Presidential Use and Abuse of the Sherman Act: Cleveland to Clinton

0:00I gather there's a libertarian principle at work. I'm just supposed to go. I'm on my own. There's no authority here. It's hard for me to come to this part of the country without thinking about the Civil War. At first glance, there doesn't seem to be an obvious tie-in to my topic. But if you think about it, there actually is. that is economic policy in general is often a type of civil war and you know that point was made a little earlier actually in passing by David Gordon when he when he referred to the the origins of the civil war I think we tend to confuse the results of the civil war with the reasons that northerners were willing to to fight and southerners were were willing to fight which some people A little bit more recently, as some of you may remember, the energy crisis of the 1970s.

1:08You may also recall that the president who came from Georgia at that time, Jimmy Carter, He had a slogan for dealing with the energy crisis, and you recall what that was, he called it the moral equivalent of war, that the energy crisis was the moral equivalent of war, and we needed policies along those lines. Now, one of my economist colleagues wrote a wonderful piece that looked at this, and if you recall, the net effect of the policies back then was really to take money from net energy producers, Texas, Louisiana, Alaska, and send it to net energy consumers, Massachusetts, New York, and New Jersey, for example.

2:05And he wrote a wonderful piece on this for the Regulation magazine. He called the energy policy of the Carter administration the moral equivalent of civil war. And so I think that's the tie-in in my mind as I was coming into the Atlanta airport. and my thoughts inevitably turn to the great conflict, the recent unfortunate conflict, and the topic I was going to talk about today. In fact, antitrust you can regard as a type of civil war as well. Right now, with my co-author, Thomas Hazlitt, who some of you may know from the Reason column, we've been looking at the case against Microsoft.

2:59Now, you know, there's more than just the case against Microsoft. There's also an investigation underway against Intel. There's also, as of about a week and a half ago, news that the Federal Trade Commission is looking at Cisco. Journal. So you take the three giants in one of the most rapidly expanding industries we have in this country, one of the most successful export stories, Microsoft, Intel and Cisco, and they are all under attack. Now, the National Journal had a recent article that I thought was kind of interesting. They talked about this in terms of sort of Silicon Valley versus Washington DC, and I think there's a good deal of truth to that. They talked about suits versus sweaters, geeks versus wonks, and there's certainly some truth to the notion that if you had just let this computer industry go where it was going to go, writing cool software, making cool chips, hooking everybody on the web, the relative influence of the geeks, predominantly on the west coast, although there's some east coast centers as well,

4:10uh... the relevant influence of the geeks over the suits in washington was going to increase and it was time to show them to show them uh... uh... who uh... who who would have the last say i'm going to go further in my analogy uh... that is to say my assertion that you could regard anti-trust as a type of civil war uh... uh... by going back to some readings that uh... that i came across during the uh... to Dealing with the Progressive Era. I was reading some of the debates that occurred at that point, and I remember, you know, the middle of the Progressive Area came only 40 years after the Civil War ended, and one of the speakers at one of these conventions got up and said that the Sherman Antitrust Act had created more damage than any federal action since the Civil War.

5:08And this seems like a very provocative statement. It seems like an extreme statement. It even seems like an implausible statement. But I am going to contend that it is actually fundamentally correct. Now, struggles between the President and big business have been a constant feature of the United States, I think, for a long, long time. Certainly going back, let's say, to the days of Andrew Jackson. But the most famous example, of course, involves Teddy Roosevelt and the trusts and his struggle with the early corporations. We can think of some other examples of FDR, particularly later on during the New Deal, had some major run-ins with big business.

6:01And some of you may also recall that John F. Kennedy had a tussle with steel companies in 1962 that involved the FBI actually showing up at the corporate offices of various steel companies for the alleged infraction having been to raise their steel prices for the first time in over a decade. and this is during a period of wage and general inflation. The historians in this area have done a remarkable job of putting together the basic facts. We know a lot about the struggle between presidents and business.

6:48But two things we don't know and that's the why. Why? Why do you get these occasional or sporadic run-ins between business and the chief executive? And we also don't know the so what. What difference does it make? A lot of the historical accounts are sort of moralistic accounts. You know, power struggles, struggles between two personalities, Roosevelt and J.P. Morgan, Roosevelt and John D. Rockefeller. Well, let me first go to the why of antitrust. And here, I'm not breaking a whole lot of new ground. The why really comes about, it comes about because of economic progress, economic change.

7:42The economic historian, Gary Lidcap, wrote a wonderful piece about the origins of the hostility toward the meatpackers, Armour, Swift, and so on, the big Chicago meatpackers that grew up at the turn of the century. He explained what was really going on there. What had changed was the introduction of the refrigerated rail car. With the refrigerated rail car it was possible to slaughter cattle and hogs centrally, Chicago was a good location, pack them in tightly, move them more efficiently to the east coast and even abroad. So you had a tremendous restructuring in an industry that up until then had involved live cattle being shipped to the east coast and being slaughtered locally. Now, you can imagine there are a lot of people who are unhappy about this development. And this sort of picture can be replayed in a lot of different industries.

8:49When you go back and think of the major developments at the turn of the century and later, chemicals, Deal, food processing, sugar refining, for example, and then later on, automobiles, think of the major changes that occurred as a result of the introduction of the automobile and its widespread use in the 20s, what that did to existing businesses, people involved with horses and so on. To get an idea of the feelings, the sonnets that were around, I have a little picture here from one of the turn of the century newspapers. And this one I'm using because it actually has armor, one of the big meatpacking companies here, as a pirate.

9:36And the pirates on the ship are about to push Uncle Sam off the plank. And you probably can't see that way from the back there, but underneath it says, one sees his finish unless good government retakes the ship. So there was a deep-seated, well-founded fear of the trust, and I think some other sort of more vague fears, People fearing that with the rise of the modern corporation, the fundamental liberties were going to be at stake. To give you one more picture, this is King Kong anticipated.

10:24That's liberty that King Kong has in his arm there. He's got a republicanism discus and the Arab democracy has wounded but not really killed him. This is one of the main issues, political issues that arose at the turn of the century. uh... i mention one reason for the rise of antitrust new forms of business that would destroy existing businesses and and raise and and and raise fears the second reason has really been and i i i think this is where where where things moving to to to slightly different territory is the is that the rise of antitrust has been uh... has has uh...

11:21uh... has been wonderful pretext to cover up business to cover up Policy Failures you may recall nineteen seventies when we had double-digit inflation that uh... that many on the left i would say when the government actually help business accountable okay the idea was that monopolistic practices bad things that business did were causing prices to rise had nothing to do with monetary policy and uh... uh... and similar kinds of issues came up for example during the first world war. Given our proximity to warm springs I have to mention another example and this one from the 1930s. In the late 30s FDR's advisors had a problem and the problem was that they were already in The Great Depression was continuing as it had before. In contrast to earlier cases, like the panic of 1907, the economy did not rebound quickly, and they needed an explanation. They went back in this grab bag of rhetoric and pulled out the old antitrust law.

12:46stuff, that there was big business, it was the monopolistic practices, the rigidities of big business that was preventing a readjustment of the economy, it was preventing the economy from coming out of the depths of the Great Depression. And the result was something that many of you know about, the TNEC hearings, the Temporary National Economic Committee, and the celebrated trust-busting of Thurman Arnold, where he went after a wide stretch of American business for war. Now that's sort of the why. One, economic change creates sentiment against that change, secondly, you've got something Let me turn now to the question of so what, the so what of antitrust. I'm going to be blunt about this. Sporadic, politically charged tax on business undermined business confidence. That is to say, trust busting hurt the stock market and it hurt economic activity. Now these are issues that if you've read around in the history of the progressive era are sort of familiar, but I don't think the literature here really resolves this. What I need to do is to make a short excursion

14:16into the origins of the laws that we're now using against Microsoft. The origins, of course, go back to 1890, the Sherman Act, and it's intriguing that initially the courts were The Federal Reserve is very reluctant to hold a favorable view of the Sherman Act, and for example in 1895, in the famous E.C. Knight case involving the Sugar Trust, the court said that merger was not subject to the Sherman Act. You could create a holding company and you couldn't touch it. You couldn't touch it with the federal law because corporations were creatures of the state.

15:02As a result, it is not surprising that between 1895 and 1901, about half of US industry merged. They found a safe haven from attack. The various kinds of arrangements they had had, cooperative arrangements, were given a safe haven. This ended when Teddy Roosevelt, through accidents of the assassination of McKinley, became president and he was determined to overturn the E.C. Knight case. And he did that in Northern Securities, a case involving Morgan Hill Railroads in the northwest, from Minneapolis off to Washington State. And with Northern Securities in hand, that's really the beginning of modern and I trust Paul.

15:56Policy. Sherman Act was passed in 1890 but not really effective until later. But of course the case came down in 1904. 1904 was an election year. There had already been claims that the attempt to overturn EC night was hurting the economy. There was a so-called rich man's panic of 1903. So March 1904 the case comes down. Immediately the attorney general goes goes out and says there's going to be no running amok on antitrust. We will not use this precedent to beat up on business. And they didn't for a while. In 1906, November of 1906 and 1907, Roosevelt, who got reelected, filed a case against Standard Oil. And this was the big one. Standard Oil was the largest industrial corporation in the world at that time. And and if he could successfully break up standard oil, he would have a precedent that he could use against the other half of the U.S. industry.

17:03In other words, a successful campaign here would have put a lot of the existing structure at risk. Now, at the same time you had this panic, about a 50% drop in stock prices, a one-third drop in industrial production. Roosevelt's critics and even many of his friends blamed his policies for the panic. Let me show you three contemporary renditions. This is such a common thing that it came up in the political cartoons of the time. Here's Teddy Roosevelt beating the big drum, nerve-tonic for business, but he's actually making noise.

17:49And there's capital, big business, sick in bed, and the nurse, Columbia, an old expression for the United States, saying, will you please, will you please hush? That's sort of the one version of it. Then it got a little bit more extreme, that is the interpretation. Here's Teddy Roosevelt, the trust buster, sort of in his Rough Rider outfit, Blowing his bugle, throwing sticks, and the big trusts, they're throwing sticks back at the trust busters. Who's caught in the middle? The plain businessman, the usual victim. And this was a common interpretation at the time that the struggle between Roosevelt and the trusts was ruining prosperity, and fairly good prosperity under the McKinley years it had been.

18:43And then finally, and this is my favorite, here is Roosevelt as Samson, about to, well I think in the actual biblical account he pushed the pillars out, but here he's pulling, he's going to knock the pillars down, and up on top is the rich malefactor. Now, this is a reference to a phrase that resonates through decades afterwards, because at the depth of the panic, Roosevelt defended himself and said, no, not he had created the panic with his policies, but rather rich malefactors or malefactors of great wealth had deliberately provoked the stock market panic in order to discredit the policies of this government.

19:36And that's where the rich malefactor comes from. The original has the caption, to trap the mouse, don't raise the house. There are a number of others. Now, this is, I think of it as the Rosetta Stone, the Rosetta Stone in this area of how does antitrust affect economic output. Similar things happened with Taft, for example. Taft in 1911 succeeded Roosevelt in the White House. He actually filed more cases.

20:23The difference between Taft and Roosevelt was Roosevelt was agile. When this happened in 1907, 1908, Roosevelt immediately was sort of retreated and said, gee, you know, maybe what we need is we need to reform the antitrust laws. And he stopped filing cases. Taft, on the other hand, in 1910, 1911, 1912, went after business with a sheer, with stubbornness. And when similar things happened at that point, the economy was not doing too well, the stock market was kind of jittery. He said, he said, well, you know, I know that reform is kind of painful, but, you know, and that these things might make business halt, but we have In a prophetic letter to his brother, he said, we are going to enforce the law or die in the attempt.

21:19And what happened in the 1912 election was essentially fought on one issue, the trust issue. He created an opening for Roosevelt, ironically, to come in as the guy who was sort of the pro-trust guy. and then we had two anti-trust guys, Taft and Wilson, the two Republicans split the vote and Wilson came into the White House. There are other instances of this. Let me just mention what I believe to be the most important one and involves Hoover. This is my hero here. William Donovan, Colonel Wild Bill Donovan, who later went on to found the CIA, or the Office of Special Services, in the 1920s, he was the chief of antitrust, and his attempt was essentially to make the Sherman Act a dead letter.

22:22and he came darn close. Over three years, despite a huge merger wave that was going on at the time, booming stock prices, booming output, they filed only one case against the public, only one merger case against the publicly listed firm. Donovan was not, when Hoover came into office, Donovan, against much expectation, was not appointed to be attorney general, he went back into private practice, and Hoover, Hoover is sort of a good boy scout, Hoover comes in and says, oh my god, we haven't been enforcing the laws, and he got his attorney general to reverse the policies that Donovan had been pushing at the time, and in a series of acts, Actions, really provided a turnaround. Now, some of you are going to say, Bittling-Meier is saying that Hoover's switch on antitrust caused the Great Depression.

23:27That's not what I'm saying. I think the switch in policies, which were announced actually on October 25th, 1929, sort of a familiar date, the switch in policies probably I think they're the best explanation we have for the stock market crash, the crash of 29. Now the fact of the crash doesn't mean the fact of the depression, as we know from 87, but it probably offers an explanation for the recession of 1930. The depression has other causes having to do with the money supply and the price level. There are a few other instances like this we could go into.

24:13Eisenhower in the late 50s, revving up the antitrust apparatus, and the fact that Nixon lost. That was sort of an economy issue, that we were in a recession, 58, 59, 60. But there are a number of instances. So, the bottom line I have here is, if you look at Bush more recently, Bush lost the 92 election because the economy wasn't doing well. One interpretation was that he had created a regulatory recession with the Americans for Disabilities Act, with the Clean Air Act, and with some of these antitrust initiatives.

25:04There were major investigations going on. He had sort of let that thing adrift. So, arguably, without antitrust, there would have been no Square Deal, no New Deal, and no Monica Lewinsky.