By prosecuting and ordering dissolution of the Northern Securities Company, the federal government showed that it would regulate corporations and set the precedent for later antitrust cases.
THEODORE ROOSEVELT (1858-1919), the president of the United States, 1901-1909
PHILANDER CHASE KNOX (1853-1921), the attorney general under Roosevelt
J. P. MORGAN (1837-1913), a prominent investment banker who financed and organized the U.S. Steel corporation as well as a number of important railroads
EDWARD H. HARRIMAN (1848-1909), the head of the Union Pacific Railroad
JAMES J. HILL (1838-1916), the head of the Great Northern Railroad
Summary of Event
On March 14, 1904, the Supreme Court of the United States ordered the dissolution of the Northern Securities Company. This was one of the first large-scale holding companies, formed in November, 1901, by James J. Hill, Edward H. Harriman, and J. P. Morgan to gain greater control over and efficiency of three railroad companies: the Great Northern Railroad, the Northern Pacific Railroad, and the Chicago, Burlington, & Quincy Railroad line. Responding to the general antitrust sentiment of the time, in March, 1902, President Theodore Roosevelt instructed Attorney General Philander Chase Knox to bring suit against the Northern Securities Company for violation of the Sherman Antitrust Act of 1890. The Northern Securities case went to the Supreme Court of the United States, ultimately ending with the case of Northern Securities Company v. United States (193 U.S. 197). The Supreme Court found the Northern Securities Company to be in violation of the Sherman antitrust law and ordered it to be dissolved.
The Northern Securities case came at the end of the great consolidation period in U.S. business history, during which nearly two thousand business mergers occurred from 1896 to 1900. General public suspicion of large corporations had been growing in the United States, evidenced by support for the Interstate Commerce Act of 1887 and the growth of the reform-minded Populist Party. These concerns, and consequent political movements, had pressured Congress into passing the Sherman Antitrust Act of 1890, which illegalized "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce." Any hopes that this law would control corporations, however, were undermined by the probusiness laissez-faire policies of the legislative, executive, and judicial branches of the federal government at this time. As a result, the Sherman Act had very little effect upon corporations in the United States for more than a decade after its passage. Between 1893 and 1903, the federal government initiated fewer than two dozen cases under the Sherman Act. Furthermore, the Supreme Court decision in the case of United States v. E. C. Knight Company (1895) undermined the strength and credibility of the Sherman Act. In that case, the Supreme Court ruled that the American Sugar Company and its subsidiary, the E. C. Knight Company, although perhaps a monopoly in manufacturing, had not monopolized or restrained interstate commerce. This gave a very strict and limited interpretation to the Sherman Act.
In May, 1901, James J. Hill of the Great Northern Railroad and Edward H. Harriman of the Union Pacific Railroad engaged in a competition to purchase controlling stock in the Northern Pacific Railroad. That railroad company in turn held a controlling interest in the Chicago, Burlington, & Quincy Railroad, the tracks of which provided a highly desirable line into Chicago and ran throughout the northern Midwest region. Harriman worked through the Kuhn Loeb investment house, with the backing of the Rockefeller family; Hill enlisted the considerable financial services of J. P. Morgan. As Hill and Harriman fought for control of Northern Pacific, the price of its stock soared to $1,000 per share. In their efforts to obtain liquid capital to purchase Northern Pacific shares, Hill and Harriman dumped other holdings at very low prices. These actions caused stock prices to fluctuate wildly, generally disrupting the stock market. After neither Hill nor Hardman was able to gain a controlling interest in Northern Pacific, they decided that cooperation was preferable to market disorder. In November, 1901, Hill and Harriman had Morgan arrange for the incorporation of the Northern Securities Company, a $400 million holding company that would, they hoped, bring order and efficiency to the northwestern railroad market by bringing their combined interests—the Great Northern Railroad, the Northern Pacific Railroad, and the Chicago, Burlington, & Quincy Railroad line—under the aegis of one board of directors. Morgan had a history of improving rail systems through his own reorganization and consolidations efforts. In the sixteen years since 1885, Morgan had made thousands of miles of railroads throughout the East more efficient, including saving the New York Central Railroad from financial collapse. In his book Highways of Progress (1910), Hill stated that the formation of the Northem Securities Company was "a device contributing to the welfare of the public by assuring in the management of great properties that security, harmony and relief from various forms of waste out of which grow lower rates just as surely as dividends." He argued that consolidation was in the public interest, as it contributed to efficiency.
To the public and much of the rest of the business world, however, the actions of Hill, Harriman, and Morgan appeared to be the very worst of the disruptive, careless, and crude abuses of power attributed to the "robber barons" of that era. Public opinion was further enraged by the fact that the episode had resulted in one of the largest holding companies yet formed in this era of large business trusts. Even The Wall Street Journalcriticized Harriman and Hill for their actions. Responding to these pressures, in March, 1902, President Theodore Roosevelt instructed Attorney General Philander C. Knox to bring suit against the Northern Securities Company.
Working with the governor and attorney general of Minnesota, the home of Hill's Great Northern Railroad, Knox filed the federal suit in a circuit court in St. Paul on March 10, 1902. The federal circuit court ruled against the Northern Securities Company on April 9, 1903. The company then appealed to the Supreme Court. On March 14, 1904, the Supreme Court found the Northern Securities Company to be in violation of the Sherman Antitrust Act. In a five-to-four decision, the Court affirmed the decision of the lower court and ordered the dissolution of the Northern Securities Company.
Impact of Event
Roosevelt and Knox, through successful prosecution of the Northern Securities Company, gave meaning and legitimacy to the Sherman Antitrust Act that it had not had since its passage in 1890. Knox built up the legitimacy and the credibility of the Justice Department, which at the time of the Northern Securities case was nothing more than a small team of independent lawyers. In his efforts to prosecute the Northern Securities case, Knox built the legal machinery of the Justice Department necessary to bring antitrust suits in the future. Roosevelt stated that Knox had "done more against trusts and for the enforcement of the antitrust law than any other man we have ever had in public life." Vigorous presidential action also influenced the jurisprudence of the Supreme Court, making it more sympathetic to the cause of antitrust in the future.
The dissolution of the Northern Securities Company opened the door for many other prosecutions by the Justice Department for antitrust violations. Just after the Justice Department brought suit against the Northern Securities Company in 1902, Roosevelt instructed Knox to bring suit against the "Beef Trust," a number of Chicago packinghouses including Swift and Company. Like the Northern Securities case, the suit against the "Beef Trust" was supported by widespread public opinion, especially since meat prices were on the rise. In the 1905 Swift & Co. v. United States case (196 U.S. 375), the Supreme Court enjoined the "Beef Trust" from engaging in collusive practices that kept prices stable or rising. This case was significant in that it expanded federal jurisdiction to include manufacturing combinations whose products were later traded in interstate commerce, a line that had been rejected in the E. C. Knight case. In 1906 and 1907, Roosevelt had the Justice Department bring suit against the American Tobacco Company, the E. I. Du Pont Chemical Corporation, the New Haven Railroad, and the Standard Oil Company. The Supreme Court ordered the dissolution of the American Tobacco (1910) and Standard Oil (1911) companies. In the years between 1890 and 1905, the Department of Justice brought twenty-four antitrust suits. The Theodore Roosevelt Administrations brought fifty-four suits, and the single administration of William Howard Taft prosecuted ninety antitrust cases. In the decade from 1905 to 1915, there were at least eighteen antitrust cases each year.
Perhaps the most important legacy of the Northern Securities case was that it answered the question of whether the federal government had the ability and willingness to aggressively regulate large corporations. Roosevelt later wrote that in 1902 the question had not been how large corporations should be controlled. "The absolutely vital question," said Roosevelt, "was whether the government had power to control them at all." Before the federal government could compose the rules and create the agencies for regulation, it had to show that it had the willingness and ability to do so. The prosecution and dissolution of the Northern Securities Company proved that the federal government had both.
The Northern Securities case proved that the federal government could regulate and punish large corporations and also set the precedent for federal intervention in the national economy. The Hill-Harriman battle had disrupted the stock market. The overwhelming pressure of public opinion provided a favorable arena for the reform philosophy of Roosevelt and Knox. Just after the announcement of the antitrust suit against the Northern Securities Company, Roosevelt said that the prosecution aimed to prevent violent fluctuations and disaster in the market. In April, 1902, Roosevelt stated that "after the combinations have reached a certain stage it is indispensable to the general welfare that the Nation should exercise ... the power of supervision and regulation."
Roosevelt did not oppose the fact of large corporations. He believed that with their ability to provide economies of scale, vertically integrated operations, and consolidations that prevented ruinous competition, corporations could achieve a degree of organizational efficiency that smaller concerns could not. Roosevelt believed in an increased regulatory role for the federal government, one that involved policing corporate behavior and actions rather than size itself. A few days after Roosevelt announced the suit against the Northern Securities Company, the president told J. P. Morgan, concerned for his much larger United States Steel Corporation, that it would be prosecuted only if it had "done something that we regard as wrong."
Perhaps because of Roosevelt's accommodationist regulatory policy, the trend toward large corporations grew at the same time that the number of antitrust cases increased. The economic concentration that had increased dramatically in the late nineteenth century continued to rise in the early twentieth century. In addition, in the Standard Oil and American Tobacco cases, the Supreme Court ruled that not every restraint of trade was illegal in terms of the Sherman Act, encouraging merger activity.
The prosecution and dissolution of the Northern Securities Company sent shock waves through the business world. It may have slowed the growth of mergers, but the trend continued through both Roosevelt administrations. Mergers decreased dramatically between 1902 and 1904 but increased from 1904 to 1906. By 1909, just 1 percent of the industrial firms in the United States were producing nearly half of its manufactured goods, illustrating how large the largest firms had become.
The Supreme Court had ruled in the Standard Oil case that through the "rule of reason" it would determine whether combinations restrained trade unreasonably, thus violating the Sherman Act. The Clayton Antitrust Act of 1914 would be passed, in part, to eliminate interlocking directorates, and also to obtain statutory specifics on antitrust prohibitions rather than relying upon the shifting opinions of the federal judiciary. The Clayton Act was supplemented by the Robinson-Patman Act of 1936, which sought to further clarify and codify types of illegal price discrimination. The Celler-Kefauver Act of 1950 again sought to reinforce the Clayton Act, in much the same manner as had the Robinson-Patman Act. In 1976, Congress passed the Hart-Scott-Rodino Act, or Concentrated Industries Act. This was a mild reform law that attempted to strengthen provisions of existing antitrust laws.
The trend toward business mergers and economic concentration continued throughout the twentieth century. With the war efforts of both World War I and World War II, the federal government accepted economic and industrial concentration necessary for high production levels. This also was true of the federal efforts to deal with the economic depression of the 1930's. The laissez-faire policies of the 1920's were born of political philosophy rather than of necessity. Finally, the post-World War II economic prosperity also lessened desire for antitrust regulation, as the system seemed to be working for the benefit of most.
Several important antitrust cases, however, did reach the courts following the main period of antitrust prosecution. In 1945, the Aluminum Company of America was found to be in violation of the Sherman Antitrust Act. In 1948, the federal government forced a number of major U.S. film studios to divest themselves of studio-owned theaters. In 1961, the Supreme Court ordered the Du Pont Company to divest itself of its holdings in General Motors Company. In 1967, the Federal Communications Commission ordered the American Telephone and Telegraph Company (AT&T) to lower its rates. In 1982, under continuing federal pressure, AT&T agreed to be broken up, and a number of rival telephone companies entered the market to challenge AT&T's control.