Notorious Business Trusts
By Harry L. Munsinger, J.D., Ph.D.
T
he idea of using a trust to own related businesses was developed by Samuel C.T. Dodd, Standard Oil’s General Counsel, during the American Civil War.1 Business trusts allowed companies to cooperate and keep the price of manufactured goods such as kerosene, finished steel, and cigarettes stable, ostensibly benefiting American consumers. Economists of the time believed business trusts would reduce ruinous competition and bring order, stability, and reasonable prices to American consumers. The Standard Oil Trust was among the first of these arrangements, and its success in stabilizing supply and consumer prices inspired others to adopt the model. However, when the United States government investigated these business trusts, it discovered that the trusts were using unfair business tactics to reduce competition and earn huge profits at the expense of consumers. The operations of business trusts violated a basic tenant of capitalism—that competition lowers prices and spurs development of new products. Eventually, this led to the passage of the Sherman Antitrust Act and the famous “trust busting” efforts by the federal government in the early twentieth century. Existing business trusts were investigated, charged, tried, convicted of restraints of trade, and forced to break up their monopolies by the United States Department of Justice and the United States Supreme Court. Business trusts were gradually phased out in favor of holding companies, which are limited in their power to restrain trade and exercise monopoly pricing power.
The Standard Oil Trust The Standard Oil Trust was established in 1863 by John D. Rockefeller. By 1868, the Standard Oil Trust was the largest oil refiner in the world, producing primarily kerosene for home lighting. Rockefeller 14 San Antonio Lawyer® | sabar.org
consolidated his oil businesses and invited other business owners to transfer their shares to the Standard Oil Trust, in return for a beneficial interest in profits from the trust. Standard Oil Trust ultimately owned fourteen corporations and exercised control over twenty-six others, creating a monopoly in the production, refining, transportation, and marketing of kerosene in America. Rockefeller claimed he established the Standard Oil Trust to improve the organization and efficiency of his many business interests, but he was accused by journalists and Congressmen of abusing his market power by gaining monopoly control of the oil industry, artificially holding prices at a steady high level, and limiting competition in the sale of kerosene to the public. The Standard Oil Trust organized committees to control crude oil production, refining, transportation, and marketing—stabilizing the price Americans paid for kerosene to light their homes.2 However, the stable price of kerosene was deceptive, because the cost of drilling and pumping crude oil, transporting it to market, refining the oil, and distributing kerosene to consumers decreased substantially under the control of Standard Oil Trust. Rather than pass these savings on to their customers, Rockefeller and his trust partners pocketed the profits. Customers did not complain because they were able to buy ample supplies of kerosene at a stable price. Until the invention of the internal combustion engine for motor vehicles, gasoline was a worthless by-product of refining kerosene. Soon after the invention of the automobile, however, gasoline became Standard Oil’s most important product and earned the trust millions of dollars annually. The Standard Oil Trust was eventually forced to split into several independent oil companies through enforcement of the Sherman Antitrust Act.
