Wall Street History

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Wall Street History

06/02/2000

The History of Sugar, Part III

As you put sugar into your coffee, or pour it onto your Cheerios,
I bet you never gave it much thought that sugar was the primary
raison d''etre behind the slave trade in the Americas, or that the
sweet substance played a large role in the American revolution.
But after the first two installments on the history of sugar, now
you know!

Of course when I started thinking of this series I hadn''t really
given the above two facts much thought, either, because sugar''s
role in the history of anti-trust law was foremost on my mind.
[I need a vacation.]

And so, we wrap it all up with the case of U.S. vs. E.C. Knight
Co. But first, to refresh your memory from previous pieces on
the Sherman Anti-Trust Act of 1890, the central provisions were
as follows:

1. Every contract, combination in the form of trust or otherwise,
or conspiracy, in restraint of trade or commerce among the
several States, or with foreign nations is hereby declared to
be illegal.
2. Every person who shall monopolize, or attempt to
monopolize.any part of the trade or commerce among the
several States, or with foreign nations, shall be deemed guilty
of a misdemeanor.

Also, in 1890, then Senator William McKinley authored the
McKinley Tariff Law. President William Harrison, during his
election campaign of 1888, had proclaimed his belief in a
protective tariff, which promised relief from the competition of
cheap foreign-made goods. As historian Louis Koenig
explained, Harrison contended that a tariff "was beneficial to all
- to workers whose jobs in effect were protected ''at good
wages,'' to farmers who supplied their needs, to the railroad
transporting their goods."

McKinley''s bill reached out to farmers by placing protective
rates on agricultural products, including sugar. President
Harrison also oversaw the development of a reciprocity provision
that "empowered the president to impose duties on sugar,
molasses, tea, coffee, and hides if he determined that nations
exporting them were imposing unequal and unreasonable duties
on American goods. No apparent heed was given to the prospect
of severely rising prices, which the new law did indeed inflict on
consumers." [Koenig]

Paul Johnson, a keen observer of the American scene, writes of
this era:

"High tariffs, which protected nascent industry against its foreign
competitors, was the one mortal sin America committed against
the virtuous creed of laissez-faire, and naturally it bred other
sins. Henry O. Havemeyer, president of the U.S. Sugar Trust,
when it was formed, said complacently: ''The tariff is the mother
of trusts.'' Once a high tariff was imposed by Congress in
response to pressure from domestic industries, it was liable to be
maintained long after any absolute need for it had ceased."

We now turn to the case of U.S. vs. E.C. Knight Co. Actually, it
should really be U.S. vs. American Sugar Refining Co., for it
was the latter that had been building its dominance of the
American sugar industry. Even the one and only Lenin
commented back then, "(Founder Charles) Havemeyer (formed)
the Sugar Trust by amalgamating fifteen small firms whose total
capital amounted to $6.5 million. Suitably watered, as the
Americans say, the capital of the trust was declared to be $50
million." ["Imperialism, the Highest Stage of Capitalism."]

American Sugar went on to acquire some Philadelphia area
companies, one of which was E.C. Knight, bringing its total
control of the sugar industry to 98%. The government decided to
sue in Pennsylvania federal court, alleging that the combinations
were designed to restrain trade and create a monopoly in the sale
and manufacturing of sugar. But the lower court didn''t agree
and the government appealed up to the Supreme Court.

Thus E.C. Knight became the first important prosecution brought
by the Government under the Sherman Act. But the Court held
that the mere control of 98% of the sugar refining of the country
did not constitute an act of restraint of trade. The monopolistic
acts alleged related only to manufacturing, which was not within
the scope of the Commerce Clause.

Chief Justice Fuller, writing for the majority:

"Doubtless the power to control the manufacture of a given thing
involves in a certain sense the control of its disposition, but this
is a secondary and not a primary sense; and although the exercise
of that power may result in bringing the operation of commerce
into play, it does not control it, and affects it only incidentally
and indirectly. Commerce succeeds to manufacture, and is not a
part of it."

Putting it another way, Fuller also wrote:

"Slight reflection will show that if the national power extends to
all contracts and combinations in manufacture, agriculture,
mining, and other productive industries, whose ultimate result
may effect external commerce, comparatively little of business
operations and affairs would be left for state control."

Or, another way of putting it would be:

"The fact that an article is manufactured with an intent of export
to another state does not of itself make such an article an item of
interstate commerce.

"The Act of 1890 did not attempt to deal with monopolies as
such, but with conspiracies to monopolize trade among the
several states. In the case at hand, the object was private gain
from manufacture of the commodity, not control of interstate or
foreign commerce. There was nothing in the proofs to indicate
any intention to put a restraint upon trade or commerce."
[Paul Bartholomew]

But legal historian Bernard Schwartz argues the converse was
also true.

"If the commerce power did not extend to manufacture,
agriculture, mining, and other productive industries,
comparatively little of business operations and affairs in this
country would really be subject to federal control."

Justice Harlan, the lone dissenter, vigorously laid out his case:

"Interstate traffic.may pass under the absolute control of
overshadowing combinations having financial resources without
limit and audacity in the accomplishment of their objects that
recognize none of the restraints of moral obligations controlling
the action of individuals; combinations governed entirely by the
law of greed and selfishness - so powerful that no single State is
able to overthrow them and give the required protection to the
whole country, and so all-pervading that they threaten the
integrity of our institutions."

The Court''s verdict fit in perfectly with the "laissez-faire" theory
of government that dominated thinking at that time; "the
economic system could function properly only if it was permitted
to operate free from governmental interference." [Schwartz]

Many claimed that the government''s case was not well-prepared.
Attorney General Richard Olney wrote, "You will observe that
the government has been defeated in the Supreme Court on the
trust question. I always supposed it would be, and have taken the
responsibility of not prosecuting under a law I believed to be no
good."

But fear not, the decision in E.C. Knight was reversed in 1904
when the Court ruled by a 5 to 4 vote that Northern Securities
Co., a consolidation of the Hill-Morgan and the Harriman
railways (see "Butch Cassidy") which embraced the Northern
Pacific, the Great Northern, and the Chicago, Burlington and
Quincy systems, was illegal. [This is a story for another day.]

But back to E.C. Knight. Historian Charles Geisst writes that, in
hindsight, the Court probably wishes it could rewrite its decision,
for it was fourteen years later that revelations came to light
which would have changed their mind.

"Much of the sugar trust''s business came from imported sugar;
tariffs protected the American industry, but (American Sugar)
found a simple way around the duties, bribing New York
customs officials to look the other way concerning the quantities
imported. In 1909 the New York Sun exposed the company''s
methods on its front page, claiming that this method saved the
company at least $30 million in tariffs over the years. It went on
to say that the company bribed officials and anyone who
discovered its methods. The whole fraud had been accomplished
''with the assistance and connivance of powerful and petty
politicians all of whom shared in the plunder.''"

And when it comes to the history of corruption, you know the
deal. The more things change, the more they stay the same.

That''s it for our history of sugar. I''m heading out for a dozen
Mrs. Field''s cookies.

Sources: "The Growth of the American Republic, Vol. II,"
Morison, Commager, Leuchtenberg
"A History of the American People," Paul Johnson
"Monopolies in America," Charles R. Geisst
"History of the Supreme Court," Bernard Schwartz
"Summaries of Leading Cases on the Constitution,"*
Paul Bartholomew
"The Presidents," Henry Graff, editor

*I knew there was a reason for holding onto this book after
taking my Constitutional Law course, 22 years ago!

Brian Trumbore

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