.S. Constitution offered some guidance. Although it gave the states the power to regulate trade within their own borders, the so-called "commerce clause" of Article I gave Congress the power to "regulate Commerce … among the several states." The idea of federal regulation was not easily accepted. In 1877 the Supreme Court ruled in the case Munn v. Illinois that the state regulatory boards had jurisdiction over the railroads. But less than a decade later, in the case of Wabash, St. Louis and Pacific Railway Company v. Illinois, the high court overturned its earlier decision and proclaimed that only the U.S. Congress had the right to regulate interstate commerce, as stated in the commerce clause from the Constitution.

• After the Wabash decision, Congress passed one of the most important legislative measures of the era, the Interstate Commerce Act of 1887. This act created the first federal regulatory agency, a five-person Interstate Commerce Commission (ICC), to oversee passenger and freight charges on any railroad that operated in more than one state. The commission was also authorized to hear public testimony on violations, to examine company records, and in general to oversee law enforcement as it applied to railroads.
• Responding at last to the public outrage against corporate trusts and monopolies, in 1888 Senator John Sherman (1823–1900) of Ohio introduced an antitrust measure in the U.S. Senate. However it was only after another two years and considerable revision that Congress passed the act. The Sherman Antitrust Act of 1890 barred any excessive attempts to eliminate competition in an industry and made it a federal crime to create a monopoly. Enforcement of the act was supervised by the U.S. attorney general, who was the chief law officer of the nation.
• The wording of the Interstate Commerce Act and the Sherman Antitrust Act was vague and many politicians and legal experts noted that it was not specific enough to be enforceable. Some suspected that the congressmen who wrote these acts did not truly support business regulation. As you read the acts, take note of some of the terms that might be considered unclear when it came to making a charge against a railroad or a trust.

Excerpt from the Interstate Commerce Act of 1887

Be it enacted … That theprovisions of this act shall apply to any commoncarrier or carriers engaged in the transportation of passengers or property wholly by railroad, or partly by railroad and partly by water when both are used, under a common control, management, or arrangement, for a continuous carriage or shipment, from one State or Territory of the United States, or the District of Columbia, or from any place in the United States through a foreign country to any other place in the United States, and also to the transportation in like manner of property shipped from any place in the United States to a foreign country and carried from such place to a port oftransshipment, or shipped from a foreign country to any other place in the United States, and also to the transportation in like manner of property shipped from any place in the United States to a foreign country and carried from such place to a port of entry either in the United States or an adjacent foreign country: Provided, however, That the provisions of this act shall not apply to the transportation of passengers or property, or to the receiving, delivering, storage, or handling of property, wholly within one State, and not shipped to or from a foreign country from or to any State or Territory asaforesaid ….

All charges made for any servicerendered or to be rendered in the transportation of passengers or property as aforesaid, or in connection therewith, or for the receiving, delivering, storage, or handling of such property, shall be reasonable and just; and every unjust and unreasonable charge for such service is prohibited and declared to be unlawful.

Sec. 2. That if any common carrier subject to the provisions of this act shall, directly or indirectly, by any special rate, rebate, drawback, or other device, charge, demand, collect, or receive from any person or persons a greater or lesscompensation for any service rendered, or to be rendered, in the transportation of passengers or property, subject to the provisions of this act, than it charges, demands, collects, or receives from any other person or persons for doing for him or them a like andcontemporaneous service in the transportation of a like kind of traffic under substantially similar circumstances and conditions, such common carrier shall be deemed guilty of unjustdiscrimination, which is hereby prohibited and declared to be unlawful….

Sec. 5. That it shall be unlawful for any common carrier subject to the provisions of this act to enter into any contract, agreement, orcombination with any other common carrier or carriers for thepooling of freights of different and competing railroads, or to divide between them theaggregate ornet proceeds of the earnings of such railroads, or any portion thereof; and in any case of an agreement for the pooling of freights as aforesaid, each day of its continuation shall be deemed a separate offense.

Sec. 6. That every common carrier subject to the provisions of this act shall print and keep for public inspection schedules showing the rates and fares and charges for the transportation of passengers and property which any such common carrier has established and which are in force at the time upon its railroad, as defined by the first section of this act….

Sec. 11. That a Commission is hereby created and established to be known as the Inter-State Commerce Commission, which shall be composed of five Commissioners, who shall be appointed by the President, by and with the advice and consent of the Senate….

Sec. 12. That the Commission hereby created shall have authority to inquire into the management of the business of all common carriers subject to the provisions of this act, and shall keep itself informed as to the manner and method in which the same is conducted, and shall have the right to obtain from such common carriers full and complete information necessary to enable the Commission to perform the duties and carry out the objects for which it was created; and for the purposes of this act the Commission shall have power to require the attendance and testimony of witnesses and the production of all books, papers, tariffs, contracts, agreements, and documents relating to any matter under investigation, and to that end may call upon the aid of any court of the United States in requiring the attendance and testimony of witnesses and the production of books, papers, and documents under the provisions of this section….

Excerpt from the Sherman Antitrust Act of 1890

Sec. 1. Every contract, combination in the form of trust or otherwise; orconspiracy, inrestraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of amisdemeanor, and, on conviction thereof, shall be punished by a fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in thediscretion of the court.

Sec. 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 3. Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any Territory of the United States or of the District of Columbia, or in restraint of trade or commerce between any such Territory and another, or between any such Territory or Territories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any States or States or foreign nations, is hereby declared illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 4. The several circuit courts of the United States are herebyinvested with jurisdiction to prevent and restrain violations of this act; and it shall be the duty of the severaldistrict attorneys of the United States, in their respective districts, under the direction of the Attorney General, toinstitute proceedings in equity to prevent and restrain such violations. Such proceedings may be by way ofpetition setting forth the case and praying that such violation shall beenjoined or otherwise prohibited. When the parties complained of shall have been duly notified of such petition the courts shall proceed, as soon as may be, to the hearing and determination of the case; and pending such petition and before finaldecrees, the court may at any time make such temporaryrestraining order or prohibition as shall be deemed just in thepremises.

Sec. 5. Whenever it shall appear to the court before which any proceeding under Section four of this act may be pending, that the ends of justice require that other parties should be brought before the court, the court may cause them to be summoned, whether they reside in the district in which the court is held or not; andsubpoenas to that end may be served in any district by themarshal thereof….

Provisions:

Conditions.

Carrier:

Transportation line that carries passengers or freight for a fee.

Transshipment:

Transfer from one carrier to another for further transportation.

Adjacent:

Having a common border.

Aforesaid:

Previously mentioned.

Rendered:

Given in exchange for payment.

Rebate:

Return of a part of the payment.

Drawback:

Partial refund.

Compensation:

Payment.

Contemporaneous:

Occurring at the same time.

Discrimination:

Partiality or prejudice.

Combination:

An organization formed when companies buy other companies and fold them into one large company.

Pooling:

Combining in a common effort.

Aggregate:

Total of all parts.

Net proceeds:

The remainder of earnings after costs and expenses are deducted.

Tariffs:

Taxes on imported products.

Conspiracy:

Secret plot among members of a group to achieve a joint result.

Restraint:

Limitation.

Misdemeanor:

Minor crime.

Discretion:

Judgment.

Invested with jurisdiction:

Given the authority to apply the law.

District attorneys:

Prosecuting officers of a court district.

Institute proceedings in equity:

Request a court to force a party to act in compliance with the law.

Petition:

Formal written request made to the court.

Enjoined:

Prohibited by judicial order.

Decrees:

Judicial decisions.

Restraining order:

Legal order issued before the final decision of the case that keeps the situation unchanged until the decision is made.

Premises:

Case set forth.

Subpoenas:

Documents ordering a person to appear in court.

Marshal:

Officer of the court acting in a role similar to a sheriff.

What happened next …

There was little enforcement of the Interstate Commerce Act in the first decades after its creation. The Interstate Commerce Commission (ICC) and the courts seemed to favor the interests of the railroads. From 1887 to 1911, the ICC brought railroads to court on only sixteen occasions, and the railroads won fifteen of those cases.

During the administration of President Theodore Roosevelt (1858–1919; served 1901–9), the ICC's authority was greatly strengthened. Discriminatory practices against short haul routes were ruled illegal in 1903, and in 1906 the ICC received the authority to enforce approved rates without first getting court orders. Aside from stabilizing railroad rates, the Interstate Commerce Act was important because it was the first federal intervention in business and provided the basis for federal regulation of commerce in the twentieth century.

By the 1960s the railroads were losing customers to other forms of transportation, particularly cars, trucks, and airlines, and they no longer posed much threat to free market competition. In December 1995 the ICC Sunset Act dissolved the ICC.

The Sherman Act was not enforced at all in the early years after its passage. The attorneys general at the end of the nineteenth century tended to be pro-trust and the courts were not inclined to rule against private industry. From 1890 to 1901 only eighteen antitrust suits were filed, and four of them were actually against labor unions said to be plotting to restrain free competition. In fact, more combinations and trusts were formed between 1897 and 1901—after the passage of the Sherman Antitrust Act—than at any other time in American history. By 1901 a few hundred large companies controlled almost half of U.S. manufacturing and greatly influenced almost all key industries.

The trust-busting movement began in 1904 with the Supreme Court's decision in Northern Securities Co. v. U.S. to break up a railroad trust. Over forty antitrust lawsuits were filed during Theodore Roosevelt's administration. Roosevelt and his successor, William Howard Taft (1857–1930; served 1909–13), used the Sherman Act to make businesses more responsible to the greater good of society.

In 1914 Congress passed the Clayton Antitrust Act, which prohibited companies from charging different buyers different prices for the same products, contracts restricting business with competitors, mergers between competing companies, and companies buying stock in competing companies.

Did you know …

• Many railroad companies, big and small, actually welcomed federal oversight by the ICC. They would rather fight one regulator, the federal government, than fighting the same war in all the state legislatures. In addition, the railroads had a lot to lose in an unregulated environment in which they were forced to pay rebates and drop their prices in order to compete. Far from being free market capitalists, most railroads favored government regulations that would ensure them a rational process of setting rates and a guaranteed profit.
• The Sherman Antitrust Act was amended several times over the years and was still in use in the early twenty-first century. One well-known violation occurred in November 1999, when a federal judge determined that computer software company Microsoft had used its monopolistic market position to restrict competition and harm consumers. Microsoft controlled more than 90 percent of the computer software market and had a market value of $470 billion, but that was not the problem. The judge's report alleged that Microsoft restricted the market access of its web browser competitor Netscape by bundling (making it an automatic part of the purchase) its own browser, Microsoft Internet Explorer, with the popular computer operating system Microsoft Windows. This meant that all computer systems that used Windows contained Microsoft's browser, thereby making the Netscape browser technically unnecessary. The court also found that Microsoft used intimidation so Apple Computers would use its browser and bullied Intel, a company that made computer chips, into staying out of the software market, threatening to work with computer chip companies that were Intel's rivals to damage Intel's business if Intel did not comply. The court ordered Microsoft to be broken into smaller companies to dissolve its monopoly. Microsoft appealed the decision, and in 2001 the U.S. Court of Appeals upheld the ruling that Microsoft was a monopoly but overturned the order to break up the company, mainly because it found fault with the first judge's handling of the case.

Consider the following …

• Imagine that you own a small farm in Illinois in 1890. In what ways would your life and income be affected by the railroad competition, and by the pools, trusts, and giant corporations? How do you think you would feel about the powerful industrialists?
• Legislation for regulating the big businesses was demanded by the public long before the federal government acted. Why do you think the members of Congress and the courts were so slow to create the laws?

For More Information

Books

Cashman, Sean Dennis. America in the Gilded Age: From the Death of Lincoln to the Rise of Theodore Roosevelt. New York and London: New York University Press, 1984.

Smith, Page. The Rise of Industrial America: A People's History of the Post-Reconstruction Era. Vol. VI. New York: McGraw-Hill, 1984.

Swisher, Karl Brent. American Constitutional Development. Boston, MA: Houghton Mifflin, 1954.

Web Sites

"Interstate Commerce Act. The People's Vote: 100 Documents That Shaped America." U.S. News and World Report. http://www.usnews.com/usnews/documents/docpages/document_page49.htm (accessed on July 6, 2005).

"Sherman Act, 1890: Defining Documents of the United States." Class Brain.com. http://www.classbrain.com/artteenst/publish/article_127.shtml (accessed on July 6, 2005).

Other Sources

Interstate Commerce Act. Public Law 49-41, February 4, 1887; Enrolled Acts and Resolutions of Congress, 1789– General Records of the United States Government, 1778–1992; Record Group 11; National Archives.

Sherman Antitrust Act of 1890. U.S. Code, Title 15, Chapters 1-7. Published by the Office of the Law Revision Counsel of the U.S. House of Representatives.