Just over 100 years ago, the US led the world in terms of rethinking how big business worked, and when its power should be constrained. In retrospect, the breakthrough legislation—not just for the US, but also internationally—was the Sherman Antitrust Act of 1890. The Dodd-Frank financial-reform bill, which is about to pass the US senate, does something similar (and long overdue) for banking. Prior to 1890, big business was widely regarded as more efficient and generally more modern than small business. Most people saw the consolidation of smaller companies into fewer, large companies as a stabilising development that rewarded success and allowed for further productive investment. The creation of America as a major economic power, after all, was made possible by giant steel mills, integrated railway systems, and the mobilisation of enormous energy reserves through such ventures as Standard Oil. But ever-bigger business also had a profound social impact, and here the ledger entries were not all in the positive column. The people who ran big business were often unscrupulous, and in some cases used their dominant market position to drive out their competitors. There was dominance, to be sure, in the local and regional markets of mid-19th century America, but nothing like what developed in the 50 years that followed. Big business brought major productivity improvements, but it also increased the power of private companies to act in ways that were injurious to the broader marketplace—and to society. The Sherman Act itself did not change this situation overnight, but once President Theodore Roosevelt decided to take up the cause it became a powerful tool that could be used to break up industrial and transportation monopolies. By doing so, Roosevelt and those who followed in his footsteps shifted the consensus. Roosevelt’s first case, against the Northern Securities Company in 1902, was immensely controversial. But the break-up a decade later of Standard Oil—perhaps the most powerful company in the history of the world to that date—was seen by mainstream opinion as completely reasonable. And this break-up took place in great American style: the company was split into more than 30 pieces, the shareholders did very well out of it, and the Rockefeller family—whose patriarch, John Davison Rockefeller, was one of the founders of Standard Oil—went on to rehabilitate itself in the eyes of the American public. Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation in their favour while also receiving generous taxpayer-financed bailouts as needed? The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters—or by the people who shaped its application in the early years of the 20th century. The banks do not have monopoly pricing power in the traditional sense, and their market share—at the national level—is lower than what would trigger an antitrust investigation in the non-financial sectors. Effective size caps on banks were imposed by the banking reforms of the 1930s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years. Now, however, a new form of antitrust arrives—in the shape of the Kanjorski amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, if necessary, break them up when they pose a “grave risk” to financial stability. This is not just a theoretical possibility—such risks manifested themselves quite clearly in late 2008 and into early 2009. It remains uncertain, of course, whether the regulators would actually take such steps. But as Representative Paul Kanjorski, the main force behind the provision, put it recently: “The key lesson of the last decade is that financial regulators must use their powers rather than coddle industry interests.” And Kanjorski probably is right that not much would be required. “If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message”—one that would “significantly reform how all financial services firms behave forever more.” Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress. Teddy Roosevelt, of course, preferred to “speak softly and carry a big stick.” The Kanjorski amendment is a very big stick. Who will pick it up?
