Published by EH.NET (August 2000)

Charles R. Geisst, Monopolies in America: Empire Builders and Their Enemies

from Jay Gould to Bill Gates. New York: Oxford University Press, 2000. x +

355 pp. $30 (cloth), ISBN: 0-19-512301-8.

Reviewed for EH.NET by Werner Troesken, Departments of History and Economics,

University of Pittsburgh.

Monopolies in America by Charles R. Geisst, is a history of the trust

and antitrust movements from their inception in the late nineteenth century

through to the present day. In light of the on-going struggle between Microsoft

and the Department of Justice, this is a timely contribution to the vast

literature on the political economy of antitrust. The book is organized

chronologically and summarizes some of the more colorful developments in the

historical battle between big business and its critics, in and out of


Geisst’s central conclusion is that “monopoly is the logical outcome of free

market economic organization (p. 319).” This conclusion does not sit well with

either standard economic theory or previous historical studies. Economic theory

suggests monopoly — or more precisely high degrees of market concentration —

only in industries with substantial entry barriers and economies of scale. But

in industries where entry barriers are low and economies of scale are limited,

both theory and casual empiricism (look at agriculture or retailing) indicate

much less concentration and market power. Indeed, previous historical studies,

notably Naomi Lamoreaux’s The Great Merger Movement in American Business

(New York, 1985), find that far from being inevitable, the great industrial

combinations of the late nineteenth century were anomalies: most trusts and

combinations failed. Geisst does not discuss the predictions of standard

economic theory, nor does he discuss or cite the work of Lamoreaux.

Chapter 1, “The Monopolist Menace,” focuses on the development of the railroads

and their close ties to state and federal legislators. Geisst emphasizes the

economic and political corruption that came with the railroads. For example, he

explains how the managers of railroads routinely “watered stock” and made the

stock market a very dangerous place for investors. Despite such pervasive

corruption on the part of managers, Geisst claims that investors “always came

back for more,” attracted by the promise of riches floated by inaccurate press

accounts (p. 19). Apparently, investors during this period were a gullible lot.

Later in the chapter, Geisst describes how state legislatures routinely “looked

the other way” as the railroads plundered consumers and investors (e.g., pp.

24-25). Why did voters tolerate such abuses? Explaining the ease with which

Pennsylvania railroads secured patently pro-business legislation, the author

writes that “the people and politicians in Pennsylvania still came under Adams’

criticism as being ‘not marked by intelligence; they are, in fact, dull,

uninteresting, very slow and very persevering.’ It was just this sort of

plodding dullness that made corporations work relatively efficiently” (p. 21).

This portrayal of state legislators as the tools of railroad interests

contrasts sharply with other studies of state railroad regulation, which have

found strong evidence that state regulators were quite sympathetic to the needs

of farmers and shippers. See, for example, Christopher Grandy, “Can Government

Be Trusted to Keep Its Part of the Social Contract?: New Jersey and the

Railroads, 1825-1888,” Journal of Law Economics and Organization, 1989;

Mark T. Kanazawa and Roger G. Noll, “The Origins of State Railroad Regulation:

The Illinois Constitution of 1870″ in Claudia Goldin and Gary Libecap, editors,

The Regulated Economy, (Chicago, 1994); and Gabriel Kolko’s Railroads

and Regulation, 1877-1916 (Princeton, 1965). These studies are neither

discussed nor cited.

Chapter 2, “‘Good’ and ‘Bad’ Trusts,” is broader in scope, discussing such

combinations as the Meat-Packing Trust, the “Banking Trust,” and Standard Oil.

Geisst argues that the rise of the great industrial trusts was driven by a

“general price deflation” which pushed “down profit margins,” and the severe

economic slowdown after 1893 (p. 51). He also ascribes the rise of large

combinations to tariffs, lax antitrust enforcement, and other policy mistakes

(e.g., pp. 51 and 319). Alfred Chandler’s competing interpretation in The

Visible Hand (Cambridge, MA, 1977), which emphasizes the efficiency

characteristics of large firms, is not discussed or cited. This omission occurs

despite well-known studies by economic historians showing that the largest and

most successful combinations persisted in industries experiencing rapid

technological change and exhibiting significant economies of scale. (See, for

example, John James, “Structural Change in American Manufacturing, 1850-1890,”

Journal of Economic History, 1983; and Gary D. Libecap, “The Rise of the

Chicago Packers and the Origins of Meat Inspection and Antitrust,” Economic

Inquiry, 1992).

In discussing Standard Oil, Geisst points out that Standard received large

rebates from the railroads. From Geisst’s perspective these rebates constitute

prima facie evidence that Standard was behaving in an anticompetitive manner

(see, for example, pp. 37-38). Yet it is well-known that Standard Oil received

these rebates, at least in part, because Standard, unlike most of its

competitors, shipped its oil via tank cars rather than barrels. (See Harold F.

Williamson and Arnold R. Daum, The American Petroleum Industry: The Age of

Illumination, 1859-1899, Evanston, IL, 1959, pp. 528-37.) There was a sound

efficiency rationale for giving Standard rebates for using tank cars — they

were cheaper and safer for the railroads to haul than barrels. The rebate

programs may well have had anti-competitive effects, but given their historical

significance, efficiency rationales deserve at least some hearing.

To be clear, I do not wish to imply that all was goodness and light with the

trusts. There is compelling evidence that the trusts repeatedly used

anticompetitive strategies in an effort to gain market power. For example,

event study methodology shows that the tobacco trust used predatory pricing to

reduce the acquisition cost of its competitors (Malcolm R. Burns, “Predatory

Pricing and the Acquisition Cost of Competitors,” Journal of Political

Economy, 1986); direct evidence shows the sugar trust earned a sixty

percent rate of return on its investments in predation (see, generally, David

Genesove and Wallace P. Mullin, “Testing Static Oligopoly Models: Conduct and

Cost in the Sugar Industry, 1890-1914,” Rand Journal of Economics, 1998;

and “Predation and Its Rate of Return: The Sugar Industry, 1887-1914,” working

paper); and event study methodology and voting analyses show how the sugar

trust used its political clout to alter tariff policy. Clearly the trusts

corrupted the democratic process — though they certainly were not alone in

this (Sara Fisher Ellison and Wallace P. Mullin, “Economics and Politics: The

Case of Sugar Tariff Reform,” Journal of Law and Economics, 1995) — and

event study methodology shows the merger of several railroads to create the

Northern Securities company was anticompetitive (Robin Praeger, “The Effects of

Horizontal Mergers on Competition: The Case of the Northern Securities

Company,” Rand Journal of Economics, 1992).

Moreover, historical experience and economic theory both tell us that antitrust

policy can ameliorate things: clearly, the break-up of AT&T increased consumer

surplus and reduced the political clout of a corporate titan; and there is

evidence that had the Supreme Court broken up U.S. Steel in 1920 it would have

accomplished similar ends (see George L. Mullin, Joseph C. Mullin, and Wallace

P. Mullin, “The Competitive Effects of Mergers: Stock Market Evidence from the

U.S. Steel Dissolution Suit,” Rand Journal of Economics, 1995).

My point, then, is simply this: Geisst omits an important piece of the story

when he fails to consider efficiency interpretations of the trusts, and he

would not have omitted this aspect of the story had he considered the entire

corpus of historical and economic knowledge. Even potentially complementary and

supportive studies, like those cited in the two preceding paragraphs, are

omitted from the analysis.

Chapter 3, “Looking the Other Way,” focuses on the 1920s. After claiming that

the twenties were halcyon days for the rich and big business, Geisst observes

(p. 93): “Yet amidst what appeared to be prosperity, the wages of the average

worker were actually dropping. The rich got richer while the working class

scraped to make ends meet. The F.W. Woolworth Company reported profit margins

of 20 percent but actually lowered the wages of salesgirls in its stores,

citing the need for belt tightening.” In short, the rich got richer, and the

poor got poorer. Geisst is not the first writer to make this claim about the

1920s, and he undoubtedly will not be the last. Alas, even when read in a light

favorable to such pessimistic views, the evidence on this point is decidedly

mixed, and when read in a more objective light, the existing evidence

contradicts the pessimistic case. Good summaries of the academic debate about

what happened to wages in the 1920s can be found in any introductory textbook

on American economic history, such as Walton and Rockoff; Atack and Passell; or

Hughes and Cain. The basic thrust of the debate can also be captured by looking

at the Historical Statistics of the United States (1976, pp. 164-68),

which reports a steady increase in the earnings of most industrial workers

between 1921 and 1929.

Later in the chapter, Geisst discusses the shady brokerage practices of banks

in the era before the Glass-Steagall Act. He writes (pp. 102-03): “Many of the

banks produced literature designed to educate investors on the intricacies of

stocks and bonds. What was less apparent, however, was the fact that many of

those investors were sold securities that the banks had a vested interest in,

namely, securities underwritten and held by the banks themselves. Investors

were not aware that the banks were selling them their own inventories, many

times at greatly inflated prices. At other times the risks associated with many

bonds sold by bank subsidiaries were not made clear to their buyers.” This

passage contains no notes or cites to supporting studies, nor is it followed by

any sort of presentation of supporting evidence in the form of statistics

and/or anecdotes. Nonetheless, Geisst goes on to assume that such abuses were

commonplace, and given this, concludes that laws like the Glass-Steagall Act

were “steps in the right direction” and “served to police malefactors in the

banking business” (p. 135).

There are competing interpretations. Probably the best known of these is a

paper in the American Economic Review (1994), “Is the Glass-Steagall Act

Justified? A Study of the U.S. Experience With Universal Banking Before 1933,”

by Randall S. Kroszner and Raghuram G. Rajan, both economists at the University

of Chicago. Kroszner and Rajan systematically compare the securities

underwritten by commercial banks and those underwritten by investment banks.

Their findings suggest investors anticipated the conflicts of interest that

confronted commercial banks and thereby constrained underwriting behavior and

forced commercial banks to deal in better known, low risk securities. Geisst

neither discusses nor cites Kroszner and Rajan.

Subsequent chapters in Monopolies in America are similar in tone and

presentation to those just discussed, with a few notable exceptions. In chapter

7, Geisst discusses McGee’s well-known study of Standard Oil, and the Chicago

School approach to antitrust more generally (e.g., pp. 244-45). And in chapter

8, he briefly considers academic defenders of hostile takeovers and other

controversial developments during the 1980s. He writes (p. 303): “Another

business school professor, Mike Jensen at the University of Rochester, gained

wide notoriety by being one of the few academics to defend corporate raids and

takeovers. He also argued against a growing trend that decried executive

compensation as being too high. He actually favored paying corporate executives

more, not less.” For readers unfamiliar with this line thought it would have

been helpful if Geisst had explained why Jensen made these arguments. Instead

Geisst chose to summarize Jensen’s reasoning curtly: “In [Jensen’s] view,

hostile takeovers were nothing more than businesses vying for a position, a

natural series of events (p. 303).” The discussion of McGee and the Chicago

School in chapter 7 is equally illuminating.

Monopolies in America is best described as a work of popular history:

the writing is clear; important persons and events are usually recounted ably;

the anecdotes are interesting, though not necessarily instructive; and the

narrative is not cluttered with caveats and footnotes. But given the

shortcomings discussed above, it says nothing specialists will find

particularly interesting, nor does it survey the existing literature in a way

that would make it useful in undergraduate courses on economic history.

Werner Troesken is Associate Professor of History and Economics at the

University of Pittsburgh. He has published a book and several articles on the

political economy of regulation.