Antitrust Enforcement During National Crises: An Unhappy History

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Daniel Crane, Dec 15, 2008

In 1940, while head of the Justice Department’s Antitrust Division (“DOJ”), Thurman Arnold published The Bottlenecks of Business, a book that defended reinvigorated antitrust enforcement. He entitled Chapter IV A Free Market in Times of National Emergency or War. Arnold wrote that “[t]he antitrust laws must constantly defend the ideal of industrial democracy against all sorts of pressures.” With the prospect of war on his horizon, Arnold observed that “these pressures increase when the government is suddenly forced to buy huge quantities of defense materials from closely controlled sources of supply.” He further noted that “[t]he temptation to exploit consumers and the government through domination of a suddenly expanding market is almost irresistible, and usually prevails unless it is curbed.”

Arnold turned out to be writing his own political obituary. As Spencer Waller has detailed in his excellent biography, Arnold began to face the “wholesale repeal or practical nullification of antitrust in the face of the war planning and production leading up to the U.S. entry into World War II.” Consistent with the themes laid out in Bottlenecks, Arnold continued to push aggressive antitrust enforcement as an aid rather than obstacle to the war effort. But the handwriting was on the wall. In 1942, when Arnold tried to indict political luminary Averell Harriman, the chairman of the Union Pacific railroad, for price-fixing, he was quietly forced out of the Justice Department. Antitrust was simply a luxury that the nation could not enforce in wartime.

Indeed, antitrust seems to be a luxury that the country cannot afford in any crisis. Or at least this is the lesson one would draw from observing our national behavior during moments of economic crisis or war. Throughout our national history, wars and financial panics have been opportunities for consolidation of industrial power. Arguments that competition policy is a help rather than a hindrance fall on deaf ears in the face of panic.

The history of the 2008 (and beyond?) financial crisis has yet to be written. But already the familiar telltale signs are appearing. The Treasury Department is reportedly pushing consolidation as a remedy for bank illiquidity, Chrysler and General Motors have discussed merger without any appearance of antitrust objection, and the failure of corporate titans like Lehman Brothers leaves little doubt that the industrial landscape will emerge considerably more concentrated than it was before.

In this essay, I have the gloomy task of mapping the failure of competition policy during periods of crisis. For purposes of the historical narrative, I conflate war and financial crisis. The strong tendency toward abandonment of competition principles arises in both circumstances. I will argue, however, that not all crises are created equal when it comes to the suspension of antitrust.