The ill-fated President William McKinley had a lax attitude toward enforcing antitrust law. And so firms in the early 20th century, like U.S. Steel and Standard Oil, either became de-facto monopolists in their industries during his administration or saw their existing monopolies go unchecked. Comparisons abound between those companies and contemporary firms like Google and Facebook, which together capture nearly 60 percent of the digital advertising market.
But where antitrust efforts ultimately felled the J.P. Morgans and Andrew Carnegies of the early 1900s, our own Mark Zuckerbergs and Larry Pages continue to expand their empires. Why?
Part of the answer may hinge on one fateful week in September 1901, Frydman says, when McKinley was gunned down by an assassin, and his vice president—a vigorous trust-buster named Theodore Roosevelt—suddenly ascended to the presidency.
No antitrust laws were changed, but the willingness of government regulators to actually enforce existing laws turned 180 degrees virtually overnight. Frydman calls this willingness “political discretion.”
In the incoming Roosevelt administration, the existing U.S. antitrust laws suddenly had teeth. And, as Frydman discovered, the economic effects were immediate and clear: Large companies that were particularly vulnerable to antitrust prosecution saw their stock prices lose nearly 30 percent more value after McKinley’s assassination compared to companies without antitrust concerns.
“We’re trying to understand how important enforcement of rules is in general, and how this affects the economy,” Frydman says. “By looking at this very particular historical event, we can argue that whatever change we observe probably has a lot more to do with enforcement of existing rules than with, say, changes in the law.”
A Tale of Two Presidents
It is notoriously difficult to empirically measure the effect of political discretion on economic regulation, even in the present day.
“We can measure how many people work at an agency like the Federal Trade Commission or the Securities and Exchange Commission, and how much funding they get. But it’s very, very hard to quantify exactly how much they are enforcing the laws,” explains Frydman, who conducted the research with Richard B. Baker of the College of New Jersey and Eric Hilt of Wellesley College.
Which is why the transition from the late 19th to the early 20th century offers an attractive laboratory setting for researching the effects of political discretion.
This is when the so-called Gilded Age of rapid, often unchecked corporate expansion butted up against the Progressive Era of reinvigorated social and economic reform. The decade-long period starting in 1895 saw thousands of small companies consolidate into large ones like Dupont, U.S. Steel, and General Electric, and the Sherman Antitrust Act of 1890 was still new. Corporate consolidation between 1895 and 1905 “was very quick. It transformed the way in which industry was organized,” Frydman says.
The sudden transition in this era between the two presidents was uniquely useful to Frydman’s research. In addition to the two leaders’ opposite stances on enforcing existing antitrust law, the assassination itself provided an unusually clean demarcation between two regimes in which only one variable—the presidency, and the discretion over enforcement that comes with it—abruptly changed.
“With normal presidential elections, many other things shift when it comes to enforcement of rules,” Frydman explains. “But this is a fascinating case in which the political party in power stayed the same, Congress stayed the same, the laws stayed the same, the Supreme Court stayed the same. Even the Attorney General stayed the same.”
Furthermore, the McKinley assassination, quite literally, did not happen overnight: he was shot on Sept. 7, and his health wavered up and down for days before he finally died a week later. Roosevelt took the oath of office on Sept. 14.
During this interval, prices on the New York Stock Exchange (NYSE) fluctuated in sync with the latest news on McKinley’s health. This offered Frydman a helpful (if somewhat macabre) way to measure market reactions to the anticipated changes in antitrust enforcement.
“Essentially we compared how the values of firms were changing as the news about the health of President McKinley—and the likelihood of Roosevelt taking over—was changing,” she explains.
The researchers wanted to know if companies that were vulnerable to increased antitrust enforcement experienced more stock-price variation during this fateful week, compared to companies that were less likely to be prosecuted for antitrust violations.
The team selected a group of 48 companies trading on the NYSE in 1901: 28 railroads and 20 industrial firms. Exactly half of these companies—14 railroads and 10 industrial firms—had engaged in mergers since 1895, an activity the researchers used to flag them as more vulnerable to increased antitrust enforcement.
The reason has to do with a subtle legal precedent. The courts quickly interpreted that the Sherman Antitrust Act clearly outlawed anticompetitive practices such as price fixing or collusion. But in an influential case in 1895, the Supreme Court ruled that simply becoming large through mergers was not a direct violation of the Act. The response? Competing companies that used to collude consolidated instead, giving rise to the largest merger wave in U.S. history.
Those concerned with the formation of monopolistic firms—the so-called “trusts”—argued that this legal precedent could be challenged. Yet McKinley chose to allow these anticompetitive mergers to proceed unchecked. Roosevelt, by contrast, had been an outspoken critic of the trusts.
The researchers’ hypothesis was that, when facing the specter of a Roosevelt presidency, the stock market would penalize these vulnerable firms to a greater degree than others.
A Smoking Gun
Indeed, all stocks plunged in value following McKinley’s shooting: the NYSE lost an average of 6.2 percentage points, by far the biggest drop in value associated with any presidential assassination attempt by gunshot in U.S. history. (In contrast, the market dropped just 0.7% following Lincoln’s death.) But the researchers found that companies engaging in anticompetitive activity saw their value swing 1.4 to 1.9 percentage points more than other firms.
“That’s big, relative to the average decline in the stock market following the shooting,” Frydman says.
What’s more, these exaggerated swings in stock price occurred precisely in sync with good or bad news about McKinley’s health.
For example, on September 7 and 13—when, respectively, McKinley was shot and when his death seemed certain—the stock prices of the recently merged firms plunged. But on September 9, when McKinley appeared poised to recover, those same firms’ stock prices “reverted, pretty much exactly by the same amount,” Frydman says. These firms’ stock prices also increased on Sept. 16, when the newly sworn-in President Roosevelt delivered a speech in which he promised to maintain McKinley’s political and economic agenda. (He didn’t mean it, but investors believed him for a day.)
The researchers wanted to be sure that these correlations couldn’t be chalked up to other causes.
For example, perhaps the firms whose stock prices pitched up and down sharply did so because those firms had political connections or had made large donations to the McKinley administration. But when Frydman controlled for these factors, she found no evidence that they were driving the results.
“Some say that economists have a taste for the dark, and I have to admit that if McKinley had been shot and died immediately, our analysis would be a lot less convincing,” Frydman says. “You could argue, ‘Well, an anarchist managed to assassinate the president and the stock market may instead be reacting to a lot more political instability.’ But if that was the story, you wouldn’t expect to see the same level of prices shifting up and down every time the news about McKinley’s health changed. So the fact that he suffered for a week was clearly not great for him, but it was quite helpful for us as researchers.”
Enforcing versus Changing Antitrust Laws
So what does this strange episode from 1901 have to do with how politics and economics intersect today?
Many economists and policymakers have argued that antitrust laws should be updated to better reign in today’s tech monopolies. To Frydman, these findings suggest a need to think carefully about this approach.
“Do our antitrust laws need to be changed, or should we try to enforce the laws that we have more strongly? There’s a lot of debate,” Frydman says. “Getting new laws through Congress is not trivial. So let’s think more carefully about enforcement, and how much discretion there is to achieve whatever we think might be the best outcomes.”