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Clayton Anti Trust Act Progressive Era Essay

Events

1913Sixteenth and Seventeenth Amendments are ratifiedCongress passes Federal Reserve Act and Underwood Tariff

1914Panama Canal is completedCongress passes Clayton Anti-Trust Act, establishes Federal Trade CommissionUnited States occupies Vera Cruz, Mexico

1915Congress passes La Follette Seaman’s ActUnited States invades Haiti

1916Congress passes Workingmen’s Compensation Act, Federal Farm Loan Act, Warehouse Act, Adamson Act, and Jones ActPancho Villa attacks New MexicoUnited States invades Dominican Republic

1917United States buys Virgin Islands

Key People

Woodrow Wilson - 28th U.S. president; outlined New Freedom domestic policies to lower protective tariff and tame big business

Venustiano Carranza - General who took power in Mexico after 1914 coup ousted revolutionary leader Victoriano Huerta

Pancho Villa - Mexican rebel who tried to provoke war between the United States and Mexico in order to oust Venustiano Carranza from power

John J. Pershing - General sent by Wilson to pursue Villa’s band of Mexican rebels into Mexico in 1916

The New Freedom

Even though Woodrow Wilson won the vast majority of electoral votes in the election of 1912, he received only 41 percent of the popular vote, ostensibly leaving him with little mandate. Despite this handicap, Wilson managed to accomplish every one of his major domestic goals on his progressive New Freedom agenda. In just four years, Wilson reduced the tariff, passed more anti-trust legislation, and reformed the banking system.

Wilson began in 1913 by pushing Congress to pass the Underwood Tariff, which drastically reduced duties on foreign goods from an average rate of 40 percent to an average rate of 25 percent. Congress compensated for the loss of revenue by creating a national income tax under the Sixteenth Amendment, another major progressive achievement of 1913.

Banking Reform

Next, Wilson took on the banking industry, which despite industrialization and the population boom had remained essentially unchanged since the Civil War. In 1913, Wilson and Congress passed the Federal Reserve Act to create a decentralized national bank comprising twelve regional branches. Collectively, all the private banks in each region owned and operated that respective region’s branch. However, the new Federal Reserve Board had the final say in decisions affecting all branches, including setting interest rates and issuing currency. This new banking system helped stabilize national finances and credit and helped the financial system survive two world wars and the Great Depression.

Other Progressive Legislation

Wilson also continued to crack down on trusts, most notably by convincing Congress to pass the Clayton Anti-Trust Act in 1914. Unlike the Sherman Anti-Trust Act, the Clayton Anti-Trust Act actually gave lawmakers the power to punish monopolistic corporations. Furthermore, it legalized labor unions and their right to strike peacefully.

Congress passed a wide variety of other progressive legislation during Wilson’s first term. The La Follette Seaman’s Act of 1915, for example, protected sailors’ rights and wages on merchant ships, while the Federal Farm Loan Act and the Warehouse Act of 1916 gave farmers access to easy credit. That same year, Congress also passed the Workingmen’s Compensation Act to help support temporarily disabled federal employees and the Adamson Act to establish an eight-hour workday for all employees on interstate railroads. With the ratification of the Seventeenth Amendment in 1913, Americans won the right to elect U.S. senators directly.

Wilson’s Foreign Policy

In foreign affairs, Wilson flatly rejected Roosevelt’s Big Stick Diplomacy and Taft’s Dollar Diplomacy in favor of a more moralistic approach to international relations. He immediately withdrew federal support for American investors abroad and pressured Congress to give increased (but not complete) control of the Panama Canal to Panama. In 1916, he signed the Jones Act, which made the Philippines an official U.S. territory and promised Filipinos independence once they established a stable government. Wilson did, however, send troops to Haiti, the Dominican Republic, and Cuba and purchased the U.S. Virgin Islands from Denmark in 1917.

The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to prohibit abusive monopolies, and in some ways it remains the most important.

Trusts and Monopolies

A trust was an arrangement by which stockholders in several companies transferred their shares to a single set of trustees. In exchange, the stockholders received a certificate entitling them to a specified share of the consolidated earnings of the jointly managed companies. The trusts came to dominate a number of major industries, and were, in effect, monopolies.

A monopoly is a situation in which there is a single supplier or seller of a good or service for which there are no close substitutes. Economists and others have long known that unregulated monopolies tend to damage the economy by (1) charging higher prices, (2) providing inferior goods and services and (3) suppressing innovation, as compared with a competitive situation (i.e., the existence of numerous, competing suppliers of the good or service).

The most infamous of the trusts was the Standard Oil Trust, which was formed in January, 1882. At that time, Standard Oil and its affiliates controlled more than 90 percent of the oil refining capacity and most of the oil marketing facilities in the U.S. Trusts were also established in numerous other industries, some of the largest of which were sugar, tobacco, railroads, steel and meatpacking.

The idea of the trust was conceived by Samuel Dodd, an attorney for Standard Oil. In the case of this company, a board of trustees was set up and it was given control of all of the Standard Oil properties. Every stockholder received 20 trust certificates for each share of Standard Oil stock. All profits from the component companies were sent to the nine trustees, who set the dividends. The nine trustees also selected the directors and officers of all the component companies. This allowed Standard Oil to function as a monopoly.

Trusts used a number of techniques to eliminate competitors, including (1) buying them out, (2) temporarily undercutting their prices, (3) forcing customers to sign long-term contracts (4) forcing customers to buy unwanted products in order to receive the products they wanted and (5) dispatching thugs to use intimidation and violence when all other means of persuasion failed.

The Sherman Act

John Sherman (1823-1900) was the younger brother of the American Civil War general William Tecumseh Sherman. He became a U.S. senator from Ohio and served as a chairman of the Senate finance committee. He also served as a member of the U.S. Cabinet, including Secretary of State under President William McKinley and Secretary of the Treasury under President Hayes. Sherman was an expert on the regulation of commerce and was the chief author of the Sherman Antitrust Act.

This ground breaking piece of legislation was the result of intense public opposition to the concentration of economic power in large corporations and in combinations of business concerns (i,e., trusts) that had been taking place in the U.S. in the decades following the Civil War. Opposition to the trusts was particularly strong among farmers, who protested the high charges for transporting their products to the cities by railroad.

The Sherman Antitrust Act was the first measure enacted by the U.S. Congress to prohibit trusts (or monopolies of any type). Although several states had previously enacted similar laws, they were limited to intrastate commerce. The Sherman Antitrust Act, in contrast, was based on the constitutional power of Congress to regulate interstate commerce. It was passed by an overwhelming vote of 51 to 1 in the Senate and a unanimous vote of 242 to 0 in the House, and it was signed into law by President Benjamin Harrison.

The first part of Section 8 of the U.S. Constitution (with the interstate commerce clause underlined) states:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; . . .

The Sherman Antitrust Act (the full text of which can be found here) authorized the Federal Government to dissolve the trusts. It began with the statement: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." And it established penalties for persons convicted of establishing such combinations: ". . . shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court."

Enforcement

For more than a decade after its passage, the Sherman Antitrust Act was invoked only rarely against industrial monopolies, and then not successfully. Ironically, its only effective use for a number of years was against labor unions, which were held by the courts to be illegal combinations.

This was the result of intense political pressure from the trusts together with the loose wording of the Act. Its critics pointed out that it failed to define such key terms as combination, conspiracy, monopoly and trust. Also working against it were narrow judicial interpretations as to what constituted trade or commerce among states.

Five years after its passage, the Supreme Court in effect dismantled the Sherman Antitrust Act in United States v. E. C. Knight Company (1895). The Court ruled that the American Sugar Refining Company, one of the other defendants in the case, had not violated the Act despite the fact that it controlled approximately 98 percent of all sugar refining in the U.S. The Court's explanation was that the company's control of manufacturing did not constitute control of trade.

President William McKinley launched the trust-busting era in 1898 when he appointed several senators to the U.S. Industrial Commission. The Commission's subsequent report to President Theodore Roosevelt then laid the groundwork for Roosevelt's attacks on trusts and finally resulted in the successful employment of the Act.

In a seminal 1904 decision, the Supreme Court upheld the Federal Government's suit under the Sherman Antitrust Act to dissolve the Northern Securities Company (a railroad holding company) in State of Minnesota v. Northern Securities Company. Then, in 1911, after years of litigation, the Court found Standard Oil Company of New Jersey in violation of the Sherman Antitrust Act because of its excessive restrictions on trade, particularly its practices of eliminating competitors by buying them out directly and by driving them out of business by temporarily slashing prices in a given region.

In this historic decision, the Supreme Court established an important legal standard termed the rule of reason. It stated that large size and monopoly in themselves are not necessarily bad and do not violate the Sherman Antitrust Act. Rather, it is the use of certain tactics to attain or preserve such position that is illegal.

The Court ordered Standard Oil to dismantle 33 of its most important affiliates and to distribute the stock to its own shareholders and not to a new trust. The result was the creation of a number of completely independent and vertically integrated oil companies, each of which ranked among the most powerful in the world. The consequent vigorous competition gave a big impetus to innovation and expansion of the oil industry as a whole.

Subsequent Legislation

In 1914 Congress passed two measures that provided additional support for the Sherman Antitrust Act. One was the Clayton Antitrust Act, which elaborated on the general provisions of the Sherman Act and specified a number of illegal practices that either contributed to or resulted from monopolization. It explicitly outlawed commercial practices such as price discrimination (i.e., charging different prices to different customers), the buying out of competitors and interlocking boards of directors. The other was the establishment of the Federal Trade Commission, an agency with the power to investigate possible violations of antitrust laws and to issue orders forbidding unfair competitive practices.

Antitrust enforcement waned during the booming 1920s, but it was revived during the administration of President Franklin Delano Roosevelt and additional acts were passed to bolster the government's antitrust powers. The Robinson-Patman Act of 1936 strengthened the Clayton Act by prohibiting large sellers from offering different prices to different buyers if it resulted in harm to even a single small firm. The Celler-Kefauver Act of 1950 further strengthened the Clayton Act by preventing one firm from merging with a competitor by purchasing its physical assets if it resulted in a substantial lessening of competition.

The most successful application of the Sherman Antitrust Act during the second half of the 20th century was the breakup of the American Telephone and Telegraph (AT&T) monopoly, which was agreed upon in early 1982 and went into effect on January 1, 1984. This enforcement had profound effects not only on the telecommunications industry but also on the economy as a whole.

The Act was also used in the attempt to attempt to rein in the allegedly abusive monopolistic practices by Microsoft Corporation, with a trial that began in 1998. However, many observers feel that the government failed to take sufficiently strong corrective measures despite winning both the original trial and an appeal. This is widely attributed to politics rather than the merits of the case.

Created June 17, 2004. Copyright © 2004 The Linux Information Project. All Rights Reserved.

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