Federal Regulation and the Rise of Big Business: United States v. E.C. Knight (1895)
The late nineteenth century was a time of business consolidation as the American economy experienced a “great merger movement” with the rise of big business. Through means foul and fair, corporations formed trusts that dominated entire industries to combat competitive pressures that drove prices and at times to monopolize for control. The sugar industry was a part of this consolidation movement.
The sugar industry supported free trade as it imported much of its sugar from Cuba. The industry was centered on the refining of sugar, which was manufacturing activity. In 1892, the American Sugar Refining Company bought out the stock of several competitors and controlled ninety-eight percent of the industry. The federal government brought suit against the “sugar trust” under the Sherman Anti-Trust Act of 1890.
Congress enacted the Interstate Commerce Act (1887) and Sherman Act as a response not only to reformers such as the Populists who wanted federal regulation of railroads and corporations, but also by businesses and railroads who were struggling to keep up prices and remain profitable during a time of competitive pressures and deflation. The Commerce Clause in Article I, section 8 of the Constitution granted Congress the power to regulate interstate trade (but not trade within a state). The regulations of the Sherman Act banned “every … combination … in restraint of trade or commerce among the several states.” However, the legislation was vague and satisfied neither its supporters nor opponents.
The Supreme Court decided the first test case of the Sherman Act in United States v. E.C. Knight (1895). The key question in the case was whether the manufacturing activity could be regulated under the Sherman Act or whether it fell under the police powers and regulatory authority of the states. In an overwhelming 8-1 decision, Chief Justice Melville W. Fuller and the Court decided that the Congress had unconstitutionally regulated manufacturing within states rather than interstate trade. The Court thus preserved the principle of federalism, which divided powers between the national government and the states. The Court also expressed a fear that if Congress could regulate manufacturing or intrastate trade, then it could regulate “every branch of human industry” and thereby have an unlimited government.
The lone dissenter in the case, Justice John Marshall Harlan, believed that the Sherman Act could be applied to business combinations because they acted indirectly to restrain interstate trade. He posited that manufacturing and prices of goods were matters of a national economy and related to interstate trade. Therefore, Congress could regulate business activity that was not actually interstate commerce. Like many progressives at the turn of the century, Harlan held federal regulation was necessary because only the national government was strong enough to combat monopoly.
Although the Court broke up the railroad combination Northern Securities Company in 1904 and the Standard Oil Company in 1911, it enunciated the “rule of reason” which held that the immense size of a trust was not the problem and not all restraints of trade were unreasonable or illegal. In other words, the Court distinguished between “good” and bad” trusts depending on behavior and intent. Some companies were reasonably large and efficient, and were not unconstitutional violations of interstate commerce. The Supreme Court was accused of being a “laissez-faire” court, but it was helping to establish the constitutional limits of federal regulation with the rise of big business.
The Court would fundamentally shift its interpretation of the Commerce Clause during the New Deal judicial revolution in 1937. Among other cases, the Court decided in N.L.R.B. v. Jones & Laughlin Steel Corp. (1937) that Congress could regulate manufacturing and nearly any activity under the Commerce Clause. The Court would not invalidate another law under the Commerce Clause until U.S. v. Lopez (1995), which it ruled that a law banning handguns near schools had nothing to do with interstate commerce.
United States v. E.C. Knight (1895) Supreme Court decision:
Tony Williams is a Constituting America Fellow and the author of five books including Washington & Hamilton: The Alliance that Forged America.