Antitrust Humbug; H. Fleming

This startling per se rule is con trary not only to our previous deci sions, but contrary to the language of Section 7, contrary to the legis lative history of the 1950 amend ment, and contrary to economic real ity. But merger decisions are not the only recent ones likely to dis concert the business community. In 1966 the Federal Trade Com mission'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 like ly to cast a wide penumbra of il legality 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 Birming ham) for trying to narrow the spread between major and inde pendent brands, which are occa267 268 THE FREEMAN May sionally of identical specifications.

And in 1964, in Simpson v. Un,ion Oil (377 V.S.13) the high court majority struck down a con signment agreement to which the Antitrust Division, in a consent decree ten years earlier, had tacit ly agreed - a decision which, since perhaps a sixth of the nation's wholesale trade is done on con signment, led a dissenting Justice to write: "Today's upsetting de cision carries with it the most severe consequences to a large sec tor of the private economy." The Belief in the Antitrust Laws Yet, year after year American businessmen profess their funda mental faith in the antitrust laws. The following are typical expres sions of this credo: First, I should like to make it very clear that I have for many years supported the basic antitrust stat utes. I firmly believe that these laws are good laws, essential laws, and that they have been the instruments of preserving within the business com munity the competitive environment which is the essence of a free econ omy.

Crawford H. Greenewalt, Board Chairman, du Pont, before the 1963 annual meeting of the Antitrust Sec tion of the American Bar Association. Maintenance of reasonable and effective antitrust policies is something that every enlightened busi nessman should and does support. M. A. Wright, President, U. S. Cham ber of Commerce, in a speech, Sep tember 6, 1966 in San Francisco. And the Attorney General's Na tional Committee to Study the An titrust Laws, in its March, 1955 report, declared its faith in "anti trust fundamentals," say~ng: Although many forces and other Government policies (sic) have ma terially promoted our creative Amer ican economy, we believe the anti trust 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 combina tion recalls the protestations of loyalty with which the King's sub jects 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 t~ be some premises here which are not altogether sound. One is that there exists an un fortunately innate tendency, in the American economy, toward monop oly and conspiracy. Another is that it has been the "historic mission" of the anti trust laws to curb this; and that, 1967 ANTITRUST "HUMBUG" 269 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 unrealisti callyc_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 vir tually a dead letter. Industrial pools to curb the cutthroat compe tition of the 1890's were formed, collapsed, formed again, and then replaced by huge horizontal indus trial 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 his tory, the ambitious comprehensive -nature of its "attempts to monop olize" being shown publicly by the new style of corporate names National, United, American. Unit ed States,Amalgamated, Allied, and so on.

For years none of these were challenged legally; most of them never were. There was no Anti trust 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, Nation al 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 competi tion. Some failed. Those that sur vived 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 Econom ics: 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 revi.val of competition may be considered a general movement.

Charles J. Bullock, quoted in Trusts, Pools and Corporation, edited by 'Wil liam Z. Ripley; Ginn &' 00., 1905, p.472. The survivors lost their share270 THE FREEMAN May 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 Su preme Court in 1920 in its refus al to break up the U.S. Steel Cor poration: "Whatever there w'as of wrong intent could not be execut ed." (251 U.S.452) Since these combinations had already been launched when trust busting began to be a popular is sue, 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 gen eral vigor of the economy. Any way, as a famous economist later put it: The rate of increase in (indus trial) output did not decrease from the nineties ... the modern standard of living of the masses evolved dur ing the period of relatively unfet tered "big business". . . the rate of advance . . . considering the spec tacular 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 (antimonop oly) cases. Within five or ten years of each decision, it ap peared 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 busi ness to such vigorous new compet itors as Pure, Sun, Union, Gulf, and Texaco. Its earnings were de clining and its dividends were smaller in 1911 than in 1900. The court-ordered fragmenta tion 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 Jer sey, Ohio, Indiana" and Califor nia) each, on the average, with as large a share of the market in its allotted area as the parent com pany 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. Neverthe less, they continued to lose, and A.NTITRUST IIHUMBUG" 271 the independents to gain, in mar ket share, for decades.

Other leading cases had simi 1arly paradoxical economic after maths. In 1895 the high court re fused to condemn the American Sugar Refining Company for com bining 98 per cent of the nation's sugar-refining capacity (E. C. Knight, 156 U.S.l). 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. Rey nolds, transformed the business with its new burley-tobacco cigar ette, "Camel." A 1914 monopoly case against a motion-picture pat ents 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 simultane ously with TV. In 1923 the Antitrust Division asked the courts to break up In ternational Harvester - only sur vivor 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 twothirds 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 Pull man Company, owner of the Pull man Sleeping Car Company and of the manufacturing company that supplied it. It was a Pyrrhic vic tory. Pullman had indeed a na tion-wide monopoly of sleeping car operation, but it was an eco nomically 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 unprofit able 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 automo bile had done to the streetcar monopolies. (Pullman, Inc., in vested 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" cru sades no longer led toward the an titrust holy grail that business men say they believe in. In its at tacks on Great· Atlantic & Pacific, Alcoa, United Shoe, du Pont (cell272 THE FREEMAN May ophane) and GM (diesel locomo tives), it picked on companies that had succeeded by the four "i's" --'- ingenuity, imagination, in novation, and improvement. It won the A&P case on fantasy account ing and the Alcoa and Shoe cases on a redefinition of "monopoliz ing" 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 revolutioniz ing the railroad locomotive busi ness charged that G]d captured over 84 per cent of the locomotive market during a pe riod in which two once-substantial competitors were driven from the field. As a result . . . the purchasers of locomotives and the public in gen eral have been deprived of the bene fits 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 un dertaking the many risks of embark ing upon a new business venture such as the development and manu facture 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 Su preme Court Justice Stewart's carefully documented comment in the Von's Grocery case: ". . . the defendants are being punished for the sin of aggressive competi tion." II Monopoly": Fact and Fiction The word "monopoly" as com monly used is practically synony mous with "sin," and is about as precise. It comes down from Eliza bethan 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 incor rect analogy with Elizabethan mo nopolies. The Tudor monopolies were official grants to royal favor ites of the exclusive rights to trade in things that people couldn't do without or find substi tutes 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 ind ustrial system was. something wholly new under the sun. But the courts began the error with their 1967 ANTITRUST "HUMBUG" 273 eyes open. Said the Ohio Supreme Court, in condemning the Stand ard 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 Car negie 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 con trol of anyone 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 de termining 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 de sired to do so. (italics added) One might ask, "If the monopo list 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 de,finiti on, 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 invi tation. It is that simple.

Or it was that simple, in the early 1900's, when manufacture was mostly of staples, industries were distinct and compartmental ized, 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 out sold the nearest challenger (Chev rolet) well over three to one. But four years later, the Model Twas dead; the heart of its manufac ture stopped beating. Significant ly, 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, serv ices, and equipment is short. The 274 THE FREEMAN Ma,y thresholds between industries have dropped to the vanishing point. The mobility of competitive capi tal and managerial skill into slug gish industries has been speeded like the In0bili~y_of air-borne -troops; retarded only by Sherman and 'Clayton Act antimerger rul ings. Cloistered corners there may be; but no firm can count on keep ing, its feet and protecting its fu ture 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 im prove.

Conspiracy Section 1 of the Sherman Act says, "Every contract, combina tion, ... or conspiracy, in re straint of trade . . . is . . . illegal." Some antitrust experts today feel that the prevention of busi ness. conspiracies has been the most successful part of the Sher~ man Act. And no quotation from Adam Smith is more fashionable today than his whimsical observa tion: 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 busi nessmen to conspire has its own built-in "counte,rvailing .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 governm,ent-spon sored 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 forc es have come from within - from among their own m,embers. To prevent this, devices have had to be used, such as the depositing of money by each member, to be for feit to the other members on vio lation of the agreement. Where, on the other hand, such ad hoc agreements try to set un reasonable (above-market) prices, the disruptive forces from within are reinforced by pressure' from without. Just as the early consoli dations found that raising prices to inviting levels defeats itself, so do conspiracies. The courts have taken an unre alistic 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 1967 ANTITRUST "HUMBUG" 275 (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 observ er of industrial pooling agree ments 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 anti trust enforcement agencies have extravagantly expanded their con cept of conspiracy, making it an "elastic, sprawUng and pervasive offense" (Jackson, J., concurring, Krulewic'h v. U.S.336 U.S.J"J"O, 1949) embodying "conscious par allel action," implied conspiracy, and merely inference of conspir acy. A notable result has been a long record of immediate acquit tals and directed verdicts of "not guilty." But an unfortunate con sequence has been to endanger co operative 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 pa. per from the Antitrust Division, be found criminal. Conclusion In the brilliant records of Amer ican 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 fed eralize business morality, through laws conspicuous for their vague ness, has turned out, after 75 years, to have chiefly resulted in the creation and growth of ever more powerful administrative agencies. An incidental, but under standable 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 hum bug. based on economic ignorance and incompetence." What he would write about it now, beggars the imagination. ~ 276 ETERNAL VIGILANCE By the seers of antiquity and to this day, man has been warned frequently: UNDERSTAND AND CHERISH FREEDOM, LEST SLAVERY BECOME A HABIT. Yet, man forgets - which is our justification for now reproducing some of those earlier warnings.