The Revolution of 1913

The Daily Reckoning PRESENTS: Americans needlessly “live in the war-torn, debt-ridden, tax-harried wreckage of a once imposing edifice of the free society which arose out of the American Revolution on the foundation of the U.S. Constitution.” Addison Wiggin explains…

THE REVOLUTION OF 1913

Readers of this book will scarcely have given any thought to the fact that they have never lived in the system of government argued for by Madison, Jay, and Hamilton in the Federalist Papers. “It may come as a shock . . .” wrote John Flynn, “to be told that [you] have never experienced that kind of society which [our] ancestors knew as the American Republic . . .” Flynn, the editor of the popular weekly the Saturday Evening Post, had already come to the conclusion in 1955. In his book, The Decline of the American Republic, Flynn observed that Americans needlessly “live in the war-torn, debt-ridden, tax-harried wreckage of a once imposing edifice of the free society which arose out of the American Revolution on the foundation of the U.S. Constitution.”

An empire needs a source of income sufficient to fund its military campaigns, regulatory regimes, and domestic schemes. It also needs a strong central authority to direct its ambitious new programs. In one short 12-month span, a year the writer Frank Chodorov calls the “Revolution of 1913,” the empire got the tools it needed. That year – the same year European countries abandoned the gold standard in preparation for World War I – the old Republic ceased to exist.

America’s current system of income tax is a twentieth-century invention. Previous attempts at creating a national tax had failed or had been thrown out because they violated tenets of the constitution deemed essential by the founders. In its f irst 100 years, the United States supported its federal government with a series of what we would call “sin taxes” today, on whiskey, tobacco, and sugar. By 1817, all internal taxes were abolished by Congress, leaving only tariffs on imported goods as a means for supporting the government.

The first income tax that citizens of the young Republic were forced to endure came about because Congress had been asked to fund the War between the States. In 1862, a tax on incomes between $600 and $10,000 was assessed at the rate of 3 percent, and the Internal Revenue Service (IRS) was created. The war was costing $1.75 million per day. The government sold off land, borrowed heavily, enacted various fees, and increased excise taxes, but it simply wasn’t enough. The income tax seemed like the only way to finance the war and service the country’s then-staggering $505 million debt. That tax was promoted as a temporary wartime measure. Temporary it was. In 1872, after servicing the Reconstruction, Congress yanked the “temporary” tax.

But that was not the end of it. The income tax appealed to empire builders because it alone offered enough cash to finance the enterprise. But it had another appeal – to the larceny and envy in the hearts of ordinary citizens. Following a banking panic in 1893, Senator William Peffer of Kansas, supported the progressive income tax in this way:

“Wealth is accumulated in New York, and not because those men are more industrious than we are, not because they are wiser and better, but because they trade, because they buy and sell, because they deal in usury, because they reap in what they have never earned, because they take in and live off what other men earn. . . . The West and the South have made you people rich.”

That sentiment was puffed up by Nebraska’s bellicose world improver William Jennings Bryan, who argued against the “equal taxation” requirement in the Constitution, in favor of the current progressive one:

“If New York and Massachusetts pay more tax under this law than other states, it will be because they have more taxable incomes within their borders. And why should not those sections pay most which enjoy most?”

This logic is simple. People who are more productive should be forced to pay a bigger share of their common expenses. But this kind of logic had no place in a free republic where all men were supposedly created equal; if they were equal they could each carry their own share of the burden of central government. Under this new regime, men were no longer equal, but given differing loads to carry based on the whims of elected hacks.

With considerable foresight, one member of the House of Representatives predicted:

“The imposition of the [income] tax will corrupt the people. It will bring in its train the spy and the informer. It will necessitate a swarm of officials with inquisitorial powers. It will be a step toward centralization.. . . It breaks another canon of taxation in that it is expensive in its collection and cannot be fairly imposed . . . and, finally, it is contrary to the traditions and principles of republican government.”

When the tax was again introduced in 1894, a challenge went to the U.S. Supreme Court. In 1895, even among the cacophony of appeals in Congress to “soak the rich,” the Supreme Court declared the bill unconstitutional in a 5-to-4 ruling.5 In writing the majority opinion, Justice Stephen J. Field quoted another case to support his conclusion:

“As stated by counsel: ‘There is no such thing in the theory of our national government as unlimited power of taxation in congress. There are limitations, as he justly observes, of its powers arising out of the essential nature of all free governments; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations.'”

But when the winds of empire blew, the old yellowed paper of the U.S. Constitution went flying. Following The Panic of 1907, President Theodore Roosevelt sided with a faction in the Democratic Party that wanted to amend the Constitution to allow a national income tax. In 1909, President Taft stated that he had “become convinced that a great majority of the people of this country are in favor of vesting the National Government with power to levy an income tax.”

Of course, politicians are always able and willing to argue that “the people” want a government to have more power. If the voters see a free lunch in the deal, they’re for it. By 1913, just in time for Wilson’s emergence on the world stage, the Sixteenth Amendment had been ratified by enough states to put the income tax into law. The Amendment states:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

It wasn’t long before Congress exercised its new powers. Wilson even convened a special session of Congress to rush through the first tax law under the Sixteenth Amendment, in which earnings above $3,000 were subject to a 1 percent tax, gradually moving up to 7 percent on higher income levels.

With its rather modest rates, the original income tax was viewed as a benign inconvenience. As early as 1916, however, the top rate was more than doubled from 7 percent up to 15 percent. Then as cash was needed to send Pershing to France, the rate was hiked to a staggering 67 percent in 1917 and 77 percent by 1918. Even the low rates were raised. From their microscopic origin of only 1 percent, the rate settled into a “modest” percent by the end of World War II. But by that time, the people of the old republic had grown to accept an income tax as a necessary evil. Now that the nation was an empire, it needed the money.

In our present era, the complexity of the Internal Revenue Code (IRC) has created an army of specialized lawyers and accountants. Even attempts at reform are out of control. A “technical corrections” bill exceeds 900 pages of adjustments. In fact, by the beginning of the twenty first century, the tax codes exceeded 7 million words, about nine times longer than the Bible; and the IRS was sending out about 8 billion pages of forms and instructions every year – at the cost of about 300,000 trees! All this effort translates to about 5.4 billion hours spent every year by Americans just complying with the tax rules.

From 1913 to 2005, the income tax has enabled, entitled, empowered, and engorged the federal government, states, and local governments, private enterprises, and millions of private citizens. Spending has grown by more than 13,592 percent.

The income tax gives the federal government a blank check to spend money, even money it does not yet have. The federal government lays a claim on all future economic activity of its citizens; its massive debts are a lien on the earnings of people who have not yet even drawn their first breaths. What’s more, the income tax could be used as both an economic tool and as a political weapon. Taxes rates could be manipulated, for example, to punish or reward favored political groups.

When the Constitution was ratified in 1789, the colonists in the New World believed they had won for themselves a measure of freedom and independence.

“A republic, if you can keep it,” Benjamin Franklin warned.

By the end of 1913, a scant 124 years later, an empire was what the people wanted.

Addison Wiggin
The Daily Reckoning
October 4, 2006

Editor’s Note: Addison Wiggin is the editorial director and publisher of The Daily Reckoning. Mr. Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and the upcoming thriller Empire of Debt. Mr. Wiggin is frequent guest on national radio and television programs.

The above essay was excerpted from the international best seller, Empire of Debt, now available in paperback. To preorder your paperback copy, see here:

The Book Washington Doesn’t Want You to Read

Yesterday, the Dow hit a new all-time high. We scarcely believed it was possible…since it seemed obvious to us that the bear market that began in January of 2000 had not yet fully expressed itself. Which is to say, after going up…stocks were supposed to go down. Actually, they have gone down in real terms; even at today’s new high, the inflation-adjusted Dow is still nearly 20% below its level of six years ago…and anyone who has held the Dow stocks during that period is a damned fool. Still, it is a new high.

Which brings us to the central part of this week’s confessional…as well as the central fraud of today’s vast public spectacle in the world economy…not to mention the central inconvenience of all living things and natural phenomena.

We begin by admitting that we have been wrong. The Dow’s new record brings out a rush of humility and contrition in your editor. He feels he must own up to other crimes and misdemeanors, great and small, to which he is not even guilty.

Squirming in his chair…sweating…his heart thumping…he wishes to make a clean breast of it.

In the winter of 2002, he watched as the feds set about blowing up another huge bubble. Techs had crashed. The World Trade Center was history. The economy seemed to be sinking into a recession…widely thought to be a precursor to a ‘Japan-like slump,’ to use your editor’s words against him. Alan Greenspan cut rates down to 1%. George W. Bush ginned up his ‘War on Terror.’ Between the two of them, they pulled off a ‘coup d’economie’- pouring trillions of new money and new credit into the world economy. Not since the time of Noah had the planet seen such a flood of liquidity.

Still, we thought it wouldn’t work. We were wrong. Upon this tide floated up almost every house and hovel in the world…and upon this new housing price bubble the entire world economy rose up too. The typical house in America had barely risen at all in the preceding 100 years. But in the first five years of the new century, it shot up more than 50%. And suddenly, everybody with a pulse and a credit card had money to spend. The recession was soon over…and a new boom was underway.

But it was a strange recession…and a strange boom that followed. In the recession, we pointed out at the time, people did not do what they typically do in such times. Instead of cutting back spending, they actually spent more. Instead of paying down debt, they actually borrowed more. Instead of undoing the mistakes that they had made during the preceding boom, they actually made more of them. What sort of strange recession was this? It was phony; it was no recession at all.

And then, the feds fed the economy phony money to fix the funk. They did not dip into savings; no, they had no savings. Instead, they merely put out more phony dollars…which produced a phony boom. The great boom that the United States has enjoyed for the last five years is as phony as the recession before it. People have not really gotten richer; they do not earn more money and save it. No, real earnings have barely budged. Savings have disappeared. What they have done instead is to borrow more money on the collateral of their house-price gains. And at the end of the day, if such a time were ever to come, they are worse off. For now they owe more money; they are deeper in debt than they were before the feds came to the rescue…with no greater earnings to help them get out.

Our Public Spectacle theory holds that every episode has a beginning, a middle and an end. There is no boom without a bust. There is no day without a night…no silver lining without a cloud and no glass half-full without missing half its contents. This is not so much an insight as an intuition. We feel it more keenly in autumn, when the leaves fall, than in the springtime….and now that we are approaching 60, we feel it in our very bones. Everything comes to an end, dear reader. And this bubble too.

But today a dear reader writes back:

“I’m not in debt, lower middle class, and manage my affairs to live within my means. I applaud you guys, but wonder if you’re not missing something.

“You keep hammering away that all this debt has been accumulated in violation of Austrian Economic Principles, so when the time comes to begin paying back the debt, in accordance with the principles of Austrian Economics, the whole financial system will melt down. Don’t you think that the Fed, and affected financial institutions, will simply come up with more innovative refinancing schemes to keep people in their houses and paying SOMETHING toward retirement of their debt, rather than letting them walk away and cause housing prices and the economy to plummet?????? Then, to keep the consumption demand going, create another bubble elsewhere?

“From where I sit, the uncertainty we face is how much traction the new
consumption demand bubble will have, not how fast the housing bubble
collapses. The Fed and affected financial institutions know they cannot
afford to let housing prices collapse.”

Indeed, they cannot. So, why now? Why can’t the feds create another bubble? Why couldn’t Napoleon sack Moscow…and go on to take Peking too? Why can’t Lance Armstrong win the Tour de France another time…maybe with one leg off?

So why not another bubble? Because what we read in the papers tells us that bubble-time must be over. Housing costs are up sharply nationwide, reports the New York Times. It varies greatly by region, but the number of people who spend more than 30% of their revenues on housing is much higher than it was five years ago.

Meanwhile, housing prices nationwide are off 2%….and in certain areas, they seem to be in free-fall. New York housing has “dropped dead,” says the New York Sun. The whole country is “house poor,” adds the Associated Press. People have a much bigger asset than they had before, but they have to spend more of their money on keeping a roof over their heads.

And now, with regulators and ambitious prosecutors looking for a mortgage lender whom they can make an example of, it’s hard to see how they could revive the kind of wild lending that blew up the housing bubble to its present proportions. It’s one thing to put money into the hands of speculators at Goldman Sachs; it’s another to get it into the mitts of the lumpen, who might baulk at the interest payments.

We are just guessing, of course…but our guess is that the big, bad housing bubble is dead. Save a new war, we can’t imagine what will replace it. If we’re right, it is time to look at the empty part of the glass…and the downside of the credit cycle.

But were we not wrong before? Could we not be wrong again?

Of course, dear reader; you didn’t have to ask.

And weren’t we wrong about gold for nearly two decades?
You didn’t have to bring that up, dear reader.

And where’s that Japan-like slump we’ve been forecasting?

Now, you are just being cruel, dear reader.

More news:

————–

Mike “Mish” Shedlock, reporting from Illinois…

“…With every bubble comes fraud. The two go hand in hand, and housing is not unique in this respect. We are only beginning to scratch the surface of the fraud that supported this bubble…”

For the rest of this story, see today’s issue of Whiskey & Gunpowder

————–

And more views:

*** Have you ever read The Daily Reckoning, and thought to yourself:

“Man, these guys are idiots! I could do a better job than them?” Or…

“Wow, these guys rock! But I know I could do better work than they do – especially if I traveled the globe and drank as much wine as Addison does every week.” Or…

“I know far more about economics than these bozos. They should hire me to write a REAL investment advisory!”

If you think you can do a better job than us, now is your chance to prove it. Here at The Daily Reckoning, we are looking for a few good men [Short Fuse’s note: ahem, or women] to add to our team. Contestants must know the financial markets inside and out. They should be loyal readers, qualified writers and willing to work in our Baltimore office.

If you are someone we should hire to write the next great letter, email your DR managing editor, Short Fuse, at kincontrera@dailyreckoning.com. Send your resume and best writing sample. Let us know why you should work for us.

*** Whoa…the price of gold fell more than $20 yesterday, to come to rest at $581. The correction was not over. This is probably a great buying opportunity. But we would not buy gold because we think it is going to $1,000. We do think it is going to $1,000 – and beyond. But it could be a long time getting there. Right now, it looks to us as though the economy is turning down along with the housing market – as we expected. Gold’s time will come. But a lot of deflationary misery could happen between here and $1,000-an-ounce bullion prices.

*** Toyota is now the biggest-selling line of autos and trucks in America. Ford, meanwhile, is laying off workers. Led by the automaker, the number of layoffs in September is supposed to reach 100,000. But these people can stop squawking…there are plenty of jobs picking fruit in California.

*** And for the edification of refugees from the bubble: Where’s the best place to live in the United States? The Associated Press has an article on housing costs that makes us wonder. In 1931, H.L.Mencken fingered Mississippi as the “Worst State in the Union,” based on what he called its “relative degree of civilization.” But Mississippi now has the cheapest housing in the United States. The average house costs only $82,700 down on the banks of the Big Muddy, where Faulkner lived. By comparison, in San Francisco you’ll pay nearly 10 times as much for the typical house.

And North Dakota has the lowest rents in the nation – just $479 a month, whereas; West Virginia has the lowest overall housing costs – at $797 per month. New Jersey has the highest, $1,938 per month. Other states with very low housing costs are Oklahoma, Arkansas and Alabama. Time to move on down….