Gentlemen's Agreement: History and Examples, Limitations

What Is a Gentlemen's Agreement?

A gentlemen's agreement is an informal, often unwritten agreement or transaction backed only by the integrity of the counterparty to actually abide by its terms. An agreement such as this is generally informal, made orally, and is not legally binding.

Despite their more casual nature, a violation of a gentlemen's agreement could have a negative effect on business relationships if one party decides to renege on their promise. A gentlemen's agreement (also spelled "gentleman's agreement") may or may not be consummated by a handshake.

Understanding Gentlemen's Agreements

A gentleman's agreement, being more of a point of honor and etiquette, relies on the forbearance of two or more parties for the fulfillment of spoken or unspoken obligations. Unlike a binding contract or legal agreement, there is no court-administered redress if a gentlemen's agreement is broken.

Still, social pressures and norms help keep gentlemen's agreements in force. Indeed, the damage to one's reputation can be more harmful in the long run than any monetary gain that may result from going against such an agreement. Trust can quickly be eroded in such a case, and few people will want to enter into business with somebody with a reputation for reneging.

How A Gentlemen's Agreement Works

Gentlemen's agreements have been commonly made in international trade and relations, as well as in most industries. Gentlemen's agreements were especially prevalent at the birth of the industrial age and well into the first half of the 1900s, as regulation often lagged new business practices. Such agreements were found to be in use to control prices and limit competition in the steel, iron, water, and tobacco industries, among others.

Limitations of a Gentlemen's Agreement

At its worst, a gentlemen's agreement may be made to engage in anti-competitive practices, such as price-fixing or trade quotas. Since a gentlemen's agreement is tacit—not committed to paper as a legal, binding contract—it may be used to create and impose rules that are illegal.

The end result, in many cases, may be higher costs or lower quality products for consumers. Worse yet, a gentlemen's agreement may be used as a means to promote discriminatory practices, such as in an "old boy's network."

Gentlemen's agreements, because they are informal and often not written down, do not have the same legal and regulatory protections in place that a formal contract has, and thus are more difficult to enforce.

History and Examples of Gentlemen's Agreements

Gentlemen's agreements between industry and the U.S. government were common in the 1800s and early 1900s. This, however, led some regulators to believe that there was rampant collusion and unfair business dealings. The Bureau of Corporations, a predecessor to the Federal Trade Commission (FTC), was thus formed in 1903 to investigate monopolistic practices.

What resulted, in some cases, were new gentlemen's agreements in which Wall Street financiers, such as J.P. Morgan and his "House of Morgan," would meet with the bureau itself to receive prior clearance on mergers and takeovers. One such example was the gentlemen's agreement that had regulators and the President overlook the Sherman Antitrust Act to allow United States Steel Corp. to become the world's first billion-dollar company.

In 1907, a stock market panic that hit several big investment banks led to a financial crisis. The panic led to President Theodore Roosevelt working closely with J.P. Morgan to consolidate banks under the argument that doing so would stave off a larger crisis.

Similarly, in 1907 Morgan again worked informally with Roosevelt to create a gentlemen's agreement that would allow U.S. Steel to acquire its largest competitor, Tennessee Coal and Iron, in an unwritten and unstated rule that violated the Sherman Act.

Example: Gentlemen’s Agreement Between the U.S. and Japan

Gentlemen's agreements may also be found in trade treaties and international relations. One example is the Gentlemen's Agreement of 1907 that saw the United States and the Empire of Japan address immigration from Japan and the poor treatment of Japanese immigrants already in America. The agreement, never ratified by Congress, saw Japan agree to no longer issue passports to individuals seeking to immigrate to America for work. The United States, in turn, would no longer allow discrimination and segregation of Japanese citizens residing in America.