The “Rule of Reason” and an Unnatural Monopoly: United States V. Terminal Railroad

The Sherman Act (1890) inaugurated the commitment of the American federal government to block the horizontal combinations or “trusts” then beginning to dominate many industries. But the statute’s sweeping language nearly demanded interpretation by the executive branch and the judiciary. Two decisions by the U.S. Supreme Court in 1911, Standard Oil and American Tobacco, promulgated a “rule of reason” that sent American antitrust law in a new direction, grounded in economic analysis. In its next antitrust case, the court used the rule to uphold a monopoly for the first time. To date, historians have overlooked that case, United States v. Terminal Railroad Association of St. Louis (1912). This article reviews the events that led to this prosecution under the Sherman At, and it explores a fallacy at the heart of the justices’ unanimous opinion. Contrary to their analysis, the Terminal Railroad of St. Louis lacked any legitimate claim to being a natural monopoly. In turn, their egregious misreading of fact and theory suggests that the justices were ill-equipped to wield economic analysis in shaping antitrust law.