Over a hundred years ago, on August 31, 1910, Teddy Roosevelt gave his famous “New Nationalism” speech in Osawatomie, Kansas. In that speech the former president projected his vision for how the federal government could regulate the American economy. He defended the government’s expansion during his presidency and suggested new ways that it could promote “the triumph of a real democracy.”
Roosevelt’s quest for “a real democracy” and for centralizing power was a clear break with the American founders. James Madison, for example, distrusted both democracy and human nature; he believed that separating power was essential to good government. He urged in Federalist No. 51 that “those who administer each department” of government be given “the necessary constitutional means and personal motives to resist the encroachments of others. . . . Ambition must be made to check ambition.” If power was dispersed, Madison concluded, liberty might prevail and the republic might endure.
Roosevelt argued in this speech that the recent rise of corporations gave businessmen too much economic control. Madison’s constitutional restraints, therefore, allowed too much wealth to be concentrated in too few hands. Redistribution of wealth by government, Roosevelt thought, would achieve “a more substantial equality of opportunity.”
The economic power of railroads triggered Roosevelt’s ire during his presidency. He was frustrated that railroads gave rebates to large customers. In effect, the railroads charged varying rates for carrying the same products the same distance. Roosevelt thought rates should be roughly similar for large shippers and small shippers, especially if the small shippers were far from major cities.
He posed the problem this way: “Combinations in industry are the result of an imperative economic law which cannot be repealed by political legislation. The effort at prohibiting all combination has substantially failed. The way out lies, not in attempting to prevent such combinations, but in completely controlling them in the interest of the public welfare.”
In practical terms, “completely controlling” railroads in the public interest meant that the Interstate Commerce Commission (ICC) would have power to set rates so that larger shippers would not get such big discounts on their high volume of business. James J. Hill, president of the Great Northern Railroad, argued that large shippers received higher rebates because their massive business created “economies of scale” for the railroads—that is, railroads could reduce their costs best when shipping large amounts of goods over the rails. The bigger shippers contributed more to the reduced costs of shipping, so they got larger rebates.
To Roosevelt and to the smaller shippers, rebates for the bigger shippers were “unfair money-getting” and have “tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power.” The founders may have provided a “right to life, liberty, and the pursuit of happiness,” but Roosevelt believed that the pursuit of happiness and private property were not absolute. “We grudge no man a fortune which represents his own power and sagacity,” Roosevelt said—but then added, “when exercised with entire regard to the welfare of his fellows.” If railroads were enriching themselves and larger shippers disproportionately to the smaller shippers, then Roosevelt believed such power to set rates needed to be limited: “The Hepburn Act, and the amendment [Mann-Elkins Act] to the act in the shape in which it finally passed Congress at the last session , represent a long step in advance, and we must go further.”
The Hepburn Act gave the ICC the power to reduce railroad rates and placed the burden on railroads to show their rates were reasonable. One intervention led to another. The railroads now had to prove that the rates they set were fair, so Congress created a Bureau of Valuation, which was empowered with a huge staff to value railroad property. According to historian Ari Hoogenboom, the bureau’s “final report, issued after a twenty-year study costing the public and the railroads hundreds of millions of dollars, disproved assumptions by Progressives that railroads were . . . making fabulous returns on their true investment.”
The lesson that Roosevelt learned from passing the Hepburn Act was that federal power was needed to break up those businesses that engaged in price discrimination. “The citizens of the United States,” Roosevelt said, “must effectively control the mighty commercial forces which they have called into being.”
Once Roosevelt established that the federal government should regulate the prices railroads charged for shipping, the next step was to intervene in other industries as well. “In particular,” Roosevelt argued in his speech, “there are strong reasons why . . . the United States Department of Agriculture and the agricultural colleges and experiment stations should extend their work to cover all phases of farm life. . . .” He added, “The man who wrongly holds that every human right is secondary to his profit must now give way to the advocate of human welfare, who rightly maintains that every man holds his property subject to the general right of the community to regulate its use to whatever degree the public welfare may require it.”
The shift from the individual rights of the founders to the community rights of the Progressives was a watershed transition in American thought in the early 1900s. But Roosevelt needed a federal income tax to help him redistribute wealth in the national interest. The title “New Nationalism” reflected his view that he and other leaders could determine the national interest and redistribute wealth and power accordingly.
Of the income tax Roosevelt said, “The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means, Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective—a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.”
Three years after Roosevelt’s speech, the Sixteenth Amendment, authorizing a federal income tax without regard to source, became law. Roosevelt had his wish—the 1913 tax was progressive: Most people paid no income tax, and the top rate was 7 percent. Roosevelt probably envisioned rates not much higher than that, but once Congress established the principle that some people could be taxed more than others, there was no way to calculate or determine what the national interest was.
Within one-third of a century after Roosevelt’s speech, the United States had a top marginal income tax rate of more than 90 percent.
When the individual liberty of the founders was transformed into the national interest of Teddy Roosevelt and the Progressives, we were only one generation away from a major threat to all our personal liberties. That threat still exists today.