America's Fiscal Constitution (25 page)

While Roosevelt worked as an effective partner with Hanna on the Panama Canal, he demonstrated his independence from Republican leaders by filing an antitrust suit against some of the party’s largest donors. In February 1902 Hanna and the party’s other congressional leaders were stunned to learn that the president had authorized the Justice Department to sue banker J. P. Morgan and the Northern Trust Company, a combination of the Northern Pacific and Great Northern railroads. The federal government accused them of violating the Sherman Antitrust Act, a law that had been largely unused since its passage in 1890.

After hearing of the lawsuit, Morgan and other financiers traveled by private rail car to Washington to plan a response. Roosevelt disarmed the agitated tycoons by inviting them to share a drink at the White House when their train arrived at ten p.m. The next morning Roosevelt met with Morgan, who wanted to determine whether other attacks on his interests—particularly the Steel Trust—would follow. Roosevelt assured him that the legal action was not personal and that the Steel Trust had nothing to worry about unless it had “done something that we regard as wrong.”
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Morgan and his colleagues realized that while they could talk frankly with the new president, he was subservient to no one. Americans applauded their president’s courage in taking action against some of the nation’s most powerful businessmen.

Roosevelt also broke new ground in labor relations in 1902. Previous administrations had deployed federal marshals—armed with injunctions issued by federal courts—against striking workers. In the fall of 1902, during a crippling and violent coal miners’ strike, Roosevelt invited mine operators and union leaders to meet with him to find common ground. Many in Congress called for the federal government to take over the mines to avoid a winter coal shortage. Roosevelt instead suggested arbitration by a neutral party, such as former Democratic president Grover Cleveland. After the coal companies rebuffed Roosevelt’s offer, J. P. Morgan showed the president that he, too, knew how to wield power. Morgan, whose partners controlled many of the largest customers of the mine owners, brought the owners to the negotiating table.

Roosevelt’s antitrust and labor initiatives were bold but not expensive. His vision of a larger navy and more assertive foreign policy had a higher price tag. The president previewed his new foreign policy in 1902, when England and Germany, the world’s two greatest naval powers, sent warships to Venezuela in order to collect a past-due debt of $70 million. The president dispatched an American naval fleet to Venezuela, informed the German ambassador to the United States that an occupation of that country would lead to war, and then offered to personally arbitrate the dispute. The ambassador politely explained that Kaiser Wilhelm had already considered and rejected that alternative. The president, who considered the German ruler an insecure bully, curtly responded by giving Germany a deadline to comply with the American “offer.”

The rattled German ambassador called a mutual friend to ask whether this inexperienced American leader could possibly be serious about
declaring war over Venezuela. Yes, he was told, Roosevelt was a new sort of American president. The night before Roosevelt’s deadline, the German Reichstag met in special session, reversed the kaiser’s position, and consented to arbitration. Immediately after the Germans backed down, Roosevelt welcomed a high-level German delegation to Washington and impressed its members by reciting—from memory—entire passages from German literature. Roosevelt began to define a new, global role for the United States, one supported by a stronger military.

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When he was just twenty-four years old, Roosevelt wrote
The Naval War of 1812
, which criticized Albert Gallatin’s limitations on the navy. As recently as 1879, when the United States considered influencing the outcome of a war between Peru and Chile, some wondered whether Chile’s navy was stronger than that of the United States. A naval buildup started when Roosevelt served as McKinley’s assistant secretary of the navy. Total military spending in 1897 was $84 million, about the same level it had been for the previous twenty years. By 1908, Roosevelt’s last full year in office, spending had soared to $115 million for the navy and $156 million for the army.
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Roosevelt requested more battleships in his message to Congress in December 1902. The Venezuelan crisis and Roosevelt’s popularity prompted Congress to fund five new battleships, a substantial increase. In March 1905 Roosevelt managed to obtain funding for a fleet consisting of twenty-eight battleships, which he said would allow the country “to rest and merely replace the ships which are worn out.”
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The president, however, did not rest long in his pursuit of a stronger navy. In 1906 he asked Congress to fund new battleships that could compete with a the superior, turbine-driven British design. Roosevelt also instructed a skeptical War Department to purchase several airplanes, a recent invention, to test their military potential.

In 1907 a fleet of sixteen modern American battleships headed out to sea from the Chesapeake Bay.
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Roosevelt directed the battleships—referred to as the Great White Fleet on account of their fresh coats of white paint—to display American strength abroad after showing the flag at major US port cities. Congress had not approved funds to finance that voyage, but Roosevelt reckoned it would be forced to pay for the return of the fleet. Because of the enduring power of the American Fiscal Tradition, no
federal leader even considered borrowing money to pay for the fleet or its routine operating expenses. Within thirty-eight years of the Great White Fleet’s tour, the US Navy would dominate the world’s oceans and continue to do so—at great cost—until the present.

Many congressional leaders indulged Roosevelt’s naval and foreign policy on account of his popularity. He weakened Bryan’s hold on populists and elevated the influence of progressive reformers within the Republican Party. The president handpicked the 1908 Republican presidential nominee, William Howard Taft. Taft had been his loyal lieutenant but had never previously been elected to public office.

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AXES AND THE
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ANIC OF
1907

Import tax revenues had steadily declined for decades in relation to the total value of imports and the size of the US economy. Ever since the nation had become a net exporter, business leaders realized the benefits of lower barriers to international trade. Pressures to alter the GOP’s historical view of import taxes had begun shortly before Roosevelt entered the White House. In 1901 Republican leaders in Iowa had unanimously endorsed reductions in import taxes obtained through reciprocal trade agreements with other nations. In a speech delivered the day before he was assassinated, President McKinley noted that “the period of exclusiveness has passed. The expansion of our trade and commerce is the . . . problem.”
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Since import taxes represented 40 percent of federal revenue, lowering these taxes would require new offsetting sources of federal income.
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Taxes—who pays them and how much—are often at the heart of any party’s budget policy, and Republican leaders found it awkward to shift from their historical defense of import taxes. It would also be difficult to cut import taxes without reducing outlays for the emblematic Republican program of pensions for the families of Union Civil War veterans. By 1902 these pensions cost $138 million, an amount greater than outlays for the army or navy.
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The Senate’s Republican old guard worried that a reduction in import taxes would open the door for an income tax, which was favored by Democratic populists and a rising number of Republican reformers. Republican congressional leaders sought to reach an understanding with Roosevelt on tax policy. They could not dictate to the popular president; they needed
his help in the West before the 1902 midterm elections, especially to compensate for expected Republican losses in urban areas populated by ethnic Democratic majorities. Roosevelt, in turn, sought cooperation from his party’s Senate leadership in order to pass legislation.

On September 16, 1902, the president hosted a meeting with Aldrich, Allison, and Hanna. No one took notes, but Roosevelt’s words on his campaign tour after the meeting describe their compromise on tax policy. He said the federal government should “treat the tariff as a business proposition and not from the standpoint of any political party. . . . But neither our nation nor any other can stand the ruinous policy of readjusting its business to radical changes of the tariff at short intervals.”
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Roosevelt proposed no major tax bill during his eight years in the White House. However, the days of raising revenue using higher import taxes were over.

After his landslide election victory in 1904, Roosevelt outlined his vision of a tax system that included a “progressive tax on all fortunes.”
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Two years later, he endorsed a “graduated inheritance tax, and, if possible, a graduated income tax.”
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According to the most popular Republican president thus far in the nation’s history, “the man of great wealth owes a peculiar obligation . . . because he derives special advantages from the mere existence of government.”
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Aldrich did not bring serious tax legislation to the Senate floor until after Roosevelt left office. To a degree unanticipated by Aldrich, public opinion on tax issues by then had shifted dramatically in Roosevelt’s direction. Aldrich’s tax bill was prompted by the need to offset federal revenue lost during a brief recession, the Panic of 1907.

The first major downturn in the Panic of 1893 also demonstrated the need to modernize the nation’s monetary and budgetary system. The recession began with a fall in copper prices, which severely affected some Latin American economies, their European creditors, and investors in copper stocks. These investors included the president of the Knickerbocker Trust Company, one of many large trust companies that had constituted a parallel and unregulated banking system, similar to the largely unregulated financial institutions that played a leading role in the Great Recession of 2008. National banks in New York in 1907 had assets of $1.8 billion compared to the $1.4 billion in trust companies.
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News of copper speculation by Knickerbocker’s president caused a run on its deposits.

Depositors lined up to withdraw funds from other New York trust companies and banks. News of the financial panic reached J. P. Morgan
at a church retreat in Virginia and Roosevelt at a bear hunt in Louisiana. Roosevelt continued hunting, while the seventy-year-old Morgan returned to New York. Morgan convened the nation’s leading bankers and assigned them tasks such as auditing the strength of various banks. Treasury Secretary George Cortelyou, who attended Morgan’s New York meetings, used Treasury deposits to strengthen the liquidity of certain banks. Morgan was a whirlwind of activity, raising more than $25 million for loans to brokers, keeping the New York City government solvent, and enlisting New York’s clergy to urge depositors to remain calm.

These prompt actions facilitated a swift recovery from the recession, but not before the downturn lowered federal revenues and produced the first federal budget deficit in years. The federal government used its cash reserves to avoid incurring debt. The Panic of 1907 led to reforms of the tax, monetary, and budgeting systems that would provide policy tools of vital importance to future federal leaders.

Immediately after Taft’s inauguration in March 1909, the president met with Senator Aldrich and House Speaker Cannon to discuss the need to close the budget deficit. That month Congress passed a resolution instructing the “Secretary of the Treasury [to] advise Congress how . . . the estimated appropriations could with the least injury to the public served be reduced or . . . new taxes as may be necessary to cover the deficiency.”
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Even though his party held sixty of the ninety-two seats in the Senate, Aldrich lost control of the debate over his bill that raised import taxes. A group of Republican senators—led by Senator Robert La Follette of Wisconsin and Allison’s successor, Albert Cummins of Iowa—lined up support in both parties for the addition of an income tax to Aldrich’s bill. Aldrich sought President Taft’s advice. Taft and William Jennings Bryan, his Democratic opponent for the presidency, both supported a federal personal income tax and lower import taxes during their 1908 campaigns.

Aldrich agreed to Taft’s recommendation of a new corporate income tax and a constitutional amendment permitting a personal income tax, subject to state ratification. Within days a corporate income tax bill passed the Senate, by a vote of 59 to 11. Aldrich’s resolution for a constitutional amendment that allowed a personal income tax passed the Senate unanimously.

Progressive leaders resented that Taft had refused to lead their fight for the income tax. The president was far more forceful in fighting on behalf of another progressive cause: establishing a modern and transparent federal budget process. This initiative began in 1909, when Congress requested
a report from the administration about how to balance the next budget. Treasury secretaries since Albert Gallatin had annually reported on the prior year’s spending and revenues, while various executive departments provided information about estimated future needs directly to congressional committees. Treasury Secretary Franklin MacVeagh recommended the use of a formal budget process that included annual total spending and revenue targets. He explained that budgets based solely on informal coordination between the executive and legislative branches, as they had been during Hamilton’s tenure, “could never have lasted and cannot now be instituted.”
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