The Tariff:

A. Before 1861, northeastern industrial interests had lacked the political power to impose a tariff on the South and West.

1.      The tariff had two central functions:

a.      to protect American producers from foreign competition,

b.      and raise moneys for the federal government (and political parties that used customs appointments as a source of boodle).

c.      As these funds accrued, the GOP used them to tie Civil War veterans to them through a generous veterans pension system – one Theta Skocpol argued functioned as an early national welfare system.

B. Raising tariffs:

1.      1867 wool tariff

2.      1897 Dingley Tariff

C. As the tariffs rose, Midwestern agrarians who profited little from the policy began to move towards their southern counterparts, who had always opposed it.

1.      Agricultural producers in these areas did not need protection, as they were low-cost global producers.

a.      Southern cotton represented half of the value of American agricultural exports.

b.      Wheat, flour, meat were highly competitive Midwestern items.

c.      Tobacco was a border-state product that needed no protection.

2.      Payne-Aldrich Tariff, 1909

a.      In the 1908 elections, both parties promised to adjust the tariff, which for the pro-tariff Republicans meant a slight downward shift.

b.      Midwestern insurgents wanted a “scientific” tariff set by a commission of experts, protecting only those strategic industries that were vulnerable to international competition.

c.      When Nelson Aldrich of Rhode Island imperiously introduced a bill in the Senate to adjust the tariff upward, insurgent Republicans in the Midwest rebelled – apart from corn- and wheat-belt Republicans (who feared Canadian competition).

i. They also attempted to insert an income tax to compensate for the difference.

ii. But they failed to overcome the Republican Old Guard, supported by the Pacific and Mountain states.

d.      Finally, a compromise was reached, one which:

i. provided for a constitutional amendment to provide for an individual income tax,

ii. kept duties high on cotton, wool, and silk goods along with raw wool and sugar.

iii. Some reductions were made in iron and steel products.

e.      However, due to discontent in the Midwest in particular, Republicans lost 50 seats in the House in the congressional elections in 1910.

D. The Underwood Tariff, 1913:

1.      As a result of their Wilson-led triumph in the 1912 elections, Democrats led the fight to reduce tariffs, and did so by reestablishing a caucus designed to discipline the party’s heterogeneous membership.

2.      The Underwood Tariff cut duties across the board – an average of 26% over Payne-Aldrich.

3.      It made wool, iron, coal, lumber, meat, lumber products, leather boots and shoes, wood pulp and paper, wheat, and most agricultural implements and supplies duty free.

4.      An income tax replaced lost income to the state.

E. The Revenue Act of 1916:

1.      This was a revision of the tax provisions of the Underwood Tariff, one opposed by the Republican core.

a.      It increased the graduation of the income tax, doubling the rate on incomes of $40,000 and above.

b.      It added an inheritance tax.

2.      Democrats argued that if the Republicans wanted war, they should pay for it.

3.      It also proposed a tariff commission.

            Banking and Credit:

F. Postal savings system:

1.      Agrarians called for this only if a system of depositors’ insurance could not be worked out – a means of protecting small accounts from banking failures.

2.      Aldrich devised a plan to sponsor a system that could be used to siphon off these deposits in support of his project to propose a central banking system.

a.      Despite Democratic and insurgent Republican opposition, he managed to get legislation that gave the President the authority to withdraw the funds for investment in US bonds.

b.      But it also required that 65% of deposits be placed with local banks, barring a presidential decree.

3.      The bulk of the deposits were made in the large cities of the industrial northeast.

a.      These investments were secure.

b.      But they earned substantially below market rates (in contrast to Germany, for instance).

G. The Federal Reserve Act (1913):

1.      Though eastern elites had long championed a central banking system, the Federal Reserve Act was not the institution they wanted, but rather one strongly influenced by agrarian Democrats.

2.      The Aldrich-Vreeland Act of 1908, passed in the wake of the Panic of 1907, set up a National Monetary Commission (NMC), to recommend banking reform.

a.      Aldrich, who headed the NMC, drew up a bill in 1910 after a secret meeting with NY bankers Paul Warburg, Frank Vanderlip, and Henry Davison, along with Harvard economist A. Piatt Andrew.

b.      It proposed a National Reserve Association consisting of 15 regional branches, capitalized by subscribing banks, and controlled by a national directorate.

c.      Its directors would be given the power to set the discount rate, issue currency, and control open-market operations.

d.      A governor, appointed by the President, was to oversee the entire operation.

3.      However, agrarians -- congenitally suspicious of monopoly – objected to the centralized, private character of the proposal.

a.      Above all, they wanted public control.

b.      House Democrats worked out an alternate proposal under the leadership of Congressman Carter Glass of Virginia, who worked closely with Wilson.

i. William McAdoo, Secretary of the Treasury, proposed a rather radical bill, a Federal Bank issuing US currency, backed by the taxing authority of the government.

ii. The agrarian Bryan wing of the party exercised considerable influence as well.

c.      Frank Vanderlip worked with the Banking Committee in an effort to revise what he held to be the most objectionable parts of the Glass bill.

i. He proposed to centralize banking decisions to greater degree, but accepted that the reserve bank would not be privately held (as the bankers wanted).

ii. He increased the gold reserve requirement from 33.3 to 50%, and made the currency redeemable only in gold, in – an effort to limit money creation (and thus inflation).

iii. He raised the dividends of the bank’s stockholders from 5 to 6%.

4.      After extended negotiations, first within the Senate, then between the Senate and House, the Federal Reserve Act passed in the House 298-60 and the Senate 42-25.

a.      Key to formulation and passage of the legislation was agrarian support – with core Democratic support – for a public institution that issued paper money and facilitated the expansion of the money supply.

b.      The northeastern core got a centralized bank, one with some restraints on the creation of money.

c.      The system set up

i. a Board of Governors

ii. up to12 regional Federal Reserve banks

iii. a Federal Open Market Committee (this evolved later),

iv. a bankers’ Advisory Council

v. and a membership consisting of several thousand subscribing banks.

d.      The Fed had three instruments for adjusting the money supply:

i. altering the discount rate, which in turn influences the interest rates charged by the banks (in turn, influencing loans);

ii. changing the reserve requirements;

iii. engaging in open-market operations – meaning the purchase and sale of government securities to member banks.

e.      The Federal Reserve Board consisted of:

i. a comptroller,

ii. a treasury secretary,

iii. five additional geographically diverse members with ten-year terms appointed by the President.

5.      In the end, agrarians, bankers, and state officials all got something from the legislation

a.      Ultimately agrarians trusted government more than Eastern bankers to govern credit and money, in part, because of their capacity to alter the government’s policies through the ballot box.

b.      Farmers got expanded money and credit, bankers got a centralized clearinghouse and a pooling of reserves, and government officials enjoyed greatly expanded powers.

H. Farm Credit Legislation:

1.      The Federal Farm Loan Act of 1916 created 12 Federal Land Banks, after the model of the Federal Reserve.

2.      The act provided up to five-year loans to farmers based on their land and/or improvements at an interest rate no higher than 6%.

3.      It had a huge and almost immediate effect in agrarian America.