In anticipation of
a victorious ending of World War II against the
Axis powers of Germany, Italy and Japan,
representatives of 45 allied countries attended a
policy conference called by the United
States as the leading power,
at the summer mountain resort town of Bretton
Woods, New Hampshire in northeast United States in
July 1944.
The purpose was to attempt to
create supranational financial institutions that
would help moderate, if not eliminate, the
geo-economic causes of war and to forge a post-war
framework for international monetary cooperation
to support international trade and finance.
The traditional geo-economic causes of
war, identified as militant international
competition based on aggressive economic
nationalism in a global quest for imperialistic
empires to exploit distant colonies with
less-developed economies, were expected to be
eliminated after World War II through the new
economic institutions to regulate free trade in
peace. International trade was regarded as an
effective economic means to avoid war.
The
Bretton Woods international monetary regime
established in 1945 was based on a fixed exchange
rate of national currencies pegged to a
gold-backed dollar at US$35 per troy ounce of
gold. Mainstream economic theory at the time did
not consider free cross-border flow of funds
necessary or desirable for promoting trade or
economic development. Foreign exchange rates were
to be intermediated only through transactions
between central banks of trade participating
nations. No private foreign exchange markets were
permitted or existed.
Twenty-six years
later, in 1971, the Bretton Woods monetary regime
was abandoned by president Richard Nixon when the
US suspended the dollar's peg to gold. This was
done because US fiscal deficits from overseas
spending were causing a massive and unsustainable
drain in US gold holdings.
On the
geo-political side, prospects of future full-scale
wars were expected by conference attendees to be
greatly reduced through non-violent conflict
resolution within a new supranational political
institution called the United Nations, based on
the principles of democracy, self-determination of
peoples and universal human rights for
individuals.
Creation of the IMF and
World Bank The outcome of the 1944 Bretton
Woods Conference was the creation of an
International Monetary Fund (IMF) to facilitate a
new post-war international monetary system to
sustain financial security with regard to balance
of payments among nations participating in
international trade.
An International Bank
for Reconstruction and Development (IBRD) was also
created to help war-torn Europe in post-war
reconstruction. To promote world trade against the
historical pre-war context of mercantilist
protectionism, participating nations of the
Bretton Woods Conference reached a decision to
meet regularly to develop supranational
institutions to promote and regulate international
free trade.
Creation of GATT and
WTO In October 1947, 23 countries followed
up with a six-months-long conference in Geneva,
Switzerland, to reach a multilateral General
Agreement on Tariffs and Trade (GATT) designed to
facilitate and regulate international trade
liberalization. GATT is a multilateral framework
for regulating international trade among some 150
participating countries that had agreed to
implement the idea of forming an International
Trade Organization (ITO) based on GATT.
A
draft charter for the ITO was produced based on
which the US, the world's strongest economy as a
result of being the only economy not severely
damaged by war in the previous decade, initiated
negotiations with 22 other countries that led to
commitments to reduce and regulate some 45,000
tariff rates.
Procedurally, GATT was
framed within existing provisions of US law as
incorporated in the Reciprocal Trade Agreement Act
(RTAA) that had been passed by congress and signed
into law by president Franklin D Roosevelt in
1934. Thus GATT did not require further approval
by congress.
By the RTAA of 1934, congress
gave the president special power to negotiate
bilateral and multilateral reciprocal trade
agreements with other countries. This power
enabled Roosevelt to liberalize US trade policy by
reaching bilateral and multilateral trade
agreements with other trading nations around the
globe. RTAA is widely credited by economists and
historians as the legal cornerstone for ushering
in the subsequent post-war era of liberal trade
policy that would evolve eventually into the
current globalized neo-liberal global trade regime
that emerged after the end of the Cold War.
Tariffs vs federal income
tax Historically, foreign trade had not
been a critically important part of the US economy
until 1913, an eventful year during which the
Federal Reserve System was created and a federal
income tax was instituted. Still, foreign trade
remained a peripheral sector in the US economy
until after World War II when the US economy began
to dominate the war-torn world economy by default.
Historically, US tariffs had been set at high
levels to provide revenue for the federal
government before the introduction of a federal
income tax.
One way to look at the
historical relationship between tariffs and income
tax is that US citizens have been asked to pay for
foreign free trade since 1913.
To raise
revenue to fund the Civil War, a temporary federal
income tax had been introduced in the North with
the Revenue Act of 1861. It was a flat tax of 3%
on annual income above $800. The following year,
this act was replaced with a graduated
(progressive) tax ranging from 3% to 5% on income
above $600 in the Revenue Act of 1862, which
specified a termination of federal income taxation
in 1866.
The Socialist Labor Party
advocated a graduated income tax in 1887. The
Populist Party "demanded a graduated income tax"
in its 1892 platform. The liberal wing of the
Democratic Party, led by Progressive leader
William Jennings Bryan, having advocated an income
tax provision in the Revenue Act of 1894, again
proposed a federal income tax in the platform in
his 1908 presidential campaign against Republican
William Howard Taft, a candidate hand-picked by
out-going president Theodore Roosevelt. Bryan lost
the Electoral College 321 to 162, his worst defeat
yet in his three campaigns for the presidency, and
did not carry any of the states in the industrial
northeast.
The provisions of the Revenue
Act of 1894, also known as the Wilson-Gorman
Tariff Act of 1894, required that, for a five-year
period, any "gains, profits and incomes" in excess
of $4,000 would be taxed at 2%. In compliance with
the Act, the New York-based Farmers' Loan &
Trust Company announced to its shareholders that
it would not only pay the tax, but also provide to
the collector of internal revenue in the
Department of the Treasury the names of all
shareholders who were liable for being taxed for
income under the Act.
Charles Pollock, a
Massachusetts resident who owned only 10 shares of
stock in Farmers' Loan & Trust, sued the
company to enjoin it from paying the income tax.
Pollock lost in the lower courts but finally
appealed to the United States Supreme Court, which
agreed to hear the case.
Since article I,
section 9 of the constitution gave the states the
power to impose direct taxation, the federal
government could impose direct taxes as well, but
only if those taxes were apportioned among the
states in proportion to their representation in
congress. In this case, the court examined a
national income tax passed by congress in 1894.
Pollock vs the Farmers' Loan & Trust
Co was decided by the Supreme Court together with
Hyde v Continental Trust Co of the City of New
York. The question was whether the federal income
tax was a direct tax in violation of the
constitution (article I, section 9). The court
ruled in the affirmative, that the Wilson-Gorman
Tariff Act of 1894 did violate the constitution
since it imposed taxes on personal income derived
from real estate investments and personal property
such as stocks and bonds; which was a direct
taxation scheme that had not been apportioned
properly among the states as required by the
constitution.
The court handed down its
decision on April 8, 1895, with chief justice
Melville Fuller delivering the majority opinion of
the court, ruling in favor of Pollock, declaring
as unconstitutional certain taxes levied by the
Wilson-Gorman Acts, such as those imposed on
income from property. The court treated the tax on
income from property as a direct tax. Under the
provisions of the US Constitution at that time,
such direct taxes were required to be imposed in
proportion to the size of each state's population.
The tax in question had not been so apportioned
and, therefore, was constitutionally invalid. The
decision was negated eight years later by the
adoption of the Sixteenth Amendment in 1913.
The Revenue Act of 1894 (Wilson-Gorman
Tariff Act - ch. 349, ง73, 28 Stat. 570, August
27, 1894) reduced the tariff rates slightly from
the rates set in the 1890 McKinley tariff, and in
exchange imposed a 2% income tax to make up for
the loss of federal revenue. Supported by the
Democrats, this attempt at tariff reform was
important because it imposed the first peacetime
federal income tax (2% on income over $4,000 or
$88,100 in 2010 dollars, which meant only fewer
than 10% of households would be required to pay
any income tax). The purpose of the federal income
tax was to make up for revenue that would be lost
to the Federal government by tariff reductions.
By coincidence, $4,000 would be the
exemption for married couples when the Revenue Act
of 1913 was signed into law by president Woodrow
Wilson in October, as a result of the February 25,
1913 ratification of the Sixteenth Amendment to
the US Constitution.
The Revenue Act of
1913, introduced by Wilson and passed by the
House, lowered tariff rates significantly as
promised in the Democratic election platform,
dropping the import tariff to zero on iron ore,
coal, lumber and wool, which angered US producers.
Protectionists in the senate added more than 600
amendments to the bill that nullified most of the
tariff reforms and raised tariff rates back again.
The "Sugar Trust" in particular pushed for higher
tariff rates on sugar that favored producers at
the expense of US consumers.
The Sixteenth
Amendment, brief in words, states: "The Congress
shall have power to lay and collect taxes on
income, from whatever sources derived, without
apportionment among the several States, and
without regard to any census or remuneration."
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