In 1911, the U.S. Supreme Court ruled that federal
anti-trust law required the break-up of Rockefeller’s mammoth Standard Oil Company,
which had replaced ruinous competition with coordination in the American
refining industry. The ruling’s impact was truncated because each of the
resulting companies had the same ownership; the existing trust certificates were
simply exchanged for shares in each company. The respective managements even remained
in the same office building in New York City. In effect, the court had mandated
oligopolistic collusion and still more restraint of trade. Undaunted, the
elderly Rockefeller worked on his golf game.
One hundred years later, the U.S. Treasury and the Federal
Reserve were still striving to salvage the economy from a near direct-hit in
September 2008. The Fed’s massive bond-buying program of some $7 trillion would
dwarf the $750 billion in the democratically-enacted TARP (Troubled Assets
Relief Program) funds. In 2010, Congress had passed the Dodd-Frank Act, which
was designed to solve the problem of banks and other companies being too big to
fail without actually breaking any up. Not surprisingly, by 2013 it had become
apparent that systemic risk was still much too high. The government that had
broken up Rockefeller’s mighty managerial machine had apparently lost its spunk
for breaking up enterprises, at least those whose very existence involves an
intolerable amount of systemic risk to the economy as a whole.
A century earlier, in 1913 to be exact, the sixteenth
amendment to the U.S. Constitution was ratified, making a federal income tax
constitutional. Congress promptly passed the Revenue Act of 1913, which
reinstituted the federal income tax and lowered tariffs. The assumption was
that the revenue from the income tax would make up for the decrease from the
lower tariffs. As the graph below indicates, the income taxes would do more
than compensate for reduced tariff revenue. The ratification of the amendment and the passage of the Revenue Act laid the groundwork for an expansion in the fiscal role of the federal government. In the constitutional convention, some delegates had been concerned that a federal income tax would “crowd out” the states as they seek to raise more revenue for domestic purposes.
Also in 1913, exactly a century before the Federal Reserve’s
board wrestled with whether to reduce the central bank’s bond-buying program, a
fiscal stimulus to reduce unemployment, the bill establishing the central bank
became law. Charles Lindberg, the father of the famous flyer, predicted from
his seat in the U.S. House of Representatives that the Act would establish “the
most gigantic trust on earth” that would be an “invisible government by the
money power.”[1] At
the time, it was assumed that the gold standard would provide sufficient
constraint. This assumption would go flat in 1973 with Nixon’s termination of
the Bretton Woods agreement. By 2013, the premise of the Act, which specifies
three purposes for the Fed: “to furnish ‘an elastic currency,’ to provide a
market for commercial paper so that banks would have more liquidity, and to
improve supervision of banks,” had been superseded to a degree that would have
stunned even the advocates of the original bill.[2]
Speaking before Congress on June 23, 1913, President Wilson
said banks should be “the instruments, not the masters, of business.”[3]
William Jennings Bryan, the U.S. Secretary of State, went one step further in
insisting that banks answer to the public rather than to themselves or
business.[4]
A century later, was the Fed buying trillions in dollars of bonds to help the
banks, whose executives had gone largely unscathed in terms of bonuses, or the
public? If the latter, shouldn’t the Congress and the elected U.S. president
have played more of a decisive role by legislating the program?
The democracy deficit in the Fed’s increasing “job
description” is not the only danger, however. Not even democracy can be relied
on to safeguard the checks and balances afforded by federalism or even
federalism itself. Simply in being such a consolidated power at the U.S. level,
the Federal Reserve further consolidates power as it expands its fiscal power.
Federalism pays the price not only directly, but also in that the Fed is
prohibited by federal law from buying the bonds of heavily-indebted state
governments. That is to say, the Federal Reserve can come to the aid of the
U.S. Treasury as well as large consolidated banks, while the state governments
are on their own. The bias here favors further consolidation at the expense of
federalism.
Europeans have been much more sensitive to the impact of the
European Central Bank’s expansive bond-buying program on the E.U.’s federal
system. Even though the ECB would be purchasing the bonds of indebted state
governments, the centralization in the purchasing and the associated fiscal
redistribution delayed agreement on the program. In 1913 as the Federal Reserve
legislation was going through Congress, federalism was not sufficiently
considered, and thus protected. Paul Warburg, a financier who had immigrated
from Germany to New York, thought the banking system was too decentralized in
the United States. Oblivious to the American federal mindset that still treated
the federal level of government as properly assuming empire-level powers such
as defense and regulating commerce between the republics, he wanted to
replicate the Reichsbank of his native state for the United States as a whole.[5]
Avoiding that political category mistake, Rep. Carter Glass,
the chief sponsor of the Federal Reserve Act, “wanted to restrain federal
authority” even in banking and yet he “wanted a more elastic currency to avert
money panics and moderate depressions” through banking reform.[6]
He proposed privately-owned regional reserve banks and referred to Wilson’s
proposal “that a Reserve Board sit atop” those banks as a federalist design at
odds with the rights of the states.[7]
That the resulting Act was more along Wilson’s lines suggests that the
federalism was not sufficiently consulted in the legislative process, which was
not coincidentally entirely at the U.S. level. That is to say, federal-level
officials established a central bank that would operate to the advantage of
that level. Also in 1913, the seventeenth amendment, by which U.S. senators
would no longer be elected by their respective state legislatures, was ratified;
the state governments would henceforth had even less wherewithal at the federal
level to thwart encroachments by the U.S. Government.
In conclusion, a consolidating trend favoring both big
business and the U.S. Government at the expense of the states can be discerned
from legislation passed in 1913. The consolidation of banking power in a few
megabanks like Citigroup and JPMorgan and of political power in the U.S.
Government evident in 2013 can thus be viewed as having historical
underpinnings.
1. Robert Lowenstein, “The Federal Reserve’s Framers Would be Shocked,” The New York Times, June 22, 2013.