Creation of the Federal Trade Commission empowered an agency of the U.S. government to protect competition and proactively deter the development of potential monopolies.
The establishment of the Federal Trade Commission (FTC) in 1914 signaled a dramatic change in the relationship between the U.S. government and business. No longer would the courts and the executive branch be the only interpreters of antitrust legislation; instead, the FTC, an independent regulatory commission, was empowered to define “unfair competition” and was also granted the requisite discretionary authority to apply the standard of unfairness.
Although the Federal Trade Commission Act was passed in 1914, the law’s roots can be traced to the late nineteenth century. It was the exercise of corporate economic power in that period by men such as John D. Rockefeller, J. P. Morgan, and Cornelius Vanderbilt that seemed to galvanize antibusiness sentiment among small-business owners, labor unions, and the middle class. These groups would become the core of the Progressive movement.
The end of the nineteenth century witnessed the beginning of the Progressive Era, which was characterized by social, economic, and political reform movements aimed at creating a society organized for collective action in the public interest. In 1901, Theodore Roosevelt advocated the supremacy of the “public interest” over business when he assumed the presidency. In 1903, the newly created Department of Commerce contained a Bureau of Corporations
The Progressive Era saw the development of a clear sense of the obligations of business to society. The role of the state started to evolve from laissez-faire
Wilson and the Democrats swept the country on election day in November, 1912. A key component of the winning party platform was a program Wilson called the New Freedom,
The Sherman Act of 1890 to this point was the sole federal antitrust legislation. It did not enumerate specific monopolistic behaviors; rather, it declared as illegal any contracts, combinations, and conspiracies in restraint of trade. The act’s vagueness ultimately left determination of the meaning of its prohibitions to the courts. The U.S. attorneys general of the 1890’s were reluctant to exercise their discretionary authority to initiate prosecutions under the act’s provisions. The act was further weakened by the U.S. Supreme Court’s promulgation of the “rule of reason”
The first response in an attempt to strengthen the Sherman Act was the Clayton bill. Drafted by Representative Henry Clayton, it attempted to overcome the vagueness of the Sherman Act and the rule of reason by enumerating specific illegal business practices. Prohibited activities included discriminatory pricing, tie-in selling, exclusive dealing, and interlocking directorates. These were deemed illegal per se, regardless of their reasonableness. The political compromises necessary to obtain passage of the bill led to an act with provisions that were easily circumvented. The Clayton Antitrust Act
Originally, neither Wilson nor his primary economic adviser, Louis D. Brandeis, supported the concept of a strong trade commission. Wilson at first proposed the creation of an agency that would moderate but not unduly restrict business. In keeping with this philosophy, the administration supported a bill introduced by Representative James Covington that envisioned a commission that would secure and publish information, conduct investigations as requested by Congress, and support methods of improving business practices and antitrust enforcement.
This proposal submitted to Congress to create an advisory commission was transformed into an act creating a powerful commission with broad regulatory powers. This metamorphosis can be attributed to the inability to pass a strong version of the Clayton Act and the pragmatic difficulty of specifying all unlawful trade practices. Faced with these difficulties, Wilson, in consultation with congressional leaders, decided on a new strategy that would abandon a legislative solution for an administrative one. The new strategy was greatly influenced by George Rublee, an attorney and former member of the Progressive Party whom Wilson called in to assist in the drafting of antitrust legislation when Brandeis was occupied by an Interstate Commerce Commission rate case. Rublee’s intervention and the deadlock over the Clayton bill were primary factors in the creation of a regulatory agency as the primary method of restraining the activities of business. The FTC Act was signed into law on September 26, 1914.
The newly created commission had two major duties: to see that unfair methods of competition were prevented and to keep the public and Congress informed as to developments within an industry that threatened competition. The agency would carry out this mission through the utilization of its three major powers: the cease and desist order, the stipulation, and the trade practice conference. The FTC was structured as an independent regulatory commission with five members (no more than three from the same political party) serving staggered seven-year terms, appointed by the president and confirmed by the Senate.
The creation of a bipartisan, independent commission with broad discretionary authority was viewed as a radical step in the federal government’s attempts to control and regulate business. The FTC was to become perhaps the most controversial of the independent regulatory commissions, with its broad discretionary powers the primary source of the controversy.
In assessing the impact of the FTC, it is necessary to analyze both the political and the pragmatic consequences associated with the commission’s creation. Politically, the FTC represented the institutionalization of the widespread public opinion that competition is beneficial and an integral part of the American economy. It further inexorably altered the relationship between the federal government and the private sector. The commission represented a continuation of the repudiation of the laissez-faire doctrine that had commenced with the creation of the Interstate Commerce Commission in 1887.
The FTC was a permanent administrative apparatus that was granted broad statutory powers, discretionary authority, and a jurisdiction not limited to a specific industry. These delegations of authority created an agency that could attack economic and societal problems without reliance on the judicial or executive branches of government to initiate antitrust actions. As an independent regulatory commission, the FTC combined the functions of policy making, administration, and adjudication. The agency set precedents for the evolution of the American administrative state. Starting in the late nineteenth century and continuing into the 1970’s, the federal government became increasingly involved in regulating industries and activities.
The creation of the FTC was surrounded by great controversy, and throughout the twentieth century the commission continued to be one of the most studied of all federal agencies. A major source of controversy was the FTC’s broad legislative delegation of authority. Section 5 of the FTC Act defines the commission’s primary responsibilities as identifying and preventing “unfair methods of competition” by issuing enforceable cease-and-desist orders. Section 6 outlines eight additional powers: to investigate corporations, to request reports from corporations, to investigate compliance with antitrust decrees, to conduct investigations for the president or Congress, to recommend business adjustments to comply with law, to make public the information obtained, to classify corporations, and to investigate conditions in foreign countries that affect trade. In 1938, the Wheeler-Lea Act
The discretionary authority granted the FTC proved to be a double-edged sword. Discretion theoretically allowed the commission to take action in numerous areas with various tools, but it could also choose to take no action. The perceived failure of the FTC to exercise its discretion in the form of action has been the source of much criticism. The commission has been accused of misallocating its resources toward minor issues and failing to take action on substantial matters. Critics have argued that the cases investigated have involved minor matters with only minimal impact on the U.S. economy or the public interest. The agency’s broad mandate has contributed to its inability to articulate definite goals, objectives, and standards of performance. The absence of direction leaves the commission rudderless in a complex environment.
The FTC has also been accused of failing to detect violations, as its primary means of detecting deceptive practices is to wait for a businessperson to inform on the practices of competitors. Critics also assert that failure to establish priorities has led to the commission’s handling too many cases, the vast majority of which have had little impact on the public interest. In addition, the FTC has been accused of failing to exercise enforcement powers, too often relying on voluntary correction of behavior. Some observers have asserted that the agency has dissipated its own power by allowing unreasonable amounts of time to elapse between investigations and final decisions. During the period of an investigation, the FTC has no punitive power to discourage illegal behavior, and many firms under investigation have continued their behavior until actual sanctions were imminent. Delay also undermines a major goal of the FTC, that of preventing unfair practices. The delay in starting agency proceedings is primarily a function of poor staff work, raising the issue of the efficacy of FTC personnel. Critics question the ability of staff and cite the high turnover rate among FTC personnel.
The FTC was born of political compromise, with no consensus as to its mission, and as such it has been exposed to shifting political winds. The FTC was created as an independent, bipartisan regulatory commission, but too often it has employed or promoted the politically well connected and allocated resources to marginal issues solely because of requests from members of Congress.
The FTC has not been without its advocates, who have been as vigorous as its critics. Criticisms of personnel and actions, they have argued, should have produced significant reforms if valid. Defenders of the FTC have rebutted allegations that the absence of precise standards has led the commission to concentrate on smaller firms by citing incidents in which the commission has been both innovative and courageous. Proponents of the FTC have noted further that its activities have been severely hampered by a lack of financial resources to accomplish a vast array of tasks. They have defended the slow speed at which the FTC has resolved cases by reminding critics that the commission is bound by procedures of due process.
In the final analysis, a given individual’s evaluation of the impact of the FTC on the U.S. economy, society, and public interest is probably a function of that person’s expectations of the commission and perceptions of the optimal level of government involvement in the private sector. FTC advocates demand greater involvement in reaction to the evils of business, whereas critics tend to view any FTC action as tampering with the market system.
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Blackford, Mansel G., and Austin K. Kerr. Business Enterprise in American History. 2d ed. Boston: Houghton Mifflin, 1990. Provides concise coverage of the history of the American business firm and the evolution of government-business relations from colonial times to the end of the twentieth century. -
Clements, Kendrick A. The Presidency of Woodrow Wilson. Lawrence: University Press of Kansas, 1992. Brief coverage of the Wilson presidency. Valuable for highlighting major issues in a direct and concise manner. Chapter 3 covers major domestic issues, including establishment of the FTC. -
Cox, Edward, Robert C. Fellmeth, and John E. Schulz. The Nader Report on the Federal Trade Commission. New York: Richard W. Baron, 1969. A scathing criticism of the Federal Trade Commission’s operations, highlighting its failures, politicization, and attempts to mask inefficiency. -
Green, Mark J. The Closed Enterprise System. New York: Grossman Press, 1972. Analyzes the impacts of the FTC on American antitrust policy. -
Link, Arthur. Woodrow Wilson and the Progressive Era, 1910-1917. New York: Harper, 1954. Addresses the political and diplomatic history of the United States from the disruption of the Republican Party in 1910 to U.S. entrance into World War I. Provides excellent coverage of the transitional reform period and the increasing role of government in society. -
McClure, Marc Eric. Earnest Endeavors: The Life and Public Work of George Rublee. New York: Praeger, 2003. First biography of the largely overlooked Rublee, who was instrumental in the writing of the Federal Trade Commission Act and was also involved in several important international events in the early decades of the twentieth century. -
Stid, Daniel D. The President as Statesman: Woodrow Wilson and the Constitution. Lawrence: University of Kansas Press, 1998. Examines Wilson’s views concerning what constitutes responsible government and describes his efforts to establish such government in the United States. Discusses the effects of Wilson’s presidency on American political thought. -
Stone, Alan. Economic Regulation and the Public Interest: The Federal Trade Commission in Theory and Practice. Ithaca, N.Y.: Cornell University Press, 1977. Provides an objective analysis of the Federal Trade Commission’s strengths and weaknesses. -
Wilson, James Q., ed. The Politics of Regulation. New York: Basic Books, 1980. Wilson and other contributors analyze the politics of the major regulatory agencies. Of special interest is Robert A. Katzmann’s chapter on the FTC, which presents an unconventional explanation of the agency’s political behavior.
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