CHAPTER 7

The Hamiltonian Revolution of 1913

The freedoms won by Americans in 1776 were lost in the revolution of 1913.

—FRANK CHODOROV, THE INCOME TAX: ROOT OF ALL EVIL

Hamiltonian political hegemony, including the near-death of the principle of states’ rights or federalism, was achieved during the War between the States. But the citizens of the once-sovereign states still retained some control over the government in Washington after the war. The Jeffersonian states’ rights tradition, therefore, had some life in it yet.

But that life was snuffed out completely in one revolutionary year, 1913. During that one year three sweeping changes occurred: the Seventeenth Amendment to the Constitution was ratified, and so for the first time U.S. senators would be directly elected rather than appointed to office by state legislatures; the federal income tax was adopted; and the Federal Reserve System was created. All three institutions almost completely centralized power in Washington and constituted the death blow to the old Jeffersonian tradition in American politics—and the final, decisive victory for the Hamiltonians. Hamilton’s totally centralized government, with an increasingly arrogant chief executive who could bully and manipulate the governors and legislatures of the states (as well as their citizens), was finally realized 126 years after he first enunciated his plan at the Constitutional Convention. The world would soon discover that national borders would not limit the bullying, interventionist proclivities of American presidents.

THE SEVENTEENTH AMENDMENT

Whenever the topic of federalism comes up today in the media or in academic writings, it is usually discussed in the context of some recent Supreme Court decision relating to the division of political power between the federal government and the states. But that was not what the founders had in mind. They never intended federalism to be enforced or protected by a few government lawyers with lifetime tenure. Indeed, the Jeffersonians believed that such a thing would be a complete farce.

If federalism or states’ rights was to be protected, it would be the responsibility of the citizens of the sovereign states, through their elected state representatives. Allowing the federal government to make such decisions would simply be allowing the fox to guard the henhouse. As part of the political infrastructure of federalism, also known as divided sovereignty, the Constitution established that U.S. senators would be appointed by state legislators.

Ralph Rossum of Claremont McKenna College explains the rationale for this in his book Federalism, the Supreme Court, and the Seventeenth Amendment. The Constitution’s framers intended that state legislatures would appoint senators and then instruct them on how to vote in Congress. This was to safeguard against the corruption of senators by special interests seeking federal legislation that would be good for them but bad for the general public. “The ability of state legislatures to instruct senators was mentioned frequently during the Constitutional Convention and the state ratifying conventions and was always assumed to exist,” writes Rossum, but still this notion “went unchallenged.”¹

During the subsequent debates over ratification, the matter of having state legislatures instruct senators came up repeatedly. At the New York ratifying convention, John Jay, who, along with James Madison and Hamilton himself, wrote The Federalist Papers, said: “The Senate is to be composed of men appointed by the state legislatures; they will certainly choose those who are most distinguished for their general knowledge. I presume they will also instruct them, that there will be a constant correspondence between the senators and the state executives, who will be able, from time to time, to afford them all that particular information which particular circumstances may require.”² At the Massachusetts ratifying convention Fisher Ames referred to U.S. senators as “ambassadors of the states.”³

In Federalist no. 45 Madison wrote that since “the Senate will be elected…by the State Legislatures,” it “will owe its existence more or less to the favor of the State Governments, and must consequently feel a dependence.”⁴ Because of this, wrote Madison, the U.S. Senate “would be disinclined to invade the rights of the individual States, or the prerogatives of their governments.”⁵ In Federalist no. 62 Madison emphasized that this system recognized and reaffirmed that the states were of course sovereign, as it gave “to state governments such an agency in the formation of the federal government as must secure the authority of the former.”⁶

After the Constitution was adopted various statesmen continued to voice their opinions about the importance of senators being appointed and not elected by the populace. Roger Sherman of Connecticut wrote in 1789 that because senators were appointed by the state legislatures they “will be vigilant in supporting their [the states’] rights against infringement by the legislative or executive of the United States.”⁷ The Virginia Jeffersonian St. George Tucker, who edited Blackstone’s Commentaries for the American audience, wrote that if a senator “abuses his confidence,” he would “be sure to be displaced.”⁸ Even the prototypical Hamiltonian nationalist, Joseph Story, wrote in his Commentaries on the Constitution of the United States that state legislative appointment of senators would avoid “undue encroachments of the powers of the states.”⁹

Most of the founders understood that it would never be in the self-interest of the federal judiciary to limit federal power for the benefit of the states. “They clearly did not intend that the un-democratic Supreme Court would protect the original federal design,” writes Rossum.¹⁰ For as the Anti-Federalist writer “Brutus” remarked, “every extension of the power of the general legislature, as well as of the judicial powers, will increase the powers of the courts.” And along with increased power usually comes increased monetary compensation and perquisites. Americans should never fall for the Hamiltonian notion that the central government can be trusted to act “for the common good,” in other words.

The states quickly showed that they would exercise their right to challenge the federal government’s decisions by means of their control over senators. The famous Kentucky and Virginia Resolves of 1798, authored by Thomas Jefferson and James Madison, were written in response to the obnoxious Sedition Act passed by Congress and were intended to be used by the Kentucky and Virginia legislatures to instruct their senators to vote to repeal the act.

Especially during the pre-1865 era senators took their instructions from state legislatures very seriously. John Quincy Adams resigned his Senate seat in 1809 because he disagreed with the Massachusetts state legislature’s instructions to oppose the Jefferson/Madison trade embargo. Senator David Stone of North Carolina resigned in 1814 after his state legislature disapproved of his collaboration with New England Federalists on several legislative issues. Senator Peleg Sprague of Maine resigned in 1835 after opposing his state legislature’s instructions to oppose the rechartering of the Bank of the United States. When the U.S. Senate censured President Andrew Jackson for having vetoed the rechartering of the Bank, several state legislatures instructed their senators to seek to have Jackson’s censure expunged. Seven southern senators resigned rather than obey these instructions. One of them was Senator John Tyler of Virginia, who would become president in 1841 after the death of President William Henry Harrison, one month after Harrison was inaugurated.¹¹

The support for state legislative appointment of senators was so strong that even nationalists of the founding generation—Hamilton and his allies—paid lip service to the principle. At the Massachusetts ratifying convention Rufus King—who would become Hamilton’s political point man in the U.S. Senate—had argued that “the state legislatures, if they find their delegates erring, can and will instruct them.”¹² At the Connecticut convention Oliver Wolcott referred to the states as “the pillars which uphold the general system” of the Constitution, “without whose assent no public act can be made,” since senators would be “appointed by the states, and will secure the rights of the several states.”¹³ Hamilton himself had said at the New York ratifying convention that if the people wanted to make a change in their government or its policies, “they have it in their power to instruct their representatives; and the state legislatures, which appoint the senators, may enjoin it also upon them.”¹⁴

But after issuing many such assurances that states’ rights would be protected by the Constitution, Hamilton and his Federalist partners would work diligently to destroy those rights. In fact, they and their political heirs waged an almost century-long campaign to abolish this check upon the powers of the central state. It could never have been any other way. The Jeffersonians championed the appointment of senators by state legislators for reasons that were anathema to Hamilton, the Federalists, the Whigs, and the Republicans—namely, it limited the size and scope of the central state. In Federalist no. 10 James Madison remarked that the whole purpose of the Constitution was to control “the violence of faction,” by which he meant special-interest politics. The appointment of senators by state legislatures was one of the constitutional constructs that was intended to assist in this goal. It did so by limiting senators’ ability to sell their votes to special-interest groups nationwide. After all, senators who went to Washington and voted against the interests of their home-state constituents could and would be replaced on short notice by their state legislatures; the founders well understood that it is easier to manipulate the public than to fool professional politicians who follow the issues intently.

“Not surprisingly,” Ralph Rossum writes, it was a Federalist from New York, Congressman Henry Randolph Storrs, who introduced the first resolution calling for direct election of senators. Storrs did so on February 14, 1826. “From that date until the adoption of the Seventeenth Amendment eighty-six years later,” Rossum documents, “187 subsequent resolutions of a similar nature were also introduced before Congress, 167 of them after 1880.”¹⁵ The flurry of resolutions starting toward the end of the century was no accident; it coincided with the rise of the “Progressives.”

The so-called Progressives worshipped the god of democracy and therefore championed the direct election of senators by saying it would make government more “democratic.” The founding generation, especially the Jeffersonian wing, had not been so naive about politics, viewing democracy as at best a necessary evil that needed to be controlled and limited. But the Progressives made great gains with the American public by waging a massive propaganda campaign against the Founding Fathers and their views of the Constitution.

One of the Progressives’ main arguments, oddly, was that the direct election of senators would reduce political corruption. Corruption does infect all levels of politics, but the founding generation—unlike the Progressives—understood that the public was more likely to detect and limit corruption the closer the government is to the people. Who in America today would believe that opening the door for senators (or prospective senators) to raise campaign funds from anywhere, including foreign countries, would limit rather than invite corruption?

Other rationales for the Seventeenth Amendment were also dubious. One argument was that states often became deadlocked in deciding who to appoint as their senators, leading to underrepresentation for long periods of time. But the cause of this problem was the complicated voting rules that the federal government—in a usurpation of power—had forced on the states in the 1870s. A simple solution would have been to allow the states to use a simple plurality vote.

In any case, Congress pushed through the Seventeenth Amendment in May 1912. Massachusetts, the home base of the old Federalist coalition, became the first state to ratify the amendment. On April 8, 1913, the direct election of senators was enshrined as the new law of the land after Connecticut became the requisite thirty-sixth state to ratify the amendment.

Rossum argues that most political leaders who supported the Seventeenth Amendment simply did not understand the founders’ logic. This is most unlikely; in fact, there is every reason to believe that most of them understood it perfectly well. The issue, rather, was most likely that politicians rejected the logic of limited constitutional government because it limited their own powers. Armed with charges of state-level corruption, and fanciful theories of democracy put forth by “Progressive” intellectuals, they made their power grab.

It worked. Todd Zywicki of George Mason University Law School has noted that since 1913 we have seen a “ratchet effect,” whereby the federal government uses the pretext of war or some other crisis to increase taxes or regulations, commandeer more resources, water down civil liberties, and otherwise expand federal governmental power, but then does not return the government to its original size or mission once the crisis ends.¹⁶ Zywicki explains that this ratchet effect was largely absent prior to 1913 because the citizens of the states were then more capable of controlling their “Leviathan” government.¹⁷ In his words, “[S]tatistical and anecdotal evidence suggests that the Senate played an active role in preserving the sovereignty and independent sphere of action of state governments. Rather than delegating lawmaking authority to Washington, state legislators insisted on keeping authority close to home…. As a result, the long-term size of the federal government remained fairly stable and relatively small during the pre-Seventeenth-Amendment era.”¹⁸

Rossum writes, “Since 1913, there has been a profound increase in the number and intrusiveness of congressional measures invading the residuary sovereignty of the states.”¹⁹ Those measures began almost immediately, with the federal government infringing upon the police powers of the states to regulate, regiment, and control the economy. To pander to labor union pressure, Congress passed a federal child labor act in 1916. Unions promoted such legislation not because they were necessarily concerned about the well-being of teenagers in the workplace but because young people rarely belonged to unions and were therefore a form of competition to unionized labor.

Then came the regulatory regime of the New Deal, with the federal government regulating everything from the amount of wheat that farmers could grow to retirement programs in the railroad industry, from wages and working hours to coal industry production, from labor negotiations to the price of almost everything. Today the states are slaves to federal “mandates.” They beg for federal dollars to finance the seemingly unlimited regulatory mandates emanating from Washington, D.C., covering how fast citizens may drive, when and how much alcohol they may consume, how to treat drinking water, who may own firearms and where they may use them, and an endless stream of nanny-state harassment. When a state does protest an “unfair” and burdensome federal mandate, it is usually quickly disciplined by the mere threat of diminished federal subsidies for the state politicians’ favorite pork-barrel programs, usually for road construction.

The political corruption that the Progressives were concerned about expanded by orders of magnitude thanks to the Seventeenth Amendment. U.S. senators now travel all around the country seeking special-interest campaign contributions; senators from practically every state spend a great deal of time fund-raising in New York and California, for example, because that’s where the money is.

Federalism is long dead, despite the Supreme Court’s occasional pronouncements to the contrary. Conservatives who celebrate every time the Court seems to allow the states a tiny bit of latitude in organizing their own political affairs might as well be barking at the moon. Rossum was right when he concluded, “The original federal design [of the Constitution] effectively died as a result of the social and political forces that resulted in the adoption of the Seventeenth Amendment.”

THE INCOME TAX

Alexander Hamilton, with his disdain for laissez-faire economics, advocated a hyperinterventionist approach that would put the federal government in control of the economy. Feeding the massive central government that he favored would require a healthy diet of revenue (to be taken out of the pockets of citizens and put into the hands of the government in the nation’s capital). Hence his calls for excise and sales taxes, a national property tax, prohibitive tariffs, and more. As the historian Clinton Rossiter put it, “Hamilton took a large view of the power of Congress to tax because he took a large view of the power to spend.” Recall that Hamilton was so committed to federal taxation that he pushed President Washington to use military force to make Pennsylvanians pay the infamous whiskey tax.

Despite Hamilton’s ambitions, the Founding Fathers were careful not to give the federal government expansive powers to tax the people. In fact, under the Articles of Confederation the central government had no taxing powers at all; revenues were raised by the sovereign states. Even under the Constitution, the functions of government were meant to be funded by modest “revenue tariffs” and selected excise taxes; “direct taxes” could be levied only in proportion to each state’s population.

The Founding Fathers did not adopt an income tax. Thomas Jefferson made it a point to denounce the notion of income taxation in his first inaugural address, when he said that “a wise and frugal Government…shall not take from the mouth of labor the bread it has earned” (emphasis added).²⁰ Jefferson’s dictum was an expression of Lockean natural rights theory: the purpose of government, Jefferson believed, was to protect these God-given rights to life, liberty, and property, not to take them away from citizens.

Hamilton did not himself call for an income tax, but the sales and excise taxes he championed were not much different from income taxation. Sales and excise taxes are indirect taxes on some people’s income; excise taxes, for example, render the taxed industries less profitable and thus deplete the incomes of those who work and/or invest in those industries.²¹ And as a voracious tax increaser in his day, Hamilton would undoubtedly have approved of the adoption of an income tax as a way to increase the federal government’s revenue and centralize its power. Since there was such overwhelming opposition to the notion of taxing income in his day, Hamilton was forced to advocate myriad other forms of taxation instead to fund the more “energetic” government that he desired.

The first federal income tax was introduced in 1862, during the period of Hamiltonian hegemony, as a war-financing tool. Using the now-familiar principle of “progressive taxation,” the government instituted a two-tiered system: incomes up to $10,000 per year were taxed at 3 percent, while income levels above that were taxed at 5 percent.²² This income tax was abolished in 1872, but the experience had whetted the appetites of special-interest groups. A forty-year crusade to reinstitute the tax would ensue.

A flat-rate income tax was adopted in 1894, but the Supreme Court ruled it unconstitutional a year later because this direct tax was not levied in proportion to state population. The crusade continued and gained an important ally in President Teddy Roosevelt, whose popularity provided a huge boost to the cause. Congressmen from the Midwest and West and Progressive ideologues all joined the cause because their constituents—farmers—had been so disproportionately burdened by the Republican Party’s decades-old high tariff policy.

By 1913 a deal had been cut whereby Congress would reduce tariff rates in return for farm state support for an income tax. President Woodrow Wilson convened an emergency session of Congress to push through the income tax and a constitutional amendment authorizing it.²³ The income tax became law on October 3, 1916. The Sixteenth Amendment establishing the tax was very simply worded: “The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” (American farmers would soon regret their support for the government’s income tax; by 1930 tariff rates had risen to the highest rates ever—an average of 59.1 percent. Federal politicians realized that with all that income tax revenue coming in, they could afford to enact prohibitive tariffs as a way to buy political support from various manufacturing industries.)

Although dozens of treatises and thousands of scholarly articles have been published on income taxation, one point that is usually either downplayed or ignored altogether is what such taxation meant to the principle of federalism. The income tax, as much as anything else, ended the ability of the citizens of the states to effectively influence their own central government. It centralized power to a degree that even Hamilton himself could hardly have imagined. It gave the federal government virtually unlimited access to funds and allowed it to pry into every business transaction and the records of every working person in America. It diminished the ability of the state and local governments to finance their activities and rendered them beggars for whatever crumbs of revenue their rulers in Washington, D.C., decided to throw their way. With federal “grants” (of the taxpayers’ own money) to the states, the federal government became more and more in charge of state governments, rendering them mere appendages or franchises of the central government. This was essentially the relationship between the federal government and the states that Hamilton had proposed at the Constitutional Convention more than a century and a quarter earlier.

The income tax was also a complete repudiation of Jefferson’s natural rights doctrine. Private property was no longer sacrosanct. The amount of income the citizen might keep would be determined by the “needs” of government. And if the citizen refused to pay his income tax, the government could imprison him and confiscate his wealth to pay the taxes due.

The income tax also helped to achieve the Hamiltonian objective of an almost dictatorial executive branch that controlled billions of dollars. As Frank Chodorov explained in a book on the income tax:

[T]he Sixteenth Amendment corroded the American concept of natural rights; ultimately reduced the American citizen to a status of subject, so much so that he is not aware of it; enhanced Executive power to the point of reducing Congress to innocuity; and enabled the central government to bribe the states, once independent units, into subservience. No kingship in the history of the world ever exercised more power than our Presidency, or had more of the people’s wealth at its disposal.²⁴

Chodorov first wrote those words in 1954. More than a half century of additional accumulations of executive power would likely have been unimaginable to him. Hamilton, on the other hand, would certainly be smiling.

The income tax knocked away another vestige of the states’ rights system that the founders had designed. The rights of secession and nullification had already been abolished in 1865; citizens who opposed what they believed to be the central government’s unconstitutional usurpations of power had to rely on political action, protests, and boycotts as the only powers they had left. What the income tax did was to give the central government vast resources with which to oppose even those feeble attempts by citizens to influence their own governments. A good illustration of this point is made by Chodorov:

Mr. Lincoln had great difficulty in enforcing a moderate form of conscription, even in wartime; now we have peacetime conscription…. Mr. Lincoln had difficulty with his draft because he did not have the wherewithal to hire an army of enforcement agents. Thanks to the income tax, our present government is not so handicapped.²⁵

Another ominous effect of the tremendous centralization of political power that income taxation has created is government-financed and-enforced mind control. For example:

[T]he farmer who receives checks [from the U.S. Department of Agriculture] for not planting does not realize that his grandfather would have thought the practice immoral; he accepts the taking of gratuities as the regular order of things…because government propaganda has got him into that frame of mind.²⁶

The same can be said of millions of other individuals and groups that receive government checks or other types of special favors. As the ancient saying goes, “He who takes the king’s shilling becomes the king’s man.”

CENTRAL PLANNING THROUGH CENTRAL BANKING

The third “shot” in the Revolution of 1913 came with the Federal Reserve Act, which established the Federal Reserve Board. Hamilton can be considered the founding father of central banking in America, and the creation of the Fed is one of his legacies. Indeed, the Fed represents the culmination of Hamilton’s plan for government control of the money supply.

Even today the Federal Reserve Board itself points to Hamilton as its institutional parent. A Fed publication entitled “A History of Central Banking in the United States” states that “the Federal Reserve has similarities to the country’s first attempt at central banking, and in that regard it owes an intellectual debt to Alexander Hamilton.”²⁷ The publication even trumpets the fact that in one of Hamilton’s comments on central banking, written in 1791, he ended up “sounding like a modern-day Fed chairman.” This rather self-serving Fed history claims that the Federal Reserve’s sole purpose is “to better serve commerce and government” and quickly adds, “That was the inspiration behind Alexander Hamilton’s campaign to establish the First Bank of the United States, behind the efforts of the Second Bank and the banking legislation that followed, and the core purpose of the Federal Reserve Act.”

As the Fed indicates, Hamilton’s plan came in stages: first the Bank of the United States, then the National Currency Acts of the 1860s, and finally the Federal Reserve Act of December 1913. With the Fed, the federal government finally established monopolistic control over the money supply. It meant “the realizing of the hopes of Hamilton and his successors, including Clay and Lincoln,” wrote Michael Lind, who celebrates the fact that Americans now live in “Hamilton’s Republic.”²⁸

The story of the creation of the Federal Reserve is the story of a decades-long political crusade by bankers, industrialists (especially those associated with the railroad industry), and power-hungry politicians.

During the late nineteenth and early twentieth centuries the banking industry faced the same issue that many other industries did: too much competition. The National Currency Acts had, in fact, eliminated much of the competition, but state-chartered banks continued to exist despite the acts’ imposition of a punitive 10 percent tax on them. As Murray Rothbard wrote, “These state banks, free of the high legal capital requirements that kept entry restricted in national banking, flourished during the 1880s and 1890s and provided stiff competition for the national banks themselves.”²⁹ As with other industries, bankers tried to create voluntary cartels, but cartels are notoriously unstable. So inevitably they turned to government to enforce their cartel for them.

The banks’ biggest complaints involved the so-called inelasticity of the money supply—that is, “the national banking system did not provide sufficient room for inflationary expansions of credit by the nation’s banks.”³⁰ Banks that issued their own banknotes suffered if they inflated their currency and too many depositors demanded their money, especially if they demanded it in gold. But this “problem” could be overcome if the government became a monopoly issuer of all currency and gave itself the right to legally counterfeit. That is precisely what the Federal Reserve did, and has been doing since 1914. Ever since, if a bank acted irresponsibly and inflated its currency and was short of funds to meet its depositors’ demands, the Fed could step in and provide it with more paper money. Banks no longer held reserves in gold; gold was deposited with the Federal Reserve for “safe keeping.”

Murray Rothbard summed up how this sweeping change came to pass: “The financial elites of this country…were responsible for putting through the Federal Reserve System, as a governmentally created and sanctioned cartel device to enable the nation’s banks to inflate the money supply…without suffering quick retribution from depositors or noteholders demanding cash.”³¹

The crusade for a central bank drew intellectual cover from a number of influential economists and other social scientists. These academics had learned the supposed virtues of collectivism and statism from the so-called German Historical School of economics—which, as the Hamilton idolater Michael Lind correctly notes, traced its lineage to none other than Alexander Hamilton and his followers in America.³² Oddly enough, Hamilton’s ideas had to migrate to Germany before they came back to America’s shores, but they were indispensable to the creation of the Federal Reserve. In the first half of the nineteenth century the German intellectual Friedrich List essentially copied Hamilton’s ideas and presented them to German university audiences, and his intellectual heirs in the latter half of the century formed the German Historical School. Intellectuals from this school disavowed much of the accumulated knowledge of economics, believing that economic planners could somehow “repeal” the laws of supply and demand and enact price controls, expansionary monetary policy, protectionism, high taxes, and other interventions without harming the economy.³³ This school eventually spread the “doctrine of economic nationalism”—that is, neomercantilism—back to American students and professors.³⁴

The American acolytes of the German Historical School’s Hamiltonian mercantilism—among them E.R.A. Seligman of Columbia University and Jeremiah Jenks of Cornell University, both close advisers to Teddy Roosevelt—played a key role in the drive for the Federal Reserve. As Rothbard wrote, they lent “the patina of their allegedly scientific expertise to the…drive for a central bank. To achieve a regime of big government…interests seeking special privilege, and intellectuals offering scholarship and ideology, must work hand in hand.”³⁵

And work hand in hand they did. These intellectuals and the business elite were united in their support for a central bank, in part because they agreed that America should pursue what Hamilton called “imperial glory,” especially after the United States acquired colonies in the Philippines, Cuba, and Puerto Rico. For example, the American Economic Association, whose cofounder Richard T. Ely was one of the most prominent proponents of the German Historical School, got a number of wealthy businessmen to fund a book entitled Essays in Colonial Finance.³⁶ Other publications advocated opening up new markets around the world, by military force if necessary. Protectionism had led to overproduction by domestic manufacturers, who were always on the lookout for ways of dumping their excess products. But if empire had its advantages, according to the economic nationalists, it also came with exorbitant costs; they argued that a central bank was needed, in addition to the income tax, to support these costs.

In the aftermath of a recession in 1907 numerous academic conferences were held calling for a central bank, including three at Columbia University alone, sponsored by E.R.A. Seligman. The Wall Street Journal editorialized in favor of a governmental monetary monopoly for years, starting in 1909 with a fourteen-part series entitled “A Central Bank of Issue.”³⁷ Various studies were published by the same cast of characters hailing the alleged superiority of European central banking systems over the American system.

With the intellectual groundwork having been laid, the Senate’s foremost proponent of central banking set to work on legislation in late 1910. On November 22 Senator Nelson Aldrich gathered several of his close allies and sailed off to a private club on Jekyll Island, Georgia, to write up the legislation that would create the Federal Reserve. A year later the American Bankers Association endorsed the bill, which finally became law in December 1913.

The creation of the Fed and the enactment of the income tax amendment, combined with the climate of opinion endorsing the view that America should become an empire and not just a constitutional republic, was the ultimate victory for early twentieth-century Hamiltonians. States’ rights were finally abolished altogether; the federal government’s greedy hand was permanently implanted into the taxpayers’ pockets; and Washington, D.C., finally had a legal counterfeiting monopoly that could be hidden behind the guise of “monetary policy” by clever academics and political activists and pundits.

The immediate results were disastrous for America. These new funding mechanisms allowed Woodrow Wilson to plunge America disastrously into the European war, a war that provided no benefits to America but exacted a tremendous cost in terms of blood and treasure. Like all wars, World War I permanently ratcheted up the powers of government and fueled the urge among politicians to “plan” American society in peacetime just as they had “planned” during the war.

The longer-term results were just as bad. The Fed’s monetary expansion during the late 1920s led to the inevitable boom-and-bust cycle, caused by too much cheap credit that enables too many businesses to become overcapitalized. When this happens—that is, when there is more production capacity than is warranted by consumer demand—the only way out is through a liquidation of some of that capital. Such liquidations are what ignited the stock market crash and the Great Depression.³⁸

From 1789, the year that the Constitution was ratified, until 1913 the consumer price level in America remained stable, with some swings during the business cycle and during wartime. Since then prices have risen about twenty-fold, even though we have been told for almost a century that the purpose of the Federal Reserve is to ensure price stability.

In any event, the Revolution of 1913 was completed by December of that year; Americans have lived in Hamilton’s neomercantilist republic ever since.