Antitrust "Humbug"

Mr. Fleming, for many years New York Busi­ness Correspondent of the Christian Science Monitor, is a prominent free-lance writer on business and economics.

The antitrust laws of the United States have since the 1930′s been the subject of odd, novel, and dis­concerting administrative and Su­preme Court decisions; and such continue to be announced at a rate that shows no signs of abat­ing.

Examples of these appear in the spate of merger decisions begin­ning in 1962. The Supreme Court’s first decision under the 1950-amended antimerger Section (7) of the Clayton Act, in the Brown Shoe case (370 U.S.294) was a long one. Yet four trial court judges, with Brown Shoe as guid­ance, shortly thereafter handed down decisions which were then reversed by the high court. And in the Von’s Grocery case, de­cided May 31, 1966, the Supreme Court majority handed down a de­cision of which two dissenting Justices said:

This startling per se rule is con­trary not only to our previous deci­sions, but contrary to the language of Section 7, contrary to the legis­lative history of the 1950 amend­ment, and contrary to economic real­ity.

But merger decisions are not the only recent ones likely to dis­concert the business community. In 1966 the Federal Trade Com­mission’s arguments persuaded the Supreme Court that privately-branded milk could not be legally sold cheaper than nationally-branded milk "of like grade and quality" (unless the discount was "cost-justified") — a decision like­ly to cast a wide penumbra of il­legality over pricing in a variety of goods from milk to mattresses. Ten years earlier the same F.T.C., in the case of branded gasolines, had attacked a major gasoline marketer (Pure Oil in Birming­ham) for trying to narrow the spread between major and inde­pendent brands, which are occasionally of identical specifications.

And in 1964, in Simpson v. Union Oil (377 U.S.13) the high-court majority struck down a con­signment agreement to which the Antitrust Division, in a consent decree ten years earlier, had tacit­ly agreed — a decision which, since perhaps a sixth of the nation’s wholesale trade is done on con­signment, led a dissenting Justice to write: "Today’s upsetting de­cision carries with it the most severe consequences to a large sec­tor of the private economy."

The Belief in the Antitrust Laws

Yet, year after year American businessmen profess their funda­mental faith in the antitrust laws. The following are typical expres­sions of this credo:

First, I should like to make it very clear that I have for many years supported the basic antitrust stat­utes. I firmly believe that these laws are good laws, essential laws, and that they have been the instruments of preserving within the business com­munity the competitive environment which is the essence of a free economy.

Crawford h. Greenewalt, Board Chairman, du Pont, before the 1963 annual meeting of the Antitrust Sec­tion of the American Bar Association.

Maintenance of reasonable and effective antitrust policies is some­thing that every enlightened businessman should and does support.

M. A. Wright, President, U. S. Cham­ber of Commerce, in a speech, Sep­tember 6, 1966 in San Francisco.

And the Attorney General’s Na­tional Committee to Study the An­titrust Laws, in its March, 1955 report, declared its faith in "anti­trust fundamentals," saying:

Although many forces and other Government policies (sic) have ma­terially promoted our creative Amer­ican economy, we believe the anti­trust laws remain one of the most important.

Statements such as the above, made by businessmen, usually are a preface to suggestions for a more realistic interpretation of the antitrust laws; the combina­tion recalls the protestations of loyalty with which the King’s sub­jects in former times used to plead for redress of wrongs by the King’s agents, done presumably in disregard of his true intent and will.

There seem to be some premises here which are not altogether sound. One is that there exists an un­fortunately innate tendency, in the American economy, toward monop­oly and conspiracy. Another is that it has been the "historic mission" of the anti­trust laws to curb this; and that, in fact, these laws have done so, if only by their presence on the statute books.

A corollary follows naturally, from a businessman’s viewpoint, namely, that the only trouble with the antitrust laws is that, in their broad generality, they have come, in recent years, to be unrealisti­cally interpreted.

The Dead-Letter Years

History seldom has answers to the question, "What would have happened if…?" But to the question, "What would happen to our industrial economy if there were no antitrust laws?" there is a pretty fair answer. For more than two decades after 1890, the Sherman Antitrust Act was vir­tually a dead letter. Industrial pools to curb the cutthroat compe­tition of the 1890′s were formed, collapsed, formed again, and then replaced by huge horizontal indus­trial combinations, "conceived in the sin of violating the Sherman Act," as a judge put it fifteen years later. This was the greatest "merger period" in American his­tory, the ambitious comprehensive nature of its "attempts to monop­olize" being shown publicly by the new style of corporate names —National, United, American, Unit­ed States, Amalgamated, Allied, and so on.

For years none of these were challenged legally; most of them never were. There was no Anti­trust Division until 1903. The first famous monopoly case was started in 1906, against Standard Oil. Three "trusts" (oil, tobacco, and gunpowder) were broken up by court order in 1911, after which a half-dozen good-sized cases were brought (against United Shoe, U.S. Steel, American Can, Nation­al Cash Register, International Harvester, and Alcoa). But the legal results were disappointing to the "trust-busters," and the rest of the attempted monopolies of 1900-1901 escaped unscathed by the law.

But not unscathed by competi­tion. Some failed. Those that sur­vived failed to grow with their markets; competition swept in on their flanks. In the fall of 1901, the very year of the great merger speculation, an economist wrote in the Quarterly Journal of Econom­ics:

As this is written… almost every day brings word of the appearance of new competitors for various trusts, and the New York Journal of Commerce says that the revival of competition may be considered a general movement.

Charles J. Bullock, quoted in Trusts, Pools and Corporation, edited by Wil­liam Z. Ripley; Ginn & Co., 1905, p. 472.

The survivors lost their share-of-market most consistently when they tried to capitalize on what they thought of then, and the courts would think of now, as their "market power." The net of it all was put succinctly by the Su­preme Court in 1920 in its refus­al to break up the U.S. Steel Cor­poration: "Whatever there was of wrong intent could not be execut­ed." (251 U.S.452)

Since these combinations had already been launched when trust-busting began to be a popular is­sue, the only effect the law could have had on their market conduct would have been to make them compete less vigorously. If so, it had no apparent effect on the gen­eral vigor of the economy. Any­way, as a famous economist later put it:

The rate of increase in (indus­trial) output did not decrease from the nineties… the modern standard of living of the masses evolved dur­ing the period of relatively unfet­tered "big business"… the rate of advance… considering the spec­tacular improvement in qualities, seems to have been greater and not smaller than it ever was before.

Joseph A. Schumpeter, Capitalism, Socialism and Democracy, harpers, 3rd edition, p. 81.

Castles in the Sand

A curious paradox dogged the trail of the Antitrust Division in its earlier Section 2 (antimonop­oly) cases. Within five or ten years of each decision, it ap­peared that it wouldn’t have made much difference if the case had never been brought; the alleged "monopoly," like a sand castle, was doomed anyway.

In 1911 when the Supreme Court ruled unanimously against Standard Oil (221 U.S.1), the company had been losing ground for a decade. The 1900′s were the "twilight of the kerosene age," but Standard was also losing ground in the new gasoline busi­ness to such vigorous new compet­itors as Pure, Sun, Union, Gulf, and Texaco. Its earnings were de­clining and its dividends were smaller in 1911 than in 1900.

The court-ordered fragmenta­tion of Standard was ill-devised for trust-busting. For it created six refiner-marketing companies (Atlantic and the Standard Oil Companies of New York, New Jer­sey, Ohio, Indiana, and Califor­nia) each, on the average, with as large a share of the market in its allotted area as the parent com­pany had had for the nation as a whole. If anything, this probably enabled these survivor companies to fight the "independents" more, rather than less, effectively than a single company run from 26 Broadway could have. Neverthe­less, they continued to lose, and the independents to gain, in mar­ket share, for decades.

Other leading cases had simi­larly paradoxical economic after­maths. In 1895 the high court re­fused to condemn the American Sugar Refining Company for com­bining 98 per cent of the nation’s sugar-refining capacity (E. C. Knight, 156 U.S.1). But 30 years later sugar-refining was fiercely competitive again. In 1911 the "tobacco trust" breakup left a "big three" but a couple of years later an outside firm, R. J. Rey­nolds, transformed the business with its new burley-tobacco cigar­ette, "Camel." A 1914 monopoly case against a motion-picture pat­ents pool was won just as outside competition practically doomed the pool; a 1931 order to Fox Films to sell its shares of Loew’s barely preceded Fox Films’ failure; and the 1948 court-ordered divorce of movie studios from movie houses hit the business almost simultane­ously with TV.

In 1923 the Antitrust Division asked the courts to break up In­ternational Harvester — only sur­vivor of the several turn-of-the-­century farm-machinery mergers. Antitrust was particularly anxious to split up Harvester’s 65 per cent of the grain-binder business. The Supreme Court refused, 6 to 0 (274 U.S.693, 1927). Ten years later, the company still had two-thirds of the business in grain binders. But grain binders had been practically outmoded by the new harvesting combines.

The last of the old-fashioned big monopoly cases brought by Antitrust was against the Pull­man Company, owner of the Pull­man Sleeping Car Company and of the manufacturing company that supplied it. It was a Pyrrhic vic­tory. Pullman had indeed a na­tion-wide monopoly of sleeping car operation, but it was an eco­nomically natural one, as the Court recognized in letting a syndicate of railroads take it over from Pullman — in one piece.

But the "monopoly" (on the ground) was also both unprofit­able and ill-omened. It had earned one per cent on investment during the 1930′s; and after the war the airlines did to it just about what, a generation earlier, the automo­bile had done to the street-car monopolies. (Pullman, Inc., in­vested a good part of the proceeds from its divested sleeping cars in truck-trailer manufacture.)

Mousetrap-Maker’s Hazard

But after Pullman, Antitrust’s spectacular anti-"monopoly" cru­sades no longer led toward the an­titrust holy grail that business­men say they believe in. In its at­tacks on Great Atlantic & Pacific, Alcoa, United Shoe, du Pont (cellophane) and GM (diesel locomo­tives), it picked on companies that had succeeded by the four "i’s" — ingenuity, imagination, in­novation, and improvement. It won the A&P case on fantasy account­ing and the Alcoa and Shoe cases on a redefinition of "monopoliz­ing" to mean keeping ahead of competitors; it almost won its cellophane case on a now-discarded "relevant market" argument. The absurd criminal indictment of General Motors for revolutioniz­ing the railroad locomotive busi­ness charged that

GM captured over 84 per cent of the locomotive market during a pe­riod in which two once-substantial competitors were driven from the field. As a result… the purchasers of locomotives and the public in gen­eral have been deprived of the bene­fits of competition. (italics added)

Wall Street Journal, April 13, 1961.

GM Chairman, Frederic G. Donner, had a sardonic comment:

While a process such as this will not turn the clock back to the age of the steam locomotive, it may well cause business to pause before un­dertaking the many risks of embark­ing upon a new business venture such as the development and manu­facture of the diesel locomotive.

In the earlier cases above, the Division’s antimonopoly patrol was somewhat like an assignment to keep the Gulf of Mexico free of icebergs. But the last five cases above call to mind dissenting Su­preme Court Justice Stewart’s carefully documented comment in the Von’s Grocery case: "… the defendants are being punished for the sin of aggressive competi­tion."

"Monopoly": Fact and Fiction

The word "monopoly" as com­monly used is practically synony­mous with "sin," and is about as precise. It comes down from Eliza­bethan days, and shows it; applied to the kaleidoscopic American business economy, it fits like a stocking on a duck’s foot.

Its use as a legal "term of art" started as a fundamentally incor­rect analogy with Elizabethan mo­nopolies. The Tudor monopolies were official grants to royal favor­ites of the exclusive rights to trade in things that people couldn’t do without or find substi­tutes for, like salt. They worked like very high protective tariffs, raised prices sharply, were legally enforced with guns, and could be got around only by smuggling.

It is not surprising that the American public in the 1890′s was confused; the nascent American industrial system was something wholly new under the sun. But the courts began the error with their eyes open. Said the Ohio Supreme Court, in condemning the Stand­ard Oil Trust, after quoting a three-century-old precedent:

It is true that in the case just cited the monopoly had been created by letters patent; but the objections lie not to the manner in which the monopoly is created.

49 Ohio State, 137, 1892.

Successful businessmen soon knew better. In 1901 Andrew Car­negie and John Wanamaker were quoted as saying:

Every attempt to monopolize the manufacture of any staple article carries within its own bosom the seeds of failure… no men, or body of men, have ever been able, or will be able, permanently to hold con­trol of any one article of trade or commerce.

Quoted in Ripley, p. 448.

But having early taken off from economic reality, the courts went further in flights of fancy. In the well-known Tobacco case in 1946 (328 U.S.781) the U.S. Supreme Court said this of monopoly:

The material consideration in de­termining whether a monopoly exists is not that prices are raised and that competition is excluded, but that power exists to raise prices or to exclude competition when it is de­sired to do so. (italics added)

One might ask, "If the monopo­list has the power —as he did have under a Tudor monopoly grant —to raise prices and/or exclude competitors, why doesn’t he use it?" The answer, or the joker in this definition, is that, as Andrew Carnegie guessed and the would-be monopolists of 1901 found out the hard way, he doesn’t have such power. He cannot raise prices and exclude competitors at the same time. His higher prices will be a loud "come-and-get-it," and the bigger he is, the louder the invi­tation. It is that simple.

Or it was that simple, in the early 1900′s, when manufacture was mostly of staples, industries were distinct and compartmental­ized, and price was paramount. The story of how the would-be monopolist’s hazards have been multiplied since those days was dramatized, though not begun, with the Model T’s story in the mid-twenties. In 1923 Ford had a near "monopoly" of the lowest-price car market; Model T’s out­sold the nearest challenger (Chev­rolet) well over three to one. But four years later, the Model T was dead; the heart of its manufac­ture stopped beating. Significant­ly, perhaps, 1927 was also the first year of the annual auto model change.

Today innovations come fast, obsolescence is rapid, and the profitable life of products, serv­ices, and equipment is short. The thresholds between industries have dropped to the vanishing point. The mobility of competitive capi­tal and managerial skill into slug­gish industries has been speeded like the mobility of air-borne troops, retarded only by Sherman and Clayton Act antimerger rul­ings. Cloistered corners there may be; but no firm can count on keep­ing its feet and protecting its fu­ture except by continuously doing what got A&P, Alcoa, Shoe, du Pont, and General Motors haled into court: using ingenuity and imagination to innovate and im­prove.


Section 1 of the Sherman Act says, "Every contract, combina­tion,… or conspiracy, in re­straint of trade… is… illegal."

Some antitrust experts today feel that the prevention of busi­ness conspiracies has been the most successful part of the Sher­man Act. And no quotation from Adam Smith is more fashionable today than his whimsical observa­tion:

People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.

Wealth of Nations: Book I, Chap. X, Part II.

This tells but half the story. For the natural tendency of busi­nessmen to conspire has its own built-in "countervailing force" —their natural tendency to go it alone. This last has intermittently raised havoc with combinations and conspiracies in restraint of trade from the last decades of the nineteenth century on down through that government-spon­sored open breach in antitrust, the NRA, to the electrical equipment conspiracy of the 1950′s.

When pools and conspiracies have tried to set reasonable prices, the disruptive or centrifugal forc­es have come from within — from among their own members. To prevent this, devices have had to be used, such as the depositing of money by each member, to be for­feit to the other members on vio­lation of the agreement.

Where, on the other hand, such ad hoc agreements try to set un­reasonable (above-market) prices, the disruptive forces from within are reinforced by pressure from without. Just as the early consoli­dations found that raising prices to inviting levels defeats itself, so do conspiracies.

The courts have taken an unre­alistic view of price agreements of even the mildest nature, just as they have of "monopoly power" that has no power. Thus in the pivotal Trenton Potteries case (273 U.S. 392, 1927) the Supreme Court said:

The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices. The reasonable price today may become the unreasonable price tomorrow. (italics added)

Not so, reported a 1904 observ­er of industrial pooling agree­ments before and just after 1900:

No pool or price agreement can continue where the price has not been fixed at a reasonable figure only when the pool price is too low unduly to tempt the outsider… is its position at all secure.

Quoted in Ripley, p. 84.

In the last 30 years the anti­trust enforcement agencies have extravagantly expanded their con­cept of conspiracy, making it an "elastic, sprawling and pervasive offense" (Jackson, J., concurring, Krulewich v. U.S.336 U.S.440, 1949) embodying "conscious par­allel action," implied conspiracy, and merely inference of conspir­acy. A notable result has been a long record of immediate acquit­tals and directed verdicts of "not guilty." But an unfortunate con­sequence has been to endanger co­operative business activities; even when these are undertaken at the behest of government agencies, they may, in some future year, unless protected by a piece of pa­per from the Antitrust Division, be found criminal.


In the brilliant records of Amer­ican business achievement, the antitrust laws are being given a vast amount of undeserved credit. In practice such good as they have done, could have been done through Anglo Saxon common law, worked out by cases. The attempt to fed­eralize business morality, through laws conspicuous for their vague­ness, has turned out, after 75 years, to have chiefly resulted in the creation and growth of ever more powerful administrative agencies. An incidental, but under­standable and natural, result has been to discourage, more often than to promote, competition. Never was antitrust less needed than today — and never more broadly applied.

Over 50 years ago, when the law was very young, Supreme Court Justice Oliver Wendell Holmes wrote to an English legal friend in 1910 his private opinion that "the Sherman Act is a hum­bug based on economic ignorance and incompetence."

What he would write about it now, beggars the imagination.