A previous post discussed the November 13, 1901, formation of the Northern Securities Company by J. P. Morgan and James J. Hill to be a holding company for the common stock of two competing railroads (the Great Northern and the Northern Pacific) and the subsequent successful lawsuit by the President Theodore Roosevelt Administration alleging that this combination violated the Sherman Act’s prohibition of combinations in restraint of interstate trade and commerce.
The prequel to all of that was first the battle for control of the Chicago, Burlington and Quincy Railroad that provided access to Chicago. The contestants were (a) the Great Northern/Northern Pacific Railways, which were controlled by Hill and Morgan, and (b) the Union Pacific Railroad, which was controlled by Edward H. Harriman and Jacob Schiff. Hill and Morgan won that round, in April 1901, and they put the Quincy stock into the Northern Pacific.
Harriman with the backing of Schiff of the Wall Street banking firm of Kuehn Loeb in April-May 1901 then surreptitiously started to buy Northern Pacific common and preferred stock on the open market in an effort to gain control of the Northern Pacific and thereby the Quincy. Once Hill and Morgan realized what was happening, they started to buy Northern Pacific shares. This buying activity resulted in large and continued increases in the price of the stock.
Others in the stock market obviously noticed this activity and the upward jumps in price. Many started to sell Northern Pacific stock ‘short,” i.e., selling more shares than they owned at what many believed to be unsustainable high prices with the expectation they could buy the stock later at a lower price and thereby make a profit. That did not happen. The market was ‘cornered” with more shares committed to be sold than could be delivered. This forced speculators to sell other stocks to raise cash to buy Northern Pacific shares, resulting in the destabilization of the entire stock market.
This Wall Street Panic ended on May 9, 1901, when Harriman and Schiff capitulated to the victory of Hill and Morgan over Northern Pacific with an agreement for Hill and Morgan to bail out the shorts and thus restore market stability in return for Harriman and Schiff ‘s agreeing to end their effort to gain control of the Northern Pacific.
Larry Haeg’s book—Harriman vs. Hill—is the most comprehensive telling of this remarkable story. It reads like a novel, and his descriptions of the participants in this stock market contest make the reader feel like an actual observer of the events. I was especially fascinated by the book’s following description of George F. Baker, a financial backer of Hill and Morgan: 
Baker then was 61 years old “and the unquestioned dean of New York banking [as the] president of the First National Bank of New York [which] he has helped found in 1863 as a mere twenty-three year old and had become its president in 1877. Also, as a venture capitalist he had bought and rejuvenated several railroads, and now, among America’s half dozen wealthiest men, served on the finance committee of Morgan’s new U.S. Steel, on the board of the Northern Pacific, and on the boards of some thirty banks, railways and insurance companies.”
“At a word from Baker, it was later said, ‘the 20th century would halt on its tracks. Indeed, the railroad came to Baker’s door. When he built a mansion further north at Ninety-Third and Park he had his own underground railroad siding in the basement where a train could stop to attach his private car.”
Baker had a “four-story, double row-house mansion at 256-258 Madison Avenue between Thirty-Eighth and Thirty-Ninth.” The “dark-paneled mansion [contained] eighteenth-century tapestries, paintings of the Barbizon school, Persian rugs, cabinets glistening with jade and Japanese enamel [and a] library with its hefty, upholstered chairs.”
The Wall Street Journal carried a favorable review of the Haeg book by Roger Lowenstein, the author of “The End of Wall Street” and “Buffett: The Making of an American Capitalist.” The review said Haeg’s book covered “a corporate dust-up that takes us back to the beginning of the 20th century, when tycoons who traveled by private rail merrily raided each other’s empires while the world around them cringed.” The book “conveys a vivid picture of the Gilded Age in splendor and in turmoil. Champagne still flowed in Peacock Alley in the Waldorf-Astoria, but fistfights erupted on the floor of the exchange, and a young trader named Bernard Baruch skirted disaster with the help of an inside tip, then perfectly legal. There were scant rules governing stock trading, the author reminds us—no taxes, either. ‘If you won in the market, you kept it all.’”
Warren Buffett added his praise for Haeg’s book with these words. “I first read about the Northern Pacific Corner when I was ten years old. When I opened my office on January 1, 1962, I put on the wall a framed copy of the New York Times of May 10, 1901, describing the fateful prior day. Larry Haeg now tells the full story, and I enjoyed every word of it.”
Haeg set out to write this book as “a character study of Hill and the businessmen known as the ‘robber barons.’ As he advanced in his research, however, [Haeg] found the true test of their character came during what is known today as the Northern Pacific Corner, a four-day run on the railroad company’s stock that roiled Wall Street and set off the country’s first stock market panic.”
As mentioned in an earlier post, one of President Theodore Roosevelt’s major efforts to enhance federal regulation of railroads in his first term was his Administration’s commencement of an antitrust lawsuit under the Sherman Act against the Northern Securities Company, which combined the stocks of two competing railroads from the Great Lakes and the Mississippi River to Puget Sound on the Pacific Coast.
The late 19th century was an era of “trusts” and of “combinations” of businesses and of capital organized and directed to control of the market by suppression of competition in the marketing of goods and services, the monopolistic tendency of which had become a matter of public concern.
To meet this problem, the U.S. in 1890 enacted “An act to protect trade and commerce against unlawful restraints and monopolies,” 26 Stat. 209, ch. 647 (1890). The statute is commonly referred to as the Sherman Act in recognition of its principal author or sponsor, Senator John Sherman, Republican of Ohio. The statute provided, in part, as follows:
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states . . . is hereby declared to be illegal. Every person who shall make any such contract, or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor . . . .” (Section 1)
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states . . . shall be deemed guilty of a misdemeanor . . . . ” (Section 2)
The prescribed penalty for such misdemeanors was a fine up to $5,000 or imprisonment not exceeding one year or both. In addition, the circuit courts (n/k/a district courts) were “invested with jurisdiction to prevent and restrain violations” of the statute (Section 4), and persons injured in their business or property by any violations could sue the perpetrators for treble damages and attorneys’ fees (Section 7).
The goal of the Sherman Act was to prevent restraints of free competition in business and commercial transactions that tended to restrict production, raise prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services.
The Formation of Northern Securities
On November 13, 1901 (only two months after Roosevelt became President), J. P. Morgan, who controlled 21 railroads, including the Northern Pacific, and James J. Hill of the Great Northern  announced the formation of the Northern Securities Company to be a holding company for the common stock of the two competing railroads, This new combination was the second largest company in the world with annual revenues of $100 million and covering commerce from Chicago to Seattle and extending to China over Mr. Hill’s shipping lines.
A New York newspaper saw the new company as another step toward universal monopoly.
The Commencement of the Lawsuit
On February 19, 1902 (only three months after the formation of the Northern Securities Company), the Roosevelt Administration announced plans to commence the antitrust case alleging that the formation and operation of Northern Securities constituted a restraint of interstate commerce in violation of the Sherman Antitrust Act. In addition to the two railroads, the U.S. planned to sue James J. Hill of the Great Northern and seven directors of the Northern Pacific, including J. P. Morgan and George F. Baker. 
The U.S. stock market immediately registered significant declines with similar reactions in London, Paris and Berlin markets. In response, J. P. Morgan starting buying stocks in great quantities and helped to stop a panic.
The next evening Morgan and 12 other wealthy men met with Roosevelt at the White House without discussing the lawsuit, i.e., the elephant in the room. The next morning, however, the subject was broached when Morgan returned alone to the White House for a meeting with Roosevelt and the Attorney General, Philander Chase Knox. Morgan asked why the Government had not just called and asked him to correct any irregularities with the charter of Northern Securities, but Knox merely said the Government wanted to stop the company, not to fix it up. Afterwards Roosevelt said, “Mr. Morgan could not help regarding me as a big rival operator who either intended to ruin all his interests or could be induced to come to an agreement to ruin none.”
The Case in the Circuit Court
The bill in equity (or “complaint” in today’s terminology) thereafter was filed with the U.S. Circuit Court for the District of Minnesota. The complaint charged that the Northern Securities was an illegal “combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states” (Sherman Act § 1).
The next April 9th (1903), the Circuit Court’s four Circuit Judges unanimously upheld the validity of the Government’s complaint (United States v. Northern Securities Co., 120 Fed. 721 (Cir. Ct., Dist. Minn. 1903)) . The court in an opinion by Judge Thayer first entered the following findings of fact as established by the pleadings and evidence:
The Great Northern and Northern Pacific owned railroad lines from Minnesota to Puget Sound that are parallel and competing lines.
These two railroads in 1901 jointly acquired 98% of the capital stock of the Chicago, Burlington & Quincy Railway.
Thereafter in 1901 James J. Hill, J. P. Morgan and six other men, all of whom were defendants in the case and collectively had practical control of the two principal railroads, arranged to place a large majority of the stock of the two railroads in a holding company, Northern Securities, and that was done.
As a result, the control of these two railroads was put into a single person and thereby “destroyed every motive for competition” between them.
Those “who conceived and executed this plan . . . intended . . . to accomplish these objects.”
The court then concluded that the Congress “deliberately employed words of such general import [in section 1 of the Sherman Act] as, in its opinion, would comprehend every scheme that might be devised to accomplish that end.” In addition, the U.S. Supreme Court had held that the Act “applies to interstate carriers of freight and passengers . . .; that [the Act does] not mean in unreasonable or partial restraint of trade or commerce, but any direct restraint thereof; that an agreement between competing railroads . . . [to fix their rates is] a contract in direct restraint of commerce . . .; and [that the Act is constitutional].”
Therefore, the court entered a decree that the defendants had violated section 1 of The Sherman Act and that Northern Securities was enjoined from acquiring additional stock of the two railroads, from voting its holdings of those shares and from exercising or attempting to exercise any control or direction over the two railroads. Northern Securities, however, was permitted to rescind its acquisitions of the stock of the two railroads.
The Case in the Supreme Court
The case then went directly to the U.S. Supreme Court,  which on December 14, 1903, heard arguments. Attorney General Knox appeared for the Government and made what many thought was a brilliant argument without any questions from the Justices.
In March 1904, the U.S. Supreme Court, 5 to 4, affirmed the Eighth Circuit and ordered the company dismantled. (Northern Securities Co. v. United States, 193 U.S. 197 (1904).) The Court’s plurality opinion by Mr. Justice John Marshall Harlan and supported by only three of the other Justices concluded that “the evidence . . . shows a violation of the . . . [Sherman Act, which] declares illegal every combination or conspiracy in restraint of commerce among the several states . . . and forbids attempts to monopolize such commerce or any part of it.”
In so concluding, the Harlan opinion emphasized that the Court’s prior decisions had established that “every contract, combination, or conspiracy in whatever form, of whatever nature, and whoever may be parties to it, [that] directly or necessarily operates in restraint of [interstate] . . . commerce” is illegal. Those prior decisions, said the Harlan opinion, also determined that the statute is not limited to unreasonable restraints of trade; that railroads operating in interstate trade are covered by the statute; and that every contract, combination or conspiracy that would extinguish such competition is illegal. (Emphasis added.)
Mr. Justice David Josiah Brewer concurred in the judgment affirming the lower court’s conclusion of antitrust violations, but disagreed with the rationale of the Harlan opinion because of fear that it “might tend to unsettle legitimate business enterprises, stifle or retard wholesome business activities, encourage improper disregard of reasonable contracts, and invite unnecessary litigation.” Instead, said Justice Brewer, the statute only covered “contracts which were in direct restraint of trade, unreasonable, and against public policy.” (Emphasis added.)
A dissenting opinion was filed by Mr. Justice Edward Douglas White and joined by Chief Justice Melville Fuller and Justices Rufus Wheeler Peckham and Oliver Wendell Holmes. This opinion concluded that the constitutional power of the federal government over interstate commerce did not extend to cover Northern Securities Company’s acquisition of the common stock of the two railroads.
Holmes also filed a separate dissenting opinion that was joined by the other three dissenters. Holmes asserted that the antitrust statute only outlawed combinations in restraint of trade, not of competition and that he saw no evidence of an attempt to monopolize some portion of U.S. trade or commerce. He also expressed relief that “only a minority of my brethren [the four Justices who subscribed to the opinion of Mr. Justice Harlan] adopt an interpretation of the [statute] . . . which . . . would make eternal the bellum omnium contra omnes [the war of all against all], and disintegrate society so far as it could into individual atoms . . . . [Such an interpretation] would be an attempt to reorganize society . . . . I believe Congress was not entrusted by the Constitution with the power to make . . . [such a law], and I am deeply persuaded that it has not tried.”
The high court’s action was a major victory for the administration and put the business community on notice that although this was a Republican administration, it would not give business free rein to operate without regard for the public welfare.
W. C. Brown’s Reaction to the Supreme Court’s Decision
Soon thereafter (May 24, 1904), W.C. Brown, my maternal great-great-uncle, in a speech to the Illinois Manufacturers Association that was covered by the New York Times commented on the Supreme Court’s decision. He said, “Propositions looking to the betterment of [railroad] service, having no other object, and impossible of any other result, have been misunderstood and have been fought inch by inch with a perseverance and zeal worthy a better cause.” As a result, Brown continued, it was “not impossible that the language of the majority of the Supreme Court [in the Northern Securities case] may . . . seem to reflect the clamor of the public, rather than the calm, judicial review of a great question.” 
Brown added that by “amendment or by judicial interpretation the question of reasonable restraint of commerce, as against any restraint whatever, must become part of the Sherman . . . [Act], and must be considered in its enforcement, or obstacles to commercial and industrial progress are likely to be interposed the gravity of which no one can foresee.” (Emphasis added.)
This commentary was preceded by Brown’s proclaiming that “[e]xcept for the birth of Christ, no event has meant so much to humanity as the U.S. Declaration of Independence;” that the recent U.S. war with Spain was “as holy, as high and unselfish in purpose as ever inspired a people;” and that the U.S. had the “satisfaction of having borne its share of the burden of carrying Christianity, civilization and education to those who sit in the darkness of ignorance and superstition.”
Brown also issued a stern warning that apparently emerged from his growing up in thinly populated Iowa and Illinois and that ignored his presumably elegant life in New York City (and earlier in Chicago). Brown said, “The most serious menace that clouds our national horizon today, ominous now and increasing in size and anger and portent, is the rapid growth of our cities . . . . No man can regard the growth of the great centers of population, with their sinister, dangerous, preponderantly influence in the politics of the State and Nation, without alarm.” He added, “The remedy for this evil and the safety of the Nation was building up, encouraging, and increasing our agricultural population.”
It should also be noted that at the time of this speech, Brown was a Vice President of the New York Central Railway, two of whose directors were defendants in the case: J. P. Morgan, a principal architect and beneficiary of the formation of the Northern Securities Company, and George F. Baker.
Subsequent Supreme Court’s Interpretations of the Sherman Act
Seven years later, in 1911, the approach to interpreting the Sherman act advocated by Justice Brewer and W. C. Brown was in fact adopted by the U.S. Supreme Court. In Standard Oil Co. v. United States, 221 U.S. 1 (1911), the Court, 8 to 1, stated that only combinations and contracts unreasonably restraining interstate or foreign commerce were illegal under the Sherman Act. Justice John Marshall Harlan, the lone dissenter in this case and the author of the Court’s opinion in Northern Securities, said the Rule of Reason was a departure from previous Sherman Act case law, which purportedly had interpreted the language of the Sherman Act to hold that all contracts restraining trade were prohibited, regardless of whether the restraint actually produced ill effects.
Thereafter the Court unanimously reaffirmed the Rule of Reason in two cases: United States v. American Tobacco Co., 221 U.S. 106 (1911) (section 2 of the Sherman Act did not ban the mere possession of a monopoly but only the unreasonable acquisition and/or maintenance of monopoly); Chicago Board of Trade v. United States, 246 U.S. 231 (1918) (agreement between rivals limiting rivalry on price after an exchange was closed was reasonable and thus legal).
Subsequent Supreme Court cases established the concept of per se violations of Section 1 of the Sherman Act. These are “agreements, conspiracies or trusts in restraint of trade” that have been found to have a “pernicious effect on competition” or “lack any redeeming virtue” and include competitors’ agreements to fix their prices or divide markets between them and concerted refusals to deal.
For other alleged violations of section 1 of the Sherman Act, the courts engage in a “rule of reason” analysis to evaluate the intent and purpose of the conduct, the facts peculiar to the business and industry, the history of the conduct and its effect on competition. If the result of this judicial analysis is the conduct unreasonably restrains trade, it is a violation of section 1.
 As of 1903 nine U.S. circuit courts had jurisdiction over trials of all civil suits initiated by the U. S. Government in different parts of the country, and the circuit court that covered the State of Minnesota (the Eighth Circuit) had four Circuit Judges (Henry C. Caldwell, Walter H. Sanborn, Amos M. Thayer and Willis Van Devanter). As of January 1, 1912, these courts were abolished, and the previously established U. S. district courts assumed jurisdiction over all civil and criminal cases in the federal courts.
 W.C. Brown, Address before the Meeting of the Illinois Manufacturers Association, Chicago, Illinois (May 23, 1904); Supreme Court Influenced, N.Y. Times (May 24, 1904).
As previously noted, Theodore Roosevelt and William Carlos Brown (my maternal great-great-uncle) were together on one of Roosevelt’s campaign journeys in the election of 1900. Thereafter during Roosevelt’s first (09/14/1901—03/04/1905) and second (03/04/1905—03/04/1909) presidential terms, these two men also had periodic contacts on railroad issues while Brown was Vice President and Senior Vice President of the New York Central Railroad, one of the most important railroads in the country (02/01/1902 —01/31/1909).
The importance of the railroads to the U.S. economy affected everyone and prompted much popular dissatisfaction with perceived abuses by the railroads. Roosevelt entered this social and political milieu with a belief that the government should use its resources to help achieve economic and social justice.
He acted on this belief in the fall of 1902 when a miners’ strike threatened a coal shortage in the upcoming winter. Roosevelt called both the mine owners and the labor representatives together at the White House. When management refused to negotiate, Roosevelt told them if the two sides did not talk, he would use troops to seize the mines and run them as a federal operation. Faced with this threat, the owners and labor unions agreed to submit their dispute to a commission and abide by its recommendations. The resulting settlement, Roosevelt said, was a “square deal” or one fair to both sides, and this label soon became synonymous with Roosevelt’s overall domestic program.
As part of this “Square Deal” program or approach Roosevelt advocated increased federal government regulation of corporations acting in interstate commerce, especially the railroads, in both of his presidential terms.
There were two principal developments on this issue in Roosevelt’s first term. The first was his Administration’s commencement in 1902 of an antitrust lawsuit against the Northern Securities Company, which combined the stocks of two competing railroads from the Great Lakes and the Mississippi River to Puget Sound on the Pacific Coast. The second was the Administration’s pressing the Congress in 1903 to enact the Elkins Act to enhance the powers of the Interstate Commerce Commission over railroad freight rates.
These developments will be discussed in subsequent posts while others will investigate this subject during Roosevelt’s second term as President.