The Evolution of Ownership: From Trusts to Index Funds

Photo by Morgan Housel (Unsplash)

In chapter 4 of my book, I Think, Therefore I Know, I talk about the history of corporations, and how they started as corporate charters that were granted special privilege by the government to serve a specific public good, usually related to infrastructure. The part I gloss over in that chapter is that governments were generally wary of granting these charters too much power, and early US lawmakers were no different.

Under 19th-century common law, corporations were strictly forbidden from owning stock in other companies unless their state legislature granted them a rare, individual exception. If a company tried to buy shares in a competitor, the courts would immediately cancel it on grounds of ultra vires (‘beyond the legal power’). Early American lawmakers deliberately blocked companies from buying each other’s stock to prevent monopolies, to protect investors by ensuring managers could only spend money on its own stated business, and to protect local businesses from being bought out and controlled by larger, out-of-state corporations.

To get around this restriction, the Captains of Industry created secret contracts known as trust agreements. Competing companies transferred their voting stock to a small, centralized board of trustees, such as the nine-member board led by John D. Rockefeller. In return, the original owners received trust certificates proving they still owned a share of the combined profits, but surrendering their voting rights. Legal control over every company in the trust now rested with the trustees.

This created the illusion of a thriving free market to the general public. Companies would maintain their original names and operations. However, behind closed doors, the board would dictate prices, production limits, and wages for all of them. This completely eliminated market competition, and by 1882, the Standard Oil Trust led by Rockefeller controlled 90% of the nation’s oil refineries and pipelines. Seeing Rockefeller’s success, other industries in sugar, whiskey, tobacco, and lead were quick to form their own trusts. During this period, these industrial titans amassed tremendous wealth and dominated the American economy.

By the late 1880s, the public was furious at these shadow boards. Consumers and farmers faced artificially inflated prices for essential daily goods, and small business owners were ruthlessly driven into bankruptcy by aggressive predatory pricing. Journalists would go on to dub these men as the “Robber Barons.” Lawmakers had their own term for them, “cartels,” and individual states would attempt to sue them under state law. The problem is that they simply shifted their assets or relocated their legal headquarters across borders.

Around the same time, the state of New Jersey rewrote its corporate tax laws to attract tax revenue. It became the very first state to explicitly allow a corporation to buy, hold, and sell stock in any other corporation. This legal change invented the modern “Holding Company” and provided the perfect loophole for these cartels to base their operations.

States then turned to the Federal Government for help. Politicians from both parties feared the United States was turning into an oligarchy ruled by corporate titans. Led by Senator John Sherman, the bipartisan bill known as the Sherman Antitrust Act near-unanimously passed (51-1 in the Senate, 242-0 in the House) in 1890. This act would ban explicit collusion (through cartels and trusts), and outlaw intentional monopolization. Corporations once again had to compete with one another.

In the same year, Sherman would also author the Sherman Silver Purchase Act, which legally forced the US to buy tons of silver using paper notes. Investors feared this oversupply of silver would force the US off the gold standard, and so they rushed the US Treasury to trade their paper money for actual gold. This run on gold drained the federal reserves below the legally required minimum of $100 million. To stop the bleeding, President Cleveland forced the repeal of the Silver Act, which caused a sudden, massive shortage of cash across the banking system. This pressured two major national companies that had over borrowed to collapse into bankruptcy. This triggered a massive shockwave that crashed Wall Street, resulting in the “Panic of 1893” where citizens conducted a widespread bank run to withdraw their life savings, forcing over 500 banks to close their doors. Although largely overshadowed by the Great Depression thirty-six years later, the Panic of 1893 drove unemployment to roughly 20 percent and pushed more than 15,000 businesses into bankruptcy.

Businesses struggling to stay afloat revisited New Jersey’s legal loophole, and decided to pressure test the vague verbiage of the Sherman Act. Instead of creating agreements to give voting power over their stock to others, they decided to merge stocks together into a singular, massive enterprise. The American Sugar Refining Company excelled at this strategy, buying up rivals through stock purchases in 1892 until it controlled 98% of the sugar market. This resulted in the company being brought to the Supreme Court on monopoly charges. However, in 1895 the Court ruled in its favor. The ruling determined the great sugar conglomerate was only involved in manufacturing, and was not a monopoly because it did not own the commerce and distribution of sugar as well. By exempting manufacturing from the Sherman Act, it cleared the way for other companies to follow suit. Between 1895 and 1904, over 1,800 independent firms merged into giant combinations, which would come to be known as “The Great Merger Movement” or the “Monopoly Wave.”

During the same period, the courts turned to the Sherman Act in an unexpected way. The injunction that broke the Pullman boycott, upheld by the Supreme Court in 1895, was followed by a series of decisions treating unions as combinations in restraint of trade. The same law intended to dismantle trusts was increasingly used to break strikes and boycotts, while the monopolies themselves continued lowering supplier prices, raising consumer prices, and negotiating preferential deals that smaller competitors could never obtain. Even where the Sherman Act could have applied, enforcement depended on lengthy DOJ litigation.

The economy suffered another panic in 1907 when the banking system began to collapse again. However, this time it was billionaire financier J.P. Morgan who single-handedly gathered Wall Street elites to bail out the banks. This created a terrifying realization that a single private citizen and his network held more economic power than the federal government itself. Immediately after, writers and journalists known as “Muckrakers” published large exposés detailing how these monopolies acted like an “octopus,” strangling small businesses and charging whatever they pleased. Several years later, a congressional subcommittee was organized to investigate Wall Street. The Pujo Committee documented a “Money Trust” of elite financiers, led by J.P. Morgan. These financiers sat on the boards of dozens of the nation’s largest banks and industries through “interlocking directorates,” a web of shared directors that let a small circle coordinate the economy without owning it outright.

This resulted in the Clayton Antitrust Act of 1914 that explicitly banned specific predatory tactics that the Sherman Act had missed, and the Federal Trade Commission Act that created a bipartisan regulatory agency of economic experts to investigate corporations, instead of relying on the DOJ to enforce the previous two antitrust acts.

As big business had done before, they evolved. Instead of one monopoly, these companies split into several massive entities, consolidating industries into oligopolies—markets dominated by three or four massive firms. The Clayton Act had tried to protect labor too, exempting unions from antitrust law. The courts hollowed that out within a few years, ruling the exemption covered only a union and its direct employer, and went on issuing injunctions against strikes until 1932. Thus the 1914 acts were dependent entirely on who sat in the White House, and a pro-business Supreme Court spent decades gutting their strength.

Because a few giant oligopolies dominated most industries, they held immense power. Instead of passing their growing wealth on to workers through higher wages, or to consumers through lower prices, they kept the money for themselves. Corporate profits skyrocketed, but workers’ wages stagnated. Everyday Americans weren’t earning enough to buy the cars, radios, and appliances that these oligopolies were pumping out, so businesses began offering installment credit. By 1929, consumer debt had maxed out, and people simply stopped buying things. Instead of adjusting prices to make goods more affordable, these oligopolies chose to cut production and fire workers to keep their profit margins intact. Investors followed the same trajectory, they bought up stocks with borrowed money, creating a stock bubble until they ran out of credit. Brokers panicked and asked for their money back. Investors didn’t have the money, so the brokers seized their stocks and sold them for whatever they could get to recover some of their losses. This triggered a catastrophic chain reaction called a margin call that crashed the stock market. Citizens panicked, and once again withdrew their cash from banks causing over 9,000 to fail this time. Instead of trying to rescue these dying banks, the Federal Reserve decided to raise interest rates, choking off any remaining business lending. The result of this comedy of events, more or less, resulted in The Great Depression.

President Roosevelt’s administration in 1933 would then pass the Banking Act of 1933 that established the FDIC and forced commercial banks to separate from investment banks. Banks were completely banned from using regular people’s checking and savings accounts to speculate on the stock market. He also passed the NIRA act that suspended antitrust laws to allow the oligopolies to openly collaborate with labor and government to set fixed prices and production quotas in an attempt to stop the downward spiral of deflation. In 1934 he created the SEC to strictly regulate Wall Street and limit how much credit could be used to buy stocks. In 1935 the Supreme Court struck down NIRA as unconstitutional because letting monopolies cartelize the economy was only making things worse. This caused FDR to shift his strategy in 1938, when he and congress established a committee that would spend three years mapping out exactly how corporate monopolies and Wall Street banks controlled the US economy that would provide the DOJ with the evidence needed to prosecute. Roosevelt also appointed Thurman Arnold to head the Antitrust Division of the DOJ. Arnold massively expanded staff, and sued entire industries at once, to shatter the shared oligopoly power.

Then came World War II, and the lawsuits were paused. The government even poured billions of dollars directly into these massive corporations to expand their factories. As the war ended, the lawsuits picked up again. There was a defining moment in 1945 when a final ruling changed how a company could violate antitrust laws. Previously, the government had to prove malicious intent to destroy rivals. After this ruling, simply having a dominant market share and systematically expanding to block out newcomers was illegal of its own accord. Congress was still worried that the 200 largest corporations controlled more than half of all US manufacturing assets, so in 1950 they passed an act that would block vertical and conglomerate mergers. This patched the final antitrust gap, and prevented corporations from expanding by buying out their competitors’ assets, or buying out suppliers or distributors. This was the beginning of what was known as “The Golden Age of Capitalism.”

This is where my chapter picks back up with Milton Friedman and President Reagan. Inspired by Robert Bork’s The Antitrust Paradox, the Reagan administration issued new Merger Guidelines in 1984 opening the doors for mega-corporations again, and Jack Welch wrote the strategy book. Today we have oligopolies in airlines, media, agriculture, vision, and the now infamous tech industry.

In 2018, three economists published a study of the U.S. airline industry in The Journal of Finance. Accounting for common ownership, they found market concentration roughly 10x higher than the level antitrust regulators treat as a warning sign. Flight routes with denser common ownership had higher ticket prices. The correlation held even when the only thing that changed was two large asset managers merging into one.

This pattern extends across much of the S&P 500, where the same institutional investors appear among the largest shareholders of competing firms. By 2017, institutional investors owned more than 70 percent of the U.S. stock market, giving a relatively small number of asset managers significant influence over corporate governance across entire industries. Index fund managers centralize the voting power of millions of individual retail accounts who surrender their corporate voice when buying into their basket. These investors then elect directors of publicly traded companies. Those directors then hire and fire CEOs, whose fiduciary obligation is to maximize returns for investors, not to minimize prices for customers or maximize wages for employees. 

This also helps explain why entire industries often seem to move together. A board encourages management to adopt a new technology or strategy. The company purchases products or services from vendors positioned to benefit. The largest shareholders do not need to own those vendors today. Diversified across entire sectors, they profit whenever a trend spreads because they own the companies selling into it as well as the companies adopting it. The trend itself becomes the investment. No explicit agreement is required because none exists.

In fact, the largest passive holders tend to follow the recommendations of two proxy advisory firms, ISS and Glass Lewis, on most governance questions. Elon Musk calls them corporate terrorists, because a CEO who does not control his own board can be removed by owners who never formed an opinion of their own. This is why he engineered a compensation package to double his voting power at Tesla. However, even at double his voting power, he’s still short of the control that would put him beyond the board’s reach.

If we look at the data between 1979 and 2025, net economy-wide productivity grew by roughly 90 percent, while typical hourly worker compensation grew by only 33 percent. The American worker became nearly twice as productive, and was paid for about a third of it. Meanwhile, cumulative inflation grew by 344 percent.

According to data by economists Thomas Piketty and Emmanuel Saez, the real income (actual purchasing power adjusted for inflation) for the bottom 20% of Americans actually decreased by 7 percent, while the income of the top 1 percent accelerated by 224 percent. Over the past four decades, CEO compensation increased more than 1,000 percent, while typical employee pay rose by less than 25 percent. The wealth gap has continued on a stark line, and the government’s pro-business stance has only widened it.

While overall consumer spending has remained resilient, recent Federal Reserve research suggests that much of that resilience has been driven by higher-income households, while lower-income households face rising debt burdens and weaker spending growth. If that pattern broadens, it would represent another historical signal worth paying attention to.

It may seem obvious, but owning the means of producing money produces money. It is the one constant under every mechanism in this history: the trust, the holding company, the merger, the oligopoly, the index fund. Each time the law closed one door, ownership found the next one, and each time the returns flowed to the people who owned and away from the people who worked.

One hundred years ago, that arrangement ran the economy straight into the Great Depression. Will we correct the course before we repeat history? If it does repeat itself, will a new generation of antitrust administration come into power? Only time will tell.

References

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