United States v. United States Steel Corporation

Date March 1, 1920

The U.S. Supreme Court dismissed the United States v. United States Steel Corporation case, ruling that the defendant had not committed conduct in violation of antitrust laws despite its large share of the steel industry.

Locale Washington, D.C.

Key Figures

• Joseph McKenna (1843-1926), associate justice of the United States, 1898-1925
• Joseph Buffington (1855-1938), district judge of the Third Circuit Court, 1906-1938
• Elbert Henry Gary (1846-1927), corporate attorney and chief executive officer of the United States Steel Corporation
• Charles M. Schwab (1862-1939), president of the United States Steel Corporation, 1901-1903
• J. P. Morgan (1837-1913), financier and founder of the United States Steel Corporation

Summary of Event

The United States Steel Corporation (U.S. Steel) was founded in 1901 as the world’s first billion-dollar company. It immediately became the dominant firm in the steel industry. A decade after U.S. Steel’s formation, the U.S. government challenged the firm’s relative size and its leadership in industry pricing as violating the Sherman Antitrust Act. After ten years of litigation, the U.S. Supreme Court dismissed the case of United States v. United States Steel Corporation on March 1, 1920. The Court’s decision reduced the market power of U.S. Steel by encouraging other mergers within the steel industry.

Until the mid-nineteenth century, the iron and steel industry was competitive and decentralized. In the 1870’s, adoption of the Bessemer process of steelmaking, discovered in England, led to large-scale production that gradually changed the development of the structure of the steel industry. In contrast to a rapid increase in steel output, the depression of 1893-1896 resulted in a reduction of demand for steel. Consequently, the price of steel rails dropped from more than one hundred dollars per ton in 1870 to seventeen dollars per ton in 1898. A wave of merger movement took place in the industry as firms attempted to reduce competition.

One of the biggest mergers was organized by financier J. P. Morgan, who bought three major steel producers: Federal Steel, National Steel, and Carnegie Steel. In 1901, the United States Steel Corporation was formed as a trust, or holding company, of these operating firms in addition to ore mines, railroads, and ore-carrying ships. Charles M. Schwab of Carnegie Steel was made president of the company. The new trust immediately accounted for 44 percent of the nation’s ingot capacity and 66 percent of steel casting production.

An economic recession in 1907 reduced the demand for steel. Rather than cutting prices in response to the declining market, U.S. Steel’s chairman of the board, Elbert Henry Gary, attempted to stabilize prices through cooperation with competitors. Through a series of well-publicized meetings, known as the Gary dinners, with many steel producers between 1907 and 1911, Gary promoted a policy of cooperation rather than competition among companies.

Gary developed a new pattern of pricing that was generally followed by other producers, a basing point system known as the Pittsburgh plus system. U.S. Steel began to quote steel product prices in all market areas on the basis of the Pittsburgh price plus the railroad freight rate from Pittsburgh to the market, regardless of where the products were made. U.S. Steel’s policy was disseminated during the Gary dinners, and other steel producers gradually adopted the Pittsburgh plus system. Other firms also followed U.S. Steel’s list of “extras” and price charges quoted to customers.

Despite its cooperative practices with other steel producers, U.S. Steel continued to expand, acquiring seven more companies between 1902 and 1908 and constructing the world’s largest steel mill at a city in Indiana named for Gary. The company’s expansionary and cooperative actions soon brought public attention, notably from newspaper journalists and labor unions.

In the early 1900’s, following formation of U.S. Steel, the federal government began to prosecute trusts in sugar, oil, and tobacco for illegal monopolization. The relationship between Gary and President Theodore Roosevelt prevented an antitrust suit in 1907, when the president granted advance approval of U.S. Steel’s acquisition of the TennesseeCoal, Iron and Railroad Company. In 1911, as a result of extensive investigations of the steel industry conducted by the U.S. Bureau of Corporations and the Stanley Committee of the House of Representatives, the long-expected antitrust suit could not be avoided. Attorney GeneralGeorge Woodward Wickersham filed suit against U.S. Steel in October, 1911, and asked for divestiture of the corporation. In the United States v. United States Steel Corporation case, the Department of Justice filed suit against U.S. Steel, charging monopolization through acquisition of competing firms and price fixing with competitors, both of which constituted unreasonable restraints of trade in the steel industry and violations of the Sherman Act.

Meanwhile, in the early 1910’s successful prosecutions of other major trusts, including Standard Oil and American Tobacco, for violating antitrust law encouraged the U.S. government to wage a war against more trusts and big corporations. The passage of the Clayton Antitrust Act and the formation of the Federal Trade Commission (FTC) in 1914 further strengthened the enforcement of antitrust laws. The Clayton Act forbade specific “unfair” business practices, including price discrimination and acquisition of competing companies in order to reduce market competition.

On June 3, 1915, the U.S. Steel case was dismissed in the District Court of New Jersey in a four-to-three decision. District Judge Joseph Buffington explained the decision, ruling that there was no acceptable evidence of a monopoly, unfair pricing, or monopolization by U.S. Steel in the steel market. In fact, U.S. Steel’s share in the iron and steel markets had declined to about 50 percent between 1901 and 1910, while many competitors, such as Bethlehem Steel, Inland Steel, and LaBelle Steel, had grown rapidly during the period. More than eighty competitive steel manufacturers were active in the industry—hardly evidence of a monopoly.

Furthermore, the court did not find any evidence that the defendant attempted to control the supply of iron ore, as its major competitors all had sufficient iron ore supplies. Judge Buffington found the evidence contrary to claims of monopolization and trade restraints. Furthermore, the Gary dinners, which might have constituted evidence of illegal practices as conspiracy to monopolize among firms, were discontinued before the suit was brought. No competitors of U.S. Steel testified against the defendant’s allegedly unreasonable business practices. Nevertheless, the federal government appealed the district court’s decision to the U.S. Supreme Court.

On March 1, 1920, the Supreme Court reaffirmed the district court’s decision in a four-to-three vote. Associate Justice Joseph McKenna delivered the majority opinion, which was similar to that of Buffington. McKenna explained that U.S. Steel was not formed with the intent to monopolize or restrain trade or to restrict competition and that the formation of the steel trust was a natural result of the existing industrial technology, which made mass production efficient. Despite its gigantic size, the corporation did not abuse its market power to increase profits by reducing the wages of its employees or by lowering product quality or output. Furthermore, the Court did not find any evidence of unfair practices or trade restraints. The corporation had no power of its own, and its power to fix prices and maintain price stability arose from the cooperation of its competitors.

Unlike in the American Tobacco (1911) and Standard Oil (1911) cases, both the district court and the Supreme Court found that the size of U.S. Steel itself was not an offense against the Sherman Antitrust Act, as it was not accompanied by “unreasonable” business practices. The failure of the government in prosecuting U.S. Steel signified the Court’s tolerance of “good trusts.”

Significance

The U.S. Steel case contributed much to the early development of antitrust laws and the course of American industries. It represents the government’s early efforts to maintain market competition in the face of mergers. Following victories in the Standard Oil and American Tobacco suits, the case accounted for the federal government’s first major failure in prosecuting a big corporation.

Both the district court and the Supreme Court decisions in favor of U.S. Steel were based on the “rule of reason” principle established in the Standard Oil and American Tobacco cases. McKenna reinforced the rule of reason that corporate size alone was no offense against the antitrust laws if not accompanied by anticompetitive conduct. The Supreme Court’s confirmation of the rule of reason signified its tolerance of big corporations. Its ruling immediately initiated a new merger movement in the steel industry as well as in other American industries over the next two decades. In addition, the U.S. Steel case set the tone for the government’s defeat in the Alcoa antitrust suit in 1924.

After the 1920 case, U.S. Steel ceased its expansion, hoping to avoid another antitrust lawsuit. Its share in steel production continued to decline, while competitors, particularly Bethlehem Steel and Republic Steel, began to grow through mergers. Only two years after U.S. Steel’s victory over the government, several major steel companies (Midvale, Ordnance, Republic, Inland, Bethlehem, and Lackawanna) proposed the formation of the North American Steel Company, which would have been only slightly smaller in size than U.S. Steel. The proposed merger eventually was broken into two parts and approved by the Justice Department, which hoped to add to the competitive forces acting on U.S. Steel. The Federal Trade Commission filed complaints against both mergers as constituting unfair competition under section 5 of the Federal Trade Commission Act. Although the Midvale-Republic-Inland proposed merger was dropped voluntarily, Bethlehem successfully merged with Lackawanna and Midvale when the U.S. Supreme Court dismissed the FTC’s charges in 1927.

Steel mergers continued successfully without challenge from the government until 1935, when Republic acquired Corrigan, McKinney Steel. A suit filed by the Justice Department against the merger was decided by the Northern Ohio District Court in favor of the industry.

In the U.S. Steel antitrust case, the Supreme Court did not find the defendant’s cooperative Pittsburgh plus pricing system to be an illegal type of price fixing. The Clayton Antitrust and Federal Trade Commission Acts, however, explicitly ruled price discrimination illegal. In April, 1921, the FTC filed a complaint that U.S. Steel’s Pittsburgh plus pricing practice constituted price discrimination against western consumers and was an unfair business practice. U.S. Steel obeyed the commission’s cease-and-desist order in 1924 and abandoned the pricing policy. Meanwhile, the basing point policy had spread to other industries, such as cement; the FTC unsuccessfully challenged that industry’s use of the policy in 1925. The basing point system continued to be used until it was explicitly banned by the government in 1948.

The U.S. Steel victory over the government encouraged mergers and the use of basing point pricing practices, which in turn led to increased efforts on the part of the government to regulate these practices. As for the steel industry, the case marked the end of U.S. Steel’s dominance and the rise of its competitors, setting the tone for the oligopolistic market structure that developed. The case also ended cooperative pricing practices among firms and led to the elimination of the practice of price discrimination.

In 1986, U.S. Steel Corporation changed its name to USX Corporation, and its major operating units focused on energy, steel, and other diversified enterprises. In October, 2001, USX Corporation reorganized into United States Steel Corporation, its original name, and Marathon Oil Corporation, which operated the nonsteel parts of USX Corporation.

Bibliography

Armentano, Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. 2d ed. Oakland, Calif.: Independent Institute, 1990. Covers major antitrust lawsuits since the Sherman Act, discussing their relationship to economic theory and the development of antitrust legislation. Chapter 4 discusses the U.S. Steel case. Includes an appendix of relevant sections of antitrust laws.

Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice. 2d ed. Eagan, Minn.: West, 1999. Covers nearly all aspects of U.S. antitrust policy in a manner understandable to people with no background in economics. Chapter 2 discusses “history and ideology in antitrust policy.”

Peritz, Rudolph J. R. Competition Policy in America: History, Rhetoric, Law. Rev. ed. New York: Oxford University Press, 2001. Explores the influences on U.S. public policy of the concept of free competition. Discusses congressional debates, court opinions, and the work of economic, legal, and political scholars in this area.

Schroeder, Gertrude. The Growth of Major Steel Companies, 1900-1950. Baltimore: The Johns Hopkins University Press, 1952. Detailed historical study of the leading steel companies during the first half of the twentieth century. Written for a general audience.

Tarbell, Ida. The Life of Elbert H. Gary: The Story of Steel. 1926. Reprint. Whitefish, Mont.: Kessinger, 2003. In-depth look at the corporate life of the president of U.S. Steel as well as the early development of the company. Includes discussion of Gary’s relationships with President Theodore Roosevelt and with organized labor.

U.S. Steel Corporation. United States Steel Corporation: T.N.E.C. Papers. 3 vols. New York: Author, 1940. Contains economic and statistical studies, charts, and illustrations submitted by U.S. Steel to the Temporary National Economic Committee during court hearings on the steel industry in 1939 and 1940.

Weiss, Leonard. Economics and American Industry. New York: John Wiley & Sons, 1961. Chapter 7 provides good coverage of the integration in steel production and market concentration in the early years of the industry. Explores pricing policy, including oligopoly and basing point systems, with economic models. Valuable for undergraduate economics students.

Whitney, Simon N. Antitrust Policies: American Experience in Twenty Industries. 2 vols. New York: Twentieth Century Fund, 1958. Chapter 5 of volume 1 provides historical and legal case studies of the steel industry and U.S. Steel in the first half of the twentieth century. Economic analysis includes changes in market concentration, forms of interindustry competition, and industry performance. Also discusses antitrust laws from an economic perspective and provides a good end-of-chapter summary of historical events.