Today in 1904: The Supreme Court upholds major railroad trust breakup

March 14, 2014

Today in Legal HistoryMany detractors of President Barack Obama claim that his policies are destroying businesses.  They are usually speaking in hyperbole, in that they contend that President Obama’s policies tending toward increased regulation have a detrimental impact on businesses operating in the U.S. – not that the president is actually destroying businesses.

Just over one hundred years ago, however, a U.S. president literally was destroying businesses – and his actions were upheld by the U.S. Supreme Court.

That ruling, Northern Securities Company v. U.S., was decided 110 years ago today, on March 14, 1904.

The facts leading up to the case started in 1901, when James J. Hill, owner of the Great Northern Railway (GN) and the Northern Pacific Railway, (NP) acquired the Chicago, Burlington, and Quincy Railroad (CBQ) – and faced intense opposition by rival Edward H. Harriman, owner of the Union Pacific Railroad (UP) and Southern Pacific Railrod (SP), who also wanted control of the CBQ.

Hill was backed by financier J.P. Morgan, while Harriman enjoyed support from his own powerful interests in William Rockefeller and Jacob Schiff.  The clash of these two powers, albeit brief, caused turmoil on Wall Street: Harriman began buying up Northern Pacific’s stock (Hill’s company that controlled the railroads) in an effort to gain enough control of the company so that he could gain control of the CBQ (by gaining a majority of the shares and thus being able to appoint directors to the CBQ).

Hill and Morgan became aware of Harriman’s efforts and countered by buying up Northern Pacific stock themselves.  This resulted in a massive spike in Northern Pacific stock (with the price reaching between $1,000 and $2,000 per share – between $27,000 and $55,000 in 2014 dollars).  Although Hill was successful in the end, the artificially high price threatened to crash the New York Stock Exchange.

Thus, all of the parties came together and formed a holding company – the Northern Securities Company – to control the NP, GN, and CBP (Hill controlled the stock of his major railway companies, while some of Harriman’s directors were appointed as representatives for his stock holdings in Northern Pacific).

The railroad trust was met with strong hostility by the American public, however, leading to the Justice Department, at the urging of President Theodore Roosevelt, to bring an anti-trust case against the monopoly to break it up – in which the government succeeded in doing.

The move was unprecedented.  The railroad magnates never expected Roosevelt to act with such force towards the trust because no president had ever taken such action before.  Indeed, this was one of the first anti-trust cases brought against corporations instead of labor.

Northern Securities appealed the ruling, and the case reached the Supreme Court.  In a five to four ruling, the Court sided with the government, holding that the Justice Department was well within its authority under the Sherman Act to break up the trust since it was a “contract in restraint of interstate commerce,” as prohibited by the Act.

Roosevelt’s success at breaking up the trust brought him into great public favor as the “trust buster,” offering him critical support during the 1904 elections.

Furthermore, the ruling was something of a game-changer in the corporate world.  Where before, corporations and other financial powers could conduct mergers and takeovers with no fear of government interruption, Northern Securities showed the country that the government not only had the power to stop some of the most powerful financial interests in the world at the time, but that it was also willing to use that power.  In fact, over the next seven years, there were 44 other rulings under the Sherman Act breaking up trusts and corporations.

This didn’t stop corporate mergers and takeovers, however, but it did change how these types of maneuvers occurred: business leaders would now seek approval for such transactions with the president and the Justice Department before moving forward.

Northern Securities remains one of the most important anti-trust rulings not only for its political and financial impacts, but also for its influence on the law.  Despite its age, the case continues to be regularly cited in anti-trust rulings today.

A final irony of the case is that, while President Obama’s critics use the claim that he “destroys businesses” as a direct attack on Obama, President Roosevelt wore that label proudly during his reelection campaign – and it served him well.