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What is the Sherman Act

4. What is the “Sherman Act of 1890”?

The Sherman Act was the first major federal law passed with the purpose of ensuring competition across and within industries. At the time of its passage, several large companies had nearly complete control over certain industries (steel, oil, and railway) very important to the development of the United States. The effect of this lack of competition was to create exorbitant wealth in a few individuals and higher prices for consumers. The high price to consumers reduced consumption and resulted in lower total economic output.

•    Note: See Justice Black’s opinion in Northern Pacific Railroad Co. v US, 36 US 1 (1958) for a description of the Sherman Act purpose.

•    Example: The most well-known anticompetitive trusts were John D. Rockefeller’s Oil Trust (Standard Oil of New Jersey), and J. P. Morgan’s Steel Trust (US Steel Corporation). Other examples include Sugar Trust, the Whisky Trust, the Cordage Trust, the Beef Trust, and the Tobacco Trust.

In response to this reality, Congress passed the Sherman Act, which seeks to preserve competition by prohibiting two types of anticompetitive business behavior:

•    Section 1 – Contracts, combinations, or conspiracies in restraint of trade or commerce, and

•    Section 2 – Monopolies and attempts to monopolize.

The Sherman Act fails to define what is a contract, combination, or conspiracy in restrain of trade or a monopoly. As such, much of antitrust law is based in the common law interpretation of federal courts.

•    Note: The specific types of conduct prohibited under The Sherman Act is discussed below.

•    Discussion: Do you think the Federal Government is justified in regulating areas of business industry in this manner? Why or why not? Should business rights be balanced against those of consumers?

•    Practice Question: What type of conduct does the Sherman Act prohibit? What are the differences between the protections of Section 1 and Section 2?

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