The great con of 1913

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Sources
The Meeting at Jekyll Island
16th Amendment to the U.S. Constitution: Federal Income Tax
The Panic of 1907
Birth of the Fed • Jekyll Island, Georgia
Purchasing Power of the U.S. Dollar

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The largest check I've ever written was to the Internal Revenue Service. It all began in 1913 when a new tax was explicitly designed as a tax on the rich, sparing the vast majority of working- and middle-class Americans entirely.

The following content is organized into subsections for greater clarity.

Who was taxed?

Initially, only the wealthiest Americans were taxed — less than 1–3% of the population (typically those earning well above average wages, as the typical worker earned around $800–$1,000 per year at the time).

How much were they taxed? Most affected individuals paid just the base 1% rate on income exceeding the exemption. Only very high earners faced the additional surtax, with the maximum 7% rate applying solely to the ultra-wealthy.

Conspiracy

So, in 1913, the U.S. government quietly enacted two transformative laws: the 16th Amendment established a permanent federal income tax, initially sold as a tax only on the rich as noted above, and the Federal Reserve Act created the central banking system, drafted in secret by powerful bankers on Jekyll Island in 1910. Although it sounds like a conspiracy theory, the conspiracy was very real and well documented as a major turning point in American history.

Promised as solutions to financial panics and inequality, these changes enabled massive money creation, causing the dollar to lose ~97% of its purchasing power since 1913. This means prices have risen roughly 33 times since 1913, so, again, the dollar has lost about 97% of its purchasing power over that period.

Trickle-down income tax

The income tax expanded rapidly—especially during wars—to burden most working Americans through bracket creep and withholding, while the Fed's policies inflated asset prices, rewarding capital owners and transferring wealth upward. What began as targeted reforms became a self-sustaining system favoring financial elites over wage earners.

What arguments were made to support the introduction of the federal income tax and the founding of the Federal Reserve?

Rapid Industrial Growth and Banking Fragility

In the late 19th and early 20th centuries, the United States experienced explosive industrial expansion. Steel production accelerated, railroads connected coasts, and oil fields in Pennsylvania yielded vast resources.

As noted above, a small circle of industrialists and financiers, including figures like Rockefeller, Carnegie, Morgan, and Vanderbilt, built immense fortunes. Beneath this prosperity, the financial system lacked a central authority and suffered repeated crises. Earlier attempts at national banks had failed due to public distrust of concentrated power. Without a unified mechanism for liquidity, panics struck roughly every 15 years, causing bank failures, factory closures, and widespread hardship.

The Crisis That Sparked Reform

The Panic of 1907 proved especially severe. It began with a speculative attempt to corner United Copper stock that collapsed, triggering runs on New York trust companies. Stock values dropped sharply, economic output contracted, and clearinghouses restricted cash payments. Private banker J.P. Morgan, then 70, organized a rescue by gathering leading bankers in his library, reviewing troubled institutions, and securing commitments for emergency funds. His intervention halted the collapse but highlighted the risks of depending on one individual’s actions. Congress responded by creating the National Monetary Commission, chaired by Senator Nelson Aldrich, to study European central banking systems.

And we're off to the races.

The Private Planning Session

In November 1910, Aldrich and a small group of influential bankers—including Henry Davison of J.P. Morgan & Co., Frank Vanderlip of National City Bank, and Paul Warburg—traveled secretly to the Jekyll Island Club in Georgia. Using first names and a hunting trip as cover, they drafted the basic framework for a new banking system over several days of intensive work. Their goal was to create a structure that would stabilize the currency while protecting major institutions from growing competition by state-chartered banks and self-financing corporations.

Birth of the Federal Reserve

The plan evolved into the Federal Reserve Act, passed by Congress on December 22, 1913, and signed by President Woodrow Wilson the following day—shortly before the Christmas recess when many lawmakers had left Washington. The legislation established 12 regional reserve banks under a central board, designed to appear decentralized and publicly accountable while providing elasticity to the money supply. Benjamin Strong, who had assisted Morgan during the 1907 panic, later became a dominant figure at the New York Federal Reserve Bank.

The 16th Amendment and Income Tax

Earlier in 1913, on February 3, the 16th Amendment was ratified, authorizing Congress to levy income taxes. The Revenue Act of 1913 implemented this power with high exemptions that initially shielded most wage earners. Less than 1 percent of the population paid any tax that first year, with rates ranging from 1 percent to a top marginal rate of 7 percent on the highest incomes. Lawmakers promoted it as a fairer replacement for tariffs, which raised consumer prices, and as a means to ensure wealthier individuals contributed more.

How the Systems Evolved Over Time

Both reforms expanded far beyond their original scope. World wars drove sharp increases in income tax rates and reductions in exemptions. By World War II, the top rate reached 94 percent, and payroll withholding made the tax a routine deduction for most workers. The Federal Reserve gained authority to expand the money supply, contributing to a long-term decline in the dollar’s purchasing power. As noted earlier, estimates based on consumer price data show the dollar has lost approximately 97 percent of its value since 1913 and it continues to lose vale.

Wealth Effects and Interconnections

Monetary expansion has tended to boost asset prices such as stocks and real estate, benefiting those who already hold capital, while wage earners face ongoing erosion in real purchasing power. Inflation can act as an indirect tax, and bracket creep pushes nominal income gains into higher tax brackets. The combination has supported large-scale government borrowing; national debt grew from about $2.9 billion in 1913 to trillions in later decades. The national debt is currently about $39 trillion. Here's a link to a national debt clock. Interest payments on that debt flow primarily to bondholders, often financial institutions and wealthy investors, funded by taxes collected broadly from working Americans.

Intended Goals Versus Long-Term Outcomes

Proponents viewed the Federal Reserve as a safeguard against banking panics and the income tax as a tool to reduce inequality. Real problems existed, including frequent financial instability and regressive tariffs. However, the resulting institutions developed self-sustaining momentum. The Federal Reserve received a permanent charter in 1927, and the income tax became the dominant source of federal revenue, shifting from a narrow levy on high earners to a broad-based system.

Reflections on Structural Design

These 1913 measures created enduring mechanisms for managing money and raising revenue. While alternatives carried their own risks, the systems have produced uneven effects, favoring asset owners in periods of monetary growth while placing consistent burdens on wage income. The structures reflect the incentives and perspectives of their architects, who addressed immediate challenges but could not fully anticipate century-long consequences. Today, they remain central to ongoing discussions about economic fairness, monetary stability, and fiscal policy in the United States.

Opposition

Conservatives and libertarians generally oppose both income taxes and the Federal Reserve. (I consider myself a conservatarian). Read The Case Against the Fed by Murray N. Rothbard here ►

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