Trust (monopoly)

I

Introduction

Trust (monopoly), corporate monopoly organized under the legal device of trusteeship for the purpose of eliminating competition in an area of business and of controlling the market for a product. Specifically, a trust was a particular technique developed in the late 19th century to consolidate firms and acquire control in a variety of industries. The widespread use and abuse of trusts during this period ultimately gave rise to a series of antitrust laws that continue to be in effect. See Competition; Monopoly.

A trust is a legal arrangement in which the voting stock of different companies is brought together under the direction of a board of trustees, which then issues trust certificates in exchange for all the shares or a controlling number of shares of the individual companies. This arrangement permits the trustees to manage and direct a group of companies in a unified way, in effect, creating a single firm out of competing firms.

II

Historical Developments

Before the emergence of trusts in the 1880s, business firms sought to monopolize commerce through industrial pools, which were voluntary agreements among producers that set production quotas, fixed prices, and allocated sales and market territories. Because a pooling arrangement by nature is monopolistic and thus violates common-law principles prohibiting combinations in restraint of trade, it could not be enforced in the courts. The principal advantages of the trust over the industrial pool lay in its binding character and its presumed legality. The American industrialist John D. Rockefeller established the first U.S. trust in 1882 by persuading the stockholders of the 40 companies associated with his original firm, Standard Oil Company of Ohio, to turn over their common stock to nine trustees in exchange for trust certificates.

The development of trusts coincided with the rapid pace of industrialization in the U.S. after the American Civil War. The trust movement was both an instrument in the creation of large-scale business firms in this period and a consequence of the tremendous growth of industry. The early trust movement can be divided into two major phases in periods of intense business growth and consolidation.

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The first phase (1879-93) was dominated by horizontal combinations in industries producing a variety of basic commodities, including sugar, salt, leather, whiskey, kerosene, meats, and rubber goods. A horizontal combination brings together into a single new firm the firms that competed with one another at the same stage of production (that is, manufacturing, wholesaling, or retailing).

As the railroads spread across the U.S. after the Civil War, creating national markets for many products, the demand for basic consumer goods intensified. Business firms, which responded to rising demand by expanding their facilities, often overexpanded and created excess capacity. As a result, small manufacturers found it necessary to combine in larger units as a way of protecting themselves against failure and insolvency. Thus, by 1893 many large American companies had been created through merger and consolidation. Such firms as Standard Oil, the American Sugar Refining Company, and the United States Rubber Company came into being during these years.

A severe downturn in economic activity beginning in 1893 temporarily brought merger activity to a halt. When prosperity returned, a second merger and consolidation phase began, which lasted until 1904. This second phase involved vertical combinations and occurred, for the most part, in the producer-goods industries rather than in the consumer-goods sectors. A vertical combination brings together under single ownership the entire production process from raw material to finished product. During this period such well-known companies as United States Steel, E. I. Du Pont de Nemours and Company, American Can, American Locomotive, and International Harvester were organized.

By 1904 approximately 300 business firms in the U.S. had combined assets of more than $7 billion. These very large companies, many of which still exist, controlled some 40 percent of the nation's manufacturing assets and played a role in at least 80 percent of its important industries. Their large size often gave them a decisive influence over price and output decisions, even though they did not always completely monopolize an industry.

III

Emergence of Antitrust Legislation

By the late 19th century, abuses of the trust technique to crush competition and create monopolies in numerous industries had become so great that the public demanded something be done about the trusts. As a result, the U.S. Congress in 1890 passed the Sherman Antitrust Act. This landmark legislation has two main provisions: First, every contract or combination, in the form of a trust or otherwise, or conspiracy in restraint of trade in interstate commerce is illegal; and second, it is illegal for any person to monopolize, attempt to monopolize, or combine or conspire with other persons to monopolize any part of interstate trade or commerce. Originally, persons convicted under the Sherman Act were only judged guilty of a misdemeanor, subject to a maximum fine of $50,000 and no more than a year in jail. Violation of the Sherman Act is now a felony, punishable by up to three years in prison; corporations found in violation may be fined up to $1 million. Individuals injured by violations of the act may bring suit for triple damages.

The Sherman Act was the first of a series of legislative enactments aimed at controlling attempts by business firms to collude and establish monopoly power in industry and commerce. Other acts followed when it became apparent that the nation's antitrust laws had loopholes. In 1914, Congress passed the Clayton Antitrust Act, which was aimed at eliminating practices that either substantially lessened competition or tended to create a monopoly. Such practices included price discrimination to eliminate competition; the use of tying contracts (that is, contracts in which, as a condition of the sale, a buyer agreed not to purchase a competitor's product); combinations in restraint of trade brought about by acquiring the stock of competing firms; and the use of interlocking directorates, in which the same individuals sit on the board of directors of several companies and cooperate to establish monopoly control. Also in 1914 Congress set up the Federal Trade Commission as a “watchdog” agency to discourage “unfair methods of competition” by issuing “cease and desist” orders.

The next major piece of antitrust legislation, the Robinson-Patman Act (1936), helped to define explicitly the forms of price discrimination that the Clayton Act forbid. It was aimed more at preventing small producers from being driven out of business by larger competitors than at protecting consumers. The last important antitrust legislation passed was the Celler-Kefauver Antimerger Act (1950). Its purpose was to prevent a firm from carrying out a merger with another firm if the effect was to substantially lessen competition or to create a monopoly.

IV

Enforcement of Antitrust Laws

The basic purpose of the antitrust laws is to create and maintain conditions of competition in industry and commerce. The effectiveness of these laws depends essentially on the way in which the laws are interpreted by the federal judiciary, and the vigor with which an administration in power seeks their enforcement. The initiative for enforcement comes from the U.S. Department of Justice, headed by the attorney general, a cabinet-level official. Ultimately, therefore, the president is responsible for determining if antitrust enforcement will be vigorous or lax. Since 1890 attitudes of both the courts and presidents toward the antitrust laws have fluctuated widely.

The first major court decision involving a trust came two decades after the passage of the Sherman Act. In 1911, in a landmark case, the U.S. Supreme Court found that unlawful monopoly power existed in both the Standard Oil Company and the American Tobacco Company; these companies were then ordered dissolved into smaller, competing firms. Prior to this case, the courts had allowed manufacturing trusts to continue on the grounds that Congress intended the Sherman Act to apply only to interstate commerce. In its decision the Court established the “rule of reason” principle with respect to industrial combinations. Congress, according to the Court, only intended that “unreasonable” combinations in restraint of trade be illegal under the Sherman Act. This doctrine gave the Antitrust Division of the Justice Department and the courts both flexibility and discretion in passing on business practices that might violate antitrust statutes.

Since 1911 the courts have not been consistent in their interpretation of the meaning of monopoly power under the Sherman Act. In the early 1920s, for example, in a case involving the United States Steel Corporation, the Supreme Court held that the mere existence of monopoly power, if not abused, did not constitute a violation of the Sherman Act. Later, however, in the Aluminum Company of America (ALCOA) case (1945), the Court reversed its position; it ruled that ALCOA was a monopoly, but it did not order the company dissolved. Pure monopoly, apart from public utilities, is rare in the American economy, and more recent cases under the Sherman Act have involved either oligopolies (industries operated by a very few firms) or mergers of conglomerates. Since the Supreme Court has not developed a legal philosophy capable of coping with the immense economic power inherent in many situations, the Court continues to wrestle with problems that are posed by the existence of giant corporations.

Attitudes of government officials charged with enforcing antitrust laws have also changed over the years. President Theodore Roosevelt gained political fame as a “trustbuster” through vigorous enforcement of the Sherman Act. In the 1920s antitrust activity languished, but it was revived again during President Franklin D. Roosevelt's administrations. In 1938 Roosevelt launched a far-reaching investigation into monopoly in the economy; more than 80 antitrust suits were filed in 1940 as a result of this investigation. Activities in this area were slowed during World War II.

None of the postwar administrations was inclined toward vigorous antitrust enforcement, although suits were filed against such well-known corporations as International Business Machines, General Mills, and General Foods. No new, clear-cut principles of antitrust law emerged from any of these cases, some of which were settled out of court or won by the defendants. A suit against American Telephone and Telegraph, however, led to its Court-ordered reorganization in 1984. Seven independent regional companies were created to handle local telephone service. AT&T continues as a competitor with other companies for long-distance business.

Recently ambivalence has grown among lawyers, economists, and business executives with respect to the effectiveness of the nation's antitrust laws. Some of this stems from the belief that the growth of multinational firms and worldwide competition makes concern about concentration in the domestic market less important. Other experts suggest that a vigilant antitrust stance is essential if price fixing and horizontal-type mergers that reduce competition in certain industries are to be prevented.