A History of US Economic Law Part 6: MONOPOLY!!!
Post Civil War America created the perfect conditions for the development of massive corporations and the emergence of a few men as the captains of industry or the more derogatory term robber barons. This is due to a variety of factors- labor became extremely cheap with a multitude of former slaves now faced with the unenviable position of having to provide for themselves and their families with no education, facing extreme racism and absolutely no significant personal property. Many of them headed north in hopes of getting jobs in factories or west in hopes of getting jobs building railroads and were willing to work far cheaper than whites. Add in large populations of Chinese were immigrating in due to economic problems in China and soldiers returning from war looking for new work and you have the ingredients of a depressed labor market.
Another key factor was the railroads which had expanded dramatically to assist the war efforts of both sides leaving a new, faster and cheaper form of transportation throughout most of the east and was ready to expand west. Taking advantage of the cheap labor railroads quickly expanded, both privately and through government projects making it possible to exploit the natural resources in large areas of the midwest and eventually the rockies that were previously too far away to be useful. Areas that once took months to reach by wagon were could now be reached in days. Led by the railroads, virtually every industry experienced a boom; especially agriculture, steel, coal and oil.
Federal regulations were virtually non-existent, taxes were low except for tariffs and state regulations were easily gotten around through the law or by simply bribing politicians. As JP Morgan famously said, "Well, I don't know as I want a lawyer to tell me what I cannot do. I hire him to tell how to do what I want to do." A group of men became extraordinarily wealthy by running their businesses aggressively, doing everything they could to not only make their own business more profitable but also to run their competitors out of business. Having more money than they could possibly spend in their lifetimes, these men used capital as chips in a giant game where money was merely a method of keeping score. These men would often socialize, throwing extravagant parties, making backroom deals creating friendships, rivalries and feuds.
Meanwhile, workers unions were on the rise as an opposing force. The corporations ran by the wealthy were obsessed with being efficient and labor being the largest expense was an area they were constantly looking to keep under control. The combination of workers/unions pushing for higher wages and better working conditions against the pressure of the corporations attempting to keep their costs below the costs of the competitors produced a constant friction between employers and employees as well as racial tensions against minorities who were often not allowed in unions and willing to work cheaper.
By the 1900's most of the American economy was in the hands of few men who were regularly successful at running their competitors out of business. The political climate was developing a strong populist movement. Progressive and communist ideas were becoming popular among the intellectual elites and the ideas were attractive to a large portion of the population. Even the average American who didn't care for leftist ideals had little sympathy for the extremely wealthy. Theodore Roosevelt was a young charismatic president who was a progressive but shied away from the more extreme communist ideas. Rather than attacking business in general he sought a middle ground of reigning in big business with regulation.
The Panic of 1901
On May 17th 1901 the New York Stock Exchange experienced a large financial battle for control of the Northern Pacific Railway resulting in the first crash in the history of the NYSE now called the Panic of 1901 E.H. Harriman attempted to monopolize the Chicago rail market by purchasing control of the Northern Pacific Railway. The market was cornered by James Stillman and William Rockefeller using Standard Oil money and James J. Hill, financed by J.P. Morgan attempted to prevent the takeover.
Initially the battle over the Northern Pacific led to a massive increase in the stock price which the stock market in general followed. Small investors, believing the stock market was booming rushed to buy. In the afternoon, the buying spree turned around and prices began to fall. Realizing they had overpaid for the stocks they had bought in the morning a panic hit the trading floor and stock prices collapsed.
A newspaper article from the following day describes the beginning of the panic.
Of a sudden, Burlington stock, which had been more or less heavy all the morning, began to show unmistakable signs of weakness, while almost coincidently the Erie issues were depressed. The rank and file watched and wondered, and as they watched, the prices of the issues went lower still. Then in the general list, prices also began to fall. First it was St. Paul, then it was Missouri Pacific, and then it was Union Pacific. Finally the whole market was declining. Some holders of stocks not knowing the why and the wherefore of it and thinking it only one of the many ordinary reactions that have from time to time appeared in the market since election, "sat" on their stocks and looked for a recovery. Other holders, more timid if might be more conservative, of even less able to hold proceeded, however, to part with their holdings. Soon the contagion spread, the professional bears on the floor of the Exchange the while aiding in this by hammering the whole list.
Quotations thereupon began to break, not quarter or half points between sales, but one and two points. That settled it. The entire Street proceeded to sell. Where before the cry had been only. "Buy, buy, buy," it became, "Sell, sell, sell." Stocks were literally tumbled out sold without rhyme or without reason-anything "to get out."
At the end of the day, E.H. Harriman failed to gain a sole monopoly on the Chicago region, however a deal was struck between Harriman, Hill and Morgan that created the Northern Securities Company, a holding company that held majority stock in the Northern Pacific, the Great Northern and the Burlington effectively owning a monopoly on Chicago are rails.
I discussed the Sherman Act in my first blog on this topic, but up to this point in history it had been used sparingly. The largest Supreme Court Case at the time United States v. E.C. Knight Co. 156 U.S. 1 (1896) ruled against the government so Harriman, Hill and Morgan thought nothing of the legal consequences of forming their monopoly. President Roosevelt ordered his justice department to file a lawsuit against the Northern Securities Company- a move that reportedly surprised Morgan who wrote the Roosevelt,
If we have done anything wrong, send your man to my man and we can fix it up.
To which Roosevelt replied,
That can not be done. Nobody treats as a sovereign equal to -- of the President. No company can presume to be -- no private interest can presume to be equal to the government. The government must be superior to all of these.
To prevent antitrust cases from becoming bogged down in legal proceedings, Roosevelt pushed the Expediting Act through congress. The Expediting Act moved any lawsuit filed under the Sherman Act to the front of the legal line, allowing for them to be ruled on quicker and eventually reach the Supreme Court faster as well as added staff to the antitrust division of the justice department.
The Expediting Act is one of those rare government laws that performs exactly as advertised. The case against Northern Securities Company was decided by the Supreme Court in March of 1904 only two years after the initial prosecution. In Northern Securities Company v. United States 193 U.S. 197 (1904) the Court found that the NSC was violating the Sherman Act and ordered it broken into separate companies. An emboldened Roosevelt filed cases against 40 other companies, 25 of which were eventually broken up. Taft and Wilson followed Roosevelt's lead and filed even more antitrust cases.
Was It Necessary?
I have been doing my best to keep my opinions out of these blogs, but I feel that here I need to say something. The theory behind breaking up monopolies is that monopolies use their size to prevent anyone from entering the market. They are so large that they can afford to sell at a loss and provide products so cheaply that their competitors go bankrupt or are forced to sell out and merge with the monopoly. Once the competitor is gone, the theory states that the monopoly raises its prices and screws the consumer leading to lower quality and high prices. This is probably what you were told by your Keynesian economics teacher in high school as absolute gospel. But is it true?
Andrew Carnegie argued that the concentration of wealth was temporary, the result of a series of events that led to a group of men exploiting previously unknown technologies. Being the first to provide the benefits of those technologies to the general public is extremely profitable, but once others can copy the technologies and mimic the techniques the distribution of wealth is broadened out to a wider number of people. In other words, monopolies are temporary.
The principal complaint against our industrial conditions of to-day is that they cause great wealth to flow into the hands of the few. Well, of the very few, indeed, is this true. It was formerly so, as I have explained, immediately after the new inventions had changed the conditions of the world. To-day it is not true. Wealth is being more and more distributed among the many. The amount of the combined profits of labour and capital which goes to labour was never so great as to-day, the amount going to capital never so small. ...
You may be sure, gentlemen, that the question of the distribution of wealth is settling itself rapidly under present conditions, and settling itself in the right direction. The few rich are getting poorer, and the toiling masses are getting richer. Nevertheless, a few exceptional men may yet make fortunes, but these will be more moderate than in the past. This may not be quite as fortunate for the masses of the people as is now believed, because great accumulations of wealth in the hands of one enterprising man who still toils on are sometimes most productive of all the forms of wealth. Take the richest man the world ever saw, who died in New York some years ago. What was found in his case? That, with the exception of a small percentage used for daily expenses, his entire fortune and all its surplus earnings were invested in enterprises which developed the railway system of our country, which gives to the people the cheapest transportation known. Whether the millionaire wishes it or not, he cannot evade the law which under present conditions, compels him to use his millions for the good of the people. All that he gets during the few years of his life is that he may live in a finer house, surround himself with finer furniture, and works of art which may be added…. But truly the modern millionaire is generally a man of very simple tastes and even miserly habits. He spends little upon himself, and is the toiling bee laying up the honey in the industrial hive, which all the inmates of that hive, the community in general, will certainly enjoy.
So were these large trusts fixtures that would be able to maintain their power and grow in perpetuity or a product of a particular moment in time destined to decline over time as the men who created them disappear?
I think it is a fairly straight forward question to answer, many trusts were broken up, but many were not. The courts were divided in how to apply antitrust law and whether or not a particular trust would be busted was a coin flip. So lets look at the trusts that were not broken up- did they become large monopolies that gouged the consumer? Were they able to maintain their dominance by destroying their competition?
The first trust to survive a court challenge was the American Sugar Refining Company, which in 1907 after changing it name to Domino had an astonishing 98% of the sugar refining capacity in the US. Another suit was brought against it, but by 1921 the suit was dropped when Domino disclosed that they only had about 25% of the market share. I credit this large decline mostly because American Sugar attempted to control the price like anti-monopolists fear. It did try to raise prices because of its market dominance. When smaller companies appeared and started selling sugar cheaper it attempted to buy them up which was about as effective as trying to remove fruit flies from your house by killing them one at a time while leaving rotting fruit on the table. Currently, the largest US sugar producer is United States Sugar Corp which only produces 8% of the sugar in the US. Meanwhile, the remnants of the great American Sugar Refining Company sold in 2001 to Florida Crystals for a mere $180 million considering that it was founded with a $50 million investment had over $90 million in capital during its hay day, it really went downhill.
US Steel also survived their lawsuit. At its founding in 1901 it held over two thirds of the market share 10 years later it held only 50%. 100 years in the future, US Steel produces little more steel than it did at its founding. While still the largest steel company in the US by a hair it is hardly dominant and isn't even in the top ten list of world producers anymore. Perhaps the best description of US Steel is stagnation. It was gigantic at its time, but a combination of conservative policies and an inability to adapt to a changing market has led it to slowly lose its grip on the steel industry.
International Harvester won their anti-trust lawsuit- it was a company that held a near monopoly on farm equipment in the 20's. Today it is no longer in business, its bits and pieces were bought up by a variety of corporations while the "little" companies they were accused of abusing you probably recognize a lot better; John Deere and Ford Motor Company.
Kodak at one point held 96% of the photography market faced several antitrust cases over the years which it settled by making concessions. In 1921 it agreed to not sell film under any brand other than its own. In 1954 it had a secret process for developing their Kodacolor film, to avoid a lawsuit it agreed to license the process to third parties. Despite these concessions Kodak maintained its market dominance well into the 70's having over 90% of the market in both camera and film sales. Yet even Kodak's 100 years of dominance eventually fell to the wayside. Struggling in the 90's with adapting to the rapidly changing market Kodak remains a major player in photography but can hardly be considered a monopoly.
My point is that monopolies in a free market are not permanent. A company can only maintain its monopoly by providing consumers with better and/or cheaper products than anyone else can offer. The lack of any significant competitor at the moment does not mean that a company can relax, start charging more, lower the quality etc. Smaller companies always exist and will always have access to funding the moment there is an opportunity to fill in a gap left by the larger company. If the large company raises prices, the smaller company will charge less, if the larger company lowers quality the smaller company will offer a higher quality product. A large company can only maintain its dominance as long as it continues to produce newer, better and cheaper products faster than anyone else can. Since large companies tend to become bureaucratic, especially when the founder dies or ceases taking a direct interest in running the company they tend to stagnate. When they do there are plenty of entrepreneurs out there who will do better than them and build a company that will eventually take the throne. Worrying about how wealthy Google, Facebook, Walmart, Microsoft or Apple are today is absurd. It is unlikely that they will maintain their dominance. Already Microsoft has seen a huge decline, and Walmart has been struggling. The dominant companies of today are unlikely to be the dominant companies 50 years from now- none of them existed 50 years ago (well July 2nd Walmart will be official 50 years old). They might still exist, they might still be large but most likely newer more innovative companies will begin the process of pushing them out of the market place.Antitrust laws protect us from a threat that simply isn't real. A monopoly that exists without the assistance of government coercion doesn't have the chance to fix prices or cut quality. As long as it is legal for another company to be founded to compete it is irrelevant whether that company currently exists. As soon as the behemoth has a weak point someone will aim for it because doing so is extremely profitable. The danger of monopolies is when they are backed up by violence, whether that be the violence of governmental police force or the violence of quasi-governing organizations like the Mafia. A company that maintains its monopoly through peaceful means by offering better products and/or better prices is not a threat, and is in fact a great benefit to us all. Instead of worrying about anti-trust lawsuits our governments time and money would have been better spent preventing the growth of the Mafia, government corruption and the gangsters that used violence to control commerce in many localities. The gangster who says "If you compete with me I'll kill you" is a threat, the robber baron saying "if you compete with me I'll charge less to the customer than you ever could" is not.
I just usually go with my own taste. If I like something, and it happens to be against the law, well, then I might have a problem.- Hunter S. Thompson