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The Not So Free Market: Monopolistic Practices and the Sherman Act

Introduction

                What if the free market, which many Americans take pride in, wasn’t really free and open to all? Unfortunately, this was the case in the late 1800s due to monopolistic practices that ensured only a small number of businesses could sell goods. While the creation of the Sherman Act and other antitrust policies helped deter these actions, monopolistic practices did not simply fade away. Even today, businesses attempt illegal practices as defined by the Sherman Act, ultimately hurting small businesses and consumers who are not given the choice of which products to buy. However, what can be done to better prevent monopolistic practices from occurring as often as they do today?

Personal Interest

               To find my history topic, I looked at some of my favorite presidents: James Garfield, Teddy Roosevelt, and Franklin Roosevelt. Through this research, I found out about the Antitrust Movement. I have always been interested in this subject but shied away from it. However, I figured that I wanted to learn about it eventually, and that now would be the perfect time to do so. Through more research, I have become fascinated with this topic.

Background

               Prior to the trust-busting era, there were stark differences between the wealthy and poor, which only became more defined as time went on. In the 1880s, trusts were created by Attorney Samuel Dodd of Standard Oil (“Sherman Anti-Trust Act”). Trusts, which came to control many businesses, were structured so that stockholders in several companies would transferred their shares to trustees, who would give back some money to stockholders. Through buying stockholders, trustees could control businesses, putting whoever they wanted in charge. This consolidated power and created monopolies in several industries, which are “when there is a single supplier or seller of a good or service for which there are no close substitutes”. The negative effects of monopolies, such as higher prices and worse goods/services, were realized as their power grew and competition was stifled. Unfortunately, monopolies prevented other businesses from surfacing and competing through a number of means including buying them out, temporarily having lower prices to undercut other businesses before raising the prices, making customers spend more money by buying other things to get what they really want, and intimidation and violence (“The Sherman Antitrust Act”).

“John Sherman.” U.S. Senate Historical Office.

                 The Sherman Antitrust Act of 1890 was the first time Congress passed a law to limit the power of monopolies and was an essential part of future trust-breaking. The Sherman Act gave the government the power to regulate trade through the constitution (“Sherman Anti-Trust Act”). Its creator was John Sherman, the chairman of the Senate Finance Committee and an expert on the regulation of commerce. This act was widely accepted and was passed overwhelmingly by the Senate 51 to 1 and by the House of Representatives 242 to 0 (“The Sherman Antitrust Act”). Finally, President Benjamin Harrison signed it into law on July 2, 1890 (“Sherman Anti-Trust Act”). This act contained three offenses: “monopolization,” “attempted monopolization,” and “conspiracy to monopolize” (“Single-Firm Conduct and Section 2 of the Sherman Act.”). Although the Sherman Act received widespread support from the public, in the beginning, the Supreme Court tended to side with businesses whenever the Sherman Act was mentioned, making it ineffective during its early years. For the entire first decade of its enactment, no economic changes were made due to the political pressure the government received from the trusts and the loose wording of the Sherman Act. The act failed to define combination, monopoly, conspiracy, and trust, offering loopholes for big businesses and allowing for monopolistic practices to continue. (“The Sherman Antitrust Act”).

                President William McKinley launched the trust-busting area in 1898 when he appointed Senators to the US Industrial Commission (“The Sherman Antitrust Act”). Their report laid the groundwork for Teddy Roosevelt and began the trust-busting era. Prior to this new era, the wealthy thought that they were more powerful than the government and were above the Sherman Act, and the Supreme Court continued to side with businesses whenever the Act was brought up, making the Sherman Act ineffective by allowing for monopolies to continue. Teddy Roosevelt saw this and realized that he didn’t need legislation, but a sympathetic court. When that happened, Teddy Roosevelt readied to take down the harmful monopolies. The first and biggest monopoly to fall was the Northern Securities Railroad Co., run by JP Morgan (“The Trust Buster”). In a historic 5-4 decision, the Supreme Court agreed to dissolve the NSRC in 1904. beginning the trust-busting era. In 1911, Standard Oil was found guilty of breaking the Sherman Act by buying out competition and temporarily lowering prices in certain regions. This established the rule of reason, where having a large monopoly does not break the law, but using certain tactics to keep its economic standing is illegal. New antitrust laws and groups were also created, such as the Clayton Antitrust Act, which specified illegal practices, and the Federal Trade Commision, which guards against bad monopolies (“The Sherman Antitrust Act”). These new laws and organizations were essential in bringing down monopolies. However, Roosevelt did not plan on going after every monopoly. He divided monopolies into two categories: good and bad. To him, a good monopoly provided good service at reasonable rates (“The Trust Buster”).

Sunday, Oct. 15, 2017. American Express Co. chip credit card. Photographer: Andrew Harrer/Bloomberg

Present Day

               As seen with American Express Co. v. Ohio, the solution for preventing monopolistic actions lies with correcting and specifying legislation so that laws such as the Sherman Act will be more effective, instead of relying on a court or people to make the right decision. Right now, American Express Co. is involved in an impending Supreme Court case addressing their alleged violation of the Sherman Act. In the credit card business, there is a two-sided market, where merchants and customers are dependent on each other. The customers need the merchants to accept their card, and the merchants need the customers to use the cards they offer. Visa and Mastercard don’t directly set credit card fees for cardholders and merchants, unlike Amex, which has direct involvement. Beginning in the 1980s, Visa and Mastercard together tried to edge out the competition by prohibiting their merchants from offering Amex. In addition, the two companies targeted Amex’s high prices and their small number of customers in ads. To fight back, Amex tightened their contracts to better control the treatment of their customers. By 2010, seventeen states had sued Amex, Visa, and Mastercard over violating the Sherman Act. The states argued that the companies were using illegal practices which blocked competition. Visa and Mastercard agreed with the states, and signed contracts agreeing to change their practices. Amex refused; thus, the case went to court. Although the states originally won, the case of Ohio v. Amex was appealed and sent to the second circuit, where Amex won. (“Ohio v American Express Co.”) This case will be taken to the Supreme Court soon, and the outcome will have dramatic impacts on the economy as a whole.

Solution

               I have looked at this impending and consequential court case and have decided that, in my opinion, Amex violated the Sherman Act. The plaintiffs needed to prove that Amex’s policies harmed both the customers and merchants, which it clearly did (“AmEx Has No Friends in Supreme Court Case”). When American Express changed their policies so that their merchants could only say that they provided for Amex it was detrimental to customers and merchants.

“Solution.” Born Realist.

The customers had to pay more, harming them. Although less apparent, this policy harmed merchants as well. Amex is one of the most expensive credit card companies, so the merchants make less money when customers use Amex because part of what they earn goes to Amex in the form of usage fees. However, what can be done in general to prevent monopolistic actions such as this? For one, laws need to be passed to make the Sherman Act clearer so there will be less loopholes for companies like Amex. When the Sherman Act was first enacted into law many monopolies initially got away with not being broken up because of loose wording in the Sherman Act.(“The Sherman Antitrust Act”) This should not happen, and the Sherman Act needs to be less up for interpretation. The more controversial terms within the Sherman Act are combination, monopoly, conspiracy, and trust (“The Sherman Antitrust Act”). I propose that we pass new legislation to correct the Sherman Act so that these terms will be more clearly defined. Often, as seen with Teddy Roosevelt’s view on monopolies, people try to separate good and bad monopolies, which is also presented in the attached video below. However, by attempting to make this distinction the law becomes weaker, allowing for the bad monopolies to get off by raising doubts. This is why we need stricter legislation that will define these terms so that decisions will not be left to self interested people who are usually biased. In the trust-busting era, Teddy Roosevelt also had a sympathetic court (“The Trust Buster”). However, having a sympathetic court, while important, is transitory compared to the law, which will remain for years. In addition, the main tool for destroying monopolies was the Sherman Act and laws like it. Without the Sherman Act, no monopolies would have ever been taken to court. This is why I feel that the solution for monopolistic practices lies with more legislation to support the Sherman Act.

                To learn more about monopolies and the importance of the Sherman Act and other antitrust laws, here is a quick summary of the history and development of antitrust laws by Crash Course Economics.

crashcourse. “Monopolies and Anti-Competitive Markets: Crash Course Economics #25.” YouTube, YouTube, 26 Feb. 2016, www.youtube.com/watch?v=Sb_-wfmJnHA.

                Thank you so much for reading my page, and I invite you to provide constructive feedback below and add to the conversation in any way you see fit.

Works Cited

“American Express Card.” Crain’s Cleveland Business,

                www.crainscleveland.com/article/20180226/news/153146/amex-rules-weighed-us-supreme-court-antitrust-

                enforcement-test-stemming.

“AmEx Has No Friends in Supreme Court Case.” Bloomberg Law,

                www.bna.com/amex-no-friends-n73014473447/.

crashcourse. “Monopolies and Anti-Competitive Markets: Crash Course Economics #25.” YouTube, YouTube, 26 Feb.

                2016, www.youtube.com/watch?v=Sb_-wfmJnHA.

“Fair Fight in the Marketplace?” Youtube, PBS, 2 Apr. 2013, www.youtube.com/watch?v=xfRKQrt2SLw.

“John Sherman.” U.S. Senate Historical Office.

“Ohio v. American Express Co.” Oyez, 5 Mar. 2018, www.oyez.org/cases/2017/16-1454.

“Sherman Anti-Trust Act.” Our Documents – Sherman Anti-Trust Act (1890),

                www.ourdocuments.gov/doc.php?flash=false&doc=51.

“Single-Firm Conduct and Section 2 of the Sherman Act.” The United States

                Department of Justice, www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-

                2-sherman-act-chapter-1.

“Solution.” Born Realist, bornrealist.com/the-root-of-the-problem/solution/.

“The Sherman Antitrust Act.” Sherman Antitrust Act and Monopolies,

                www.linfo.org/sherman.html.

“The Trust Buster.” Ushistory.org, Independence Hall Association,

                www.ushistory.org/us/43b.asp.

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COMMENTS: 1
  1. April 27, 2018 by Lucinda Thompson

    I really loved reading about your project. I think you did a great job of presenting the historical aspects of it and the clearly tying it back in to our modern day struggle with monopolies. Generally I’ve found economics to be confusing, but this is super interesting and concise! Nice job!

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