Wilson came to the presidency in 1913 with clear and precise ideas about the urgent agenda for the reconstruction of the American political economy. Fortunately for him, the Democratic platform of 1912, largely written by Bryan, was either in conformity with Wilson's views or was sufficiently general in language to validate them as pure Democratic doctrine. Wilson believed deeply in the resourcefulness and capacities of the American people. He also believed that the energies of the aspiring middle classes had been stifled by industrial, commercial, and financial monopolists. Wilson laid out his program for reform, which he called the New Freedom, clearly and eloquently during the presidential campaign of 1912.
The first item on Wilson's legislative agenda was, inevitably, a drastic lowering of the high rates of the Payne-Aldrich Tariff of 1909. Low tariffs, to benefit consumers and stimulate competition, had been the most important Democratic policy since the Civil War, and Wilson had pressed the issue vigorously during the campaign of 1912. Moreover, the Payne-Aldrich Tariff stood as the single most glaring symbol of the power of special-interest groups over legislative policy.
Wilson sounded the call for reform in his address to Congress of 8 April 1913: "We must abolish everything that bears even the semblance of privilege or of any kind of artificial advantage." The House of Representatives was ready and eager to act. The Ways and Means Committee, led by Oscar W. Under-wood of Alabama, had already introduced a measure that cut most rates drastically, put most consumer goods and articles used by farmers on the free list, and (at Wilson's demand) put farm products, including wool and later sugar, on the free list. The Under-wood bill reduced the average ad valorem rates of the Payne-Aldrich Tariff from about 40 percent to about 29 percent; these figures do not take into account the additional reductions effected by the vast expansion of the free list. Finally, in order to compensate for the anticipated decrease in customs receipts, the Underwood bill imposed a modest income tax, the first under the Sixteenth Amendment. The House Democratic caucus made the bill a party measure, and Underwood pushed it through the House by a vote of 281 to 139 on 8 May 1913.
The main danger now was that the slim Democratic majority in the Senate would vanish if senators from the sugar- and wool-producing states bolted. But Wilson stood firm, and he enjoyed the full support of the Finance Committee, headed by Furnifold M. Simmons of North Carolina. Wilson, in a public statement on 26 May 1913, denounced the lobbyists who were hard at work trying to wreck tariff reform. This charge led to a Senate investigation of the private interests of senators that might be affected by tariff reductions. Under the white heat of this investigation and Wilson's steady pressure, Democratic opposition melted, and the Senate, on 9 September, approved what was now called the Underwood-Simmons bill by a vote of 44 to 37. The Senate bill actually decreased the rates of the Underwood bill by 4 percent and brought the general ad valorem rates to a level of about 26 percent; in addition, the Senate bill increased the maximum income tax in the Under-wood bill from 4 percent to 7 percent. The House accepted these changes, and Wilson signed the Underwood-Simmons Tariff Act on 3 October 1913.
The measure marked a significant change in federal economic policy. It reflected certain underlying changes in the American economy that had been taking place since the late 1890s, the most important of which was the transformation of the United States from an importer of goods and capital into the leading manufacturing nation of the world, with a surplus of capital and goods that had to be invested and sold abroad.
Much more complex, difficult, and urgent than tariff reform was the restructuring of the nation's banking and currency systems so as to assure a money supply adequate for the needs of a dynamic and growing economy and to open the channels of credit to all worthy borrowers. Bankers, businessmen, and economists had long pointed to the grave weaknesses of the national banking system, established during the Civil War. It tied the money supply in large degree to the gold supply and the bonded indebtedness of the United States, provided only a primitive means of mobilizing and transferring banking reserves from one section to another, and encouraged the concentration of reserves in Wall Street. The National Monetary Commission, headed by Senator Nelson W. Aldrich, Republican of Rhode Island, had exposed these weaknesses in its report to Congress of 1912, but its solution—a single national reserve bank, with branches, owned and controlled by the banks—only intensified the widespread fear that Wall Street wanted to fasten its control over the credit resources of the country.
Wilson had the main outlines of a currency and banking bill in mind at least by November 1912. He explained them a month later to Carter Glass, who would be the next chairman of the House Banking Committee. Wilson proposed the creation of a number of regional reserve banks owned and controlled by member banks. The "capstone," as Wilson called it, would be the Federal Reserve Board, which would control the money supply, determine interest rates, and perform all the functions of a central bank. Moreover, the legislation would provide for new currency, Federal Reserve notes, to be issued by the Federal Reserve banks upon a basis of gold and commercial assets so that the money supply would expand or contract according to the needs of producers and businessmen. Glass and his committee and technical advisers set to work and, about 1 May 1913, completed a draft of a banking and currency bill that conformed to Wilson's concepts.
Circulation of this draft set off a fierce controversy. Bryan could not accept the Glass bill because it stipulated that Federal Reserve notes would be the obligation of the reserve banks, not of the federal government. Neo-Populists in Congress went even further and demanded a reserve and currency system owned and controlled exclusively by the federal government. They were also adamantly opposed to the Glass bill's stipulation that three of the nine members of the Federal Reserve Board should be bankers chosen by the regional banks. McAdoo muddied the waters by drafting a bill that made the Federal Reserve system an adjunct of the United States treasury. Wilson moved decisively but calmly to regain control. He conceded Bryan's point and won his support. Wilson also accepted the advice of Louis D. Brandeis, progressive lawyer and economist of Boston, to the effect that all members of the Federal Reserve Board should be appointed by the president. Glass revised the bill accordingly.
Wilson went again in person before a joint session of Congress on 23 June 1913: "I have come to you, as head of the Government and the responsible leader of the party in power, to urge action now." Glass and Robert L. Owen of Oklahoma, chairman of the Senate Banking Committee, introduced identical bills in their respective houses on 26 June.
By this time, conservatives and many large-city bankers had mounted a furious assault on the Federal Reserve bill. They charged that it was socialistic because it deprived bankers of control over their own property, and they also said that the measure would politicize the banking and currency systems. Other assaults came from agrarian spokesmen because the Federal Reserve bill made no provision for the redis-counting of agricultural paper. Wilson quickly conceded the demand of the agrarians but held firm in his adherence to the principle of public control. The House passed the Federal Reserve bill by an overwhelming majority on 18 September. Wilson waited patiently as conservative Senate Republicans and obstructionist Democrats wore themselves out. The Federal Reserve bill passed the Senate by a vote of 54 to 34 on 19 December. Wilson signed the measure on 23 December 1913.
The Federal Reserve Act was the most important legislation of the Wilson era and one of the most important pieces of legislation in the history of the United States. The cornerstone of the new progressive political economy, it attempted to combine private initiative with public control. The act has been amended significantly only once, in 1935, in order to strengthen the Federal Reserve Board's power over interest rates and the money supply. The Federal Reserve system is still the most important economic instrumentality of the United States.
Achievement of Wilson's third great New Freedom goal—legislation to clarify and strengthen the generalities of the Sherman Antitrust Act of 1890—proved to be nearly as difficult as the writing and enactment of the Federal Reserve Act, but not because of any significant opposition to a stronger federal antitrust policy. The administration's original program was embodied in the antitrust bill introduced by Representative Henry D. Clayton of Alabama on 14 April 1914; in a measure to create an interstate commerce commission with no power to enforce its decrees, introduced by Representative James H. Covington of Maryland on 16 March 1914; and in a measure to give the Interstate Commerce Commission authority over the issuance of securities by the railroads, introduced by Representative Sam Rayburn of Texas on 7 May 1914.
The keystone of the administration's program, the Clayton bill, attempted to outlaw all known methods and devices used to strangle competition and achieve monopoly. It at once drew the fire of the leaders of the AF of L because it did not specifically exempt labor unions from prosecution for acts that the Supreme Court had said violated the Sherman Act. Wilson assuaged labor by permitting the addition of provisions that stipulated that labor unions and agricultural cooperatives should not be deemed to be conspiracies in restraint of trade and that sought to protect labor unions against indiscriminate court injunctions in strikes. The House passed the Clayton, Covington, and Rayburn bills by a huge majority, all on 5 June 1914.
Opposition to the Clayton bill came quickly and vociferously from small businessmen, who claimed that the measure provided jail terms for their day-today practices, and from legal authorities, who argued that it was impossible to legislate against every conceivable restraint of trade. Wilson again sought the advice of Brandeis, who urged him to take up a measure that he and a friend had drafted. Known as the Stevens bill, it outlawed all "unfair" competition and established the Federal Trade Commission (FTC) to investigate alleged unfair trade practices; most important, the Stevens bill authorized the FTC to issue cease and desist orders, which would have the force of court injunctions, to alleged perpetrators of unfair competition.
Wilson took up the Stevens bill at once, and a relieved House adopted it as a substitute for the Covington bill on 12 June 1914. Then the Senate undertook the task of generalizing the Clayton bill. The final text may not have "clarified" the Sherman Act, but it strengthened the Sherman Act in two important ways. It made corporation officials personally and criminally liable for the acts of their companies, and it gave individuals and corporations the benefit of decisions in antitrust cases instituted by the government. This meant they could almost automatically collect threefold damages from companies that had injured them once the government had won a suit against the latter. The Rayburn bill was abandoned when the outbreak of war in Europe in August 1914 totally demoralized the securities markets, but would be revived and incorporated in the Transportation Act of 1920. Wilson signed the Federal Trade Commission bill on 26 September 1914 and the Clayton bill on 15 October 1914. The reconstruction of the American political economy was now complete.
Labor and farm organizations and social reformers now increased their pressure upon Wilson and Congress for legislation to benefit special interests and protect disadvantaged groups. Wilson at first yielded gracefully and then championed their causes in 1916, in part because he would need the support of progressive Republicans in the presidential election of 1916 and in part because he was becoming increasingly convinced that federal authority alone could cope with some of the urgent social and economic problems of the day.
Wilson had nothing to do with the origins and passage of the two important pieces of social legislation in 1915. One was the Burnett immigration bill, which attempted to restrict immigration by imposing a literacy test upon newcomers. Organized labor had long demanded this legislation, but social workers and reformers were badly divided over it. Wilson lost no standing with progressives when he vetoed the Burnett bill on 28 January 1915. It was reenacted over his veto in 1917.
The second measure was the Seamen's Act, drafted by Andrew Furuseth, president of the International Seamen's Union, and championed in Congress by Senator Robert M. La Follette, progressive Republican from Wisconsin. The United States was obliged by treaties with twenty-two maritime nations to arrest their seamen when they deserted in American ports and to return them to their ships. The Seamen's Act freed all seamen in American ports from bondage to their labor contracts; in other words, once seamen were on American soil, they were free to leave their ships and accept whatever employment they chose. Bryan talked to La Follette and Furuseth on 2 March 1915. Wilson was so moved by Furuseth's plea and by the justice of the seamen's claims that he signed the bill on 4 March 1915, and the State Department duly abrogated the treaties.
The pace of Wilsonian reform quickened as the two great parties prepared for their national conventions in 1916. As has been said, Wilson pushed adoption of a comprehensive program to provide to farmers long-term credit, educational and other assistance, and good roads. He advocated and obtained congressional approval for the establishment of the Federal Tariff Commission, which progressives had long demanded. He appointed Brandeis to the Supreme Court and won the Senate's approval of the nomination after a grueling battle. Soon after the adjournment of the Democratic National Convention, Wilson pushed the Keating-Owen child-labor bill and a measure for federal workmen's compensation through the Senate, where they had been stalled for months. In late August and early September, he obtained quick passage of the Adamson Act, which established the eight-hour workday on interstate railroads, thus averting a disastrous nationwide rail strike. At the same time, Wilson approved a Revenue Act that drastically increased taxes upon incomes and estates.
The Democratic platform of 1912 demanded enlarged self-government and early independence for the Philippine Islands and territorial self-government for Puerto Rico. Wilson, who had long since shed whatever imperialistic sentiments he might once have had, became in fact the first de-colonizer among the statesmen of the twentieth century. The Jones Act of 29 August 1916 affirmed the intention of the United States to withdraw entirely from the Philippines as soon as a stable indigenous government was established, created an elective senate to supplant presidential appointees as the upper house of the Philippine legislature, and provided that the governor-general should appoint heads of executive departments, except the Department of Public Instruction, with the consent of the Philippine Senate.
The all-Filipino legislature, which met on 16 October 1916, was the first autonomous legislature established by a colonial power in an overseas possession, except for the self-governing dominions of the British Empire. Moreover, Wilson's governor-general, Francis Burton Harrison, was an ardent anti-imperialist. He transferred virtually all powers of local government to Filipinos, so that the Philippine Islands enjoyed dominion status in fact, if not in name, by the end of the Wilson administration.
For Puerto Rico, Wilson pushed through Congress, and signed on 2 March 1917, the second Jones Act. It gave Puerto Rico territorial status, conferred American citizenship upon residents of the island, and created a virtually autonomous two-house legislature elected by the people.