From the Sherman Act to Theodore Roosevelt

Home , John Sherman

Faculty of Humanities

Alessio Cioli

Rethinking Early Antitrust History:

The “Trust Problem” as a Fundamental Issue

in Modern History, or the Historical Reasons

for the Re-articulation of the Power Relationship

between “Big Business”, Society and the State in the

Nascent Industrial Mass Civilization

Final dissertation for the Advanced Master of American Studies

Academic Year 2016-2017

Promotor: Prof. Ken Kennard

Table of Contents

Abstract ...... 2

Foreword

A Case Study on Trade Policy ...... 4

Introduction ...... 9

Chapter 1

The Press’s Big Antitrust Campaign,1888-1890 ...... 14

Chapter 2

The Rise of the Industrial Society: New Ethical-Economic Dilemmas ...... 27

Chapter 3

The “Trust Problem” as a Legal Dilemma ...... 39

Chapter 4

Theodore Roosevelt’s Attempt to Reconcile Liberty and Justice ...... 50

Conclusion ...... 60

Bibliography ...... 63

1 Abstract

By the turn of the 19th century, the US had become an industrial powerhouse and a world power. However, massive economic inequality threatened to rip apart American society. The US market had been monopolized by huge companies known as “the Trusts”. While the likes of Rockefeller and Carnegie amassed incredible fortunes, the average American suffered high prices for commodities and consumer goods. Consequently, in 1888 progressive newspapers initiated a vehement antitrust campaign, eventually prompting Congress to approve the Sherman antitrust law.

However, the “trust problem” could not be solved at a stroke. By the

1890’s “big business” had become indispensable in the US. Technological development and advancements in transportation and telecommunications had created a fast-paced and interconnected market where family-owned companies could not thrive. In a laissez-fair regime such as in late 19th century US, the inherent complexity of the industrial production processes and

“cut-throat” competition seemed to “naturally” encourage business consolidation.

Legally, the Sherman Act was difficult to apply in the real world and the Supreme Court struggled to harmonize it “into” the American law. The

American law primarily protected individual freedom and private property, which left the federal government little room to regulate the American economy and restrain the trusts’ excessive power.

Theodore Roosevelt tried to offer a remedy towards injustice and inequality, advocating a more flexible interpretation of the Sherman Act. Alt-

2 hough he went down in history as the “trust buster”, he strived to find a

“fair” compromise with the trusts: a compromise between justice and liberty, governmental “supervision” of big business and right to free enterprise.

He knew that big business was necessary in modern industrial society, and he wished only “bad trusts” to be banned.

However, Roosevelt’s project of a moral regeneration of American business ultimately failed. Roosevelt wanted the President to be the final arbiter of antitrust cases, but this would have created an imbalance in the

American “checks and balances system”, which Congress did not accept.

3 Foreword

A Case Study on Trade Policy

During the second half of 2016 the debate surrounding the Transatlantic

Trade and Investment Partnership – or TTIP, the (in)famous treaty which should have created a common Euro-American market – became increasingly desperate. Washington urged Brussel to have the treaty signed before the

Christmas. Trade liberalization, that is to say the removal of tariff and bu- reaucratic barriers to ensure the free circulation of goods and services, has always been a leitmotif in US foreign policy, from the Open Door Policy in the Far East to the post-Cold War age of neo liberal economics.1 Both Re- publican as well as Democrat administrations have pursued this understanding. Reagan declared in 1986, that “The freer the flow of world trade, the stronger the tides of human progress and peace among nations.” Subse- quently, Clinton founded the WTO and duly signed the first modern trade agreement (NAFTA, North American Free Trade Agreement). Moreover, the Obama administration saw TTIP as their strategic goal. However, Don- ald Trump’s unforeseen victory changed the game, as the new President seems keener on pursuing a more protectionist policy. Time will tell.

Consequently, the TTIP project now seems to have been shelved. But if the age of comprehensive trade agreements appears to have suddenly shuddered to a halt, it is not only because of this change in the White House.

In Europe, treaties such as TTIP have always raised strong opposition, especially from large sectors of the civil society and leftist grass-root move-

1 A. Bacevich, The American Empire, Harvard, Harvard University Press, 2002.

4 ments. Such an instinctive distrust of trade agreements developed into a political fait accompli by October 2016. CETA, the Canadian-European Trade

Agreement, was on its way to ratification, when unexpectedly the regional

Belgium government of Wallonia voted against acceptance, basically due to the Socialists’ strong opposition. This rejection set off a political chain reaction. Belgium’s federal government could not approve the treaty because it needed the consent of all the regional parliaments. But as the implementation of CETA needed the unanimous approval of every EU member state, the European Commission could not ratify the treaty either. As a result, the representatives of a scanty 1% of the European population stopped a treaty that the European Commission had been negotiating for years.

What was the origin of this unexpected resistance to trade liberalization? Much has been written, stressing the TTIP’s inherent risks, and especially those related to the relaxation of the provisions concerning food safety. The “new frontier” of trade policy is indeed focused on the “harmonization” of those rules determining the criteria a certain product or service for it to be sold into a foreign market (tariffs between the EU and the US are already almost non-existent). This has always been a major obstacle in the creation of a common Euro-American market, because many American and

European products are just incompatible. European standards are usually higher than in the US, and the European Commission had to lobby hard to try and convince the European civil society that the agreement would not actually lower them. Hence, “harmonizing” European and American standards would have had a far-reaching impact on society as a whole, not just on the

5 business world. In Europe, such a process could have triggered a “race to the bottom” in terms of product quality and safety in production.2

Apart from single content issues, there was another topic that raised fierce opposition, i.e. the legal “correlative” of the harmonization doctrine: the Investor-State Dispute Settlement proviso, or ISDS. The ISDS would have effectively been an international court where disputes were settled between private corporations and nation states. The ISDS proviso could have given private companies the right to sue sovereign states if nation-states had enforced laws restricting “freedom to trade” after the treaty ratification. In other words, the nation-states’ legislative action aiming to enhance quality standards, hygiene or safety on the workplace etc. could have been legally stopped. Civic protections risked thus being surrendered to corporate interests, sacrificing the “common good” on the altar of “freedom to trade” – or

“of private profit”, would critics contend.

The “freedom to trade” argument is key to understanding the issues that were in play during the TTIP debate. “Freedom to trade” is usually considered a value in Western societies. Why, then, did it come to be seen as a

“bogus” by the TTIP critics? To answer this question, an often underesti- mated factor should be taken into account: the sheer size of the players in- volved in this “treaty game”. Generally, it is the big multinational companies that are expected to gain the most from this trade liberalization. But these companies hold huge bargaining power, because they often operate in

2 F. De Ville - G. Siles-Brügge, The Truth About TTIP, London-Malden MA, Polity Press, 2015, pp. 51-62.

6 a quasi-monopolistic regime.3 Moreover, the global service they offer is simply unrepeatable: no one else has facilities or abilities to develop the same expertise and technology. Who could ever compete against Google or

Apple or AT&T or General Electric? Hence, what would have happened if

“big business” had been entrusted with the legal power to confront nation states, in addition to the real economic power they already possess?

Therefore, the real issue of the debate surrounding the TTIP was a question far more fundamental than trade policy technicalities. It was the clash between two opposite values: the need for justice for the sake of peaceful sociability, and free enterprise (or liberty). Liberty is a key value in

Western democracies, but what happens when that sense of freedom is com- promised by corporate power when it “goes big” dictating the rules and conditions of societal life? What role does the state then play? How much freedom should “big business” enjoy from government interference? The classical liberal paradigm – on which much of today’s neoliberal policies are founded – maintains that free markets always produce the most efficient results. Therefore, whenever possible we should grant enterprises the right to carry out their activity free from government’s trammels. But is it true that free market is the most efficient? Moreover, what do we mean by “efficient”? Can the “natural laws of market” under the pressure of “free competition” lead to monopoly? What does “liberty” mean in this context: defend-

3 A recent event clearly shows what “bargaining power” means. At the end of 2015 the Ital- ian government reached agreement with Apple regarding a vexatious taxation question. Apple had never paid taxes in Italy because it operated on the Italian market through a company based in Ireland. However, Apple was found guilty and it finally resolved to pay. The Italian government boasted this achievement has a great success, because it brought €318 million into the Italian treasury. But the real figures showed that Apple was due to pay €880 million. The Italian government actually discounted 60% of Apple’s debt.

7 ing the status quo of those corporations who have gained an advantage, or restoring the pristine situation where a lot of smaller competitors fought against each other? Is not the primary role of the state to offer balance in terms of civil society needs and economic necessities? Especially in times of crisis that we have been experiencing since 2008?

8 Introduction

In spite of the so-called “uniqueness” of our time – an era of deep and fran- tic change – this is not the first time that questions about the relationship between business, society and the state have arisen. More than a century ago, the US socioeconomic make-up became destabilized by the so-called “trust problem”. The trusts were large industrial groups that have monopolized key sectors of the American market, due to their huge size and “unortho- dox” practices: competition was savage, and anti-dumping law did not exist.

This “Gilded Age” is very similar to our present situation. Firstly, it was a period of fundamental change – by the 1890s the US had become a mature mass industrial society. Secondly, the American economy during

1892-94 was struck by the worst depression since the Reconstruction Era.

Unemployment climbed to 14% and as a result economic inequality became extended and distressful. Whereas cities such as New York were crowded with masses of poor laborers, the likes of Rockefeller, Morgan and Carnegie amassed fortunes beyond imagination (experts estimate that Rockefeller’s wealth alone accounted for over 25% of the whole American wealth). Last but not least, an unprecedented wave of poor and unschooled immigrants flooded into the US, coming mostly from non-Anglo-Saxon cultures. Hence, ethnic (if not “racial”) conflict added strain to an already heated situation.

Contextually, Theodore Roosevelt endeavored to find a solution to these economic challenges by facing up to the issues surrounding the Trusts.

Theodore Roosevelt would not accept that corporate power could override

9 the government’s power,1 and that business was free from any social responsibility. But if Roosevelt was to acknowledge the plea for social economic justice on behalf of the less fortunate, he also recognized that “big business” was a necessary function of modern society. So, how was a balance between corporate and public power to be found? What could be done to limit the trusts’ excessive power and therefore, provide some equity without destroying “big business”? A “new deal” had to be devised. This task required a deep reshaping of the American mindset and, in particular, of the American legal system. In more than a century, the Supreme Court had construed a judicial interpretation of the Constitution aimed at defending individual and property right from the Federal government’s action (the non- interference principle). Theodore Roosevelt decided to confront this interpretation.

Still, Theodore Roosevelt was no “socialist”. On the contrary, he was an enthusiast of the “American way of life” and an ardent supporter of those

“American virtues” (individualism and hard work) that had made the US a world power. The distinctive feature of Roosevelt’s antitrust policy was hence his quest for a workable compromise. His political foes either saw him as a friend of big industry, or viewed him as a “socialist” willing to suf- focate the citizen’s liberty by enhancing the federal government’s control over the business world. Both critiques offer a crude understanding of the man. In fact, the “bully boy” image – he was the “rough rider” of the ex-

1 I use the expressions “state” and “government” as synonyms, though sometimes am- bisuously. This depends on the inherent complexity of the US political structure. In the US, what Europeans refer to as “state” is actually the (federal) government, whereas “states” are the members of the Continental Union. But “state power” means also in the American context “governmental power”, i.e. “public power”. Hence, when Theodore Roosevelt advo- cates “state control” he refers to the “federal government”.

10 ceedingly celebrated Cuban expedition in 1898 – was nothing but the outer peel of TR’s complex political personality.

The main goal of this research is in demonstrating that Theodore Roo- sevelt’s apparently contradictory position on the “trust problem” was actually an attempt to find a “fair” balance between business, society and government. Such a compromise should preserve the unmistakable benefits of the young industrial civilization and reform its most heinous aberrations.2 Why did TR opt for such a convoluted way, instead of for a sharper, clear-cut position either in favor of the business world or of state control? This research argues that Theodore Roosevelt had too keen a perception of the historical changes to ignore that the new ways to produce goods, trade, exchange information and travel had “come to stay”. The rise of the industrial society marked the dawn of a new era in the history of human kind, and any attempt to return to “jolly old time” should necessarily fail. In particular, the old liberal paradigm conceived by Adam Smith, and on which the Fathers had founded the non-interference principle, seemed not to be viable in the mass industrial society anymore.

Hence, to understand Theodore Roosevelt’s position and show its soundness it is necessary to briefly sketch out the evolution of the American capitalism in the decades ensuing the Civil War. But firstly, it is necessary to understand what the “Trust problem” practically was, and why it generat-

2 This is why Theodore Roosevelt’s time has been called “Progressivism”. Although this research will not delve into domains other than economic history, it should be recalled that Roosevelt promoted the enforcement of “social legislation” aiming to protect the most fragile strata of the working class, for example women. See J.G. Zimmerman, “The Jurispru- dence of Equality: The Women’s Minimum Wage, the First Equal Rights Amendment, and Adkins v. Children’s Hospital, 1905-1923”, The Journal of American History, 78, 1, June 1991, pp.188-255.

11 ed a vehement, though vague and confused, demand for justice. In Chapter

One we survey a wide selection of newspaper articles to show what kind of action people requested government to take.3

In Chapter Two we move on to show the novelty and paradoxes of the newborn industrial society, and in particular how the rise of big business mined the fundamental principles of the liberal creed that had guided the

American society until the Gilded Age. Especially, such a development questioned the idea that “free competition” is always beneficial to society.

Resultantly, the Sherman Act was enacted, but this did not actually lead to the solution of the trust problem.

The Sherman Act must be indeed interpreted by the Supreme Court in order to determine its actual meaning, i.e. how it could be applied in the new context of the industrial society. In Chapter Three we consider how the Su- preme Court was at a loss when interpreting the Sherman Act. Moreover, in the twenty years since the law’s enforcement it interpreted and reinterpreted the Sherman Act on numerous occasions, contradicting itself many times.

This inconsistency suggested that a new legal paradigm had to be found if the Sherman Act was to be harmonized “into” American law. In other words, a new comprehensive intuition of the relationship between society, business and the law was necessary.

Such a new view was to be provided by Theodore Roosevelt, to whom the fourth chapter is dedicated. We review the steps of Roosevelt’s reform

3 For simplicity’s sake, only New York Times articles have been used. Browsing more than one newspaper would indeed have greatly exceeded the scope of this research. The Times has been chosen because it was one of the best “trust observers” as the most popular newspaper of the US financial capital. Moreover, inter-state incorporation took often place in New Jersey thanks to more permissive incorporation laws – the “holding” was firstly introduced in the US by that state legislature.

12 project and aims to reinterpret it on the grounds of its philosophical and historical premises, which the preceding chapter will have already clarified. As a primary source, we utilize a wide selection of Theodore Roosevelt’s speeches, ranging from his first term as a president until the presidential campaign of 1908.

Finally, it is necessary to say what this study is not. From a methodo- logical viewpoint, the objective is to connect many stimuli from different disciplines (ethics, legal history and economics) which are often treated as unrelated to each other by their specialists. Therefore, the fundamental premise that has guided this research is the recognition that the border between different fields of knowledge does overlap allowing for a fuller understand the deepest meaning of historical phenomena. Conversely, it is self-evident that research based upon this premise of the “big picture”, cannot trap all the details of the most technical issues. Because of this overarching interpretation of this period of American history, this research puts em- phasis more on the fundamental issues of the “trust problem” than on the details, hence many conceptual issues are accepted or simply touched on. This research aims to offer a holistic and alternative viewpoint on a classical issue of economic historiography that can hopefully inspire in the future more refined inquiries.

13 Chapter 1

The Press’s Big Antitrust Campaign, 1888-1890

1888 is a turning point in the early antitrust history. By then the “mischie- vous” business schemes carried out by Standard Oil had already entered the public domain. Many businessmen were actually keen on following the

Standard’s model, to the extent that Standard Oil was labelled by the New

York Times as the “school” where the American business world was learn- ing how to suppress competition and create monopolies.1 The public opinion shuddered seeing trusts proliferating in every nook and corner of the Ameri- can economy. Since the last months of 1887 the New York Times devoted pages to the “trust problem”, publishing articles with almost daily cadence.

But what was a “trust” exactly? Like most definition problems, the question has no straightforward answer.2 Legally, trusts have always existed. The trust is an “arrangement whereby a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries” (Oxford

Dictionary). For example, it can be an arrangement made with a tutor ad- ministering his pupil’s fortune while the latter is underage. However, companies used such a legal device to combine, i.e. form greater production units and therefore monopolize the American market. Business consolidation through trusts usually followed this path. The stockholders of single corporations “surrendered” their stock to a “board of trustees” and received

1 The New York Times, “The Foes of Competition”, 20 February 1888. The article sarcas- tically defines the trusts as “Graduates of the Standard Oil School of Political Economy”. 2 J. Moody, The Truth About the Trusts, New York, Moody Publishing Company, 1904, pp. XII-XIV.

14 certificates entitling them to dividends according to their shares in the newfound trust’s capital. In turn, the trustees were entitled to manage the trust’s stock and coordinate the companies’ activity. The board of trustees could even decide to issue additional stock exceeding the trust’s inherent value.

This was the so-called “stock-watering”, which could lead to cases of manifest speculation – the trustees could secure for themselves large amounts of money. Of course, those corporations which did not “jump” early on the trust, risked being wiped out from the market after substantial consolidation had been accomplished.

Why was the public eye so outraged by trusts? Essentially, there are two reasons. Firstly, it was the intrinsic nature of the trusts. Trusts were seen by many as “conspiracies” inasmuch as they went beyond the law’s constraints.3 Numerous newspapers denounced what they saw as trusts being “secret” agreements set up by greedy individuals (the trustees) willing to amass insane fortunes. Clearly, trusts operated within a “gray” area from a legal viewpoint. The 19th century invented the concept of corporation as we conceive of it in modern times. Corporations are legal persons entitled by the public authority to do business according to their mission and in full re- spect of the extant limitations to private enterprise established by law. The charter of incorporation is the defining document in which the corporation declares its purpose and scope.4 However, the trust device enabled incorporation without any charter of incorporation, by means of simply transferring property by the former owner to the board of trustees. This was an extreme- ly dangerous operation, at least in the opinion of journals such as The New

3 The New York Times, “Trusts under the Law”, 3 March 1888. 4 See chapter 2 for further details.

15 York Times, because it created an opaque space where businessmen could do whatever they wanted untrammeled by the law’s “checks and balances”.

Trust agreements, with their secrecy, could therefore jeopardize the common good, because they had been created with the explicit purpose to cir- cumvent the provisos of incorporation laws.

Secondly, newspapers lamented that the trusts’ ultimate purpose was increasing prices through market monopolization. Big business could indeed drive out the smaller competitors and eventually control production. Reduc- ing “the output” and coordinating their associates’ business, trusts could keep prices at a level higher than the “natural” one. With growing concern, the New York Times discovered and revealed to its readers that trusts were sprawling across the whole country, and that they were monopolizing key sectors of the American economy. They were monopolizing production of the “necessaries of life”: sugar and whisky; consumer goods: cottonseed oil, linen oil, letter envelopes; raw materials: cotton, rubber, quarry; but also resources such as steel, copper and coal, which were strategic to the growth of the nascent industrial society.5 Not to mention railroads, a prime example of how monopoly can be created in a domain where perfect competition is difficult to achieve – railroads cannot evidently be numerous by their very nature: there cannot be more roads beating the same track.6 Nothing seemed to escape from the greedy claws of the “big captains of industry”.

The ultimate responsibility of such a lamentable condition of Ameri- can economy was chalked up to the political class. The Gilded Age was in-

5 See for example The New York Times, “The Trust ‘combines’”, 1 January 1888. Or the above mentioned “The Foes of Competition”. 6 See for example The New York Times, no title, 1 January 1888, about Mr. Gould’s speculation after the consolidation of Kansas Pacific and Denver Pacific.

16 deed a restless era upset by numerous political scandals. Since the Union’s victory the “spoil system” became a source of corruption, especially under the weak Grant presidency. As a result, the political class of the late 19th century came to be deeply enmeshed with the business’s under-the-counter activity and its reputation bottomed down.7 In particular, it was the Republi- can party that carried the burden of the fiercest criticism. As the political expression of the American capitalist class, the Republicans had always defended the interests of the industrial world through the implementation of a highly protectionist trade policy. People thought that high tariffs on foreign products were responsible for the trust problem, inasmuch as the killing of foreign competition was alleged to give the trusts free hand in the American market. With few competitors, the American corporations could simply consolidate and effectively kill domestic competition. After a monopoly had been established they could control prices for their benefit.

Some Republicans suggested that monopolies, trusts and high prices were a phenomenon not necessarily related to each other and that high tariffs, on the contrary, increased domestic competition while protecting

“home business”.8 The origin of the trusts’ “corruption” had to be found

7 For example, the New York Times reported a flagrant case of corruption in April 1887, showing to what extent “the city [was] at the mercy of the Brush and United States Electric Light Companies”. As the Gas Commission met in the mayor’s office “to award the contracts for electric light”, the Secretary objected that all bids except the United States Illumi- nating Company’s were not valid. Judge Dittenhoefer insisted “bids be readvertised”, what eventually happened. But the United States Illuminating Company was anyway awarded a contract “at $182,50 for each light per year”. See The New York Times, “In and about the City”, 29 April 1887. 8 In contemporary academic research, the connection between the tariff and the trust problem has indeed been questioned. Although protectionism undoubtedly offered a highly favorable ground to the trusts, their rise seemed to be linked more to capitalism’s internal dynamics, and not to be the mere reflection of trade policy. Chapter 2 backs this interpretation, as it carries out a sketch of the American capitalism’s history in the post-Civil War era. See also W.E Kovacic, “Failed Expectations: The Troubled Past and Uncertain Future

17 somewhere else; more importantly, the diagnosis of the evil should not lead to the disposal of the tariff system. However, the public opinion was not convinced by the Republicans’ plea, and by 1888 widespread dissatisfaction took hold. This gloomy picture rendered by progressive newspapers such as the New York Times was certainly exaggerated, but it appealed to a large raging audience, the “plain American citizens” who could not see why they now had to pay more for goods and services. During crises, black-and-white representations have a great consolatory power. They reassure the average citizen by projecting “the evil” on one side of society, suggesting that the remaining was still sound. Consequently, once the cancer has been removed, the organism’s health was – at a stroke – restored. But in reality the outcome is usually much more nuanced.

The press saw the average consumer as victim of the trusts’ evil schemes. In particular, it was the farmers who were being damaged the most.9 As the Times noted, the well-off was not affected by a rise in prices, because they could always afford buying commodities and services. Nor it was the dispossessed: those who do not have anything cannot spend anything. It was the middle class that were the target of the trust conspiracies: those who could barely afford, after generations of hard work, enjoying the benefits of “progress”. Hence, a difference of few cents per pound in the price of wood or glass could mean the difference between building a new

of the Sherman Act as a Tool for Deconcentration”, Iowa Law Review, 74, July 1989, p. 1129. 9 The New York Times, “How Protection Affects the Farmers”, 27 May 1887. In this articles the journalist painstakingly calculates how much a farmer building a new house could have spared without the tariff.

18 house or bitterly renouncing it as a project of personal aggrandizement.10 In- cidentally, references to the farmer’s plight by the press were a little disingenuous. The American society had never been as urbanized as in the Gild- ed Age; although the key political figure of the newborn industrial society was the wage worker – or the “proletarian” – the farmer still retained its hagiographic value. In the American political mythology, the small independent landowners were the “backbone of American democracy”, as in Jef- ferson’s famous definition. Rhetorically, if the farmer was not thriving, this automatically meant that American society was sick and unjust.

Whether the picture rendered by the newspaper was dark as stated, by

1888 it became clear to most that the trust problem was now a key political theme that could not be ignored any longer by politicians if they wished to retain their “office”. Initially, it was the Democrats who had got an advantage over the Republicans, who continued defending their political reci- pe on commercial protectionism. However, the GOP quickly realized they had to change their mind as the public rage against the business world mounted. 1888 was a key presidential year for them. This election could bring back a Republican President into the White House after Grover Cleve- land had suddenly broken the Republican domination of the political stage since Lincoln. The Republicans started wondering whether “antitrust” could become, with a twist, a Republican pièce de resistance.

The trust problem became so “politically hot” that the New York Sen- ate resolved to organize a Democrat-Republican joint committee that could

10 Ibid: “It is the middle class, the hard-working ‘Hodges’, the wage-earning mechanics and artisans; they are bone and sinew; they are the multitude, and they have to pay to the organized army of the protectionist oligarchy an oppressive tax on every necessary of life, and are even derided, scolded, and cursed if they look in any other way on this legal robbery”.

19 cast light on the obscure trusts world – despite the “trust lobby” trying to persuade the Senate to shelve the project.11 The Committee met in New

York City on 20 February at the Fifth Avenue Hotel12 – not too enthusiasti- cally. The first day went by debating what the best location for the ensuing session could be. A sub-committee was created to solve the urgent dilemma, and the Committee adjourned to the following day. After a couple slow days

– the press wondered what those sleepy politicians were really up to, and whether they were intelligent enough to carry out a fruitful investigation13 – the Committee got down to work. The first question they had to address was tricky: what actually was a trust? Everyone seemed to agree that trusts were outrageous and against the public interest, but in 1888 no one actually knew what a trust was.

On 24th February the Committee began their hearings. Prominent businessmen who were known as having set up trusts were invited to the

Committee to be asked what their activity consisted of. The Commissioners were very explicit that they were no judiciary institution: the hearings were meant to be merely informative.14 The first session ended up in a tragic comedy. Apparently, a great epidemic was now sweeping the NY business world as a great many of those who had been invited sent letters begging pardon they could not show up since they sat ill at home. Others – perhaps

11 The New York Times, “The Trust Lobby at Work”, 16 February 1888. The “lobby” wanted the Judicial Committee be entrusted with the investigation, where it would have slept “the sleep of death”. 12 The New York Times, “Definition of a Trust”, 19 February 1888. 13 The New York Times, “The Trust Investigators”, 20 February 1888. The Times laments the committee’s “apparent apathy” and claims that the inquiry is going to be “a farce”. Re- portedly, the Committee’s lack of initiative depended on the Republican members’ “tactics”. The Republicans felt thus uncomfortable within an antitrust committee. 14 Ibid.

20 in dire need for sun and good weather – had gone to Florida.15 Mr. Rocke- feller stood out from the crowd since he came before the Committee. With his characteristic ambiguous politeness and self-control, he answered all the

Committee’s questions – it was a five hour hearing.16

After a cumbersome beginning, the Committee now started uncover- ing the “mysterious” trust world. They gathered data about the amount of capital harvested by trusts17 and, more importantly, how trusts were organized.18 But the most significant conclusion was that, in spite of the New

York Senate urging the Committee to report their findings,

The investigation covered only a small portion of the field into which

it had strayed. The committee had hardly entered upon the work be-

fore it discovered that its task was too stupendous to be performed in

the limited time at its disposal.19

The investigation demonstrated that the large trust sector of the American economy could not be explored just by six people. Moreover, the trust problem raised conceptual as well as moral dilemmas. In particular, the connection between trusts, monopoly and rise in price was not evident. However, the newspapers’ chronicle of the Committee’s activity clearly showed that the Commissioners struggled to acknowledge the problem’s inherent com-

15 The New York Times, “Sugar, Milk, and Rubber”, 24 February 1888. 16 The New York Times, “Biggest Trust of All”, 28 February 1888. 17 The New York Times, “Respite for the Trusts”, 3 March 1888. The committee carefully examined Standard Oil’s minute books and drew a very careful table showing the extent of Standard Oil’s control of smaller refineries. 18 See the above mentioned “Sugar, Milk, and Rubber”. The Committee was shown by a representative of the Sugar Trust the model certificate that every member received as a proof of the stock transfer to the board of trustees. 19 Ibid.

21 plexity. Apparently, they had been driven to “investigate” by the popular rage against the trusts, not by the wish to understand. A prime example was the interrogation of Mr. Preble, an envelope manufacturer, on the part of

Chairman Colonel Bliss, whose prejudiced aggressiveness was dismissed as inopportune even by the New York Times. The witness’s astonishment seemed to be genuine, as he tried to argue that his actions as a trustee had been dictated by mere business dynamics and that he had no desire to monopolize the American market.

Col. Bliss told the witness that it was understood the country was op-

pressed by an envelope trust. Mr. Preble, astonished, said the under-

standing was incorrect. Without abating his aggressiveness Col. Bliss

assumed that the witness was a member of the trust, and hinted that

much valuable time would be saved if Mr. Preble would prove com-

municative.

Thus prodded Mr. Preble admitted that he was a Trustee of the Stand-

ard Envelope Company. It was formed at Springfield, Mass., about

three years ago by envelope manufacturers who saw, with sorrow, that

the price of envelopes was so low as to be absolutely depraved. The

organization did not prosper for a time […] Mr. Preble was careful to

say [the company] was not a trust […] Did it control the manufacture

of envelopes in the United States? No, not more than 45 or 55 per cent

[…] This information [the share each member charged for every thou-

sand envelopes] was dragged out of the witness by the threat that he

must take the consequences if he did not answer questions.20

20 The New York Times, “Trusts Still in Sight”, 26 February 1888.

22 Anyway, after the Committee’s hearings a “public enemy” had been uncov- ered, just as the public opinion demanded, hence everyone agreed that the trusts had to be banned. But the Committee’s work was little more than a surface exploration: an antitrust law was necessary. Moreover, such a law must be a federal law, because the problem went beyond the single states’ jurisdiction – trusts combined companies at a national level.

Then Senator John “Honest” Sherman came into the limelight. The ambitious John was a brother of the more famous Civil War general Wil- liam Sherman. After being admitted to the bar in 1844 he started a political career in the Whig Party. After the Civil War, he became a prominent Ohio

Republican. A man of great power, he was described by the press as a cun- ning satrap. Many a time he managed to be the only Ohio Republican Sena- tor, allegedly not because Democrats were too strong but because he self in- trigued to oust out any potential competitor and remain the only Republican in control of the local party.21 He served also as Treasure Secretary in the

Hayes administration, but in his mind this was only a springboard to his real target: the Presidency. Sherman had already submitted its name for the Re- publican nomination in the 1880 and 1884 Convention. Although his rank- ings had always been high, he failed to win the ticket. However, persever- ance – or stubbornness – was Sherman’s strength, since he ran again in June

1888. He did not mind the progressive press depicting him as the Conven- tion’s laughing stock; although the New York Times often mocked him and

21 The New York Times, “Senator Sherman’s Foes”, 22 August 1889: “Undoubtedly the charges against Mr. Sherman are true in substance. Indeed, they may be said to be matters of notoriety in Ohio. They are in effect, that the Senator has used his influence from time to time to keep himself the ‘sole Republican Senator’ from Ohio […] This power, which is more extended and more subtle than most persons imagine, he has used to create a compact, thoroughly-disciplined Sherman ‘machine’”.

23 almost offensively questioned his intellectual capabilities, Sherman knew he could rely on many followers. 1888 would be his best chance to get the nomination. He was the favorite, and he seemed to have the edge over his rivals, but at the last ballot Harrison won by landslide.

Sherman’s disappointment was bitter, but the Ohio senator did not fall in despair. He was already planning to run again in 1892 – which he eventually did. Perhaps, his relentless ambition was the reason why he started pat- ronizing the antitrust cause. Was that a political scheme? Did he think that he would be endeared to the raging mass by becoming the champion of such a hot political topic? As the press reported, he seemed to “discover the trusts” in January. In a speech before the Senate he stated:

But it is notorious that this competition is too often strangled by com-

bination quite prevalent at this time, and frequently called Trusts,

which have for their object the regulation of the supply and price of

commodities made and sold by members of the combination.22

And he went on to advocate a tariff reduction in order to “invite competition” from abroad and keep domestic prices lower.

When such combinations to prevent a reduction of price by fair com-

petition exist, I agree that they may and ought to be met by a reduction

of duty. I hope the President will be able to specify them. I know on

none such.23

22 The New York Times, “Sherman and the Trusts”, 11 July 1888. 23 Ibid.

24 But it was only in July – just after the Republican convention – that

Sherman started issuing public declarations about the “wickedness” of the trusts and his firm belief that they must be tamed. Though with some uncer- tainty and contradictions. For example, in a declaration on the project of fish trade liberalization with Canada, Sherman pleaded to be an ardent advocate of freedom to trade and protectionism.24 But how could domestic industry be protected without high duties? Of course, such a position impacted on

Sherman’s credibility as a “trust buster”. If the trusts were the offspring of protection through tariff, how could Sherman support both positions? More- over, by December 1888 the Senate voted “for high metal duties”, which the

Times stigmatized as a measure to protect “a great trust”.25

Perhaps to solve their contradictions without disclaiming their political creed, Sherman and his fellow Republicans slowly began defending with more conviction an alternative thesis about the trusts’ origin, i.e. that the trusts and the tariff were not linked. This was a disingenuous political move; as a Republican, Sherman could appease the popular discontent as well as the American businessmen, the GOP’s traditional supporters who had thrived thanks largely to the US fierce protectionist policy. Nevertheless,

Sherman’s newfound thesis was worth attention. Theoretically, the creation of a closed and tariff-shielded market did not mean per se monopoly. After all, the American market was large enough to welcome competition – had businessmen been willing to welcome competition, of course. The newspapers pointed to the “big captains of industry’s” greediness as to the ultimate cause of the rise of the trusts. Hence, even the populist press was admitting

24 The New York Times, “Senator Sherman’s Consistency”, 8 August 1888. 25 The New York Times, “Protecting Great Trusts”, 11 December 1888.

25 that more fundamental reasons than the tariff technicalities were at play here. Could there be reasons intrinsic to the evolution of the American capitalism for the rise of the trusts? Were the trusts the mere effect of few individuals’ greediness, or were they originated by fundamental historical processes going on in the turn-of-the-century American society?

26 Chapter 2

The Rise of the Industrial Society: New Ethical-

Economic Dilemmas

In the decades between the end of the Civil War (1865) and the end of the

1880’s American society underwent an extraordinary evolution thanks to the process of rapid and massive industrialization. Within thirty years the US became an urban mass society, after being for a century a largely rural country. Many left the countryside and moved to the town seeking new opportunities as did hundreds of thousands of emigrants from Europe as well as

China and Japan. If in the 19th-century Melville’s New York was still jeal- ously preserving the memory of its Dutch roots, the city of the Gilded Age had now become a world metropolis. Politically, industrialization brought about the development of a new political subject: the proletariat. Its power was fully displayed during the violent strike of the Pullman’s workers. In

1894, as a consequence of the severest depression since the Reconstruction

Era, unemployment had climbed to a huge 14%, and this had led to violent protests. The average American feared that the class struggle had been im- ported from Europe, and that socialism was about to overthrow the traditional “American values” founded on individualism and private property.

In foreign policy, the closing of the Frontier marked the end of the

American continent colonization, which prompted the US to find new foreign markets for its huge industrial surplus – by the turn of the century the

US had become the world’s industrial powerhouse. Hence, the US tried to

27 colonize “non contiguous territories” in the same fashion as the European powers. Between 1897 and 1898 the US projected itself towards Asia incor- porating the Hawaii and creating a protectorate in the Philippines. It also consolidated its presence in the Caribbean with the occupation of Puerto Ri- co. The US definitely shelved the Monroe Doctrine, which had been only a defensive theory aimed at keeping the European powers out of the Western hemisphere (in the 1820’s the US was still a fragile experiment).1 However, the American imperialism was a short-lived and limited experience in comparison with European colonialism. The US lacked the facilities (it still lacked a substantial fleet) nor the experience to emulate the European powers. After all, the sheer size of the US’s economic power was its trump card.

As the biggest player, economic colonialism rather than territorial colonialism was much more promising.

Consequently, the US promoted and then defended the “Open Door

Policy”, the principle that the huge Chinese market had to be “free”, i.e. that only economic competition should decree the winner. Had China been di- vided into “influence areas”, the European powers with their trade posts in the Far East would have prevailed. But if the Chinese market remained

“free”, the biggest fish would eventually swallow the small one. Especially in the Theodore Roosevelt era, the US succeeded in preserving the status quo – though with increasing difficulty due to Japanese hegemonic ambi- tions, which Roosevelt tried to contain as the chairman of the peace confer- ence ensuing the Russian-Japanese war in 1905. Hence, in the Gilded Age

1 R. Hofstadter, “Manifest Destiny and the Philippines”, now in Th.P. Greene (ed.), Ameri- can Imperialism in 1898, Boston, Heath & Co, 1955, p. 54-70, on the ideological justification of the US’s outward projection, and in particular p. 61 on the Monroe Doctrine.

28 the foundation of a “New Empire” on the grounds of economic power – to use Walter LaFeber felicitous definition – had been accomplished.2

The key to the US’s success in the second half of the 19th century was the American capitalism’s shift to the industrial stage. If the pre-Civil War age was still the self-made men’s age, that is to say of those “industrious” and restless men who were the “backbone” of the American democracy; if it was the age of small workshops, stores and family-run concerns such as the

Thoreaus’, who produced the best pencils in the American continent thanks to Thoreau Sr.’s ingeniousness; if it was the age of Jackson who, from the

Tennessean log cabins was anointed to the Presidency after a not very successful career as a businessman; then, at the turn of the century this world had definitely faded away and it had become nothing but a remembrance of

“jolly old time”. The Union’s victory in the Civil War had indeed sanctioned the triumph of the Northern capitalistic bourgeoisie: the class that transformed the US into an industrial powerhouse.

Incidentally, industrialization also had disadvantages. The Confedera- tion’s nostalgics lamented that the “Yankees” had created a new type of serfdom, the “wage slavery”.3 The poor worker who labored up to twelve hours a day to make a living was the new outcast. Conversely, men such as

J.D. Rockefeller, J.P. Morgan, A. Carnegie, H. Ford etc. had amassed insane fortunes after the boisterous economic growth that the 1870’s and the

1880’s witnessed. In the age of steel, coal, gas and electricity, inequality had

2 W. LaFeber, The New Empire: An Interpretation of American Expansion 1860-1898, Itha- ca, Cornell University Press, 1963. See also W.A. Williams, “The Frontier and American Foreign Policy”, Pacific Historical Review, 24, 4, November 1955, pp. 379-395. 3 G. Bancroft, “The Office of the People in Art, Government and Religion”, in C. Rozwenc (ed.), The Meaning of Jacksonian Democracy, Lexington, Heath & Co, 1963, p. 27: “The labourer at wages has all the disadvantages of freedom and none of its blessings”.

29 become an urgent problem within the American society, and people became increasingly interested in social issues. The successful sale of books such as

Progress and Poverty by Henry George was proof.4

How could the US, within scanty 30 years, transform into a mature industrial society? Up to the 1860’s the US was still largely a rural country.

Many factors account for such a wondrous growth. Of course, the US en- joyed highly favorable material conditions, such as abundance of natural resources, but also immaterial factors played a decisive role. For example, the

19th century invented the modern corporation, a key juridical innovation.

Before, every new company needed to obtain a special permission (the

“charter of incorporation”) by the highest authority, as sanctioned by the

English Common Law.5 It would be the king,6 the parliament or legislative bodies such as the American state legislatures. It became apparent in the second half of the 19th century that the old charter system had become obsolete especially within the modern context of the US.7 Within a few years, the state legislatures approved laws which “automatized” the incorporation process. The vote of the legislative assembly was no longer necessary; the

4 H. George, Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy, 1879. 5 The American law inherited the entire corpus of the English Common Law after Inde- pendence. For this reason, American laws and Court opinions can refer to old English jurisprudence (even to medieval laws) as to their precedents. 6 In 17th-century United Kingdom it was the king who issued charters to individuals wishing to produce, sell or trade with goods in a monopolistic regime – against the exclusive power retained by the gilds. With the Statutes of Monopolies (1624), signed by James I, the English parliament reserved for itself the right to award privileges, and reduced the number of the lawful monopolies (Statute of Monopolies 1624, 21 Jac 1 c 3). 7 T. Freyer, “The Sherman Antitrust Act, Comparative Business Structure, and the Rule of Reason: America and Great Britain, 1880-1920”, Iowa Law Review, 74, Winter 1988-1989, p. 74: “In both nations [the US and the UK] the corporation was essential to the emerging industrial order. The corporate form was not new, but between 1870 and 1890 increasing numbers of transportation and manufacturing companies used it to consolidate new business functions and to establish improved organizational control”.

30 would-be corporation had only to be registered in a general list after submit- ting a document declaring its name and purpose. This meant that politics and business had become independent, and that business could speed up its pace – although the charter of incorporation specified the scope that the corporation ought not to trespass.

Of course, corporations existed also in other countries, but the Ameri- can context was more favorable to business, thanks to its peculiarity. In

Great Britain, the most important companies were still largely owned by independent families, whereas American companies quickly evolved from the stage of the individual firm to the modern and more efficient managerial enterprise.8 This depended on the very structure of American society, where class boundaries were not so strong as in Europe, but there are at least two additional reasons. As Hannah points out, the American legal context influ- enced the evolution of American business. Laws regulating economic activity put strain on family-run and family-owned companies; hence, they “provided a positive pressure for federations of small family firms to turn them-

8 L. Hannah, “The Development of Modern Management Structure in the US and UK”, in Th. McCraw (ed.), The Essential Alfred Chandler: Essays Towards a Historical Theory of Big Business, Boston, Harvard Business School Press, 1988, p 361. Hannah lists three stag- es in business evolution. The first was the “personal enterprise”, where the owner is at the same the only or the main manager (but he “rarely employed as many as four or five”). The second stage is the “entrepreneurial enterprise”. As companies “grew large and began to carry more than one function, the number of salaried managers increased, reaching 20 or 30 or even 50”. But these managers where still “servants of the company”, the largest amount of shares “remained in the hands of the entrepreneurs […] or in those of their families. These share-holders continued to have a major say in the selection of managers and in long- term planning and allocation of resources”. The final stage was the “managerial enterprise”, which meant the complete separation of ownership and management. “As [companies] grew larger and as their activities were extended and diversified, stock ownership tended to become very scattered. Full-time, salaried career men who owned little or no stock took over positions in top as well as middle and lower management […] Owners became ren- tiers, more concerned with the dividends than the operation of their company”.

31 selves into large, functionally departmentalized managerial enterprises”. 9

On the contrary, antitrust laws were to appear later in Britain. Secondly, the

US market was bigger and more dynamic than any other European market.

Entrepreneurs were attracted by the opportunity of huge profits in very short time, and this meant that companies had to be efficiently organized to provide the US market with all the goods it demanded. As a result, “American manufacturers standardized machines in volume and invented or adapted mass-production machinery and other equipment long before the British did”.10

But the key factor of US success was the technological development of the central decades of the 19th century. It stimulated the birth of an efficient industrial system able to satisfy the quickly growing demand for new goods and services. Initially, the symbol of such progress and process was the transcontinental railway. After the accomplishment of this gigantic enterprise (1869) the whole continent became connected from coast to coast, and within a couple decades it became networked by private company railroads competing with each other. The average American became mobile, and the railway became indispensable. This advancement in means of transportation and telecommunication technology (invention of printing telegraph; laying of the first reliable transatlantic telegraph cable, 1866) enor- mously expanded the American corporations’ market, which now embraced

9 Ibid, p. 381. Hannah does not mention the very fact the whole structure of American law is designed to protect the individual freedom and property rights from government interference, which made the US a context particularly suitable for private enterprise. The relationship between the American Constitution, antitrust law and business is discussed in the following chapter. 10 On “standardization” and “modularization” as a typical feature of the American mindset see R. Kroes, If You’ve Seen One You’ve Seen The Mall, Chicago, University of Illinois Press, 1996, pp. 32-33.

32 the whole continent, and was more tightly connected than Europe.11 Such a development changed people’s habits forever. The urban skyline changed as it started growing in height due to the extensive use of steal in buildings and to the invention of the lift.

However, the technological development had unforeseen side effects.

A bigger market meant of course more opportunities – Missouri’s meat could now reach New York and still be fresh thanks to refrigerated railway carriages – but also an increase in competition: in principle, everything could now be everywhere. The more technology advanced, the “smaller” the

US became, but the higher degree of interconnectedness caused a cut-throat competition situation that encouraged the quest for more efficient production methods. Production costs had to be minimized, and the price level of finished goods had to be kept high in order to assure a decent margin of profit. A strategy to maintain such price level was the “output reduction”, which was to be achieved through “business consolidation”. In other words, since the 1870’s the biggest companies started to buy the smaller competitors to reduce competition and avoid the prices race to the bottom.

After all, this was nothing extraordinary. Despite the dominant rheto- ric, free competition has always been capitalism’s thorn, and entrepreneurs have always tried to associate and avoid cut-throat competition.12 At the be-

11 Ch. Van Hise, Concentration and Control – A Solution of the Trust Problem in the Unit- ed States, New York, McMillan, 1912, pp. 1-7. 12 This was admitted for example by E.H. Gary, chairman of the board of United States Steel Corporation during the hearings of the committee created by Congress to investigate on the lawfulness of the trust’s business in 1912. Gary describes the business world as a “war of the survival of the fittest, whereas every businessman’s interest was “stability as opposed to demoralization and wide fluctuation”. Hence, when Gary invited to his “din- ners” the most important capitalists in the steel sector, “the question was how to get between the two extremes of securing a monopoly by driving out competition, however good- naturedly, in a bitter, destructive competition or without making any agreement, express or

33 ginning of the 19th century they created “pools”, informal associations where the entrepreneurs could exchange information and “coordinate” their business. Of course, such a mechanism was very weak, because it had to rely on the individuals’ word of honor.13 Consequently, in the 1880’s a more perfected form of business coordination was invented – the trust.

But there was an additional reason why small companies faced increasingly difficult trading by the end of the 19th century: the intrinsic nature of the industrial-capitalistic system. The production of steel, machinery, locomotives, steamships etc. required high investments that only a big company could afford. The very complexity of the production process excluded new products being manufactured by a single family-run company.14 By the beginning of the 20th century, twelve huge plants were enough to supply with steel the whole of the US market – the small town foundries had van- ished. In addition, the sheer size of the biggest companies, which meant a larger liquidity in absolute terms, gave them greater bargaining power. The

“big fishes” could more easily obtain discounts on the shipping costs (re- bates) or even sell under the production cost to test the resistance of their smaller competitors, whose liquidity would have been quickly exhausted by implied, tacit or otherwise, which should result in the maintenance of prices”. Paradoxically enough, pointed out the Committee Chairman, Gary would have welcomed state control of prices (“socialism”) against free competition, which Gary agreed with. See Committee of Investigation f the United States Steel Corporation, “A Testimony of Elbert H. Gary, Chairman of the Board, United States Steel Corporation”, in E.C. Rozwenc (ed.), Roosevelt, Wilson, and the Trusts, Boston, Heath & Co., 1949, pp. 64-68. 13 On the various forms of business coordination / consolidation see H.U. Faulkner, “Con- solidation of Business”, in Rozwenc, op. cit., pp. 1-19. 14 Van Hise carefully lists the many advantages yielded by business concentration in the new industrial society, such as “subdivision of labor”, “Integration [of production]”, “In- vestigating Departments” (what we today call “Research Division”), “Keeping establish- ments up to date” etc. All factors leading to “small manufacturers disappearing” (Van Hise, op. cit., pp. 8-21). Van Hise lists also the disadvantages of competition, for example the fact that “competition has failed to secure quality” (p. 77). Consequently, he labels the general opinion that competition is the best means of securing a fair price” as a “blind faith” (p. 74).

34 damping. As a result, the latter were forced to put their business up for sale or to close. Standard Oil was the paradigmatic example of such a predatory economic strategy. Without scruples Rockefeller’s colossus did not shy from using any means – including intimidation – to acquire the smaller companies and therefore monopolize the US oil market.

The technological advancement had paradoxical effects on the Ameri- can economic system. Under the pressure of industrialization the market tended to a monopolistic equilibrium. But this fact, after all, should not have been unexpected. That had to be the final result, because in a laissez-faire regime the market’s “natural laws” tend to the reduction of competition.15

This is contrary to what the classical liberal theory states, i.e. that the market must be let “free” from state interference because it is capable to reach an efficient equilibrium which is beneficial for society as a whole. According to the liberal creed, an “invisible hand” – as Adam Smith aptly said – spontaneously coordinates all activities better than any statesman; thanks to competition between all the economic players, the consumer can enjoy low prices. However, by turn-of-the-century US the laissez-faire doctrine was conducive to a situation where big players monopolized the market and kept

15 John Moody, the founder of today’s Moody’s Corporation, boldly defended the legality of the trusts in The Truth about the Trusts – A Description and Analysis of the American trust Movement, New York, Moody Publishing & Co, 1904, p. 494-495. Moody states that “The modern Trust is the natural outcome or evolution of societary conditions and ethical standards which are recognized and established among men to-day as being necessary ele- ments in the development of civilization”. The reason thereof is that trusts “engender monopolies”, and monopolies are beneficial because “men can accomplish [their] ends far more cheaply and satisfactorily than in the old ways […] with the active working of this new element in our modern life industry grew with greater rapidity”. In other words, monopolies are more efficient than free competition: “Up to a certain point, it certainly was true that competition was the life of trade. But not so beyond that point. For quite early in the modern commercial and industrial life of men it was discovered that there were advantages to be gained in the adoption of methods somewhat different from those in vogue under the old regime of competition”.

35 prices higher than the “natural” level. Why? What is the origin of such apparent contradiction?

The fundamental issue is that by the late 19th century the economic world was completely different from Adam Smith’s. The founder of political economy and the early theorist of liberalism, Smith imagined an envi- ronment of modest traders, shopkeepers and handworkers who pursued their own interest basically ignoring each other’s decisions and behavior. In such a context, the interaction of a myriad small players contributed to produce an efficient equilibrium, the same way as gas atoms fill the vacuum in the classical theory of mechanics. Within such a context, monopolies appeared to always be a wrong, the most inefficient way to allocate resources.16

Many readers of the Wealth of Nations – politicians as well – over- looked the fact that Smith’s ideal society was largely utopian. Smith imagined a community of simple industrious men whose life purpose is not to become rich, but to make for a living with “dignity”. Consequently, when

Smith in the Wealth of Nations determined what the “right price” an em- ployer has to charge for goods or services, he stated that it is a price ena- bling him and his employees to maintain themselves and their families.17

16 A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, chapter VII “Of the Natural and Market Price of Commodities”, now in D. Campbell (ed.), The Wealth of Nations, London, Everyman’s Library, 1991, p. 54: “The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give: the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business”. 17 Ibid., chapter VIII “Of the Wages of Labour”, p. 60: “A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation. Mr. Cantillon seems, upon this account, to suppose that the lowest species of common labourers must

36 Perhaps, by the end of the 1840’s the US still resembled the Smithian ideal

– Thoreau’s Walden was after all a small town in the countryside whose inhabitants were farmers, hunters, merchants, blacksmiths, loggers and bookkeepers.18 But by the 1880’s the US had already become a completely different world. In 1848 Thoreau could still behold the train as a mirific symbol of progress; to his virgin eyes, it appeared as a puffing beast creep- ing through the forest, halfway monster halfway herald of a progressive age.19 By 1890 no one would have considered the train as a technological miracle, because it had become “normal”.20

From a socio-economic viewpoint, such major changes in the Ameri- can civilization had far reaching effects. In “old America” the individual had infinite opportunities for self-betterment, and equality could be preserved by granting everyone freedom, that is to say a chance to set up a new and more

everywhere earn at least double their own maintenance, in order that one with another they may be enabled to bring up two children; the labour of the wife, on account of her necessary attendance on the children, being supposed no more than sufficient to provide for her- self […] Thus far at least seems certain, that, in order to bring up a family, the labour of the husband and wife together must, even in the lowest species of common labour, be able to earn something more than what is precisely necessary for their own maintenance; but in what proportion, whether in that above mentioned, or in any other, I shall not take upon me to determine”. 18 This kind of community is defined by Van Hise as the “self-sufficient community”, where life did not reach further than the “neighborhood”. Van Hise, op. cit., p. 2. 19 H.D. Thoreau, Walden, in B. Atkinson (ed.), Walden and Other Writings of Henry Da- vid Thoreau, New York, The Modern Library, 1950, chapter “Sounds”, pp. 111-128. On the one hand, the railway seems to disrupt the pristine harmony of nature; it is the symbol of the modern man’s greed: “The whistle of the locomotive penetrates my woods summer and winter, sounding like the scream of a hawk sailing over some farmer’s yard, informing me that many restless city merchants are arriving within the circle of the town, or adventurous country traders from the other side” (p. 105). But on the other hand Thoreau is fascinated by the engine “moving like a comet”: “There is something electrifying in the atmosphere of the former place [the train station]. I have been astonished at the miracles it has wrought; that some of my neighbors, who, I should have prophesied, once for all, would never get to Boston by so prompt a conveyance, are on hand when the bell rings” (p. 107). 20 For a survey on the train as a symbol of disruptive modernity in the American literature see the classic L. Marx, The Machine in the Garden, Oxford, Oxford University Press, 1964, pp. 11-33.

37 successful life somewhere else. In other words, in a context such as pre- industrial US, equality could be provided through liberty, and social justice meant granting everyone a “fair chance”.21 This was in essence Jefferson’s dream: the US to become a democracy founded on a class of small landowners, “equal” because everyone was king in his own garden. Laissez-fair was the economic-political instrument to pursue such a project. But the rise of a fast-paced world where territorial expansion was no longer possible and where the material conditions of production excluded that an individual could better his condition simply with industriousness and abnegation, dis- rupted the old social paradigm. Equality could not be provided through liberty, because in a finite world “liberty” meant “the survival of the fittest”.

On the grounds of the laissez-faire doctrine, the market’s “natural laws” had generated monopolies conducive to higher prices and abuses. Hence, equality and freedom had come into conflict with each other.

In conclusion, the classical liberal theory proved to be irrelevant to solving the dilemmas triggered by the rise of the industrial society, because it applied to a world that simply did not exist any longer. Crucially, in the newborn industrial society the principle “total enterprise freedom is beneficial to society as a whole” was no longer valid. Equality and freedom had to be reconciled in a different way through a different concept of “social justice”. To solve the dilemma a radical revision of the classical liberal paradigm became necessary, but the elaboration of a “new deal” was to be very challenging, because the American constitutional law entrusted the federal government with little power to reform the American economic system.

21 J. Charvet, A Critique of Freedom and Equality, Cambridge, Cambridge University Press, 1981, pp. 11-19, on the paradoxes of the equality / freedom dialectic.

38 Chapter 3

The “Trust Problem” as a Legal Dilemma

The dilemmas brought about by industrialization heavily impacted on the

American law. In 1890, the Sherman Act – the first antitrust law in US history – was finally approved after long and fierce debate. Its phrasing was very concise and sharp: it prohibited “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations” (26 Stat. 209). However, despite such apparent simplicity, it was difficult to determine the Congress’s motive when it voted in favor of the Sherman Act. According to Bork, Con- gress aimed to protect consumers from excessively high prices. 1 Other scholars strongly disagree, pointing out that the Sherman Act showed the typical American aversion to every kind of “privilege”. Hence, the Sherman

Act did not actually mark any radical departure from the American legal tradition.2 Hoverkamp thought that the Sherman Act was a clear sign of a turn in economic ideas; it signposted a new interpretation of the competition concept.3

1 R.H. Bork, “Legislative Intent and the Policy of the Sherman Act”, Journal of Law & Economics, 9, p. 11: “In short, since the legislative history of the Sherman act shows consumer welfare to be the decisive value it should be treated by the courts the only value”. Bork reaches this conclusion thanks to his painstaking review of the Congressional Record reporting the debate. See also p. 16: “Sherman wanted the courts not merely to be influ- enced by the consumer interest but to be controlled completely by it”. 2 S.G. Calabresi – L.C. Leibowitz, “Monopolies and the Constitution: A History of Crony Capitalism”, Harvard Journal of Law and Public Affairs, 36, 3, Summer 2013, pp. 989- 1097. 3 H. Hoverkamp, “The Sherman Act and the Classical Theory of Competition”, Iowa Law Review, 74, Winter 1988-1989, pp. 1019-1065. According to Hoverkamp (pp. 1025-1026) the classical concept of “competition” is a political concept. The “English classicists” as

39 The most convincing interpretation is perhaps Letwin’s.4 Law is often the reaction to resentment on the part of the body politics or at least some sectors of the population. Such a feeling can be very strong, but also very vague. Citizens may feel that they are suffering injustice, but they can have little or no idea of the reason. Single politicians decide to represent the citizen’s plea within Congress and promote a law project addressing the issue.

Of course, they may do this for political opportunism without exactly know- ing what the problem is and how to fix it – they are just trying to appease the body politic in order not to lose favor. But such an intention does not necessarily produce new legislation; the path from an idea to a new law is indeed a twisted one. The law’s promoters must enter a long process of negotiation to find a majority that can vote the draft law. The draft enters a deep process of revision where the various political parts seek an agreement, and the result is an abstract text – every good law must be abstract, otherwise it could never be applied to a high number of cases. The draft is written in a technical language, and it is the final condensate of many different opinions. After this long negotiation, the final draft could be a document having little in common with the popular resentment which prompted the legislative process. And even now, it still needs the Congress’s approval and the president’s definitive ratification. well as the early neoclassicists appraise competition as a means to guarantee freedom from government: “[competition] referred to a theory about liberty and free choice, not to a description of price/cost relationships […] Further, anticompetitive conduct was identified as a restraint on individual freedom, rather than a manipulation of the price/cost relationship”. But in the Gilded Age a new concept of “economics” dawned. Once a branch of moral phi- losophy, economics became a technical and specialized field, and the very concept of competition became “objective”. Hoverkamp maintains that the two definitions of competition coexisted for a while. This could explain the many misunderstandings about the competition definition, for example in Holmes’s dissent in Northern Security vs US (p. 1032). 4 W. Letwin, Law and Economic Policy in America – The Evolution of the Sherman Act, Chicago, The University of Chicago Press, Chicago, 1981 (2nd edition), pp. 11-15.

40 The Sherman Act duly beat such a path. It was a response to a vague but raging dissatisfaction, and it was approved due to the patronage of an ambitious and powerful senator who most probably did not see the trust problem complexity – no one knew that in 1888-1890. The result of the legislative process was a strikingly short and sharp text that proved to be difficult to apply in the real world. The Midwest farmer could perhaps feel that something had been done, but the Sherman Act was just the starting point of antitrust policy, not the definitive solution. The Sherman Act had to be inte- grated into the American legal context, and this was soon to prove challenging.

Clearly, no law is a self-sufficient text. The actual content of a law has to be fully determined by the judiciary, which explores the law’s con- nections with the other parts of the legal corpus, whenever the interpretation of a certain case yields ambiguities. In the US, it is the Supreme Court that establishes what the correct interpretation of a law is. Strikingly, in the first twenty years after this law’s enforcement the Supreme Court’s interpretation was varied. Moreover, the first test case under the Sherman Act ended up with a crushing defeat.5 In U.S. v. Knight Co., 156 U.S. 1 (1895), known also as “The Sugar Trust Case”, the Fuller Supreme Court held that the prohi- bition of “every restraint of trade” did not apply to sugar production, but on-

5 Moreover, the Harrison, Cleveland and McKinley administrations paid little or no attention to antitrust policy, which would take off only under Roosevelt. The Attorney General’s Bureau was tragicomically sub-dimensioned and ill-funded to initiate an effective antitrust campaign. It was the clear sign of the little interest towards antitrust policy nurtured by the mentioned presidents. They were 19th-century presidents who could not see in the trusts a fundamental problem of the industrial society. In economic policy, senator McKinley’s biggest concern had been the enforcement of his McKinley Tariff Act (1896). Once he became a president, McKinley went on with his protectionist policy, following a typically American tradition dating to Hamilton’s time. For a survey on the history of the Attorney General’s Bureau in the 1890’s see W. Letwin, “The First Decade of the Sherman Act: Ear- ly Administration”, Yale Law Journal, 68, 3, January 1959, pp. 464-495.

41 ly to trade. In other words, the Supreme Court ruled that the de facto monopoly obtained by the Sugar Trust did not violate the provisos of the Sher- man Act. According to the Fuller Court’s quasi-unanimous decision (8-1) the federal government could stop only the attempt to restrain interstate commerce.6 But production was under state jurisdiction; consequently, the sheer fact that the Sugar Trust produced 95% of US sugar did not fall under the jurisdiction of federal law.

Incidentally, the Court’s decision led Justice Harlan to write a dissenting opinion, arguing that the “patriotic statesmen who framed the Constitu- tion” would have never agreed with such a literal interpretation, nor would they have ever accepted an abridged federal government. Because monopolies such as the Sugar Trust were an absolute novelty, the Founding Fathers could “not foresee the necessity of investing the national government with power to deal with gigantic monopolies holding in their grasp, and injuri- ously controlling in their own interest, the entire trade among the states in food products that are essential to the comfort of every household in the land”.7 Hence, Harlan advocated the rethinking of the power relationship between the federal government and the state legislatures; he was convinced that the former should be granted more power on economic issues.8

6 On the grounds of the Constitution, art. 1, §8, cl. 3, the so-called “commerce clause”: “[The Congress shall have power to lay and collect taxes, duties, imposts and excises…] To regulate commerce with foreign nations, and among the several states, and with the Indian tribes”. 7 156 U.S. 19. 8 Ibid.: “But it is equally true that the preservation of the just authority of the general government is essential as well to the safety of the states as to the attainment of the important ends for which that government was ordained by the people of the United States, and the destruction of that authority would be fatal to the peace and wellbeing of the American people. The Constitution, which enumerates the powers committed to the nation for objects of interest to the people of all the states, should not therefore be subjected to an interpretation so rigid, technical, and narrow that those objects cannot be accomplished.”

42 In Northern Securities vs U.S., 193 U.S. 197 (1904), a lawsuit where the railway companies Great Northern and Northern Pacific were found guilty of “restraint of trade”, the Supreme Court issued a completely different ruling. Following the New Jersey incorporation laws, the two formerly independent companies had been merged into the holding Northern Securi- ties Company and had started issuing stocks. The Supreme Court ruled that such a financial operation violated the Sherman Act, but the sentence went down in history because the Court acknowledged in the syllabus that the

“holding corporation” was legal. Therefore, Northern Securities opened the floodgates to an unprecedented wave of mergers. In a few years the trust- form was supplanted by the holding-form; even Standard Oil was legally re- incorporated as a holding.

In between these opposite decisions, there was a row over lawsuits where the Court constantly changed its interpretation of the Sherman Act, which is extraordinary if we consider that Melville Fuller vested the Chief

Justice office in the whole period of the early antitrust history (1888-1910).

United States v. Trans-Missouri Freight Ass’n, 166 U.S. 290 (1897) was the first triumph of the Sherman Act. Justice Peckham wrote the opinion holding that the Sherman Act went beyond the unclear precedents of Common

Law, which seemed to prohibit only “unreasonable” monopolies. On the contrary, the Sherman Act prohibited every restraint of trade, and it should therefore be interpreted literally.9 The decision blatantly turned upside down

9 Common Law seemed to forbid “engrossing” and “restraint of trade” only with reference to the “necessaries of life”. Monopoly could be acceptable, provided its ends were not “unlawful”, i.e. that it was not against the public interest. English courts ended up embracing the “rule of reason” as the criterion to assess the legitimacy of monopolies, which of course left much room to discretion. On the historical foundation of antitrust law see T.W. Dwight,

43 the interpretation of the District and the Circuit Court, which had upheld the defendant. Justice White wrote a strong dissent where he claimed that the law had to be interpreted more flexibly. According to him (and to the advo- cates of modern business) the law prohibited only “unreasonable” monopolies, as stated by Common Law.

Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899) was apparently another victory of the antitrust party, since it ruled that the pipe makers company, who operated in concert in various municipal actions, violated the Sherman Act provisos. However, the underlying criterion of the

Sherman Act interpretation changed again. Writing the Court’s opinion, Jus- tice Peckham extensively quoted the decision written by the Chief Judge of the Sixth Circuit Court, William Taft. The latter had proven the unlawful- ness of the Addyston Pipe & Steel Co. on the grounds of Common Law.

According to his calculations, the defendant was guilty because the price charged was too high, hence “unreasonable”. The Sherman Act should therefore be interpreted within the Common Law framework, as Peckham self-stated delivering the Court’s majority opinion. The Trans-Missouri decision was turned upside down.

The “rule of reason” doctrine came into maturity after the Fuller

Court, when Justice White became Chief Justice. Predictably, in the great

Standard Oil Co. of New Jersey v. U.S. 221 U.S. 1 (1910) decision, he ar- gued that Standard Oil was guilty because it had “directly” and “immediate-

“The Legality of ‘Trusts’”, Political Science Quarterly, 3, 4, Dec. 1888, pp. 592-632; T. Freyer, “The Sherman Antitrust Act, Comparative Business Structure, and the Rule of Rea- son: America and Great Britain, 1880-1920”, Iowa Law Review, 74, Winter 1988-1989, pp. 991-1017; Letwin, op. cit., pp. 18-52.

44 ly” affected interstate commerce.10 Restraint of trade was not per se unlawful, but only under such conditions. In other words, Standard Oil was guilty because it had been “established by a presumptive intent to exclude others, evidenced by the use of tactics to exclude other”.11 Standard Oil had at- tempted to “monopolize” the oil market, and it was the intention which was unlawful, not the very fact of monopoly. Paradoxically, as the Sherman Act began to successfully “burst the trusts”, the Supreme Court’s considerably weakened its reach by constructing the “rule of reason” argument, which finally ushered in new forms of business consolidation after the Northern Se- curities decision.

The uncertain interpretation of the Sherman Act on the part of the Su- preme Court clearly betrayed the difficulty of “harmoniously” inserting this new law into the framework of the American jurisprudence. The Sherman

Act contrasted with the key principles of the 19th-century American legislation, which primarily aimed to protect the sanctity of contracts and of property rights from government interference. Progressive historians such as

Charles Beard contended that the American Constitution was the bulwark of property rights. According to Beard, the American Constitution was conceived of as an “economic document” aiming to protect the interest of the mercantile, professional and financial strata of the (late 18th-century) Amer- ican society. The American Constitution defended the preeminence of the

“moneyed interests” against the landowners. The cumbersome “check and

10 221 U.S. 66, quoting from the Freight Ass’n case (p. 592): “To treat as condemned by the act all agreements under which, as a result, the cost of conducting an interstate commercial business may be increased, would enlarge the application of the act far beyond the fair meaning of the language used. There must be some direct and immediate effect upon interstate commerce in order to come within the act”. 11 Letwin, op. cit., p. 264.

45 balances system” had been specifically devised to impair a “democratic” majority from taking command of all the state branches and overthrow the political order.12

The problem of the economic interpretation of the American Constitu- tion is one of the most debated topics in American historiography. More recent research has shown that a rigid, dichotomal approach such as Beard’s – the so-called “economic determinism” – is not backed by empirical evi- dence.13 Moreover, Beard’s position was not neutral, he was a militant progressive historian.14 However, there is little doubt that the Supreme Court during the US’s first hundred years did actually construe the “sanctity of contracts” doctrine, and that they boldly defended the property rights using the Constitution as the legal basis. In particular, the V amendment of the

Bill of Rights was used as the foundation of the so-called “substantive due process” doctrine.15 Clause 3, which says “nor [shall any person] be deprived of life, liberty, or property, without due process of law”, can be indeed interpreted in two ways. In the “procedural” interpretation clause 3 simply means that everyone must be granted just process, because everyone is equal before the law. The “substantive” interpretation construes instead the argument that government cannot constrain the citizen’s “prerogatives”

12 Ch. Beard, An Economic Interpretation of the American Constitution (1913), New York, McMillan, 1921. 13 F. McDonald, We the People: The Economic Origins of the Constitution, Chicago, Chi- cago University Press, 1958. 14 For a critique of Beard’s method and contextualization of his thought see R. Hofstadter, “Beard and the Constitution: History of an Idea”, American Quarterly, 2, 3, Autumn 1950, pp. 195-213. 15 The “substantive due process” doctrine is, properly speaking, based on the “due process clause” of the XIV amendment, which was introduced into the Constitution only in 1864 after Lincoln’s Emancipation Proclamation. However, the V amendment clause is very similar, and this is the reason why the idea that the “due process jurisprudence” existed before the Civil War is altogether sensible. Consequently, the “substantive due process” doctrine can be regarded as a leitmotiv of American jurisprudence until the Progressive Era.

46 other than in the judicial context. On the grounds of such an interpretation, defended mostly by conservative courts, social legislation or public utility policies are difficult to enforce, because every restraint of the citizens’ freedom is unlawful.

Early in 1810 Chief Justice Marshall, the first Supreme Court’s Jus- tice, defended the “sanctity of contracts” – a fundamental principle of the

Federalist creed – in Fletcher v. Peck (10 US 87).16 Taney’s Court, did much to construe the “substantive due process” doctrine, although with some ambiguity. The democratic spirit of the Jacksonian era led the Taney

Court to abridge the primacy of individual interests in lawsuits such as

Charles River Bridge v. Warren Bridge, 36 U.S. 420 (1837). 17 But the

(in)famous decision of Dred Scott v. Sanford, 60 U.S. 393 (1857) became the legal basis of the “substantive due process” doctrine,18 which was to be finalized in the 1870’s and in the 1880’s by Justice Field. Although many of his opinions had been dissenting, they became after his tenure the core of later jurisprudence.19 For instance, in the much-contested decision Lochner

16 H.E. Willis, “Capitalism, The United States and the Constitution”, Kentucky Law Jour- nal, 22, 3, March 1934, p. 351: “[Justice Marshall] held that a charter of a charitable corporation was not only a contract rather than a mere repealable act of a legislature, but that as a contract it was free from the exercise by the state government of the great police power, the power of taxation, and perhaps even the power of eminent domain which had been delegat- ed to the legislatures as agents of the people. The doctrine of this case was soon extended to private business corporations”. 17 36 U.S. 549, Taney delivering the Court’s opinion: “While the rights of private property are sacredly guarded, we must not forget that the community also have rights, and that the happiness and wellbeing of every citizen depends on their faithful preservation”. 18 60 U.S. 451, Taney’s opinion: “An act of Congress which deprives a citizen of the United States of his liberty or property, merely because he came himself or brought his property in- to a particular Territory of the United States, and who had committed no offence against the laws, could hardly be dignified with the name of due process of law”. 19 See for example Slaughterhouse Cases, 83 U.S. 36 (1872), especially 83 U.S. 88, Field’s dissenting opinion: “It is contended in justification for the act in question that it was adopt- ed in the interest of the city, to promote its cleanliness and protect its health, and was the legitimate exercise of what is termed the police power of the State. That power undoubtedly

47 vs New York 198 US 45 (1905), the Court rested upon the principle that the introduction of a maximum working hours per week for the New York bak- ers was unconstitutional because it deprived those workers of the right to bargain, i.e. of the “opportunity” to work more hours than the average. Since working in bakeries was an unhealthy and debilitating job, progressive legislation wanted to reduce the damage caused by overwork, but such an intention was not accepted by the Supreme Court, who defended the “liberty of contract” on the grounds of the “substantive due process” doctrine.

In conclusion, the American legal context left little room to social legislation. Therefore, it was difficult to interpret the Sherman Act as a law trying to stop “big business” against the traditional property rights doctrine.

However, the Supreme Court never declared the Sherman Act unconstitutional. The quest for more economic justice was reasonable, after all, and the Justices must also hold that the trusts were a menace for society if not

“properly” regulated. But how could a reform project rethink the “big business’s” weight in the American society within a legal system construed to the protect liberty? The Common Law precedents were too ancient and vague to yield clear guidelines. Furthermore, they did not exclude the legitimacy of certain monopolies. How could they be profitably interpreted in a

“new world” such as the US in the Gilded Age? A new comprehensive vi- sion of society, ethics and economy was necessary; it should offer new fundamental moral intuitions which could serve as the guiding principle of a

extends to all regulations affecting the health, good order, morals, peace, and safety of society, and is exercised on a great variety of subjects, and in almost numberless ways. […] But under the pretence of prescribing a police regulation, the State cannot be permitted to en- croach upon any of the just rights of the citizen, which the Constitution intended to secure against abridgment”.

48 more “up-to-date” jurisprudence. It was Theodore Roosevelt who understood that the solution of the “trust problem” required to tackle such a theo- retical challenge.

49 Chapter 4

Theodore Roosevelt’s Attempt to Reconcile Liberty and Justice

Theodore Roosevelt was the first US president who took seriously the trust problem. Ironically, a “president by accident” was to show a better understanding of the historical importance of the trust problem than the experi- enced, but basically 19th-century-minded, presidents Harrison, Cleveland and McKinley. Of course, nobody can say how McKinley could have react- ed to the challenges of the new century, had not he been assassinated. How- ever, the eventful circumstances that brought Roosevelt to the presidency make this figure strongly stand out against the political background of his time as a “titan” – or as “the Rough Rider”, an image that he self- popularized after his famous charge in the Spanish-American war.

In antitrust policy Theodore Roosevelt went down in history as the

“trust buster”, but at a closer look it clearly appears that such a label does not render the picture of a man much more complex than he appeared. TR understood that the trust problem, beyond the legal technicalities, was a moral dilemma. He could see that both society and the capitalists had their good reasons, and he sought to find a good compromise. Moreover, Theo- dore Roosevelt never pleaded for returning to the literal interpretation of the

Sherman Act as in late 19th-century jurisprudence. During his administration the Supreme Court ruled that the Standard Oil Trust was unlawful, but it ruled also that business concentration was no evil per se. On the contrary, it

50 was under Roosevelt that “big business” was definitely consolidated. Still,

TR ardently advocated governmental control of big business, to the extent that in his last years he was (quite improbably) labelled as a “socialist”.1

To summarize, Theodore Roosevelt was a character who defied any straightforward, black and white definition. It is a pointless question as to whether he was more “progressive” or more “pro-business” in his antitrust policy: both aspects were related. It depends on the very way TR conceived of the trust problem, and especially on the historical significance Roosevelt attached to it. Although TR did not seem to have any clear idea how to practically fix the trust problem as he started his first term,2 he had a keen perception of the mighty historical changes within the US at the turn of the century. In spite of Holmes’s most trenchant epithet – Roosevelt as an “or- dinary intellect”3 – TR knew that industrialization had come to stay. In particular, he considered the transformations in business and production as “an inevitable process of economic evolution, being in many cases efficient economic instruments”.4 More importantly, TR understood that the people’s very way of life had been changed by the “extraordinary” technological de-

1 Roosevelt was dubbed as a “socialist” especially after splitting with Taft, who represented the traditional wing of the Republican party. 2 T. Roosevelt, “Wise and Unwise Methods for Remedying Trust Evils”, 2 Sept. 1902, in W. Griffith (ed.), The Roosevelt Policy – Speeches, Letters and State Papers, Relating to Corporate Wealth and Closely Allied Topics by Theodore Roosevelt, New York, The Cur- rent Literature Publishing Company, 1919, vol. 1, p. 54: “There is not any patent remedy for all the ills. All we can do is to make up our minds definitely that we intend to find some method by which we shall be able to tell, in the first place, what are the real evils and what of the alleged evils are imaginary; in the next place, what of those evils it is possible to cure by legislation; and then to cure them by legislation and by an honest administration of the laws after they have been enacted”. TR’s wording and phrasing, here, is remarkably abstract and vague. It seems to be more an attempt to elaborate guidelines than an action plan. Only in 1905 did his plan of a federal commission come to maturity. 3 Holmes was at odds with Roosevelt, and especially after the Northern Securities decision their personal relations quickly deteriorated. 4 Roosevelt, “Progress Made toward Federal Control of Corporations”, 3 Apr. 1903, in Griffith, op. cit., p. 109.

51 velopment “due […] above all to the revolution in the methods of transportation and communication, that is, to steam and to electricity to the railroad and the telegraph”.5 As a result, the “complexity and rapidity”6 of industrial growth had given the US a “commanding position”7 in the world, but it had also brought about “complex social and economic questions”.8

Of course, Roosevelt was enthusiastic supporter of US industrial growth, which he saw as a formidable instrument of “soft power”. He was by no means a revolutionary striving to turn upside down the American way of life. Quite the opposite, he was a “conservative”, and he was scared by the bogus socialism whose “ghost” seemed now to take root even on the

American soil.9 He was also a genuine supporter of the traditional “Ameri- can values”. He defended “liberty” (i.e. the primacy of individual rights and of property rights) but also all those moral qualities such as “honesty” and

“hardihood” which had transformed a bunch of colonies into a modern empire. He considered that the American people were best placed to develop a viable form of “self-government”.10 Incidentally, his faith into the American people’s superiority was backed by his basically racist belief that the “An- glo-Saxon race” was best endowed by nature in the “struggle for survival” –

5 Roosevelt, “Administrative Control of Railways”, 19 Oct. 1905, in Griffith, op. cit., p. 302. 6 Roosevelt, “Progress Made…”, p. 109. 7 Roosevelt, “Industrial Peace”, 11 Nov. 1902, in Griffith, op. cit., p. 98. 8 Roosevelt, “National Supervision of Great Combinations of Capital and of Labor”, 9 Apr. 1902, in Griffith, op. cit., p. 26. 9 Roosevelt claimed many a time that social (“progressive”) reforms had to be enforced in the capitalist burgeoise’s self-interest. Promoting a more humane kind of capitalism through legislation would have preserved the US from radicalism, that is to say from anarchism and socialism. See Roosevelt, “Enforcement of Law and the Railways”, 10 Oct. 1907, in Griffith, op. cit., p. 629: “Their [= of the great corporations] spokesmen do not seem to be aware that in what we have been trying to do we have not been improperly radical; using the word in its right sense, we have been conservative”. 10 Roosevelt, “Class Government”, p. 150.

52 especially in comparison with the weaker “Latinos”. Theodore Roosevelt belonged indeed to a milieu of social Darwinist intellectuals, and Peter

Chandon Brooks Adam – author of The Law of Civilization and Decay – was one of his intimate friends.

However, TR did not intend to pursue the US’s aggrandizement project at any price. TR came from that North-Eastern “aristocracy” which has been sharply characterized by Richard Hofstadter as a “generation of alien- ated and homeless intellectuals”. 11 A generation of well-off and well- educated men for whom “money-making was sordid” and “politics was dirty” by definition. Consequently, TR could not accept that the pursuit of self-interest overrode the most basic standards of morality. He could not accept that “wolfine greed”12 and egoism were to become the measure of success, nor that the plea for individual freedom became an excuse to overlook the huge inequality disrupting the turn-of-the-century American society. In brief, he could not accept that individualism tore the fabric of society. The legitimate pursuit of success and profit must not destroy the bond which makes of a group of individuals a community.13 Thus, businessmen had to remember that they served an end higher than mere profit.

11 R. Hofstadter, The American Political Tradition (1948), New York, Vintage Books, 1989, p. 267. 12 Roosevelt, “Industrial Peace”, p. 102. 13 Roosevelt rearticulates here a classical motive of the ancient Greek historiography (Thu- cydides). The pólis falls into the stásis (disorder, lack of harmony, internecine conflict) when different groups start fighting each other to obtain supremacy. The only way to re- store peace (eleuthería) in the political community is either the enforcement of reforms changing the power balance, or civil war. Such a classical motive occurs in “Class Gov- ernment”, 7 Sept. 1903, in Griffith, op. cit., p. 149, where TR explains the causes of the decay of the ancient Greek and medieval Italian republics.

53 It is, of course, a mere truism to say that every corporation, the small-

est as well as the largest, is the creature of the State. Where the corpo-

ration is small there is very little need of exercising much supervision

over it, but the stupendous corporations of the present day certainly

should be under governmental supervision and regulation.14

Let us the man of great wealth remember that, while using and enjoy-

ing it, he must nevertheless feel that he is in a sense a trustee, and that

consistent misuses, whether in acquiring or spending his wealth, is

ominous of evil to himself, to others who have wealth, and to the Na-

tion as a whole.15

In old-time America, the “rugged individualism” paradigm yielded fruit because the material conditions of life were different.16 But, the changes brought about by modernization cried for a deep revision of the social contract: the old American virtues needed to be given a new meaning.17 Ac- cording to Theodore Roosevelt, even the Founding Fathers would have approved of his plea, because they would have found corporate power incom-

14 Roosevelt, “Problems Growing out of Modern Industrial Revolution”, 6 Sept. 1903, in Griffith, op. cit., p. 64. 15 Roosevelt, “Regulating Railways by Law”, 30 May 1907, in Griffith, op. cit., p 517. 16 Roosevelt, “There Will Be No Change in Policy”, 20 Aug. 1907, in Griffith, op. cit., p. 536: “When the Constitution was created none of the conditions of modern business existed”. 17 Theodore Roosevelt knew how challenging such a task was. Not by chance, in many a speech he likens his time with the Civil War, underlying that the changes unfolding in the Gilded Age on were as traumatic and far-reaching. See, for example Roosevelt, “Rights of Property and Abuses of Wealth”, 21 Oct. 1907, in Griffith, op. cit., p. 634: “we need to have that spirit shown in civic life just as much as in military life. If ever our people become so sordid as to feel that all that counts is moneyed ignoble well-being, effortless ease and comfort, then this nation shall perish, as it will deserve to perish, from the earth”.

54 patible with the very principles on which the US was founded, especially the hatred of privilege sanctioned by the Constitution itself.18

Was Theodore Roosevelt, the ultimate “trust buster”? Quantity-wise, it should be Taft, who filed in four years more antitrust cases than TR in two terms. Moreover, the Supreme Court upheld the holding corporation in

1904, the acme of Roosevelt’s political fortune. Generally, TR never condemned big business per se, because he knew that it was necessary in a modern society. Besides, as a true American he maintained that enterprise freedom was a key value.19 He aimed to bust only the “bad” trusts.20 In other words, TR sought to find a balance between individual freedom and social justice, and it is precisely this plea for balance which is most typical of his antitrust policy. For this reason, he wanted governmental supervision to be indirect in order not to transform American society into a socialistic society. He created a Federal Commission with full power of inspection; Roo- sevelt deemed indeed that publicity would deter private entrepreneurs from

18 Roosevelt, “Class Government”, p. 148: “Class government, whether it be the government of a plutocracy or the government of a mob, is equally incompatible with the principles established in the days of Washington and perpetuated in the days of Lincoln”. In the same speech (p. 152) TR seems also to implicitly quote the Gettysburg address: “Ours is a government of liberty, by, through and under the law”. Again, by such rhetorical means, TR aimed to underline the similarities between the “industrial revolution” and the Civil War in order to justify his reform project. If modernity had changed so deeply the American society, the government action had to be as far reaching and powerful as in the 1860’s. 19 Roosevelt, “Wise and Unwise Methods for Remedying Trust Evils”, 2 Sept. 1902, in Griffith, op. cit., p. 51: “But if by trust we mean merely a big corporation, then I ask you to ponder the utter folly of the man who either in a spirit of rancor or in a spirit of folly says ‘destroy the trust’, without giving you an idea of what he means really to do. I will go with him if he says destroy the evil in the trusts, gladly”. And p. 51: “We wish not to penalize but to reward a great captain of industry or the men banded together in a corporation who have the business forethought and energy necessary to build up a great industrial enterprise”. 20 Roosevelt, “Progress Made toward Federal Control of Corporations”, 3 Apr. 1903, in Griffith, op. cit., p. 109: “I speak for the great majority of the American people when I say that we are not in the least against wealth as such […]; that we merely desire to see any abuse of corporate or combined wealth corrected and remedied”.

55 wrongdoing. 21 Besides, TR wanted the commission to enjoy a licensing power: only business which had been proven to be “honest” should be granted the right to exist. Roosevelt hoped that in this way, companies would spontaneously adopt a sort of unwritten moral code, that they would

“discipline” themselves without governmental coercion. In brief, Roosevelt pleaded for a moral regeneration of American capitalism. He urged the business world to become more humane and less greedy, and he wanted businessmen not to be indifferent to the masses toiling for survival. The individual too had to rethink his role in society. “Hardihood” and “individual initiative” – some of the traditional “American values” – had to be reinterpreted in the community’s self-interest. The end of individual action must not be sheer “self-betterment”, but the preservation of peaceful sociability.

TR maintained people must find in themselves the moral stimulus to coop- eration.

The state had to be the final arbiter who judged whether the corporations’ conduct was reprehensible, i.e. dangerous to the common good. The federal government had to provide the overarching framework which should keep together the whole of society through the primacy of law. However, in

TR’s view the moral reform of capitalism should pivot not on the judiciary but on the executive through the Federal Commission, and the final word on disputes must be the president’s. TR’s did not want the Supreme Court to be the ultimate judge of anti-trust cases. Though vitally important for democracy, judicial review takes years: it is too slow a process. Moreover, although it may provide remedies, it comes after the evil has been committed and –

21 Ibid., p. 112: “Moreover, the mere fact of the publication would cure some very grave evils, for the light of day is a deterrent to wrongdoing”.

56 especially in a nebulous field such as antitrust policy – people must know in advance what “lawful behavior” means: businessmen want certainty.22 For this reason TR deemed a federal commission with preemptive powers to be the right way to go.23 Of course, TR was aware that such a project would have required a deep reshaping of the American political system, although he disingenuously insisted that he did not plead “for an extension of constitutional power” but only for the application of “the existing constitutional power”.24

In conclusion, TR wanted to build a community based upon liberty and justice. TR maintained that America’s historical mission was to secure prosperity for every industrious individual, and liberty was instrumental to this end. But in a modern world, liberty and property rights ought not to tear the social fabric. Hence, social justice had to be pursued through federal

“supervision”. Significantly, TR did not use the word “control”, because we was no advocate of a “socialistic” system. Big business had to spontaneously be open to federal inspection, and in turn government would recognize its right to free enterprise. Law had to provide and sanction the overarching principles of sociability. Accordingly, TR’s project implied a re-articulation

22 See E.H. Gary’s opinion in Committee of Investigation of the United States Steel Cor- poration, “A Testimony of Elbert H. Gary, Chairman of the Board, United States Steel Corporation”, in E.C. Rozwenc (ed.), Roosevelt, Wilson, and the Trusts, Boston, Heath & Co., 1949, pp. 68. 23 Roosevelt, “Control of Railways”, op. cit., 19 Oct. 1905, p. 305: “We must not leave the enforcement of such a law merely to the Department of Justice […] The delays of the law are proverbial and what we need in this matter is reasonable quickness of action”. 24 Roosevelt, “Federal Control and the Constitution”, in Griffith, op. cit., p. 605. See also Roosevelt, “Railway Rates and the Standard Oil Company”, 4 May 1906, in Griffith, op. cit., p. 383: “It is impossible to work a material improvement in conditions such as above described merely through the instrumentality of a lawsuit. A lawsuit is often a necessary method; but by itself is often an utterly inadequate method. What is needed is the conferring upon the Commission of ample affirmative power, so conferred as to make its decision take effect at once”.

57 of the balance between government and society. Giving up some of their freedom, the business world would have entrusted the federal government with enough power to become an impartial ward in the community’s interest. Such a lofty objective had to be achieved through the institution of the

Federal Commission for Interstate Commerce, and this would have also meant the need for the re-articulation of the power balance within the very branches of the federal government. The Hepburn Act (1906) should have been the law bringing TR’s project to life.

TR’s project eventually failed. Congress raised serious objections about its constitutionality. If the Hepburn Act had been approved as TR wanted, the government’s discretionary power would have been dramatical- ly expanded. Congressmen did not overlook the potential risk of transform- ing US democracy into an oligopoly. TR might be been a trust-buster, but what could happen, if the president was a puppet in the hands of few “robber barons”? The Hepburn Act was heavily amended and was finally approved by Congress, to TR’s great discomfiture. From a moral viewpoint, it was clear the way of TR’s resolve was very narrow. He wanted to reconcile liberty and justice, which are two opposite, hence irreconcilable, values.

Therefore, the story of TR’s antitrust policy is a literally tragic story, since

“tragedy” is nothing but the staging of an irredeemable conflict.

Significantly, later antitrust policy would depart from TR’s approach.

The election of Taft as President meant the revival of a more literal and le- galistic application of the Sherman Act, to the extent that the rift between the two Republican leaders widened and led to Roosevelt founding the Pro- gressive Party. The enforcement of the Clayton Act (1914) under the Wilson

58 administration marked the dawn of modern anti-trust law. In sharp contrast with the shortness and sharpness of the Sherman Act, the Clayton Act painstakingly enumerated all the situations where business concentration was unlawful. A casuistic approach, but perhaps the only way to find clarity in a field that continues to raise doubt and perplexity.

59 Conclusion

Antitrust history is not a “technical” discipline for specialists. Naturally, the antitrust historian must delve into very specific issues such as problems of legal history, but at the upper level writing about the origin of antitrust policy means writing about fundamental issues of modern history. In particular, it means dealing with the paradoxes, dilemmas and conflicts brought about by industrialization.

The Gilded Age was a restless period in which inequality and injustice threatened to rip apart American society, as the Pullman strike blatantly showed. A period in which wealth was held by “big captains of industry”, whereas the less fortunate was helpless in fighting one of the worst economic crisis in 19th century. Nevertheless, although the evil was evident, the remedy was not. Technological development had changed the very way of life in modern society. Services such as the telegraph, the railway and all the new industrially manufactured consumption goods had become irreplacea- ble. But only big business could offer all these new products and services.

The stage was then set up for a major moral conflict. Big industry could thrive in the last decades of the 19th century due to a political regime protecting individual freedom and property rights – the non-interference principle. But the market “natural” laws, unimpaired by government action, led to monopolies and economic inequality. In the technological, fast-paced and interconnected world, “liberty” was not necessarily beneficial to society as a whole. What had to prevail, then? Should the classical liberal concept of individual freedom be anyway defended, even though the changing mate-

60 rial conditions of life had made the liberal paradigm obsolete? Or was not justice the key value of economic policy, if a remedy to growing inequality within the American society had to be found?

In such a context, the figure of Theodore Roosevelt stood out, since he tried to find a compromise between liberty and justice. Thanks to his clear understanding of historical processes, he saw that the trust problem was an epoch-making problem reaching beyond the contingency of tariff policy.

Theodore Roosevelt acknowledged that it was essentially a moral problem brought about by the rise of industrial mass society, and as such he tackled it. But the path he chose was a very narrow one. As a true American, he defended the traditional “rugged individualism” paradigm. He maintained that self-initiative and “hardihood” must be preserved and rewarded. Neverthe- less, when business went “big”, private power ought not to override state power and jeopardize peaceful sociability. The corporation must always remain “the servant of the state”. And the state – ultimately, government, i.e. the presidency – had to be the final arbiter of business’s activity. Though in an indirect way, through federal “supervision” rather than “control”.

Can this story teach something to us, the inhabitants of the “postmodern” world – whatever “postmodernity” means? There are striking similarities between the Gilded Age and our time. The issues about redistributive justice, the business role within society, the disrupting effect of technological development etc. are of great relevance today. This is hardly surprising, because our contemporary world was born from those years. Of course, there are sharp differences. Nowadays, information flows instantly from

Beijing to Rome and to New York, and we in ourselves can quickly move.

61 Within few hours we cover distance that the fastest locomotive or ship could cover in weeks, and the speed factor is essential if we are to understand the novelty of our postmodern world – “quantity becomes quality”, Hegel aptly says.

Still, the origin of the 21st century digital society must be found in the late 19th century. Between internet and the transoceanic telegraphic cable there is less difference than between the latter and the Wells Fargo wagon.

The introduction of technology in everyday life, communication and production was soon to make the world faster and much more complex. This process was continued in the 20th century and peaked in the digital revolution. Such is the paradox of continuity, as the French historian Marc Bloch recalled in L’apologie pour l’histoire. History is a flow of innumerable moments, different and similar at the same time. In the gray area between

“sameness” and “difference”, change is produced. And this is the historian’s arena as he attempts to give the past meaning.

In conclusion, writing about the early antitrust history means writing about ourselves, and it helps understanding the issues of our own time. Per- haps, it can help us tackling the challenges we will face – very soon – in the future.

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