By Stephen Smoot
It was hard to see at the time, but the year 1913 would redefine the American system. Some might argue for the better, others for the worse. The changes wrought, however, have brought both benefits and consequences.
The first major change started the previous November when Theodore Roosevelt’s Bull Moose challenge against his former protege, William Howard Taft, allowed Woodrow Wilson to assume the presidency. Wilson’s brand of Progressivism was much more expansive than the “trust busting” of both Theodore Roosevelt and Taft.
Wilson’s foreign policy, however, would have much more impact than his domestic initiatives.
At home, the establishment of a financial powerhouse and the passing of two constitutional amendments had far reaching consequences.
First, as the result of the bank panic of 1907, the government established the Federal Reserve Bank of the United States. Bank panics occur when customers of multiple banks act on real or perceived weaknesses in the system. They withdraw money at the same time and bleed out capital reserves.
The FED, as it’s called, was originally seen as a lender of last resort to keep banks open during crises and keep customer confidence. The Federal Deposit Insurance Corporation was established in the 1930s era New Deal to reinforce that role. Today, the Federal Reserve’s ability to set baseline interest rates and other aspects of monetary policy give it tremendous power over the United States, and by extension the global, economy.
Congress and the states also passed what is commonly called the Income Tax Amendment. This change in the Constitution overturned a Supreme Court decision forbidding the federal government from collecting income taxes. In a far reaching example of “bait and switch,” advocates of the measure promised that only the top two percent of incomes would ever pay the tax.
This opened up a much larger stream of taxpayer money to fund an ever expanding slate of expenditures, foreign and domestic, needed and frivolous, some programs good for the people, but many only benefiting the politicians. A federal government accustomed to frugality would expand into an insatiable leviathan demanding added power and resources to pursue its endless slate of agendas.
One of the important restraints on federal power until 1913 came from the states. The original Constitution set up a balance between the power of the federal government, the power of states, and the power of the people. Just as in the British system, balance was seen as important to prevent one aspect of the system from emerging as a tyrant.
British and English history featured a number of examples of tyranny halted by the action of others, from King John to King James II. Americans learned the lessons of history and applied them against King and Parliament in the War of Independence.
Aristotle had proposed that a system in balance could remain resilient against the temptation toward corrupt and oppressive regimes. Britain balanced monarch, aristocracy, and people, the three main parts of their society. The Founding Fathers forged one that put a balance within the federal system, but also against the central government as a whole to check its power.
The original Constitution had US Senators selected by state legislatures. This made them particularly important in determining national policy, since issues such as treaties and appointments come through the Senate. States had a major voice in both foreign and domestic power and policy as a result.
That voice restrained the system. Federal initiatives always had to keep the states in mind. Corruption in legislative selections for senators, however, led to a movement to establish popular election of them.
Popular election failed to remove all the corruption from the process. It did untether the federal government from its requirement to take state needs into account. This eventually led to an ever expanding regulatory state that also forces mandates on state governments without reimbursing states for many of them. Unfunded mandates remain one of the biggest issues that every state faces.
Understanding the issues faced by America today often requires knowing how they originated. The year 1913 was pivotal in bringing about the America seen today, for better, for worse, or both.