The year 1890 was eventful in the U.S. Congress. President Benjamin Harrison signed the ostensibly antimonopoly Sherman Act into law on July 2. Then, on October 1, President Harrison signed a tariff bill—known ever since as the McKinley Tariff—which raised the average duty on imported goods from 38 to 50 percent of their delivered prices.

It is well known that Senator John Sherman (R-Ohio), the younger brother of Union General William Tecumseh Sherman, sponsored both bills. Less well-known, and certainly much underappreciated, is that the two statutes were elements of a political quid pro quo.

Economists have long taught that protectionist tariffs, like McKinley’s, allow domestic industries to raise their prices under a tariff “umbrella.” Indeed, the main purpose of taxing imports is to shelter domestic business enterprises from foreign competitors threatening their dominant market positions. On the other hand, so-called revenue tariffs, which impose lighter burdens on imports, are meant to supply revenue to governmental treasuries.

Tariff-protected industries cannot raise their prices by the full amount of the import duty because consumers will buy less when tariff-ridden prices increase. Tariffs, like most taxes, rarely stick where they land. The owners of protected businesses absorb part of a tariff’s burden in the form of lower profits. Their input suppliers, including employees, also bear some of the burden. Furthermore, tariffs are not inflationary, which is a continuous rise in the overall price level. Import duties increase the prices of tariff-protected industries relative to those not favored by trade policies unless, contrary to historical experience, tariff rates are continuously elevated across the board.

The “trusts” that worried Senator Sherman would be called holding companies nowadays. They were formed by the owners of the constituent companies exchanging their stockholdings for shares in much larger business entities. The Gilded Age was the heyday of trust formation in American industries ranging from crude oil and its then main refined product, kerosene, to steel, sugar, meatpacking, the railroads, and even matches. Taking advantage of common ownership and the economies of large-scale production and distribution, the trusts expanded their outputs and lowered their prices faster than their smaller domestic rivals. That is not the behavior expected of any “monopoly.”

As a key member of the Senate Finance Committee, Senator Sherman would have been aware of ongoing congressional debates on the tariff question before and after the passage of his eponymous antitrust bill. Economist Thomas DiLorenzo first recognized the link between the two legislative initiatives, noting that “the Sherman Act ... serve[d] as a smokescreen behind which politicians could grant tariff protection to their big business constituents while assuring the public that something was being done about the monopoly problem.” The interest-group dynamics in Congress between protectionists and trustbusters meant that “the Sherman Act won legislators’ votes and campaign contributions from farmers and small businessmen who believed antitrust regulation would protect them from their more efficient competitors, while the tariff bill received support from all U.S. manufacturers, large and small.” Even the New York Times acknowledged the connection, ultimately withdrawing its support for the Sherman Act, which many economists of the time opposed.

Fortunately for America’s consumers, the Department of Justice’s enforcement of the Sherman Act was feeble during its first quarter-century. Thus, the trusts could reduce prices and weaken the tariffs as price-raising measures. Lower domestic prices shifted Americans’ purchases away from imports, rendering protectionism less effective as a source of public revenue, which helps explain why customs receipts fell by 4 percent from 1890 to 1891.

Aside from the sharp yet brief downturn caused by the Panic of 1893, attributed by some commentators to passage of yet another bill named for Senator Sherman, the Sherman Silver Purchase Act of 1890, by others to the abrupt failure of the Philadelphia & Reading Railroad, the Gilded Age was a period of unparalleled prosperity. It’s important to recognize that the robust economic growth of the late 19th and early 20th centuries cannot be attributed to McKinley’s protectionist tariff but rather to American innovations in business organization led by John D. Rockefeller, Sr., Andrew Carnegie, J. P. Morgan, and their contemporaries.