Organized Crime

An old myth of economics is that in the late nineteenth century, a period of several decades of price deflation, monopoly was running rampant in American industry. There was supposedly “rampant cartelization” occurring, as legal scholar Richard Posner wrote in his book, Antitrust Economics. According to the “mainstream” view (but not the view of Austrian School economists), this “rampant” monopolization, like all forms of monopolization, supposedly led to reductions in output and subsequently higher prices. Consumers are said to have been victimized by the free market run amok with monopoly.

A corollary to this mythology is that, in the public interest, the federal government stepped in and rather heroically saved American consumers from the rapacious monopolists by enacting the Sherman Antitrust Act of 1890. Thus, antitrust law is said to be a “public interest” law in response to monopoly as a form of “market failure.” Every bit of this story is a complete falsehood.

In an article published in the June 1985 issue of the International Review of Law and Economics your author showed that American industry during the last decades of the nineteenth century was in fact extremely competitive and that the real purpose of the Sherman Antitrust Act was to stifle rather than to protect competition.

In the late 1880s Senator John Sherman (brother of General William Tecumseh Sherman) and his congressional colleagues began accusing various industries of “restraining trade” and charging monopolistic prices for their products. Indeed, the language of the Sherman Antitrust Act outlaws “conspiracies in restraint of trade.” The accusations are made all throughout the Congressional Record of the 51st Congress. These industries included salt, zinc, steel, bituminous coal, steel rails, sugar, lead, liquor, twine, iron nuts and washers, castor oil, cotton seed oil, leather, linseed oil, and matches.

These industries were all accused of conspiring to “restrain trade” or reduce production levels in order to prop up prices in the decade prior to the 1890 Sherman Act. Thanks to such sources of information as Historical Statistics of the United States, one can safely conclude that these accusations were pure hogwash. The decade prior to the Sherman Act was a part of what economic historians call the “second industrial revolution” in America. As such, real GDP grew by 24 percent from 1880 to 1890. The U.S. economy was about one fourth larger at the end of the decade, which is hardly a sign of “rampant” restraints of production and trade.

By contrast, the industries accused of becoming monopolized for which real (inflation-adjusted) output data are available grew by 175 percent during that decade. In other words, industries accused by Sherman and others of “restraining trade” increased trade more than seven times faster than the rest of the economy, which itself was growing very vigorously. There was no “restraint of trade,” conspiratorial or otherwise in these industries. Among the more rapidly expanding industries that were ludicrously accused of restraining trade were steel (258 percent), coal (153 percent), steel rails (142 percent), and petroleum (79 percent). These same trends continued in the decade after passage of the Sherman Act as the “monopolized” industries continued to grow faster than the rest of the economy.

In terms of prices, it should be noted that the decade prior to the passage of the Sherman Act was a period of price deflation in which the consumer price index fell by 7 percent from 1880 to 1890. Prices in the supposedly “monopolized” industries fell even faster. For example, the price of steel rails fell by 53 percent; the price of refined sugar fell from 9 cents per pound in 1880 to 7 cents in 1890 and to 4.5 cents by 1900. The price of lead dropped 12 percent from 1880 to 1890; and the price of zinc fell by 20 percent during that time.

In sum, the historical evidence shows that, by the government’s own standard of monopolization—restraint of trade and rising prices—there was no monopoly problem in America during the decade preceding the passage of the Sherman Antitrust Act. The real problem for consumers was government interventionism, spurred on by special-interest lobbying by less-than-successful, sour grape business competitors, that threatened to interfere with the extraordinary production expanding, new product creating, and price cutting policies of the most dynamic firms in American industry at the time. That was the real purpose of the Sherman Antitrust Act.

The Real Purpose of the Sherman Act

One function of the Sherman Act was to divert public attention away from a more certain source of monopoly power, government itself, particularly the long-standing Republican Party policy of high protectionist tariffs. The average tariff rate in 1857—on the eve of the start of Republican Party hegemony that would last for for more than fifty years—was 15 percent according to Frank Taussig in his Tariff History of the United States. By the middle of the Lincoln administration the average tariff rate approached 50 percent and remained in that high, protectionist range, with a few ups and downs, until the federal income tax was adopted in 1913. The “anti-monopoly” Sherman Act made no mention of how protectionist tariffs restrained trade despite the fact that the trade-diminishing aspects of protectionist tariffs had been common economic knowledge in the world since at least Adam Smith’s publication of The Wealth of Nations in 1776.

During the congressional debates over the Sherman Act Sherman himself complained that the output-expanding and price-cutting “trusts” in the above-mentioned industries “subverted the tariff system” that was designed to “protect . . . American industries.” Think about that. The only thing that could “subvert” the protectionist tariff system would be lower prices since the whole purpose of tariffs is to “protect” consumers from low prices. What tariffs “protect” American industry from is competition. The Sherman Act was therefore always inherently an anti-competitive law.

Even more damning than Sherman’s words is the fact that just three months after the Sherman Act was passed by Congress Sherman sponsored legislation that was labeled by journalists as the “Campaign Contributors Tariff Bill.” This was the McKinley tariff bill that increased the average tariff rate from 38 percent to 49.5 percent. On October 1, 1890 the New York Times editorialized that “The Campaign Contributors’ Tariff Bill now goes to the president for his signature . . . and the favored manufacturers, many of whom proposed and made the [tariff] rates which affect their products, will begin to enjoy this legislation.”

This caused the New York Times, which had originally supported the Sherman Act, to reverse its position. In the same editorial the Times wrote that “That so-called Anti-Trust law was passed to deceive the people and make the way for the enactment of this . . . law relating to the tariff. It was projected in order that the party organs might say to the opponents of tariff extortion and protected combinations, ‘Behold! We have attacked the Trusts. The Republican Party is the enemy of all such rings.’”

In other words, the Sherman Act was a political fig leaf designed to fool the public into believing that the Republican Party, which was founded as the party of protectionism, central banking, and corporate welfare, had somehow changed its fundamental purpose for existing and was now a libertarian, pro-consumer organization. This of course was all a big lie, as the New York Times explained at the time.