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A California League (Class 'A') game in San Jose, California in 1994.
The existence of the minor league system is partly due to major league baseball's ability to include a reserve clause in the contracts with minor league baseball players which gives a major league team exclusive rights to a player even after the contract has expired. This is possible in baseball because of a 1922 Supreme Court decision which grants baseball a special immunity from antitrust laws.
The first league recognized as minor was the Northwestern League, which in 1883 entered into an agreement with the two major leagues at the time (the National League and the American Association), under which it would have a lower salary limit than the other two leagues. The National Association of Professional Baseball Leagues, now known as Minor League Baseball, was formed in Chicago, Illinois on September 5, 1901 as a type of "minor league". Then the National Agreement of 1903, which made peace between the National League and the new American League, also further codified the notion of "minor league" and establshed classifications for different levels.
Even so, until about 1925, many minor league teams operated largely independent of any major league influence. Some teams in the higher minor leagues actually outdrew some major leagues teams and had players who made more money than some major leaguers. Many baseball writers of that time regarded the greatest of the minor league stars, such as Buzz Arlett, Jigger Statz, Ike Boone and Frank Shellenback, as equal to some major league stars.
It wasn't until after the 1925 season that the minor leagues began to be fully subordinated to the majors. Following that season, the majors and minors signed an agreement allowing any player on a minor league roster to be purchased for $5,000 from his minor league team. This was leveled primarily at the Baltimore Orioles, then a Triple-A team who had dominated the minors for years with stars such as Babe Ruth and Lefty Grove because owner Jack Dunn refused to sell them to the majors for years.
Branch Rickey is credited with developing the first modern "farm system" in the 1920s. Under a farm system, major league teams own or have working relationships with minor league teams, and then stock those teams with prospects and reserve players, who can then be reassigned (to the major league team, or to another club in the farm system) at the discretion of the major league club. Today, every major league franchise has a farm system and only a few minor leagues operate independently of major-league influence.