Politics and Antitrust: Lessons from the Gilded Age

Richard B. Baker is Assistant Professor of Economics at The College of New Jersey; Carola Frydman is Professor of Finance at the Kellogg School of Management at Northwestern University; and Eric Hilt is Professor of Economics at Wellesley College. This post is based on their recent paper.

Recent years have witnessed a resurgence of interest in antitrust. In response to the perception that antitrust enforcement has become ineffectual, some commentators have argued that existing statutes may no longer offer regulators adequate tools for policing anticompetitive behavior. Yet the Department of Justice and Federal Trade Commission hold considerable discretion over how they choose to enforce the law. If modern antitrust is too weak, its weakness may originate in the content of our laws, or alternatively in the approach taken to enforcing those laws. It is not clear whether different leadership at America’s antitrust authorities would have produced different outcomes.

In a recent paper, we study an extraordinary episode from the Gilded Age in which the enforcement of antitrust statutes was suddenly strengthened, and show that political discretion over antitrust enforcement can have meaningful consequences for the economy. No period in American history witnessed a more significant consolidation of economic activity into large firms than the Great Merger wave of 1895-1904. William McKinley, who was elected president in 1896, was generally friendly towards business interests, and did not attempt to use the Sherman Act to challenge any of those mergers. His assassination by an anarchist in September 1901 presents an opportunity to study the effects of a change in the president’s attitude towards enforcement of antitrust laws at a time when all other institutions remained unchanged. In contrast to McKinley, his vice president Theodore Roosevelt, who succeeded him as president, had been openly critical of big business. The sudden accession of a well-known Progressive reformer to the presidency likely shifted expectations regarding the aggressiveness with which antitrust laws would be enforced.

We use the stock market’s reaction to the McKinley assassination to measure the expected impact of this change in the president’s preferences over antitrust enforcement. In response to the shooting of McKinley, the value of NYSE-traded firms fell by an average of 6.2 percent. To put this magnitude in perspective, the stock market declined by only 1.6 percent on average over the six other presidential assassinations and nearly successful assassination attempts we have identified. As the president and vice president are chosen together, the assassination of the president typically does not lead to a significant change in expected policy. The transition from McKinley to Roosevelt was clearly anything but typical.

We analyze the importance of antitrust in the stock market’s reaction by comparing the stock returns of firms that were likely to have been differentially vulnerable to more aggressive antitrust enforcement, to those that were not. Many of the firms that were listed on the NYSE at the time were the product of recent horizontal mergers, and we argue that these firms were much more likely to be subject to greater antitrust scrutiny under a more aggressive enforcement regime. We find that following McKinley’s shooting, firms involved in recent mergers saw declines in their abnormal returns that were 1.5 to 2 percentage points greater than those of other firms.

A possible source of concern regarding these estimates is that the effects of the change from McKinley to Roosevelt may have been confounded with the effects of a presidential assassination. The fact that an anarchist shot the president, for example, may have been perceived as a sign of rising political instability. Yet the experience with McKinley offers a unique opportunity to address this concern. President McKinley initially survived the shooting, and three days later his doctors announced that they expected him to make a “full recovery.” When that prognosis was announced, the losses experienced following his shooting were largely reversed, and firms involved in recent mergers saw differentially large gains. Then, seven days following the shooting, it was suddenly announced that McKinley was in fact near death. Upon receiving this news, the market reversed again, with an overall fall in share prices of similar magnitude. Since the effects from political unrest should have been reflected in prices on the day of the shooting, this latter decline in stock prices suggests that investors instead reacted to expected policy changes that would result from Roosevelt becoming president. Finally, Roosevelt’s statements when he ultimately took the oath of office defied expectations and signaled that he would follow McKinley’s policy agenda; these resulted in differential gains for firms that had been involved in recent mergers.

Once in office, Roosevelt violated his pledge to follow McKinley’s agenda and began to enforce the Sherman Act more aggressively. We also use an event study methodology to analyze the stock market’s response to the announcement of his first antitrust suit. On February 19, 1902, Roosevelt’s attorney general announced that he was going to file suit against the Northern Securities Company, an enormous holding company formed by J.P. Morgan in 1901 that controlled several major competing railroads. Plans for this suit were kept secret, which enables us to observe the market’s assessment of the expected change in antitrust doctrine that would result from the suit. Our analysis indicates the firms whose shares performed worse in response to bad news regarding McKinley’s health also suffered differentially low abnormal returns following the announcement of the suit. The stock market’s response to the assassination was consistent with its response to Roosevelt’s trust-busting.

The structure of antitrust enforcement is much more institutionalized today than it was in 1901 and recent presidential administrations have exhibited a high degree of continuity in their approaches to the issue. Nonetheless, scholars interested in designing strategies to address the growth of economic concentration should not neglect the role of enforcement efforts. One of the most significant changes in antitrust enforcement of the Gilded Age resulted not from new legislation, but from a change in the approach taken to the enforcement of existing law when Roosevelt became president. Antitrust is fundamentally political, and it is at least possible that different political leadership could produce meaningfully different antitrust enforcement.

The complete paper is available for download here.

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