MK3 BLOG

MK3|MK3Blog|Nov. 1, 2025

What really changed in 1913

Two pillars were installed:

1. The Federal Reserve Act (Dec. 23, 1913) created a central bank with a hybrid structure—public governance at the top (Board of Governors) and 12 regional Reserve Banks with compulsory “member bank” stock that pays a limited dividend and cannot be traded. That stock does not confer normal corporate control. The Fed’s design deliberately split power between Washington and regional banks while walling off day-to-day monetary operations from short-run politics.
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3. The Sixteenth Amendment (ratified Feb. 3, 1913) removed the apportionment barrier for taxes on income, allowing Congress to levy an income tax “from whatever source derived” without dividing it by state population. Congress promptly used it in the Revenue Act of 1913. The Supreme Court then upheld the new tax structure in Brushaber (1916) and Stanton (1916).

The “hijack” thesis—what proponents mean

Working theory: 1913 shifted two levers of national power—money and revenue—away from earlier constraints. One lever (the Fed) centralized control of credit and currency; the other (the income tax) changed the federal government’s financing model from tariffs and excises toward direct claims on individual and corporate income. That’s the core of the “hijack” narrative.

1) Monetary power compressed into a central bank

• The Fed emerged after the Panic of 1907, the Aldrich Plan, and the famous clandestine Jekyll Island meeting where the broad blueprint was hashed out. The final Glass-Owen compromise differed from Aldrich’s banker-heavy plan but kept the essential central-bank engine. Contemporary and modern histories document the Jekyll Island episode plainly—it was secretive, not mythical.
• Early critics feared recreating a “Money Trust,” the same concentration that the Pujo Committee (1912–13) had just investigated. The political answer was a hybrid: a public Board in D.C., regional banks, and statutory limits.
• Over time, Congress tightened central control, especially via the Banking Act of 1935, which built today’s FOMC architecture and increased the Board’s authority. If you think “hijack,” this consolidation is a milestone.

2) Fiscal power shifted to income taxation

• The Revenue Act of 1913 cut tariff rates sharply and installed a modest income tax (roughly 1% above generous exemptions; top marginal 6–7% for very high incomes). It initially hit a small slice of households—but it created the legal and bureaucratic scaffolding for later expansion.
• By mid-20th century, the individual income tax had become the federal government’s main revenue source (accelerated by WWII changes to exemptions/withholding). Today it’s consistently the largest revenue stream. That long arc, not 1913 alone, is what entrenched federal fiscal reach.

What the law and courts actually say

• Sixteenth Amendment: National Archives confirms ratification on Feb. 3, 1913; Knox proclaimed it soon after. Courts have repeatedly rejected “improper ratification” theories (e.g., U.S. v. Thomas, 7th Cir.). Brushaber and Stanton cemented that the Amendment eliminated apportionment concerns and that 1913’s income tax was constitutionally valid.
• Who “owns” the Fed: The Board of Governors is a federal agency accountable to Congress; Reserve Banks are structured like non-profit corporations with non-transferable member bank stock paying a limited dividend (historically 6%, now effectively capped). That stock doesn’t confer control like normal equity. This undercuts the claim that private banks “own” U.S. money in any ordinary sense, though the structure undeniably institutionalizes Wall Street’s seat at the table.

The bigger arc (1913 wasn’t the end of the story)

If 1913 opened the door, the 1933–34 gold changes and 1935 reorganization marched through it:

• 1933–34 gold program & Gold Reserve Act (1934): Private gold convertibility ended; all monetary gold moved to Treasury; the dollar was devalued to $35/oz. This removed a key external brake on monetary policy and formalized a different regime of monetary sovereignty.
• 1935 Act: Centralized policy in the FOMC and strengthened the Board—further professionalizing and insulating monetary decisions.
• Modern oversight: The Fed is audited (accounting audits annually); after 2008, Dodd-Frank forced a one-time GAO audit of the crisis facilities, which exposed the scale and mechanics of emergency lending and recommended tighter governance. Whatever your priors, the GAO report is the receipts.

Where the “hijack” frame is fair—and where it isn’t

Fair:

• 1913 + New Deal-era reforms centralized monetary power and built a federal tax machine capable of financing a permanently larger national state. That’s a structural pivot away from the 19th-century model (tariff-funded government, gold constraints).
• The Fed’s hybrid design gave private banks a formalized role in the plumbing (Reserve Banks, discount window, payments), and the post-crisis record shows how much discretion the system wields in emergencies