12 The Use and Abuse of Antitrust From Cleveland to Clinton: Causes and Consequences George Bittlingmayer The Struggle Between Presidents and Big Business: Winners, Losers, and Business Confidence

Dramatic conflict between the president and business is a recurring theme in U.S. history. Nineteenth-century disputes over banking, such as the struggle between Nicholas Biddle and Andrew Jackson, provide early examples. The rise of the modern corporation toward the end of the nineteenth century resulted in an intensification of this conflict. In response to the emerging “trusts” and their successors, the modern industrial corporations, individual states, and the federal government passed “antitrust” laws in the 1880s and 1890s. However, the new laws by themselves proved ineffective in curbing the growth of big business, partly because the federal judiciary resisted interpreting early antitrust laws aggressively and partly because New Jersey and Delaware offered a safe legal haven. Ironically, the new laws drove the trusts underground or stimulated the formation of corporations that were beyond the reach of the law as the courts were then interpreting it. The Supreme Court justices, steeped in the common law tradition on which the Sherman Act was allegedly based, were not ready to condemn big business.

The turning point came when Theodore Roosevelt initiated a series of antitrust suits against big business. His targets included a major railroad merger, the Chicago meat packers Armour and Swift, and Rockefeller’s Standard Oil. However, the lawsuits by themselves likely would not have been enough to sway the high court. It was Roosevelt’s simultaneous use of the bully pulpit that persuaded the Supreme Court to reverse itself and rescue the Sherman Act from irrelevance. Roosevelt turned a legal and economic question into a highly charged political issue and showed that government could indeed make life tough for the trusts. The Supreme Court bowed to this political reality—though by the narrowest of margins, perhaps for fear that it would lose influence on the trust issue if it did not.

Other presidents picked up where Roosevelt left off, and the list of trustbusters turns out to be surprisingly long and bipartisan. Roosevelt’s successor, William Howard Taft, though serving only one term, actually filed more cases than did Roosevelt. Taft’s attorney general sued to break up U.S. Steel and promised to break up the country’s one hundred largest corporations. Woodrow Wilson enacted several major pieces of antitrust legislation and conducted a vigorous campaign of enforcement. The trust-busting tradition surfaced again under Herbert Hoover, Franklin Roosevelt, Harry Truman, Dwight Eisenhower, and John Kennedy. In fact, Kennedy’s famous May 1962 confrontation with Big Steel was accompanied by a major antitrust initiative.

Though the history of these struggles is well-known, their treatment by historians, even by economic historians, is unsatisfying. Historians have told us what happened: presidents and big business frequently clashed. However, the historians have not offered compelling reasons for the struggles between government and business. They also haven’t offered insight into the consequences.

This neglect of the “why” and the “so what” of antitrust is unfortunate. The neglected “why” can help us illuminate the nature of economic policy and, in particular, the motivations of the chief executive. For a number of policies—and antitrust is a leading example—economists have not reached a consensus about why government does what it does. The history of presidential use of antitrust offers some clues. Presidents undertook major antitrust initiatives either (1) after a period of sustained economic change as a reaction to that change, or (2) as a way of covering up policy failures. Antitrust originated in the far-reaching economic changes that took place a century ago and received a new endorsement after the far-reaching changes that occurred in the 1920s. A similar, though muted, reaction occurred after the 1980s merger wave, which led to stepped-up antitakeover legislation and court opinions less friendly toward takeovers.

The neglect of the “so what” of antitrust is also unfortunate because antitrust mattered. In the first instance, and perhaps surprisingly, it mattered for the stock market and the economy. Antitrust was bad for the economy because politically charged and volatile attacks on business undermined business confidence. Why would corporations make investments when the future of the corporate form was uncertain? A decline in business confidence is a plausible consequence of volatile, politically charged trustbusting.

The assertion that trust-busting affected the economy is perhaps surprising today. However, it was not surprising to eminent economists writing when the trusts were under attack. Ninety years ago, the charge that Theodore Roosevelt had caused the panic of 1907 was commonplace. But the panic of 1907, though extreme, was not unique. The evidence supports the view that sporadic attacks on business hurt the stock market and the economy in 1919–1920, 1929–1930, 1937–1938, and at several other crucial points.

If beating up on big business hurts stock prices—if it lowers the traded value of big business—does a friendly attitude increase the value of business? The answer turns out to be “yes.” A number of presidencies—including those of McKinley, Coolidge, Reagan, and, perhaps surprisingly, Clinton—have been marked by a friendly attitude toward business and a buoyant stock market and robust economic performance. The strong stock market returns of the last fifteen years of the twentieth century were the consequence of two happy circumstances—low inflation and policies that, more so than during any other fifteen-year period of our history, have accepted the modern corporation and the merger of large firms.

Given its woeful economic effects, antitrust also mattered for the fortunes of the two major parties and individual presidents. For example, the conflict over antitrust policy resulted in Theodore Roosevelt’s Bull Moose candidacy in 1912 and contributed to the Democratic victory. Indeed the role and power of the large corporation was the single defining issue of the election of 1912. In addition, much contemporary commentary and the relevant evidence support the notion that Wilson’s policies hampered economic recovery. Big business and Wall Street were afraid, and rightly so. America’s antitrust struggles also explain some aspects of U.S. policies during World War I, in particular the suspension of antitrust under the War Industries Board, which gave business a safe harbor at the expense of government control.

Another example further illustrates the possible influence of antitrust on the course of presidential history. Coolidge became president by accident in 1923. He deliberately pursued antitrust liberalization over the next five years. Hoover reversed this policy in the fall of 1929, and this shift put into doubt the legal validity of the very large number of mergers that had occurred under Coolidge. This uncertainty arguably laid the basis for the 1930 recession, and hence can be viewed as a precipitating factor in the Great Depression and in Hoover’s defeat in 1932.

One point deserves emphasis: The shift in antitrust policy probably created an ordinary recession; it did not cause the Great Depression. The cause of the Depression has to be found in whatever turned an ordinary downturn into a world-class, one-third decline of output. Most plausibly, the one-third decline in the price level, aggravated by U.S. adherence to the gold standard, explains the depth of the Great Depression itself. Uncertainty about the future course of government policies engendered by Hoover’s New Deal-like initiatives may very well have contributed to a decline in investment by business, a decline in durable goods expenditures by the public, and increased hoarding of money. The latter no doubt contributed to the decline of the price level.

A final example concerns the very close election of 1960. With a more robust economy, Richard Nixon would likely have beaten John Kennedy. One possible cause of the low economic growth of the late 1950s may very well have been the revival of antitrust in the late Eisenhower administration. This revival was consistent with Eisenhower’s concern about the “military-industrial complex.” Ironically, it may have cost Nixon his first chance to move into the White House.

The view advanced here, that (1) the Sherman Act had its origins in the gains and losses of a dynamic economy and (2) the Sherman Act caused economic damage when applied in a highly charged political environment, solves some riddles. This theory of the origins and effects of antitrust explains the very large amount of attention paid to the trust problem. New business forms created winners and losers on a grand scale. The political struggle and ensuing uncertainty created recessions and stock price volatility.

However, this new view of the Sherman Act also raises a provocative question. If slowing down the redistribution of wealth that occurs with dynamic markets also hurts economic growth and financial markets, was this a price that presidents and others involved in trust-busting willingly paid? The evidence suggests that most presidents were unaware of the full extent of the trade-off.

The Modern Corporation: Its Economic and Political Consequences

From the vantage point of the early twenty-first century, we’ve lost sight of a fact that was once obvious. In the words of historian Martin Sklar:

The trust question was the corporation question. The great antitrust debates were . . . in essence, debates about the role and power of the large corporations in the market and in society at large, and debates about the corresponding role and power of government in relation to the emergent corporate order.[1]

A hundred years ago, the debate revolved around a single “trust and corporation problem.” Remnants of this view were evident as recently as two decades ago, when some legal scholars and economists took the view that the defense of small business and worthy men beset by larger, more efficient competitors was still a valid goal of antitrust. That debate seems quaint today. Most observers have accepted the modern corporation and the goal of economic efficiency. Today’s debate over antitrust revolves around how best to protect consumers rather than how best to protect inefficient competitors.

Why was the “trust and corporation problem” important?

(1) The modern corporation constitutes the single most important innovation in the organization of business. The modern corporate form is responsible in large part for the phenomenal increase in the standard of living of the last century. By means of limited liability, the corporation can raise large amounts of capital. By means of the holding company and merger, it solves problems of coordination and control and allows valuable assets in the form of a going concern to be transferred to more valuable uses. We tend naturally to view our improved conditions as the result of a long list of specific technical advances—the automobile, the airplane, electrical appliances, or the computer. But we owe our well-being to organizational as well as physical innovation. The application of new technology on a wide scale requires large amounts of capital. Indeed, even the prospective rewards for would-be innovators depend on the institutions available to implement their innovations. The integrated circuit finds wider application and has generated higher social returns because corporations produce the final products—everything from microwave ovens to handheld games to supercomputers. Any complete explanation of our material progress over the last century would also have to emphasize the role of new forms of business organization and, in particular, the modern corporation.[2]

(2) The rise of the modern corporation and new technologies generated winners and losers, and the losers turned to the political process. A hundred years ago, ever cheaper railroad transportation helped efficient large-scale producers and hurt their existing smaller competitors. Cheap kerosene was a boon to the average household but harmed candle and whale oil producers. The refrigerated railcar made centralized slaughter of hogs and cattle possible but hurt regional slaughterhouses, in particular those along the eastern seaboard. In the 1920s, the rapidly growing use of the automobile, electricity, and other innovations created higher standards of living for many and “profitless prosperity” for others. Today, information technology generates winners and losers—firms and workers whose value is increased in the marketplace by the computer and telecommunications technology, and those whose value is decreased. Even within high-tech industries, new developments create winners and losers.[3]

(3) In the U.S., the political reaction to these gains and losses often took the form of antitrust. If large firms threatened small firms, then the political policies designed to protect small firms would focus on firms grown large through merger or through colorably unfair business practices. At several points, the legal struggle threatened to involve nearly every major corporation or subject major sectors of the economy to state control on prices or profits. This happened formally with railroads, utilities, and phone companies, and informally with steel.

(4) Antitrust attacks were often linked with other antibusiness initiatives. At the turn of the century, for example, antitrust initiatives were linked in time with efforts to enact personal and corporate income taxes, with agitation against the “money trust,” and with the creation of federal bureaucracies with power over business. During the late 1930s, antitrust chief Thurman Arnold’s attack on business practices was accompanied by an attack on America’s “hundred wealthy families” and the Temporary National Economic Committee hearings.[4]

(5) Attacks on business, though sometimes largely rhetorical, often posed a substantial threat to the continued vitality of the corporation. This is true even if the country never actually “went socialist.” There were points at which there was an appreciable likelihood—perhaps small but still not negligible—that the country would go ’round the bend. A new antitrust initiative might have been successful in reaching its rhetorical aims, or it might have signaled the first step in a broader panoply of antibusiness policies. At such points, it makes sense for business to put its investment on hold, with predictable consequences.[5]

Fixed Costs: An Economic and Political Perennial

The trust and corporation problem had its origins in the rise of the modern corporation a century ago. One important complication arose from the problem of fixed costs. Many of the early corporations involved in transportation and manufacturing produced under conditions of high fixed costs. However, high fixed costs implied that an industry might not be able to conform to the textbook model of competition. Some sort of “noncompetitive” conduct often emerged, generating situations that were ripe for political exploitation. Even with a good-government view, the fixed-cost problem generates a policy challenge, namely that of separating good, “efficient” restrictions from “bad” inefficient restrictions.

The fixed-cost problem arose from new technologies. Substantial fixed costs came to characterize manufacturing, transportation, and telecommunications. Paradoxically, the decline in transportation costs that accompanied the rise of the railroad and steamship meant that a small, local monopoly was often displaced by regional, national, or even worldwide oligopoly of large firms.

In an older literature, the existence of several firms with high fixed costs implied “cutthroat competition,” competition that drove prices below the costs of production. The idea has had fluctuating fortunes. It initially received the endorsement of leading economists but then came in for a good deal of derision. Today, the problems posed by fixed costs and the possibility of cutthroat competition have experienced a revival among economic theorists. Modern economic theory has shown that, excepting special circumstances, fixed costs are incompatible with a competitive equilibrium.[6] This opens the door to something else: prices too low to cover socially-justified costs, cartels or merger, for example.

The emergence of fixed costs generated reaction and counter-reaction on the part of business and the government. The original reaction took the form of pools in railroading and of trusts and cartels in manufacturing. Some companies also adopted merger or the holding company, a form made possible by New Jersey in the late 1880s. With the increased pressure of antitrust at both the state and federal levels during the 1890s, many more corporations sought refuge in merger and the holding company. The fixed-cost problem and the public’s and government’s reaction to the original cooperative forms—trusts, pools, cartels, and merger—are an important part of the story.

Though some firms took refuge in merger, many others continued as separate entities linked through cooperative agreements. It was a simple question of relative costs. Though cartels suffered occasional breakdowns, independent firms under the control of owner-managers were more efficient.

The question of what to do about these cooperative forms of organization surfaced repeatedly in the trust debate. The vague prohibitions of the Sherman Act against restraints of trade can be interpreted as a plea to the courts to find a solution. During Theodore Roosevelt’s administration, the fixed-cost problem was reflected in the Hepburn bill—proposed legislation that would have allowed “reasonable restraints of trade.” With the failure of this initiative, attention turned to Arthur Jerome Eddy’s “open-price” or “association movement” and Judge Gary’s steel industry dinners. The fixed-cost problem also surfaced in Supreme Court decisions that allowed for reasonable restraints of trade and in the debate leading up to the creation of the Federal Trade Commission (FTC) in 1914. Indeed, the hope was that the trade commission would be able to offer guidance on the nettlesome issues raised by restraints of trade. However, when it was finally allowed to do so in 1920s, the Supreme Court rebuffed its efforts.

In the meantime, the idea of a safe haven for cartels was implemented during World War I in the form of Webb-Pomerene exemptions for shipping and export cartels, and the War Industries Board. After the war, efforts to establish a peacetime industries board foundered, but antitrust chief “Colonel” Donovan at the Justice Department along with William Humphrey at the FTC continued with sub-rosa efforts to promote cooperative forms of organization during the 1920s. Beginning in the early 1920s, Commerce Secretary Herbert Hoover promoted similar aims, with policies designed to encourage the exchange and dissemination of information at the industry level.

The fixed-cost problem surfaced again in the infamous 1933 Appalachian Coals decision. Paying close attention to developments in the political world, the Supreme Court briefly returned to a “rule of reason” approach to cartels and approved a joint sales agency covering roughly 10 percent of U.S. production.

Possibly the most famous attempt to deal with the consequences of the fixed-cost problem was the National Industrial Recovery Act, enacted in 1933 close on the heels of the Appalachian Coals decision. The NIRA was the centerpiece of Franklin Roosevelt’s First Hundred Days. It created the National Recovery Administration (NRA). Historian Robert Himmelberg convincingly argues that the NRA had its origins in the War Industries Board and the pro-association-movement policies of the antitrust agencies during the 1920s. In fact, Roosevelt had been a trade association lawyer.

The NRA was the culmination of antitrust reform efforts that began with the panic of 1907 and the ill-fated Hepburn Bill. One continuous thread connects the Sherman Act, the early cartel cases such as Trans-Missouri and Addyston, Theodore Roosevelt’s proposed Sherman Act amendments to allow “reasonable restraints of trade,” Eddy’s “open-price associations,” Judge Gary’s dinners, the Federal Trade Commission Act, antitrust exemptions to export associations and ocean shipping, Bernard Baruch’s War Industries Board, the activities of Hoover as Commerce secretary and Colonel Donovan as antitrust chief, the discussion over antitrust reform during Hoover’s term as president, and the short-lived reforms under the NRA.

The Supreme Court declared the National Recovery Act unconstitutional in 1935, and no further attempts were made to provide a statutory haven for cartels. Over the next few decades, manufacturing industries that operated under substantial fixed costs—steel and cement, for example—adopted a variety of forms to deal with the problem: illegal cartels, vertical integration, basing point pricing, merger, and foreign ownership. A number of other industries characterized by high fixed costs—notably railroads, telephony, trucking, and airlines—either were already subject to federal or state regulation of price and entry or became subject to such a regime. In all of these cases, whether steel, cement, or airlines, the industries arguably operated with less efficiency than they would have under a system of self-regulation disciplined by common law courts, free entry, and the emergence of new products.

Presidents and Turning Points

President Benjamin Harrison signed the Sherman Antitrust Act into law in July 1890. Early enforcement was sporadic. Indeed, early legal commentary held that the new law either merely codified the common law—and hence implied no large changes for the legality of trusts—or was bound to have limited reach because of constitutional limitations. E.C. Knight, the case against the infamous Sugar Trust, proved these doubters right. The case, decided in 1895, put merger out of reach of the Sherman Act, because it held that the trade in shares that effectuated a merger was not interstate commerce. Grover Cleveland’s attorney general, Richard Olney, had already been skeptical of the Sherman Act’s reach. This decision only confirmed his suspicion.

It would be difficult to exaggerate the importance of Knight. The case created a well-defined safe haven for the trusts—namely merger. At the same time, Trans-Missouri and Joint Traffic, both cases against railroads, and the Addyston Pipe, filed against an industrial cartel, established the per se rule against cartels. The resulting legal scissors created a clear incentive for the trusts to merge—and merge they did, on a scale that has not been equaled, adjusting for the size of the economy. The ensuing Great Merger Wave of 1898–1902 involved roughly half of U.S. industrial capacity and created or greatly augmented many large firms that were household words through much of the twentieth century, including General Electric, DuPont, U.S. Steel, and Standard Oil.

The trusts played a secondary role in the election of 1896. The main issue was the currency question. However, it was clearly understood that the victory by William Jennings Bryan would imply changes for the trusts as well. Many commentators have stressed the possible link between the election of 1896 and the recession that occurred the same year. The fear of limitless money creation under Bryan’s proposed free silver program may have generated part of the slump, but the prospect of stepped-up and politicized attacks on corporations may have played a role as well.

With the election of 1896 decided and William McKinley in office, the economy grew at a remarkable pace over the next four years. From a monetarist’s view, one factor may have been the discovery of gold in Alaska. Arguably, the safe haven for trusts and widespread mergers of the same years also played a role. Though a renewed candidacy by Bryan in 1900 appears to have cast a momentary shadow over the economy, the economy turned robust again after the election.

The assassination of McKinley in September 1901 proved to be a crucial event. It propelled “that cowboy,” Theodore Roosevelt, into the presidency. In fact, the attack on McKinley and his death a few days later unsettled the stock market. Note that Kennedy’s assassination did not have similar effects. The mere fact of a lone madman attacking the president would not and should not rattle markets. Rather, commentary at the time and circumstantial evidence implicates the trust-busting inclinations that Roosevelt had already revealed as governor of New York.

Wall Street’s suspicions proved well-founded. The most important case of Roosevelt’s first term stemmed from the Northern Securities merger. On the basis of the facts and the law, the merger was beyond the reach of the law, by virtue of E.C. Knight. However, the merger generated strong emotions, and Roosevelt communicated his determination to overthrow legal precedent. Arguably, the fear that Roosevelt would be successful and attack other larger mergers contributed to the rich man’s panic of 1903. In a 5–4 decision in 1904, a divided Supreme Court, in fact, overturned the Sugar Trust decision and held the Northern Securities merger in violation of the Sherman Act. This case marked the beginning of twentieth-century trust-busting.

However, 1904 was also an election year. Roosevelt’s attorney general showed sensitivity to business fears when he said immediately after the decision there would be “no running amok” on antitrust. Roosevelt and Congress undertook administrative measures, forming both the Bureau of Corporations and the Antitrust Division of the Justice Department. But they did not initiate any more aggressive, high-profile cases.

This changed in 1906. Standard Oil had been one of the pioneering trusts, and independent oil producers had attacked it for two decades. Two circumstances may explain the escalating attacks of 1900–1906. First, the discovery of crude in Texas depressed crude oil prices, squeezing the margins of Pennsylvania producers. Second, Ida Tarbell had written a series of highly popular muckraking pieces about Standard Oil. The stage was set for a number of investigations and the November 1906 antitrust filing.

The Standard Oil case generated interest for a number of reasons. It represented the first attempt to use the Northern Securities precedent—which involved a railroad merger—against a large industrial trust. Moreover, when the case dragged on in 1907, Roosevelt’s attorney general threatened to institute criminal proceedings—raising the prospect of substantial jail time for Rockefeller and for other leading industrialists. Third, a successful prosecution of Standard Oil would put in jeopardy nearly every major industrial consolidation. The legal posture at the time was that a violation of the Sherman Act—“bad behavior” under the antitrust laws—carried the punishment of dismemberment. This satisfied the political craving to undo the Great Merger Wave that E.C. Knight had permitted, but it would have implied a costly and drawn-out legal battle between government and the trusts. Finally the Standard Oil case generated uncertainty because Roosevelt backed up the legal assault with a wildly popular political assault on the trusts. Two further major cases, against the Tobacco Trust (American Tobacco) and the “Gunpowder Trust” (DuPont), added to the sense that large changes were afoot.

The assault on the trusts was accompanied by what came to be called the panic of 1907, which was marked by a 50 percent decline in stock prices and a one-third decline in output over the twelve months ending December 1907. Roosevelt’s critics blamed the panic on his trust-busting, and many of his friends even urged him to suspend his attacks or reverse course. In a phrase that reverberated through ensuing decades, Roosevelt responded that he had not caused the panic, but rather that “malefactors of great wealth” had provoked it in order to discredit his policies.

In fact, Roosevelt began pulling his antitrust punches in late 1907 and started to urge antitrust reform to allow “reasonable restraints of trade.” The proposed legislation, which provided for an agency that would have passed judgment on proposed cooperative arrangements, eventually died, in large part because it would have strengthened the hand of the executive.

Roosevelt’s successor was William Howard Taft. Taft was the author of the 1898 circuit court opinion in Addyston Pipe, which had established the per se rule against price fixing. Indeed, Taft’s circuit opinion became more famous than the Supreme Court opinion that affirmed it in 1899. He argued that a per se prohibition of cartels under the Sherman Act merely codified the common law, though recent scholarship disputes this claim.[7] Ironically, his Addyston opinion had accelerated the merger wave in which many large corporations were formed.

Taft, besides having shaped early antitrust doctrine, was also a very stubborn man. Against this background, it is not surprising that he pursued an even more aggressive antitrust policy than did Roosevelt. At one point, his attorney general threatened to break up the nation’s hundred largest corporations and send corporate officials to jail. Taft saw himself restoring an idealized nineteenth-century competition. “We must go back to competition: If that is impossible, then let us go to socialism, for there is no way between.”[8] His most famous case involved U.S. Steel, which, with Roosevelt’s approval, had acquired Tennessee Coal and Iron in the depths of the 1907 panic.

Taft’s trust-busting was also accompanied by troubled financial markets and charges that his policies undermined business confidence. Unlike Roosevelt, Taft freely admitted that his policies “may make business halt.” In a letter to his brother, he wrote: “We are going to enforce that law or die in the attempt.” The words were prophetic.

Roosevelt, piqued because he was named as the handmaiden of the trusts and sensing that Taft was vulnerable, staged his celebrated Bull Moose candidacy. Taft and Democratic challenger Wilson adopted a strong antitrust position, while Roosevelt viewed trusts as engines of progress in part and sought to distinguish good and bad trusts. The debate over the trusts was the single defining issue of the election of 1912. A sullen Taft did little campaigning, in fact. His only goal was to deny Roosevelt the White House. With the benefit of hindsight, it is possible to argue that had Taft shown more discretion and less valor, he would not have provoked Roosevelt into running, the economy would have done better, and Taft would have been reelected.

After Wilson’s victory, the trust issue continued as one of the major policy topics. In the 1911 Standard Oil and American Tobacco opinions, the Supreme Court had upheld the divestiture of these two trusts, but also had included language friendly to the “good trusts” view. Congressional attempts to take back the initiative resulted in the Clayton and Federal Trade Commission Acts. At the same time, concern about the “money trust” resulted in two major reforms. The Federal Reserve Act of 1913 gave the U.S. a central bank. At one level, this was a response to the perceived lack of “elasticity” in the banking system during the panic of 1907. At another level, it established a counterweight to influential bankers, like J.P. Morgan, who had served as lenders of last resort. The second related reform emerged from Pujo Investigation. This investigation, which concerned the alleged influence of the “money trust” over industry, did not result in new law, but prominent investment bankers removed themselves from the boards of major industrial firms to avoid trouble.[9]

Wilson’s first administration was not marked by a robust economy. Critics charged that unfriendly business policies hurt business confidence. Indeed the Wilson administration admitted as much. In January 1914, Wilson told Congress, “The antagonism between business and government is over.”[10] But it was not over, and his administration seemed divided between faithfulness to the slogans of 1912 and the desire to create a favorable business climate. World War I provided a new dimension. U.S. opportunities for ocean transport and export provided rhetorical cover for antitrust exemptions to shipping and export associations. The need to secure industrial cooperation in the war effort once the U.S. entered the war formally in 1917 caused the Wilson administration to grant a long-standing request for antitrust exemptions along the lines proposed in Roosevelt’s ill-fated Hepburn bill of 1908. The War Industries Board administered the resulting industry associations. Arguably, the strong performance of the U.S. economy during the war was due in part to the restoration of business confidence—the knowledge that the Wilson administration was a good deal less likely to attack business on antitrust grounds. In fact, the newly created FTC, which many viewed as a potential rogue elephant from the very beginning, did not receive substantial funding for several years after its creation.

After the November 1919 Armistice, U.S. policies changed rapidly. Industry hopes of a peacetime industries board were not fulfilled. In fact, public opinion turned hostile. The inflation generated by wartime finance created a “cost of living” controversy, complicated by a “war profiteer” controversy. Together with high-profile antitrust cases, sharpened antibusiness rhetoric at the state and federal level in 1919–20, and sharp deflation, the business climate worsened, increasing the chances of Republican victory in 1920.

The Republicans did win, and Harding’s administration continued a moderately aggressive antitrust policy, though Commerce Secretary Hoover waged bureaucratic resistance to the campaign against “open price associations” by championing the cause of information exchange at his agency. Harding’s death in 1923 set the stage for more radical reform. Under Calvin Coolidge, antitrust policy was scaled back so far that prominent antitrust attorney Gilbert Montague called the Sherman Act a dead letter. The FTC saw its major function in promoting industry trade association agreements, and Department of Justice (DOJ) antitrust chief “Colonel” William Donovan attempted to establish accomplished facts administratively that the courts would have to recognize. In particular, he was providing premerger clearance, though he lacked statutory authority. During the three years 1926 through 1928, the two agencies filed only one merger case against a publicly traded firm. At the same time, America experienced its second large merger wave, which resulted in consolidation of electric utilities (the go-go industry of the 1920s), automobile manufacture, food processing, and the fast-growing radio and movie industries.

The rapid growth of some sectors, like automobiles and electric utilities, caused wrenching changes in others. The rise of the department store and grocery chains created problems for old-line retailers. Indeed, complaints surfaced about “profitless prosperity” and the lax enforcement of the antitrust laws.

The time was ripe for a swing of the pendulum, but Hoover might have seemed an unlikely agent. As commerce secretary under Harding, he had pursued policies sympathetic to the association movement, then under attack by the Justice Department and the courts. As commerce secretary under Coolidge, he might have been expected to have been sympathetic to the favorable attitude toward business and big business in particular. In retrospect, one early warning sign appeared when Hoover declined to make Donovan his attorney general.

During the summer of 1929, merger activity continued at a rapid pace. Hoover became uneasy and asked Attorney General William Mitchell to look into the matter. Hoover and Mitchell were appalled to discover the actual practice under Coolidge. Major antitrust initiatives under Coolidge were quietly reversed in the fall of 1929, and on Friday, October 25, 1929, in his address at the annual meeting of the American Bar Association, Mitchell announced a new regime. He promised to enforce the laws as they were written; he characterized “the machinery of some trade associations [as] dangerously near price fixing”; he revealed that the Department of Justice had not approved a single merger since the administration took office in March; and he reserved the right to file suit against any merger not explicitly approved. This policy put at risk a large volume of mergers, and it put at risk the multitude of industry trade association agreements brokered by the two agencies. Mitchell’s October 25 speech and the related policy initiatives offer a compelling explanation for the stock market crash that began the preceding Wednesday and ended with a one-third decline of the Dow Industrial Average at the close of trading on the following Tuesday. The switch in regime generated a debate over antitrust reform that lasted through the remainder of Hoover’s administration. In line with experience during earlier periods in which policy took a turn for the worse from the point of view of business, economic activity declined in 1930. Clearly, a good deal of the subsequent economic decline was caused or greatly aggravated by the collapsing price level. Still, the switch to a less favorable business climate offers an explanation for the beginning of that decline in 1930, when prices were still stable.

The presidencies of Coolidge and Hoover offer compelling evidence against economic determinism. Accident thrust Coolidge into the White House, and a misunderstanding caused the public and Wall Street to think that Herbert Hoover would continue Coolidge’s policies, when in fact he did not.

Historians and modern commentators focus on the rhetoric of the early New Deal, but not the substantive policies. The “First Hundred Days” are powerful legend, about which little is known today. This ignorance may be deliberate. Both writers sympathetic to Roosevelt and writers sympathetic to business are embarrassed by the cozy relationship between government and business inherent in the New Deal’s first major piece of economic legislation—the National Industrial Recovery Act (NIRA) of 1933.

From an economic standpoint, the NIRA had its advantages and disadvantages. Its main advantage was that it implemented the status quo ante under Coolidge. Its main disadvantage was that it represented an adorned power grab by the executive and a politicization of issues that should have been handled by industry Given business’s worst fears in 1933, which may have included the country “going socialist” (recall that socialists of one stripe or another had prevailed in much of Europe), the good news may have outweighed the bad. Some evidence at least points to that conclusion. The passage and early implementation of the NIRA were marked by a very strong economic recovery. This may have partly reflected the net benefits of the act itself. Passage of the NIRA may have had an even greater symbolic effect by conveying the message that Franklin Roosevelt’s administration was prepared to give business what it wanted, albeit at a price.

The Supreme Court declared the NIRA unconstitutional in 1935, and the monopoly issue languished until the fall of 1937. With the 1938 elections looming and no end of the Depression in sight, the administration faced a problem. The solution was to blame the alleged monopolistic practices of business and the “hundred wealthy families.” This proved to be effective politically, but it had the effect of delivering a sharp blow to the already slow and faltering recovery. The 1938 recession was arguably a result of this assault. Thurman Arnold began his legendary antitrust campaign. The Temporary National Economic Committee hearings on monopoly and business practices were another reflection of this initiative.

America’s entry into World War II brought an end to antibusiness actions. After the armed services complained that antitrust investigations of major defense industries were harming the war effort, Franklin Roosevelt kicked Arnold upstairs to a judgeship, and the Department of Justice largely suspended its campaign against business. Repeating a pattern seen in World War I, cooperation between government and business flourished once again. The strong performance of U.S. industry during the war was plausibly the result of lucrative cost-plus contracts (paid for by a generally lower standard of living of the general population) and relative freedom from the sorts of virulent antibusiness initiatives that had marked the late 1930s and early 1940s.

After the war, some of the old fears and politics surfaced. A largely unfounded concern about a “rising tide of concentration” led to the 1950 Celler-Kefauver Amendment to the Clayton Act. This closed the “assets loophole,” which had allowed firms to merge by purchasing assets rather than actual stock shares. Like earlier wars, the Korean War generated a truce between government and business that was soon lifted. The Antitrust Division took the first steps, but the Federal Trade Commission soon followed. The Supreme Court also endorsed a more strident antitrust policy. A good deal of this initiative came from Eisenhower. Among other measures, he directed that government purchases of vehicles be carried out so as not to increase concentration among the automobile producers. These attacks coincided with the 1958–1959 recession and likely contributed to Kennedy’s slim victory in the 1960 election.

Though different in other respects, Kennedy nurtured the strident antibusiness policies he inherited from Eisenhower. In fact, his celebrated 1962 confrontation with the steel companies only intensified the conflict between government and business. Already during the Eisenhower years, steel had become a regulated utility for all intents and purposes. The steel companies could not raise prices without presidential approval. However, in 1962, the industry thought it had the go-ahead to finally raise prices as well. When it did, Kennedy claimed that no agreement had been reached and forced the steel companies to roll back their prices in May. A flurry of antitrust cases against steel firms and other companies followed in mid-1962. This incident left the Kennedy administration with the reputation of being “antibusiness” and resulted in the Investment Tax Credit.

Antitrust under Lyndon Johnson came under two influences: Johnson’s natural inclination to make a deal where one could be made and the Vietnam War. Antitrust enforcement was in fact scaled back. The war had several consequences. First, it distracted the chief executive. Its growing unpopularity also diminished Jackson’s influence over domestic economic policy. Second, in conjunction with Johnson’s Great Society programs, the war created inflation and the familiar though erroneous claims that big business was causing inflation. The departing Johnson administration filed some of the worst cases on record, though largely without Johnson’s encouragement. The notorious case against IBM was filed in January 1969, just before Nixon’s inauguration.

Antitrust in the 1970s under Nixon, Ford, and Carter went through its Dark Ages. The agencies engaged in new, entirely speculative antitrust crusades. Symbolic was the FTC’s case against the ready-to-eat cereal companies, which alleged that the major cereal companies had jointly monopolized the market by offering too many product varieties. The FTC also filed a monopolization suit against DuPont for building a titanium dioxide plant that was too large and too efficient. Also symbolic was the fact that none of these administrations killed the IBM case. The revival of the large-firm deconcentration case with the filing of the AT&T divestiture case in November 1974 raised the possibility of a new, broader assault on American business.

The Reagan administration brought about two permanent shifts in economic policy. First, it brought inflation down from double-digit levels. Second, it scaled back antitrust adventure. Together, these two changes explain a good deal of the improved performance of the U.S. economy and the unprecedented performance of the U.S. stock market. The experience of the 1920s was repeated, though in much muted fashion. Again, restrained antitrust enforcement and good times went together. And again, the far-reaching restructuring that these policies permitted generated a political reaction. In the 1980s, this occurred both at the federal and state levels. At the federal level, the most noteworthy initiatives involved the proposed antitakeover legislation that researchers have implicated as a precipitating factor in the 1987 stock market crash and actual measures taken to undermine the junk-bond market, which had fueled a large fraction of the takeover activity. At the state level, the U.S. Supreme Court had declared earlier antitakeover statutes unconstitutional. However, a new generation of statutes offered takeover targets some protection. To some extent, the state-level actions were a political substitute for the federal actions that did not go very far.

Antitrust under George Bush slid back into some of the old bad habits. Bush’s antitrust authorities conducted investigations of Microsoft and Intel; they brought new life to antimerger policy; they undertook quixotic attacks on Japanese business practices in Japan; they filed cases against the Ivy League colleges for alleged conspiracy in offering financial aid; and they revived the vertical restriction policy after a period of benign neglect. Indeed, these actions, together with Bush’s endorsement of policies such as the Americans with Disabilities Act and the 1990 Clean Air Act, led to the charge that the 1991–1992 downturn was a “regulatory recession.”

The genius of the Clinton record was its ability to implement the Reagan changes while at the same time offering some public-relations dressing. In antitrust history, the Clinton administration will forever be linked with the case against Microsoft. Arguably, the case had its origins as much in Microsoft’s failure to pay tribute in Washington as in competitor complaints. The shift in policy is apparent from the many large mergers that took place during the Clinton administration—mergers that would have been unimaginable two decades earlier.

Conclusion

The past has significance for our future. Consider the case of a rational, perhaps too-rational, twenty-five-year-old planning for the future, and in particular planning for retirement. She might well ask, how will the economy and the stock market do over the next forty years? The simplest predictions of the economy and the stock market merely refer to past averages—2 percent real growth and 12 percent per annual returns in the stock market. Slightly more sophisticated answers attempt to make predictions based on guesses about future technical and demographic developments. In view of our experience over the last hundred years, the best prediction of the future will be the one that correctly guesses how government deals with business and the inevitable political pressures to regulate business that economic progress and economics generate.

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[1] Martin Sklar, The Corporate Reconstruction of American Capitalism: 1890–1916 (Cambridge: Cambridge University Press, 1988), p. 179.

[2] Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass.: Harvard University Press, 1977); Lester G. Telser, A Theory of Efficient Cooperation and Competition (Cambridge, Mass.: Cambridge University Press), chap. 8.

[3] Thomas J. DiLorenzo, “Origins of the Sherman Act: An Interest-Group Perspective” International Review of Law and Economics 13 (Fall 1985): 73–90; Telser, A Theory of Efficient Cooperation and Competition, chap. 2; Gary D. Libecap, “The Rise of the Chicago Packers and the Origins of Meat Inspection and Antitrust,” Economic Inquiry 30, no. 2 (April 1992): 242–62.

[4] Sam Peltzman, “Toward a More General Theory of Regulation,” Journal of Law and Economics 19 (October): 211–40; Fred S. McChesney, “Be True to Your School: Chicago’s Contradictory Views of Antitrust and Regulation,” Cato Journal (Winter 1991): 775–98; Mark J. Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, N.J.: Princeton University Press, 1994); Ellis Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence (Princeton, N.J.: Princeton University Press).

[5] The idea that uncertainty on the trust question might affect business confidence was first proposed by Wesley Clair Mitchell, the founder of American business cycle research (Wesley Clair Mitchell, Business Cycles [New York: National Bureau of Economic Research, 1927]). John Bates Clark and John Maurice Clark suggested the possibility as well. Irving Fisher was undoubtedly thinking about the same debate when he wrote a scant two decades later: “During the Roosevelt and Wilson regimes, there was an organized effort at ‘trust busting’; it was the popular sport of politicians” (Irving Fisher, The Stock Market Crash—And After [New York: Macmillan, 1930], p. 106).

[6] Telser, A Theory of Efficient Cooperation and Competition, chap. 3.

[7] Mark F. Grady, “Toward a Positive Economic Theory of Antitrust,” Economic Inquiry 30, no. 2 (April 1992): 225–41.

[8]Wall Street Journal, October 7, 1911, p. 1, col. 4.

[9] Roe, Strong Managers, Weak Owners.

[10] Thomas K. McCraw, Prophets of Regulation (Cambridge, Mass.: Belknap Press, [1984] 1986).