A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror (103 page)

Party hierarchies, though, do not embrace change any more readily than the professional business managers on whom they pattern themselves. Unpopular incumbents, whether Taft in 1912, Hoover in 1932, or Ford in 1976, generally maintain sufficient control over the machinery of the party to prevent a coup, no matter how attractive the alternative candidate. Roosevelt should have recalled his own dominance of the procedures in 1904, when he had quashed an insurgent movement to replace him at the top of the ticket. Taft’s men knew the same tricks. TR needed only 100 votes to win the nomination, but it may as well have been a thousand. The Taft forces controlled the procedures, and the president emerged as the party’s nominee. Unwilling to bow out gracefully, Roosevelt declared war on Taft, forming his own new party, the Progressive Party (which had as its logo the Bull Moose). Roosevelt invoked thoroughly Progressive positions, moving to the left of Taft by advocating an income tax and further regulation of business. This not only stole votes that normally would have gone to Taft, but it also allowed Democrat Woodrow Wilson to appear more sensible and moderate.
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Roosevelt won 4.1 million votes and 88 electoral college votes, compared to 3.4 million for Taft (and 8 electoral votes). This gave Wilson an electoral victory despite taking only 6.2 million popular votes (45 percent of the total), a number lower than any other victorious president since Lincoln had won with less than half the country in 1860. TR effectively denied the White House to Taft, allowing the second Democrat since Reconstruction to be elected president.

An ominous note was sounded by the candidacy of the avowed socialist Eugene V. Debs, who received nearly a million votes. Uniting the anarchists, Populists, Grangers, and Single Taxers, the Socialist Party had witnessed a rapid growth, from 10,000 in 1901 to 58,000 in 1908 to its peak of just under 1 million votes, or 6 percent of the total vote cast, in the 1912 election. Debs, whom fellow socialist Margaret Sanger once dubbed a silly silk-hat radical, was the glue that held together the disparate groups.
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Despite their meteoric rise, however, the socialists flattened out against the hard demands of industry in World War I.

One could not miss the contrast of the American election, where the winner had only a plurality and where there was no challenge whatsoever to the legitimacy of the election, with the events in Spain the same year, where not one but two prime ministers in succession were assassinated; or in Paraguay, where two successive presidents were overthrown in coups (one hunted down and killed); or in neighboring Mexico, where Francisco Madero overthrew President Porfirio Díaz, but who lasted only a few months himself before being overthrown by Victoriano Huerta. In short, America’s remarkable stability and willingness to peacefully abide by the lawful results of elections was a glaring exception to the pattern seen in most of the world.

Woodrow Wilson was a throwback in many ways to the old Van Buren ideal, or rather, the reverse of it—a Southern man of Northern principles. Born in 1856, Wilson grew up in Georgia, where he saw the Civil War firsthand as a boy. His Presbyterian minister father sent Woodrow to Princeton, then to the University of Virginia Law School, then to Johns Hopkins, where he earned a doctorate. Throwing himself into academia, Wilson became a political science professor at Princeton, then, in 1902, its president. His 1889 book,
The State,
adopted a strangely Darwinian view of government. He called for regulation of trade and industry, regulation of labor, care of the poor and incapable, sumptuary laws, as well as prohibition laws.
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With great pride, Wilson observed that government did whatever experience permits or the times demand, and he advocated a “middle ground” between individuals and socialism. Wilson argued that “
all combination
[emphasis added] which leads to monopoly” must be under the direct or indirect control of society.

Both Wilson’s Progressive positions and his prominent place at Princeton made him a prime prospect for the New Jersey governorship, which he won in 1910 on a platform of ending corruption in state government. By the time he ran for president in 1912, Wilson could claim roots in both the South and North, blending the two under the banner of Progressive idealism.

Wilsonian Progressivism

Timing is a large part of any presidency. Presidents receive credit for programs long under way before their arrival, or pay the penalty for circumstances they inherit. As a Progressive president, Wilson benefited from ideas already percolating through the system, including the income tax and reform of the national banking system. This one-two punch, it could be argued, did more to fundamentally reorder American economic life than any other package of legislation passed anytime thereafter, including the New Deal and Great Society programs. Both received the enthusiastic support of Wilson’s secretary of the treasury, William Gibbs McAdoo, who helped craft the banking reform, which he called a “blow in the solar-plexus of the money monopoly.”
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A Georgia Populist/Progressive lawyer, McAdoo stood firmly on the side of reform, whether it was food and product safety, taxes, or banking, and as a Southerner, he bridged the old Confederacy gap by invoking the name of Lincoln favorably while touting Wilson as a Southerner. However, he abandoned states’ rights entirely by hastening the transfer of financial power from New York to Washington through both taxation and banking policies.
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America’s banking system had suffered criticism since the Civil War. It was too elastic. It was not elastic enough. It was too centralized in New York. It was not centralized enough in New York. For twenty years, it had seemed that the colossus J. P. Morgan alone might carry the nation’s banking community on his shoulders like Atlas. He did so in 1893, then again in 1907, at which time he announced that even with support from other syndicate members, including some foreign bankers, the next panic would sink him and the country. Consequently, by the turn of the century most of the so-called bank reformers—including numerous bankers from the Midwest who feared for their own smaller institutions if large East Coast banks got into trouble—agreed on three main principles for shoring up the system.

First, genuine bank reform needed (in their view) to fill the void left by the old BUS as a central bank. Never mind that the BUS had never fulfilled that function. Collective memory inaccurately said that the Bank had restrained the inflationary impulses of the state banks, and thus provided a crucial check on the system in times of stress. The new central bank above all should be a lender of last resort, that is, it should provide cash (liquidity) when there were isolated bank runs.

Second, bank reformers concluded that an elastic money supply was needed in which credit and cash could expand in good times and contract in bad. This was a main complaint about the money supply under the National Bank Act—that the national banks lacked the ability to rapidly issue new banknotes or any mechanism for withdrawing them from circulation. Of course, any elastic powers would centralize even further the money supply in the hands of one source, as opposed to the many national banks who each issued their own notes, providing some tiny measure of competition.

Third, all but a few of the most conservative East Coast bankers wanted to reduce the power of New York’s financial community. A certain element of anti-Semitism accompanied this because the phrase “New York bankers” was really code for “New York Jewish bankers.” It regurgitated the old fears of the Rothschilds and their “world money power,” but even well-meaning midwestern bankers looked suspiciously at the influence eastern banking houses had over affairs in Kansas or Colorado. It seemed unfair to them that an East Coast panic could close banks in Littletown or Salina.

Critics noted another problem, namely, that national banks could not just print money willy-nilly. To expand the number of notes they issued, the national banks had to purchase additional U.S. government bonds, a process that could take several months. Certainly the structure did not enhance elasticity. On the other hand, states permitted branch banking (which enhanced stability and solvency), whereas national banks were denied branching privileges.
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The entire banking structure still relied on gold as a reserve. For gold to effectively police international transactions, all nations had to abide by the rules of the game. If one nation had a trade deficit with another, it would make up the difference in gold. But this meant a decrease in that nation’s gold reserve, in turn decreasing the amount of money issued by that nation’s central bank, causing a recession. As prices fell, the terms of trade would then swing back in that country’s favor, whereupon gold would flow in, and the cycle would reverse.

The difficulty with the gold standard was not financial, but political: a nation in recession always had an incentive to go off the gold standard. However, from 1900 to 1912 most nations faithfully submitted to the discipline of gold in a time of prosperity. Such false optimism cloaked the fact that when the pressure of national recessions began, the temptation would be for each country to leave the gold standard before another. In the meantime, however, it reinforced the desire on the part of American reformers to create a financial system with a central bank along the lines of the European model.

Following the many plans and proposals drawn up by bankers’ organizations over the previous thirty years, in November 1910 five men met in secrecy on Jekyll Island, Georgia, to design a new financial system for the nation. Frank Van-derlip (president of National City Bank), Paul Warburg (a powerful partner in Kuhn, Loeb and Company), Henry Davison (a partner in the Morgan bank), Harvard professor A. Piatt Andrew, and Senator Nelson Aldrich of Rhode Island outlined the plan that became the Federal Reserve System. They presented their completed plan to Congress, where it stagnated. Many viewed it as too centralized, and others complained that it did not deal with the “money power” of New York’s banks.

Meanwhile, the House held hearings in 1912 that dragged J. P. Morgan and other prominent bankers before the Banking and Currency Committee. Morgan was accused of “consolidation” and stifling competition. In fact, Morgan and his contemporaries had strengthened the system and protected depositors by establishing combinations and utilizing clearinghouses, which were private organizations that reduced the likelihood of panics and provided a setting for effective information exchange. House members pontificated about the evils of consolidation—an incredible irony given that in the 1930s, after the Great Depression, another set of congressional investigators would complain that the competitiveness within the securities industry helped cause the stock market crash. Thus, bankers were criticized for competing and criticized for combining!
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Congressional interest in the Jekyll Island proposal revived, but with emphasis on decentralizing the system and in reducing the influence of New York’s banks. The result was the Federal Reserve Act, passed by Congress in 1913. Under the act, twelve Federal Reserve banks would be established across the country, diminishing New York’s financial clout. Atlanta, Boston, Dallas, San Francisco, Minneapolis, Chicago, Cleveland, Philadelphia, and Richmond all received Federal Reserve Banks, and Missouri got two—St. Louis and Kansas City. Each bank was a corporation owned by the commercial banks in its region and funded by their required deposits. In return, the member banks could borrow from the Reserve bank in their region. A separate board of governors, housed in Washington, D.C., consisting of representatives from each bank, was to set policy, but in reality, each bank tended to go its own way. These characteristics allowed the Federal Reserve System to appear to be independent of the government and nonpartisan.

While decentralizing the financial system answered one critical need demanded by the reformers, the Fed (as it became known) also met another in that it served as the lender of last resort. The district banks were to step in during emergencies to rescue failing private banks, but if the crisis grew too severe, one Federal Reserve bank could obtain help from the Reserve bank in another region (or all regions, if necessary). Few really imagined that even under the new system, there might exist an emergency so broad that every Federal Reserve District would come under siege at the same time. But the reformers had ignored the single most important corrective: introducing interstate branch banking.
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This disadvantage kept large branch-bank systems from becoming member banks, especially A. P. Giannini’s powerful Bank of America and Joseph Sartori’s First Security Bank and Trust, both in California. To rectify this problem, Congress passed the McFadden Act in 1927, which permitted national banks to have branches in states where the state laws permitted branching, thus allowing both Giannini and Sartori to join the Federal Reserve System as members. But Giannini’s dream of nationwide interstate banking was never reached, contributing to the collapse of the banking system during the Great Depression.

Contrary to all intentions, the New York Federal Reserve Bank quickly emerged as the most powerful influence in the new Fed system. The creation of the Fed also marked the end of any form of competition in money, since the new Federal Reserve notes eventually replaced money specifically (and legally) backed by gold or silver.

Another pillar of Progressivism came to fruition on Wilson’s watch. The idea of an income tax had long been cherished by socialists, and it was one of the ten planks desired by the Communist Party in Karl Marx’s
Communist Manifesto
. During the Civil War, the Republicans had imposed a 3 percent tax on all incomes over $800, then raised it twice thereafter. Several utopian socialists called for income taxes in the postwar years, and both the Populists and the Democrats advocated an income tax in the 1890s. But not until 1894 did Congress pass a 2 percent tax on all incomes above $4,000. Within a year, the Supreme Court struck down the measure as unconstitutional—which it clearly was.
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