1913—The Final Days of the Old Regime in the United States

In 1913, exactly a century ago, the United States was a flourishing, economically advanced country. Its real output per capita was the world’s highest. It produced a great abundance of agricultural products and was a leading exporter of cotton, wheat, and many other farm products. Yet it also had the world’s largest industrial sector, producing as much manufactured output as France, Germany, and the United Kingdom combined. It brought forth new technological marvels almost daily, and its cities featured well paved and lighted streets, automobiles, modern sewerage and water-supply systems, central electrical-supply systems, skyscrapers, street cars, subways, and frequent intercity train service. During the preceding fifty years, its real income per capita had grown by about 2 percent per year, on average, and its total real output by about 4 percent per year, on average. All races, classes, and regions participated in this progress. In 1913, the rate of unemployment was 4.3 percent, and the price level was roughly the same as its average during the nineteenth century.

Yet the United States in 1913 had no federal income tax, no central bank, no social security taxes, no general sales taxes, no Securities and Exchange Commission, no Equal Employment Opportunity Commission, no Department of Health and Human Services, no National Labor Relations Board, no federal this, that, and the other as far as the eye can see. Except for restrictions on Chinese and Japanese immigration, nothing but perfunctory health examinations impeded the free flow of foreigners into the country, and hundreds of thousands arrived each year, mostly from Europe. All governments combined spent an amount equal to about 7 percent of GDP; the federal government’s part amounted to only about 3 percent of GDP. Local governments were the biggest actors in terms of regulations and expenditures. The average American had no regular contact with the federal government aside from the postman and little or none with the state and local governments aside from the school teachers and the public streets. The country was on an official gold standard. Gold and silver coins circulated as normal media of exchange, and gold certificates issued by individual commercial banks, as well as their checking accounts, served the public for making larger transactions.

Never before had so much prosperity been attained by a comparably large population, and never before had so many people enjoyed such spacious freedom to live their lives and go about their business as they chose in a context where voluntary transactions dominated economic affairs and governments were relatively inconsequential factors in the economy and society. Such was the garden in which the serpents of war would soon whisper in the ears of politicians and government officials, who shortly afterward would blast this auspicious scene to smithereens.

The Old Regime would then be lost forever, as the war’s pervasive legacies insinuated themselves permanently into economic and political life. Gone forever was a world that, notwithstanding its many defects and crying needs, had been traveling a sure road to improvements and remedies largely within a nurturing spontaneous order. Henceforward, the intrusion of politics and governments into ever more aspects of social and economic life would poison the people’s public affairs and turn them away from creative activity and self-responsibility toward more and more political conflict, suppression of freedom, and plunder of one another.

ADDENDUM: I wrote above that “the United States in 1913 had no federal income tax [and] no central bank.” Yes, such was the case when the year began.

However, on February 3 the Sixteenth Amendment to the U.S. Constitution was ratified, and on October 3, as part of a broader revenue measure, the government enacted a federal income tax law. Tax returns under this act were due by March 1, 1914, for the ten months beginning on March 1, 1913, and so in early 1914 the government began to collect the amounts due for the 1913 tax year. (Readers may find the tax form 1040 for 1913 interesting. It consists of 3 pages plus a page of instructions. Under this schedule, taxes were due from only a small fraction of the population; more than 96 percent of the people owed nothing. The tax rate was 1 percent of taxable income, with surtaxes rising to a maximum of 6 percent on substantially higher incomes. In perusing the tax rates, bear in mind that the dollar had about 20 times more purchasing power in 1913 than it has today.)

Also, on December 23, 1913, the government enacted the Federal Reserve Act. Considerable time was required to organize the Fed, however, and it did not begin its operations for about a year.