So in 1909, a Missouri circuit court ruled that Standard Oil engaged in monopolistic practices. Standard Oil appealed.

Upon taking office in 1909, President William Howard Taft had continued the antitrust cases begun by Teddy Roosevelt, adding that he would enforce the Sherman Antitrust Act.

Taft, like TR, had no problem with big business as long as it behaved itself, and he recommended that 'good' trusts with a capitalization of $100 million or more incorporate under a new federal law, thus exempting them from suits brought by states. A law embodying his ideas was introduced in both houses in February 1910 but it failed to pass because it would have destroyed the Act.

Taft launched 75 suits in 4 years, compared with 47 suits in 7 years by Roosevelt. But he seemed to misunderstand the whole basis behind the antitrust act.

It's interesting to note that before the Supreme Court ruled on the Standard Oil case a future Justice, Louis Brandeis, wrote a letter to the editor for "Survey" magazine.

"Is there not a causal connection between the development of these huge, indomitable trusts and the horrible crimes now under investigation?…Is it not irony to speak of the equality of opportunity in a country cursed with bigness?"

And so it was that on May 15, 1911 the Court ruled against Standard Oil by an 8 to 1 vote. At the time Harper's magazine noted that the case, along with a few others, had "been awaited with countrywide suspense and attention…For months the financial markets have virtually stood still awaiting their settlement."

Actually, in doing some research on the numbers, this definitely was the case. Between March 1 and May 15 the Dow Jones was in a range of less than 4%, 81.32 to 84.53. On May 15 the Dow closed at 82.71. The next day it rose to 84.63.

The Supreme Court upheld the Missouri decision to dissolve Standard into some 37 subsidiary companies. But in its ruling the Court announced a new "rule of reason" by which it could decide whether a restraint of trade was "reasonable" or not and what restraints of trade were allowable.

Put another way, the restraint of trade outlawed by the Sherman Act is not to apply to every contract or combination in restraint of trade, but only to those that do so unreasonably. In other words, the Act was weakened.

Chief Justice Edward D. White wrote:

"[The Sherman Act was designed to prohibit] all contracts or acts which were unreasonably restrictive of competitive conditions, either from the nature or character of the contract or act or where the surrounding circumstances were such as to justify the conclusion that they had not been entered into or performed with the legitimate purpose of reasonably forwarding personal interest and developing trade, but on the contrary were of such a character as to give rise to the inference or presumption that they had been entered into or done with the intent to do wrong to the general public and to limit the right of individuals."

[Actually, when you read it slowly, very slowly, it makes perfect sense.]

The lower court had found Standard in violation of the Act and had ordered its dissolution. As historian Bernard Schwartz writes, "Yet, while the Court upheld the dissolution ruling, the government had to accept an interpretation of the Sherman Act which greatly reduced that law's effectiveness. The Court ruled that Standard's practices constituted 'unreasonable' restraint of trade prohibited by the Sherman Act, rather than the type of 'reasonable' restraint which the Act permitted. Thus was born the most curious obiter dictum (incidental remark) ever indulged in by the Court - the so-called 'rule of reason' in antitrust cases."

The rule of reason was almost entirely the handiwork of Chief Justice White, what Justice Holmes called "the Chief Justice's greatest dialectical coup." In practice it made prosecutions under the Sherman Act far more difficult. At the same time, it increased the judicial role in antitrust cases and ensured that the law, "based though it might be on enactments by Congress, would still be primarily judge-made law." [Schwartz]

Justice Harlan offered the lone dissent, one later labeled "a passionate outburst seldom if ever equaled in the annals of the Court."

To Harlan, the Court's action was an example of "the tendency to judicial legislation…(the) most alarming tendency of this day, in my judgment, so far as the safety and integrity of our institutions are concerned." In this case, the Court was led "to so construe the Constitution or the statutes as to mean what they want it to mean." The result was "that the courts may by mere judicial construction amend the Constitution or an Act of Congress."

Justice Holmes told a law clerk about the White opinion: "The moment I saw that (the 'rule of reason' clause) in the circulated draft, I knew he had us. How could you be against that without being for a rule of unreason?"

Author Charles Geisst concludes: "Standard Oil's sins were too great when weighed against its benefits to continue to exist as it had. The company was ordered to break up, liquidating its stock and returning the funds to its shareholders. The individual companies went their respective ways, free to compete against each other when the holding company no longer existed. The federal government had successfully dissolved the largest and most profitable business enterprise ever created."

Although Standard was physically broken up, Rockefeller maintained his one-quarter ownership in the business, only this time it was one-quarter of thirty-some new companies. J.P. Morgan was said to have remarked, "How the hell is any court going to compel a man to compete with himself?" The new set of companies continued to dominate the markets well into the1930s. Because of their size and vast network of suppliers and distributors, the prices they set for their industries became the norm. Smaller competitors broke ranks at their own peril.

Years later, in the 1950s, a group of scholars at the University of Chicago took a hard look at the history of antitrust law. The group came to be known as the Chicago School. One of them, John McGee, studied Standard Oil to determine whether the charges leveled against it in the original government suit were justified. Author Geisst writes:

"McGee concluded that (they) had not used predatory pricing in order to become a monopoly. His conclusion ran against the common assumption that Rockefeller cut prices drastically in order to force out his competitors…The fact that Rockefeller's customers feared his wrath if they did business with someone else was central to the entire issue, but the net effect was that predatory pricing was not involved. This was especially important because predatory pricing had been a fundamental assumption of antitrust until that time. If a company was a monopoly, then it must practice predatory pricing. How else could it have accumulated dominant market power? Obviously, Rockefeller was able to accomplish it in other ways - for example, making shipping more of a problem for his competitors through arrangements he made with the railroads themselves."

In other words, while predatory pricing was one of the sins, one couldn't conclude that all monopolists practiced them.

And so our little history of Standard Oil is over. Hopefully you have found it informative, especially in light of the ongoing Microsoft saga.

Sources:
"Monopolies in America," Charles Geisst
"The Growth of the American Republic, Vol. II" Morison, Commager, Leuchtenburg
"A History of the Supreme Court," Bernard Schwartz
"The Presidents," Henry Graff

Brian Trumbore