Today's image of the Progressive Party — the "Bull Moose Party" — is that it was a spoilsport effort on the part of Theodore Roosevelt, intended as revenge on the Republican Party that had betrayed him and progressivism. Roosevelt's lust for power was presumably so great that he sacrificed the good of the country and split the Republican Party, handing victory to the Democrats. The fact that a number of contemporary political cartoons and speeches depicted Roosevelt as a bullying, power-mad, big-stick-swinging, imperialist oppressor of less developed nations only confirms the myth. The depiction of a lunatic who thought he was Theodore Roosevelt in the film Arsenic and Old Lace (1944) did nothing to correct what has become a popular misconception.
Contrary to popular myth, however, Roosevelt thought long and hard before accepting the nomination of the Progressive Party. It is true that he was the only viable progressive presidential candidate, and to all intents and purposes was the Progressive Party. This does nothing to alter the fact that Roosevelt did not found the Progressive Party, nor was it as easy as some today might believe to persuade him to run for president.
The Progressive Party had its roots not in a fit of pique by Roosevelt, but in the formation in 1906 of the American Party in Utah by Senator Thomas Kearns. Kearns broke from the Republican Party when he and his followers felt that the Church of Jesus Christ of Latter Day Saints (the Mormons) had too much influence in Utah politics. Purged of its anti-LDS elements, the remnants of the American Party became the core around which progressives and moderate populists coalesced to form the Progressive Party in 1912, virtually forcing the nomination on Roosevelt. As Herbert Knox Smith related,
"Some time in 1911 I called upon Colonel Roosevelt at the Outlook office, on leave from Washington. I told him I was going home for a few days. He pounced down on me instantly: 'H.K., don't you dare go back to Connecticut and do anything for my nomination for the Presidency in 1912!' Then he said: 'I've had eight years of the Presidency. I know all the honor and pleasure of it and all of its sorrows and dangers. I have nothing more to gain by being President again and I have a great deal to lose. I am not going to do it!' — then he went to the window and looked out on Fourth Avenue for some moments, and turned and added with great emphasis — 'unless I get a mandate from the American people.' I know much better now than I did then what was before his far-seeing eyes as he stood there looking out over the housetops — the fierce strife ahead, the menacing issues lying within it, the far-reverberating results that would follow, the sacrifice that would be required of him.
"That mandate came. It became desperately clear to all Progressives early in 1912 that their accomplished advance was in imminent peril of recession. The pressure came down on Colonel Roosevelt, culminating in the appeal of the seven Governors on February 10, 1912. He accepted the call of his friends, the challenge of his familiar foes." (Herbert Knox Smith, "The Great Progressive," introduction to Social Justice and Popular Rule, by Theodore Roosevelt. New York: Charles Scribner's Sons, 1926, xiii-xiv)
The campaign of 1912 was hard and bitterly fought. This is not, however, the place to recap it. Suffice it to say that, with many Americans still in sympathy with progressivism — however much both Republicans and Democrats attempted to paint it as tantamount to socialism — Roosevelt came in second to Woodrow Wilson, the Democratic candidate. This was the best showing of any third party in American history.
For nearly a century, Republicans have blamed Roosevelt for splitting the Republican Party and handing the victory to the Democrats. This is as unjust as it is untrue. The fact is that relatively few Republicans who remained in the party after the initial split came over to the new Progressive Party. The diehards who remained in the Republican Party after the progressives walked out were not likely to desert the Old Guard, and voted the party line.
Despite that, Taft was never a viable candidate. Progressive Republicans and all Democrats, as well as populists and socialists viewed him as a tool of the reactionary elements of the Republican Party, firmly in the pocket of Nelson Aldrich and the financial interests that had caused the Panic of 1907. The Old Guard Republicans had worked without cessation during Taft's administration to reverse everything Roosevelt had accomplished. Taft had only managed to become president in the first place on the strength of Roosevelt's endorsement, and Taft had lost that as a result of his betrayal of the progressive cause.
The bulk of the voters "stolen" by the progressives came from Populist Party members and Democrats either disillusioned or fearful of the turn the parties seemed to have taken under William Jennings Bryan and others of a more radical, and certainly less ethical bent. If anything, Roosevelt split the Democratic Party, not the GOP, and gave the Democrats a salutary fright that kept the radicals at bay long enough to enact necessary financial and fiscal reforms without giving in to socialist pressure. Wilson, in fact, had to paint Roosevelt as a socialist in all but name, forcing himself into taking the progressive instead of populist position on many issues to maintain credibility, at the same time excoriating the progressives.
The Progressive Party lasted barely a year, and Roosevelt-style progressivism only a while longer, but it was a year that neither the Republicans nor the Democrats have ever truly forgotten. To maintain some standing in the eyes of the public, the Old Guard Republicans had to modify their hard-line stance — for a time. At the same time, the radical Democrats had to ameliorate their drive to what was socialism in all but name — again, for a time.
In a paradox with which conservative Republicans have yet, after a century, to come to terms, the progressive split saved the Republican Party from becoming a political nullity, a historical dead letter. By offsetting the Party's reactionary trend, Roosevelt forced the GOP in later elections to adopt a more progressive stance in order to offer a viable alternative to the resurgent Democrats. Simply to survive, the Party had to abandon the Old Guard in practice (however much lip service it might pay to them in public) and bring itself into the 20th century, all the while adhering in theory to an outmoded laissez faire capitalism along individualistic lines.
The fact that the Progressive Party had the only truly viable political platform in 1912 forced the two major parties to adopt elements of the platform, at the same time they denied they were doing any such thing. Each party depicted the progressives as virtual enemies of freedom and justice. Consequently, progressivism, like populism before it, became redefined in the years following the 1912 campaign as little better — if not worse — than outright socialism. Progressivism is defined as such today, with most people seeing no difference between progressivism and populism. Nevertheless, although the Progressive Party went down in defeat, it gained two major victories: the Federal Reserve System and the income tax.
This seems like an astonishing claim to make, especially in light of the egregious misuse of both institutions almost from the beginning. The fact of the matter is, however, that the fiscal and monetary system of the United States had not had even the pretense of being adequate since Andrew Jackson had "won" his war against the Second Bank of the United States in the 1830s. The reforms implemented by Salmon P. Chase during the Civil War had imposed an inelastic banknote currency on the country, and oriented the backing of the currency toward government debt instead of the present value of private sector hard assets, both existing and future.
The inelastic banknote currency and the deflation imposed after the Civil War to restore parity of the paper currency with gold smothered small investment and capital development, and thus the ability of many people to consume at an adequate level. At the same time, the already wealthy could create money virtually at will by having their privately issued bills of exchange accepted in trade and at the National Banks. The failure of consumer demand to keep up with the enormous increase in the production of marketable goods and services was the primary cause of the financial panics that periodically ravaged the country. As Roosevelt pointed out,
"The people of the United States suffer from periodical financial panics to a degree substantially unknown among the other nations which approach us in financial strength. There is no reason why we should suffer what they escape. It is of profound importance that our financial system should be promptly investigated, and so thoroughly and effectively revised as to make it certain that hereafter our currency will no longer fail at critical times to meet our needs." (Theodore Roosevelt, "The New Nationalism," Social Justice and Popular Rule. New York: Charles Scribner's Sons, 1926, 14)
The Federal Reserve System was designed specifically to address the twin evils of an inelastic banknote currency and the concentration of control over money and credit. In this it succeeded. The fact that the Federal Reserve was only permitted to operate as designed for a brief period of time is not the fault of the institution, but of the politicians who discovered a way to circumvent the intended prohibition against monetizing government debt through the misuse of open market operations in government securities.
Like the Federal Reserve, the income tax is a profoundly misunderstood institution. Many people believe that an income tax is unconstitutional in the United States. As we saw in Part V of this series, this belief is unfounded. Others maintain, with more credibility, that, if the federal government can simply create all the money it needs by emitting bills of credit that are purchased on the open market by the Federal Reserve, why do we need to have taxes at all? As Harold Moulton summarized this position, popularized through the general acceptance of Keynesian economics and the belief that the size of the public debt is of no concern,
"The implications of the new philosophy of public debt from the point of view of taxation are engaging. If the growth of the public debt is of no moment, one might at first thought be inclined to ask — Why go to all the trouble and expense of collecting taxes? Why burden the public with ever-increasing levies? Indeed, if the purpose of fiscal policy is not to balance the budget but to obtain the largest possible 'net income-creating' expenditures — as measured by the size of the cash deficit — why not promote the desired end by canceling all taxes?" (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 71.)
The reason why we presumably must have taxes, whether or not they are deemed necessary for revenue, is obvious, once we understand money and credit, and the plain fact that the issuer of whatever becomes money when accepted in commerce must own or have an enforceable claim on that which stands behind the bill. That is, a private drawer of a bill of exchange must own the present value of existing or future marketable goods and services on which the bill is drawn, while a government must reasonably expect to collect the future taxes that stand behind its "anticipation notes," the bills of credit it emits.
Taxes are not only a means of raising revenue for a government to defray legitimate expenses, they are also, by the fact that they are backed up by the State's power to coerce, a means of controlling people. "The power to tax is the power to destroy" (Justice John Marshall, McCulloch v. Maryland, 17 U.S. 316 (1819)) is an accepted legal and political maxim that any government with pretensions to ruling with the consent of the governed must keep in mind at all time.
Forgetting or ignoring this maxim, even Keynesians who insist that a deficit as large as twice GDP is nothing to worry about (ibid., 68) continue to insist on taxation as an important policy tool. This is not for fiscal purposes, however, but to restructure society to conform to Keynesian principles of how the economy ought to work . . . at least in the Keynesian analysis. The real reason for taxation shifts from revenue raising, to controlling people through redistribution and rewarding or punishing desired behavior. As Moulton explained,
"That a reorientation of thought with respect to tax policy would be necessary [given meeting all expenditure needs through deficit spending] is suggested in a statement already quoted: 'Once freed from the obsolete concept of the balanced budget, the larger uses of federal taxes can be creatively explored.' ("The Domestic Economy," Fortune magazine, December 1942, 16.) The suggested creative purposes are: (1) To regulate the distribution of income; and (2) to prevent inflation in periods of full employment. (Alvin H. Hansen, Fiscal Policy and Business Cycles. New York: W. W. Norton and Co., 1941, 175.)" (Moulton, op. cit., 72.)
The primary goal of the government within the Keynesian paradigm is to ensure that the economy runs smoothly for the benefit of everyone. The role of the central bank (the Federal Reserve) is, in the Keynesian framework, to finance government and to regulate the economy through manipulation of the currency — what Keynes described as the realization of Georg Friedrich Knapp's "chartalism," chartalism being a form of socialism developed in Weimar Germany.
In Keynesian economics (as well as Monetarist/Chicago and Austrian), all financing for new capital formation comes from existing accumulations of savings, that is, as a result of cutting consumption. With the government monopolizing the currency-issuing power of the central bank to inflate or deflate the currency to conform to policy demands, the tax system must be structured so as to encourage the rich to save to reinvest what they cannot consume.
Thus we have the paradox that the Federal Reserve, instituted to provide the country with a stable and elastic currency sufficient to meet the needs of private sector production and consumption by accepting private sector bills of exchange, is being used today to create money for non-productive government expenditures and politically motivated bailouts of failed companies by accepting government bills of credit. At the same time, the tax system, which was instituted to provide the government with sufficient revenue to meet legitimate expenditures, is being used to encourage private sector businesses to save for reinvestment.
Cutting consumption to finance new capital investment, however, reduces the feasibility of the new capital. In response, the government attempts to correct the fall in demand by further manipulating the currency and encouraging consumer indebtedness and non-productive speculation on the secondary securities market. This destabilizes the currency and makes productive activity even less attractive than before, encouraging hoarding of cash and low or negative rates of investment.
The functions of the central bank and the tax system have been exchanged, and the result is the utter chaos we see in today's global economy.
Abuse, however, does not invalidate use. Without an income tax, the chief source of income for the federal government was the tariff. (Land sales had ceased being a significant source of revenue in the 1850s.) Like a sales tax, however, a tariff is an "ad valorem" tax. An ad valorem — value added — tax gets passed through to the consumer and is thus heavily regressive.
All taxes are a disincentive to production to some degree. Value added taxes, however, are far more damaging in their effect than income taxes. An income tax lowers the reward to the producer, thereby taking away some of the incentive to produce if the residual to the producer after costs and taxes is deemed insufficient to compensate him or her for the time and effort expended.
A value added tax, however, directly attacks the ability of people to consume by raising prices, thereby decreasing demand. Since the demand for new capital — even replacement capital — is derived from consumer demand, a decrease in consumption removes the reason to produce at all, rather than simply making production less attractive.
To oversimplify, income taxes reduce the incentive to produce, where ad valorem taxes remove the incentive the produce. All things considered, an income tax is the lesser of two evils if the goal is to sustain healthy economic growth.
The new Democratic administration of Woodrow Wilson made fiscal and monetary reform a top priority. Principally this meant instituting the income tax and the Federal Reserve System. The income tax, of course, had been a socialist and populist demand for decades. Consequently it was relatively easy to get through Congress. It needed a constitutional amendment to make it possible to levy a direct tax without apportionment, but it was clearly in the interest of simple justice that the Constitution be amended for that purpose. It was hardly controversial, especially since a progressive income tax had been part of the Progressive, Populist, and Democratic Party platforms. The only holdouts were the admittedly powerful Old Guard Republicans, but even they could see the writing on the wall.
The Federal Reserve was another matter. The Old Guard Republicans had no problem with a central bank. The National Bank system had, in effect, served as a quasi-central bank since 1863, and they were perfectly satisfied with it — up to a point. The problem for the Old Guard was that the National Bank currency, albeit supplemented with the Treasury Notes of 1890, gold and silver certificates and gold and silver coin, was "inelastic," that is, issued in a fixed amount.
Further, although parity with gold had been restored, the National Bank Notes were backed with government debt. If the government got into financial trouble or needed funds on an emergency basis, the temptation might be too great for politicians to resist, and the country would again experience inflation as the government cranked up the printing presses.
Aldrich and his group were fully aware that the country needed an elastic and asset-backed banknote currency to ensure adequate liquidity in the system. The proposal that came out of the Jekyll Island meeting in 1910 would have provided that. It would also have put total control over the central bank in their hands, and removed virtually all government oversight or regulation of the currency.
The Federal Reserve System greatly improved on the Aldrich Plan, in the process becoming substantially different. Rather than simply centralize control over the National Bank system in the hands of New York's financial elite, headed by J. P. Morgan, the Federal Reserve retained the decentralized character of the National Bank system by establishing twelve regional Federal Reserve banks.
This was, in effect, a decentralized central bank, intended to issue twelve discrete regional currencies, the Federal Reserve Notes, but which necessarily passed at par with each other. The rediscount power of each regional Federal Reserve thus backed up each member bank, with open market operations taking care of the needs of non-member banks and businesses.
This meant that commercial banks, even individual businesses, were no longer dependent on retaining the goodwill of the House of Morgan if they wished to obtain banking accommodation. Morgan's refusal to accommodate the Knickerbocker Bank and Trust during a liquidity crunch (brought about by the president of the Knickerbocker using the bank's assets to speculate in copper) had caused the Panic of 1907. Morgan had taken the opportunity to drive the Knickerbocker into bankruptcy. The Federal Reserve ensured that this would no longer be possible.
The Federal Reserve was established largely through the efforts of Representative Carter Glass of Virginia, and Secretary of State William Jennings Bryan. Both realized that the Federal Reserve did not conform to the specific populist demand for free silver or an inflated paper currency backed with an increase in government debt — but it got them what they wanted, which was an adequate money supply to meet the needs of commerce to prevent financial panics and economic downturns.
The establishment of an elastic and stable currency was even an improvement over an inflationary currency. It did not satisfy the more radical populists and socialists, of course. Disregarding or rejecting the importance of private property, the radicals saw great advantage in an inflationary currency. Nevertheless, the removal of the problem of deflation was a major victory.
Thus, despite his defeat, Roosevelt did manage to stop the reactionaries from regaining lost ground. For a brief period, populism was modified by progressivism, getting through necessary reforms, especially the income tax and the Federal Reserve. The vision of America's Founding Fathers as articulated by Orestes Brownson and restored by Theodore Roosevelt seemed secure.
The restoration of the American Republic was, however, incomplete. It did not solve the growing problem of concentration of capital ownership. Even in its incomplete form the restoration would, as was the case with many things, not outlast the First World War.
The conflict between capitalism and socialism resurfaced almost immediately. The Great Depression of the 1930s and the Second World War accelerated the rise of the Welfare State, that ultimately unworkable combination of capitalism and socialism that, to all intents and purposes, is the institution of Hilaire Belloc's "Servile State," depicted, ironically, in The Servile State, published in 1912, just as the foundation to avoid the twin evils of capitalism and socialism seemed to have been solidly established in the United States.
In the late 1950s and early 1960s, the work of Louis Kelso and Mortimer Adler detailed a paradigm to reestablish the three principles of economic justice and the four pillars of an economically just society, solving the problem of how to finance widespread ownership of capital. In the early 21st century, Capital Homesteading gave a specific program to implement the vision of America's Founding Fathers.
The upcoming presidential campaign may very well determine whether the United States and the global economy will continue to dissolve into economic and social chaos, or whether the ideas of the Just Third Way will receive serious consideration.