The End of the Reserve System, The Beginning of Big Salaries
“After my fourth season I asked for $43,000 and General Manager Ed Barrow told me, ‘Young man, do you realize Lou Gehrig, a 16-year-man, is playing for only $44,000?’ I said, Mr. Barrow, there is only one answer to that – Mr. Gehrig is terribly underpaid.”
– Former Yankees Outfielder, Joe DiMaggio
With Giancarlo Stanton signing a Major League Baseball high – in fact, North American athlete high – $325 million contract with the Miami Marlins this fall, it’s hard to imagine a time when professional athletes were underpaid. In reality, the vast majority of Major League ball players were paid well below their market value until the 1970s, when salary arbitration and free agency became realities. For example, Willie Mays, arguably one of the best players in MLB history, earned at his highest $165,000 in 1972 (approximately $936,000 today).
How were the team owners and managers able to keep player’s salaries so low? There were two primary reasons. First, the owners included a “reserve clause” into the uniform player’s contract – the basic contract that the average ball player would receive. Second, the players lacked a unified bargaining power to force the owners to increase player salaries. If the players stood any chance at increasing their wages, the reserve clause would have to be eliminated and a strong player’s union would have to be formed.
THE RESERVE CLAUSE
Arguably the most effective measure in keeping player’s salaries low occurred in the 1880s, when the reserve clause was inserted into all standard player contracts. This reserve clause included a “renewal year provision” which essentially allowed the team to re-sign a player under the terms of the previous year’s contract, if a new agreement could not be reached. Since the player’s consent was not needed to renew the contract, the player was left with what amounted to a “take-it-or-leave-it” deal. Even worse, if the player decided to “leave it,” the player would often be blacklisted and prevented from playing on another team. Ultimately, unless a player was traded, he was bound to the team that signed him.
The reserve clause was challenged and upheld many times in the subsequent years. In Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs (Federal Baseball), Chief Justice Holmes found that the reserve clause did NOT violate antitrust laws, and that it was, in fact, necessary to protect a club’s players from an interfering team. Holmes determined that the sport of baseball was a purely state affair, since baseball itself was not engaging in interstate commerce. This ruling acted as the impetus for Major League Baseball being granted an exemption from the Sherman Antitrust Act and the perpetuation of the reserve clause.
In Toolson v. New York Yankees, Inc., the Supreme Court once again determined the validity of the reserve clause. Without much weight given to the facts of the case, the Court ultimately decided that reversing Federal Baseball and eliminating the reserve clause would “cause the destruction of the game.” The fear was that by eliminating the system that had been in place and allowed baseball to flourish, the popularity of the game would decline, and baseball as they knew it would cease to exist.
The most famous challenge to the reserve clause came in 1969, when Kurt Flood had his claim heard by the Court. In opposition to the clause, Flood sat out a season following an undesired trade to the Philadelphia Phillies, thinking that by sitting out a year, the reserve clause would no longer apply to him. Additionally, Flood argued that the Court hadn’t applied the Federal Baseball antitrust exemption to other forms of entertainment; therefore it wasn’t appropriate in his case. Justice Blackmun refused Flood’s arguments, reiterating the point that the reserve clause was intended to protect competitive balance, the game’s integrity, and public confidence. Furthermore, Blackmun asserted that the clause maintained economic stability within Major League Baseball, and provided incentives for teams to pay the high player development costs.
Given the judicial support and congressional indifference, the reserve clause seemed to be as much a part of baseball as the 7th Inning Stretch.
CHIPPING AWAY AT THE RESERVE CLAUSE
The first major step toward eliminating the reserve clause came in 1966, when the players elected Marvin Miller, a former United Steelworkers of America economist, as head of the Players Association – the union that represents professional baseball players. Two years after his election, Miller was able to convince the team owners to enter into the first collective bargaining agreement (CBA) in professional baseball. The most important thing to come from the 1968 CBA was the provision allowing players to have grievances heard by a neutral party arbitrator, ultimately paving the way for salary arbitration. While Miller wasn’t able to eliminate the reserve clause in this first CBA, he was able to get the owners to agree to conduct a comprehensive review of the impacts of the clause.
The second major blow to the reserve clause came in the 1973 CBA, when Miller was able to get the process of salary arbitration actually included within the language of the CBA. The owners eventually agreed to salary arbitration because they believed the process would prevent players’ holding out for greater wages, and would eliminate the want of free agency. Again, this CBA did not eliminate the reserve clause, but it did give the players a degree of bargaining power never before enjoyed.
THE FINAL BLOW TO THE RESERVE CLAUSE
The reserve clause was finally struck down during the grievance arbitration of Andy Messersmith and Dave McNally. The neutral arbitrator, Peter Seitz, interpreted the language in the standard player contract – which included the reserve clause – as only granting a one-year option to renew.  This meant that a player was no longer under contract after a club exercised its one-year right of renewal, and that players would be able to use the open market to force salaries up.
In the 1976 CBA, Marvin Miller was able to solidify Peter Setiz’s holding by integrating free agency into the contract. As a compromise, the owners agreed to allow free agency eligibility for only players with six years of major league service time. 
Today, all professional baseball players have the contractual right to have grievances heard by a neutral third party, the right to salary arbitration after three years of major league service time, and the right to test free agency after six years. As a result, salaries have continued to climb over the years, reaching the gaudy numbers – like those of Giancarlo Stanton in Miami – that we see today.
SOURCES: http://www.latimes.com/sports/sportsnow/la-sp-giancarlo-stanton-contract-marlins-20141117-story.html  http://www.baseball-almanac.com/players/player.php?p=mayswi01  Primm, Adam. “SALARY ARBITRATION INDUCED SETTLEMENT IN MAJOR LEAGUE BASEBALL: THE NEW TREND.” Sports Lawyers Journal Spring (2010)  Ham, Eldon L. and Jeffery Malach. “HARDBALL FREE AGENCY–THE UNINTENDED DEMISE OF SALARY ARBITRATION IN MAJOR LEAGUE BASEBALL: HOW THE LAW OF UNINTENDED CONSEQUENCES CRIPPLED THE SALARY ARBITRATION REMEDY–AND HOW TO FIX IT?“ Harvard Journal of Sports & Entertainment Law (Spring 2010)