What Is the Sherman Antitrust Act?

The Sherman Antitrust Act (the Act) is landmark 1890 U.S. legislation that outlawed trusts—groups of businesses that team up or form a monopoly in order to dictate pricing in a particular market. The Act's purpose was to promote economic fairness and competitiveness and to regulate interstate commerce. The Sherman Antitrust Act was the first attempt by the United States Congress to address the use of trusts as a tool that enables a limited number of individuals to control certain key industries.

The Meaning of Antitrust

Antitrust laws refer broadly to the group of state and federal laws designed to ensure that businesses are competing fairly. Antitrust laws exist to promote competition among sellers, limit monopolies, and give consumers options.

Supporters say that antitrust laws are necessary for an open marketplace to exist and thrive. Competition among sellers gives consumers lower prices, higher-quality products and services, more choice, and greater innovation. Opponents argue that allowing businesses to compete as they see fit would ultimately give consumers the best prices.

A Landmark Act

The Sherman Antitrust Act—proposed in 1890 by Senator John Sherman from Ohio—was the first measure passed by the U.S. Congress to prohibit trusts, monopolies, and cartels. The Sherman Act also outlawed contracts, conspiracies, and other business practices that restrained trade and created monopolies within industries. For example, the Sherman Act says that competing individuals or businesses can't fix prices, divide markets, or attempt to rig bids. The Act also laid out specific penalties and fines for violating its rules.

The Act was not designed to prevent healthy competition or monopolies that were achieved by honest or organic means, but to target those monopolies that resulted from a deliberate attempt to dominate the marketplace.

The Sherman Antitrust Act was amended by the Clayton Antitrust Act in 1914, which addressed specific practices that the Sherman Act did not ban. For example, the Clayton Act prohibits appointing the same person to make business decisions for competing companies.

Key Takeaways

  • The Sherman Antitrust Act is the first measure passed by the U.S. Congress to prohibit trusts, monopolies, and cartels.
  • The Act's purpose was to promote economic fairness and competitiveness and to regulate interstate commerce.
  • It was proposed, and passed, in 1890 by Ohio Senator John Sherman.
  • The Sherman Antitrust was quite popular and signaled an important shift in American regulatory strategy toward business and markets.

Historical Background

The Interstate Commerce Commission (ICC)

The Sherman Antitrust Act was born against a backdrop of increasing monopolies and abuses of power by large corporations and railroad conglomerates. In 1887, in response to increasing public indignation about abuses of power and malpractices by railroad companies, Congress passed the Interstate Commerce Act, which spawned the Interstate Commerce Commission (ICC)—whose purpose was to regulate interstate transportation entities. In particular, the ICC had jurisdiction over U.S. railroads and all common carriers, requiring them to submit annual reports and prohibiting unfair practices such as discriminatory rates.

However, during the first half of the 20th century, Congress consistently expanded the ICC's power such that, despite its intended purpose, some believed that the ICC was often guilty of assisting the very companies it was tasked to regulate—by favoring mergers that created unfair monopolies, for example.

The Gilded Age

Congress passed the Sherman Antitrust act at the height of what Mark Twain coined as the "Gilded Age" in American history. The Gilded Age, which occurred from the 1870s to about 1900 was a period dominated by political scandal and the Robber Barons, the growth of railroads, the economization of oil and electricity, and the development of America's first giant—national and international—corporations.

The Gilded Age was an era of rapid economic growth. Corporations took off during this time, in the part, because they were easy to register and, unlike today, had no incorporation fees.

The Notion of "Trusts" in the 19th Century

Late-19th-century legislators' understanding of "trusts" is different from our concept of the term. Today, trust refers to a financial relationship in which one party gives another the right to hold property or assets for a third party. In the 19th century, however, a trust became an umbrella term for any sort of collusive or conspiratorial behavior that was seen to render competition unfair. The Sherman Antitrust Act was not designed to prevent healthy monopolistic competition, but to target those monopolies that resulted from a deliberate attempt to dominate the marketplace.

The Impact of the Sherman Antitrust Act

The Act was passed at a time of extreme public hostility toward large corporations like Standard Oil and the American Railway Union, which were seen to be unfairly monopolizing certain industries. This outcry sprang from both consumers, who were being damaged by exorbitantly high prices on essential goods, and competitors in production, who found themselves shut out of industries because of deliberate attempts by certain companies to keep other enterprises out of the market.

The Act received immediate public approval, but because the legislation's definition of concepts like trusts, monopolies, and collusion was not clearly defined, few business entities were actually prosecuted under its measures. 

However, popular demand for the Act signaled an important shift in American regulatory strategy toward business and markets. After the 19th-century rise of big business, American lawmakers reacted with a drive to regulate business practices more strictly. The Sherman Antitrust Act paved the way for more specific laws like the Clayton Act. Measures like these had widespread popular support, but lawmakers were also motivated by a genuine desire to keep the American market economy broadly competitive in the face of changing business practices.

Sections of the Sherman Antitrust Act 

The Sherman Antitrust Act is broken into three sections. Section 1 defines and bans specific means of anticompetitive conduct. Section 2 addresses the end results that are by their nature anti-competitive. As such, Sections 1 and 2 act to prevent the violation of the spirit of the law while still remaining within its bounds. Section 3 extends the guidelines and provisions in Section 1 to the District of Columbia and U.S. territories.