The Sherman Act on Trial

Professor of Law at Yale from 1931 to 1938, THURMAN ARNOLD entered public service as Assistant Attorney General of the United States and then as Judge of the United States Court of Appeals for the District of Columbia. Now, after several years in private practice, he has come to a deeper appreciation of the vital part the antitrust laws have played in the stimulation of our commercial independence.



THE economic philosophy behind the antitrust laws is a tough philosophy. Indeed, since the depression it has been regarded as too tough by the three most important organized interests in this country — labor, farmers, and big business. In theory, at least, the antitfust laws are designed to give security to nobody. They recognize that competition means someone may go bankrupt. They do not contemplate the game in which everyone who plays can win.

Big businesses would feel more secure if they could freely buy up or merge with competitors which offer cutthroat competition. They could pay larger dividends if they were allowed to own all local businesses that process or distribute the goods they make by mass production. But theoretically our antitrust laws prohibit this kind of unrestrained expansion. At any rate, the terms of the law are so vague that the big businessmen are never sure exactly how far they can go in this type of operation. Neither do the antitrust laws give much comfort to small businessmen. The theory of the law, though softened by amendments, is that the protection of the inefficient little fellow has no economic justification.

Nor does the law itself directly protect consumers. A combination to keep prices down is as illegal as one to keep prices up. Labor and farmers, both major consumer groups, themselves seek immunity from the antitrust laws with respect to their own attempts to fix prices and to restrict production. During the depression, farmers and labor actually succeeded in obtaining almost complete exemption from the Sherman Act. The theory of the Sherman Act continues to hold that this kind of protection for either business, farmers, or labor has no economic justification and that in the long run the risks and incentives of a free competitive market are the best mechanisms to promote an expanding economy. Those who cannot keep up with the procession must fail. Despite the periodic complaints from special interests, the ideal behind the antitrust laws remains opportunity for all and security for none.

This fundamental ideal is still the cornerstone of American economic philosophy. True, there have been periods when the Sherman Act was not enforced at all. During the depression in the thirties it was regarded as an obstacle to economic recovery. The NRA and AAA were passed to encourage businessmen and farmers to restrict production and raise prices — to substitute so-called “ fair competition” for real competition. These early New Deal measures in effect copied the cartel system of Europe in their effort to protect big business, little business, labor, and the farmer from the rigors of competition. It is a tribute to our faith in the basic competitive idea underlying the antitrust laws that this experiment in “coöperation” did not last long—that it was in fact followed by a greater effort than ever before to enforce the Sherman Act, an effort which continued until war controls took over.

Looking backward it must be conceded, however, that the Sherman Act has not produced everything its framers in 1890 hoped for. It has not, for example, made little corporations out of big ones. But no law could or should have curbed the expansion of the American art of mass production, possible only in enterprises of tremendous size, which has increased production on a scale never before known in the history of the world. If the Act had curbed this kind of expansion, it would have destroyed the great dynamic force in American economy.

Nor has the law succeeded in eliminating entirely one notorious economic evil incident to the size of a corporation necessary for mass production. Great corporations can still acquire indefinite numbers of purely local enterprises where size or integration is neither essential nor efficient. Absentee ownership of such enterprises grows in spite of the antitrust law. Such a trend hampers the growth of local capital and robs outlying communities of their economic independence, and has made the South and West colonies of the industrial East. It was indeed this very loss of independent purchasing power in the West and South that destroyed the market for Eastern goods and ushered in the great depression.

Yet in spite of those failures the Sherman Act continues to be the unique and distinctive contribution of the Unided States to economic legislation. We are still the only country in the world that makes it a crime for a combination of persons or corporations to interfere with a free market, and which entrusts courts of justice with the enforcement of the broad economic program of competitive free enterprise. This basic ideal of the antitrust laws is our economic constitution, our charter of commercial freedom.

To this economic fact of American life we owe the essential difference in the development and direction between our business structure and that of Western Europe. In Europe under a cartel structure in which great business enterprises were permitted by law to divide markets among themselves, to establish production quotas and price agreements, such restraints of trade became so built into the economy that it is hard today for European businessmen, big or little, even to think of accepting the risks and hazards of competition. Restraints of trade became property rights on which stockholders were dependent for dividends. The nineteenth-century idea that distribution of goods on competitive free markets was the most effective mechanism for an expanding economy practically disappeared.

In America, while many businesses, big and little, wanted to follow the noncompetitive European idea, no properly rights or vested legal interests in a division of markets could be established while the Sherman Act remained on the books. Ownership of local industries by giant absentee corporations was extensive, but never achieved the dignity of a property right, and such business combinations are still subject to question. The very uncertainties of the Sherman Act, the impossibility of pinning the law down to any definite formula, the chance that some new Attorney General might suddenly adopt a vigorous prosecution program — these factors which are so often criticized by business have kept our business structure fluid and elastic and still capable of shifting from a cold-war economy to the freedom of an unrestricted market.

The permanent abandonment of our economic constitution represented by the Sherman Act would have had incalculable consequences for free enterprise in our economic future. But we did not abandon it. The sanctity of the ideal was such that it always returned like Banquo’s ghost to haunt the feasts of rational economic planners both in business and in government. This was in spite of the fact that the enforcement of the Sherman Act has been hit-or-miss, sporadic, and often unfair, following no consistent or logical pattern — in spite of the fact that during the depression and its aftermath the special interests exempt from the Sherman Act became larger than those included. These contradictory policies were accepted only as temporary expedients. The economic ideal of the Act still remained the theoretical pattern of our economy.


TODAY, as we contemplate the possible transition from a war to a peace economy, the Sherman Act is again on trial. The free markets of the nineteenth century which the Sherman Act was intended to preserve no longer exist. Neither goods nor people nor money can freely move across international boundaries any more. And our great domestic market, which in the last century seemed to be limitless, seems suddenly too small to absorb the vastly accelerated productive capacity of the twentieth-century industrial revolution without the stimulus of huge government spending. We are haunted by the specter of overproduction and underconsumption whenever this government spending ends.

As a result, pressures for new exemptions from the Sherman Act and for softening of its punitive provisions are reappearing. Persons of learning and influence claim that the Act is obsolete and flies in the face of inevitable business trends. Investors, farmers, and labor want and have largely succeeded in getting controls to protect our price structure from the menace of overproduction. They are afraid free trade with other countries will glut our markets. They think cutthroat competition at home will lower wages, send prices on a downward spiral, and destroy invested capital. They preach rational planning of production and distribution to replace the hazards and chances of ungoverned competition on a free market. Competition must be kept fair and gentle and a ring put through its nose by amending the Sherman Act. Our conservative press believes that big business management, acting in concert, should not be harassed and annoyed by the Department of Justice while they are pursuing the goal of planned production and distribution. Radicals, ironically enough, accept the idea of ralionally planned industry, insisting only that the planning should be done not by big business but by big government.

This growing anticompetitive sentiment finds its counterpart in the executive branch of the government. Regulatory commissions generally hate the idea of competition in the particular field they regulate. The Securities and Exchange Commission is more concerned over the possibility that some fool may lose his dollar than over competitive expansion in the investment field. In the transportation field, regulatory agencies act on the theory that if railroads are forced into real competition with independent truck lines, investors will run like frightened rabbits and refuse to support more than one train a day — that if new truck lines are allowed to compete with old established ones, over-all trucking service will suffer. The learned men who regulate our air transport are sure that it our established and subsidized air lines are forced to compete with new nonsubsidized air lines, grass will grow kneehigh in our deserted airports.

Our tariff restrictions provide one of the most glaring contradictions to our antitrust policy. We pay lip service to the idea that we cannot effectively lead the Western world against Communism unless we coöperate economically with our allies by buying from and selling to them. Then we turn around and smother the reality of such coöperation by insisting on the protection of all domestically produced goods from competing foreign imports. And then we proclaim loudly that we must stop giving away goods in the interests of a balanced budget. Consider, for example, our management of Japanese economics. We will not allow Japan to trade with Communist China, nor will we accept cheap Japanese goods in this country. How Japan is to support her own economy under such restrictions must be in our top-secret files.

Today we have 6 per cent of the world’s population and about 50 per cent of its industrial production. But the force which has been making our economy expand is not competition on a free market: it is government spending. Our markets today are largely controlled by our biggest buyer — the United States Government. The wheels of industry turn at home because we are giving away goods abroad (a program which creates neither enduring commercial ties nor even friendly feelings). One fifth of our total production of goods and services goes into the war machine.


FROM bitter experience we know we can have no confidence in the stability of such a governmentsubsidized prosperity. We are afraid that if it keeps up we will face runaway inflation, and just as afraid that if it lets down we will face disastrous depression. We blow hot and cold in our efforts to ward off both. The fear of inflation causes us to put on price controls; the fear of deflation provokes farmers’ demands for price supports in a period of rising prices. Either way, we are frightened of economic freedom and too ready to exchange our birthright for a ration of security. In such an atmosphere, the Sherman Act with its emphasis on tough, hard competition is thought by many to be obsolete.

Rapidly emerging from the contradictions of our present economy, however, I see two developments which spell the survival of our national competitive ideal and the continuance of the Sherman Act as the legal codification of that ideal. The first is the miracle of our vast and accelerating production. The second is the persistence of our American tradition of commercial freedom.

In 1939 our production of goods and services was $174 billion. In 1944, at the peak of war spending, when our productive plants were strained to the utmost, our production rose to $244 billion. This year it is at the rate of $363 billion. This rising curve will soon make it over $100 billion. All these estimates are in 1951 dollars. This astonishing increase in production made false prophets of those who predicted that the Korean War would cause a disastrous inflation. The pressure of this accelerating productive capacity, already too large for our domestic market, will in the long run restore free enterprise and free markets to the Western world.

We are not going to repeat the fiasco of the thirties and shut off that production. Our enormous output must be distributed cither by government or by competition in free markets. Each year that our production increases, the pressure is greater. The only way that America can respond consistently with the character of its business leaders is through the development of competitive markets. With the advent of new market frontiers, the ideal of the antitrust laws — business opportunity rather than security — will again become the dominant economic force in America.

If one understands the basic ideals of a nation, one may guess the basic solution which will emerge in a period of conflicting pressures. Karl Marx was a German and knew German psychology. His prophecy that inherent contradictions of a capitalistic system would lead to monopoly and that monopoly would end in socialist control of industry proved to be true so far as Germany was concerned. He understood neither England nor America. His conception of socialism as a world movement proved false because of that lack of understanding.

Adam Smith wrote in 1776, a period when England, with an economy dominated by governmentsponsored monopoly, was pursuing a suicidal mercantilistic policy of exporting without importing. The conflict between English business practice and a free-market economy was greater than it is in America today. Adam Smith went down to the markets and the dockyards and concluded that no nation could achieve wealth under the restrictions of commerce which he saw at first hand. The Wealth of Nations expresses better than any other book the ideal of the antitrust laws. It became the economic bible of the nineteenth century, the greatest period of economic expansion the world had yet known. Adam Smith proved to be right because England became the dominant producer of that new economic world. Adam Smith saw this coming because he instinctively understood the fundamental economic aspirations of Englishmen.

My belief is that the aspirations of the American people today lie in the same direction as those of the nineteenth-century Englishmen who exported capital and created free trade all over tlie world,

I have never feared that the forces against free enterprise, which started with NRA and are now evidenced by a mass of restrictions on free markets both at home and abroad, represented anything more than a temporary surrender to expediency in what appeared to be a desperate situation, I never believed that such measures would in the long run interfere with the vitality of our economy. That they have not done so is shown by the rate of expansion of American production in the past few years, a rate never before equaled in the world and achieved despite gloomy prophecies to the contrary.

I recognize that when government spending is withdrawn we may find ourselves overproducing in terms of the present world market for our goods.

I do not doubt that, as war spending declines, government will be compelled to prime the pump.

1 would, however, predict that the method of pumppriming will be consistent with the expansion of private enterprise; that, is, loans to private industry abroad rather than loans to governments. Interest rates in South America and Western Europe run up to 20 per cent for sound businesses with good records. Certainly this would be an attractive opportunity for American private investment if confidence in the future of Europe were restored. To get private capital started abroad might take the kind of credit insurance that is now so successfully given in the United States to loans on housing projects. But we would have nothing to lose by such credit insurance, since if Europe’s economy goes to pot we will have to pour in money anyway. So private capital may soon begin to replace the creaky and wasteful machinery of the Marshall Plan.

Proposals like this cannot as yet be found in the platform or speeches of either political party. They come from conservative business sources. They are some of the straws pointing to the way the wind is blowing.

I do not believe that the change from an economy based on government spending to one of expanding free markets will come because someone persuasively advocates it. I doubt if even Adam Smith persuaded the leaders of British industry that it was a good idea to bring about the expanding free-market economy of the nineteenth century, or that they ever even read him. He was a prophetic observer, not a messiah. It was the pressure of expanding British production, rather than the reading of economic theory, that produced the economic revolution. It is the tremendous pressure of American goods seeking a free-market outlet that will produce the expanding economy of the twentieth century.


OTHER nations might adopt some system of rationalized and controlled production and distribution. America can’t. The incorrigible independence of American businessmen, their tendency to fight the government and not to coöperate as twentiethcentury English businessmen have been doing, their very failure to fall into line for humanitarian reform, and the fact that Americans admire such characters — these attitudes are the best evidence that love of commercial freedom cannot be easily eradicated in our country.

It is true that these qualities are oppressive at times. Businessmen may confidently be expected to fight even necessary humanitarian measures until they get used to them and find they can live with them. But I am not concerned here with whether American businessmen were right or wrong in opposing either the permanent reforms or the temporary expedients of the New Deal and the Fair Deal. These reforms are here to stay. But so, thank God, are the American businessmen who fought them. They represent a hard core of resistance to the kind of coöperation with government that is necessary to make planned production and distribution work. Their desire for freedom to expand their business organizations without interference from anybody may at times impede necessary reform. Nevertheless, this quality in the long run is what has made our economy the most dynamic in the world.

I recall when I was a bureaucrat in the New Deal, how much more reasonable I found English business leaders compared with Americans. I thought at the time that the English, who had become accustomed to a noncompetitive cartel system between the two wars, took a more intelligent view of the necessities created by the depression. Looking at England today as it falls behind in the competitive race with conquered Germany, I wonder if the thing that most humanitarians think of as the pure cussedness of American businessmen when faced with government interference may not be the quality which guarantees our commercial freedom.

This may seem illogical to one who thinks that government should be the product of the reasoning of reasonable men. But the shape of an economy is never the result of logical thinking. It is molded by the fundamental aspirations of a people. America has no other path it is capable of following except that of competitive enterprise on a free market.

If that be so, the present contradictions which make a hopeless muddle of our economy are going to be resolved by private business faced with the necessity of selling its goods. This is an economic force which in the long run cannot be resisted. To sell its goods American industry rather than government must export capital and create purchasing power. You can’t buy without selling, and you can’t conduct trade without giving the other fellow something to do. And sooner or later the rising flood of our production is going to sweep away the restrictions that now freeze our markets. This America must do or shut down its plant, and it has always been a bad guess to sell America short.

Given an economy which is developing into the reasonable approximation of a free market, the antitrust enforcement will make a great deal more sense than it appears to do among the contradictions of today. It is true that an antitrust law like the Sherman Act, embodying a broad national economic program, will never be a rule of thumb. For that reason, businessmen in the future, as now, will never find a precise answer to all the questions which the Sherman Act raises in connection with their business operations. There can, however, be a clearer understanding of the purpose of the antitrust laws in dealing with organizations of tremendous size. Certainly the ideal of the law is not to put any limits on their growth in legitimate ways. To limit expansion of a business is to make it stagnant and inefficient. It would restrict the competitive effort which the Sherman Act is designed to promote.

The present procedures under the Sherman Act may need re-examination, but its substance is as sound an idea for America as it ever was. Its function is not to limit growth, but rather to prevent an aggressive minority from destroying the free markets that make growth possible.