Business, Banking, and National Politics

Business, Banking, and National Politics

Wilson pledged to make the interests of farmers and laborers a leading priority, promising reforms that would “shield” these groups from the negative consequences of industrialization and the abuses of monopolies. The president supported the Clayton Antitrust Act of 1914, which clarified the definition of illegal business practices. The act declared that any action that reduced competition in the marketplace would be subject to federal penalties, as determined by the newly created Federal Trade Commission (FTC)A federal agency created in 1914 to enforce antitrust legislation and other measures designed to prevent monopolies and unfair business practices. The FTC also seeks to defend consumers from fraud and deceptive business practices.. The FTC was charged with enforcing federal regulations, such as a section of the Clayton Act that prohibited individuals from serving as members of a corporation’s board of directors if they had a conflict of interest. For example, if an individual was a member of Ford’s board of directors, he could not also serve another automaker in that capacity. In the past, various holding companies had conspired to form trusts by appointing the same individuals to multiple boards as a way of conspiring to eliminate competition. The Clayton Act also required government approval for mergers and acquisitions to prevent the growth of monopolies, and it banned a variety of unfair business practices. For example, a company could no longer require one of its suppliers to refuse the business of its competitors as part of the price of doing business. In the past, courts had interpreted antitrust laws such as the Sherman Act against labor unions. For example, the leaders of the Pullman Strike of 1894 were declared in violation of antitrust laws when their wildcat strike began affecting other rail companies. For this reason, the Clayton Act specifically exempted labor unions from its provisions.

The Clayton Act was inspired by the work of Progressive attorney, author, and later Supreme Court Justice Louis BrandeisAuthor, attorney, and the first Jewish appointee to the US Supreme Court. A leading private university in Massachusetts was named in honor of Brandeis, who was known as a someone who exposed corruption in the financial industry and defended consumers against corporate interests.. Known as “the People’s Lawyer,” Brandeis authored the influential book Other People’s Money, which exposed the techniques used by trusts to create monopolies and destroy small businesses. Brandeis showed how men who sat on the boards of banks, as well as various trusts, were able to manipulate the money supply to enrich themselves. The book also demonstrated the artificial limits that were placed on the supply of capital and the way these methods discouraged consumer spending and investment. At their worst, these trusts destroyed innovation by rewarding companies that were less competitive but enjoyed powerful connections. Brandeis also fought on behalf of the right of free speech—a liberal cause that was still gaining acceptance in the early twentieth century. His nomination to the Supreme Court was controversial both because of his liberal politics and because he was Jewish in an era of virulent anti-Semitism. Today, most scholars of legal history consider Brandeis to be one of the most capable justices in US history. In an era when protections of free speech and privacy were considered secondary and conditional to other interests, Brandeis helped to construct the modern legal framework that protected these freedoms as inherent rights of all US citizens.

Figure 5.2

Progressive attorney Louis Brandeis was the first Jewish appointee to the US Supreme Court. A fellow Justice called Brandeis a “militant crusader for social justice whoever his opponent might be.”

Wilson recognized that the nation’s banking system needed federal support to provide greater stability, especially as a number of prominent banks failed despite the relative financial tranquility of the early 1900s. In each instance, bank failures led to the loss of depositors’ money and panicked selling on Wall Street. In an effort to provide greater regulation and stability to the nation’s banking system, the Federal Reserve Act of 1913Created the modern central banking system of the United States. The Federal Reserve acts as a central bank for the government and establishes monetary policies that affect the economy such as the federal funds rate—the interest rate commercial banks pay to borrow money. created the Federal Reserve and twelve district banks scattered throughout the nation. The Federal Reserve has authority over policies such as the amount of money the government should print. The role of the Federal Reserve also includes authority over monetary policy, including the establishment of interest rates that member banks pay to borrow money from each other. The Federal Reserve can lower this rate to spur investment or raise it to limit inflation.

Some Progressives supported a program whereby the federal government would also require strict regulation of private banks and provide insurance against bank failures. However, these more active government measures would not be approved until after the nationwide panic that helped create the Great Depression. The powers granted to the Federal Reserve expanded during these years, and the institution continues to manage the nation’s banking system by regulating the flow of credit to banks. As a result, decisions made by the Federal Reserve have a direct impact on businesses and the general public.

The Populists of the 1890s had sought the enactment of a modest federal income tax that would apply only to the wealthy. Previous attempts to add direct taxes on the wealthy had been challenged in the courts, leading to the decision to seek a constitutional amendment specifically authorizing a federal income tax. With the support of the Progressives, the Sixteenth Amendment was approved by Congress in 1909 and ratified by the states in February 1913. That fall, Congress approved an annual tax on all those who made more than $4,000 per year. Because most workers made about $80 per month, only the wealthiest 5 percent of households paid any federal taxes the following year. In addition, the tax rates were quite modest, ranging from 1 percent for those who made just above $4,000 to a maximum rate of 7 percent for the wealthiest Americans. Conservatives feared that these relatively modest taxes would be the harbinger of more assessments. In 1916, they fought against a proposed tax increase and an additional tax on corporations. They were especially angered by the creation of an estate tax that was levied when property valued above a certain amount changed hands from a deceased individual to his or her children. Even after tax rates increased and the exemption was lowered, most Americans still did not earn or own enough property to come under the terms of the new law. Most believed the feature requiring those with higher incomes to pay higher rates—a feature known as progressive taxationA system where the rate of taxation increases for individuals who earn more money. For example, incomes between $50,000 and $80,000 might be taxed at 20 percent, while incomes between $300,000 and $1,000,000 would be taxed at 35 percent.—was fair. As the size of the federal government increased in future decades, tax rates also increased while the exemption level declined. As a result, larger percentages of Americans were required to pay federal income taxes, resulting in greater public awareness regarding federal tax policies.

A second goal of the Populist Party of the 1890s was a constitutional amendment requiring direct election of US senators. Although the Populists had failed to pass this measure, their ideas continued to generate support leading to the approval of the Seventeenth Amendment in April 1913. The amendment ended the practice whereby state legislatures selected the delegates to the Senate. Instead, popular elections in each state would determine each senate seat. Other goals of the Populists were realized during the early years of the Wilson administration, such as the Adamson Act establishing the eight-hour day for railroad workers. The federal government also approved a measure providing financial compensation and reimbursement of medical expenses for laborers injured at work, although the measure only applied to federal employees.