Defending Wealth in America

by Jeffrey A. Winters

Democracy poses unique challenges to wealth defence, and yet market democracies have achieved some of the highest degrees of wealth inequality in human history. How have the rich managed the contradiction between formal equality and material disparity?

First published: 14 October, 2014 | Category: Democracy, History, Inequality, The State

As discussed in Part 1 of this essay, extreme wealth stratification is the single most enduring social pattern across all polities from Mesopotamia to the present. Sustaining extreme material inequality is neither easy nor automatic. It requires constant and active strategies of wealth defence by the rich, or by those their material resources engage for this purpose. An important transformation over the centuries was the movement of violence out of the hands of the rich in exchange for their support for impersonal institutions of coercion whose first priority has been the defence of property rights that make great fortunes viable politically.

Abundant wealth attracts far greater threats than do ordinary possessions, and protecting it from redistribution demands an unusually conscious and multi-faceted defence. Partly for this reason, great wealth concentrates the political attention and heightens the class consciousness of the rich far more than great poverty does for the poor.1 As with any minority, the wealthy few are more acutely aware of their small numbers than the non-rich are of their enormity. The rich therefore tend to prioritise wealth defence in their political activity, dampening many of the social cleavages that divide and distract the poor. This becomes especially significant in democracies.

Democracy poses unique challenges to wealth defence. If oligarchs have laid down their arms in exchange for an armed state bound by the rule of law that provides a secure space for property and riches, what happens if the non-rich use the democratic state to threaten wealth? Dispersed participation power and concentrated wealth power are incompatible as a matter of democratic principle, and yet have coexisted in every democracy from the eighteenth century to the present. Indeed, modern market democracies have achieved some of the highest degrees of wealth inequality in human history: never before has so much equality coexisted with so much inequality.

The experience of the United States from the late eighteenth century to the present day tells us much about how this potentially fatal tension has been managed.

Taming democratic temper

As the wealthy class of the newly independent United States soon discovered, before democracy can coexist with extreme wealth stratification it must first be crippled.

The United States began as an amalgam of semi-sovereign states united by what amounted to a weak executive committee. Democracy was a hard-won local affair. The basic American building blocks were towns, and strong sentiments of individual liberty and equality had been whipped up in the mobilisation against the British crown. Having just broken free from external dictatorship, few leaders in the states were in the mood for strong domination from above. Had the post-War period been one of economic prosperity, the current US Constitution may not have been written at all—certainly not as early and as urgently as 1787. But the United States was gripped by a deep and painful economic crisis in the years immediately following the war. A recession combined with deflation plunged ordinary farmers, who had sacrificed mightily during the revolution, into severe tax and mortgage debt. 

This convergence of factors set the stage for a dangerous clash between participation power and wealth power in America. There were no sophisticated institutions of ‘financial intermediation’ such as banks or stock exchanges to mask the looming class conflicts between creditors and debtors. The richest Americans had personally purchased government bonds that funded the war and also held the mortgages on farms across the states. Small farmers were the ones who would have to repay them with interest. Enormous sums of oligarchic money were tied up in these legal contracts, and their owners fully expected to be paid. Taxation was the wealth defence mechanism for making sure the public debts would be covered in an orderly fashion, and bond holders who dominated the legislatures repeatedly raised taxes on the population to fund the payments they themselves would ultimately receive.2 To recover mortgage debt, the creditors turned to the coercive capacities of the civil state—courts and sheriffs seized the livestock and tools of farmers, and if necessary the farms themselves were taken in foreclosure. Recalcitrant Americans were thrown into debtors’ prisons to serve multi-year sentences while their families were pushed off their plots.

If all of this had been unfolding under an authoritarian regime, the story might have ended with the rich getting made whole and ordinary citizens suffering the pain of it. But the states were participatory democracies and the indebted many possessed vastly more votes than the creditor few. To complicate matters, the firm grip on politics long held by wealthy colonial gentlemen had loosened in the years after the war. In many states, ‘a new breed of politicians, often from lower social backgrounds’ began to win seats in the various legislatures.3 Wealth defence would be impossible under such extreme economic conditions if these powerful bodies were captured by the electorate and began to respond to their desperate pleas for fairness and relief. If the people was not stopped, the new nation threatened to devolve into an insecure economic space for those holding the most property.

The wealth defence crisis had two faces. One, represented by Rhode Island, was the money printers.4 These state legislatures solved the debt problem in favour of the poor by printing paper money that was worth far less than the gold and silver creditors had loaned and were demanding in repayment. This amounted to using democratic power to redistribute wealth from the few to the many. The other face was that of hard currency, represented most brutally by Massachusetts. These legislatures refused to print money and insisted on enforcing contracts, foreclosing on farms, and filling the prisons with debt scofflaws. To the horror of the rich, indebted farmers responded by taking up arms and attacking the state apparatus they saw as doing the bidding of the wealthy few.5

US elites were alarmed by the growing democratic threat to property. When word reached of the debtors’ uprising in Massachusetts, George Washington was beside himself:

The commotions, and temper of numerous bodies in the Eastern States, are equally to be lamented and deprecated. They exhibit a melancholy proof… that mankind when left to themselves are unfit for their own Government. I am mortified beyond expression.…6

Their solution was the 1787 Philadelphia Convention, which redesigned the Constitution to better insulate oligarchic wealth from democratic commotion. The new Constitution created a much stronger federal government with less democracy below and a tighter concentration of power at the top—including an upper chamber of senators that could constrain the people’s House, a Supreme Court of just nine persons that would play a particularly important role in property and wealth defence, and a single executive president.

Written in language intended to leave most powers to the states, the document nevertheless included an explicit statement of things states could not do, all of which were a direct reflection of the wealth defence scare that motivated many at the Convention. Article I, Section 8 gave Congress the power to establish ‘uniform laws on the subject of bankruptcies throughout the United States’. This removed from the states the ability to intervene is this sensitive zone of contestation between creditors and debtors. Article I, Section 10 contained a laundry list of prohibitions on states that concisely summarised every injustice that hyper-democracy in the 1780s had perpetrated on the rich. No state shall ‘coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts’. The last two states to ratify the Constitution were the staunchest paper-money states—North Carolina resisted for 23 months after the first state signed, and Rhode Island held out for 30.7

The Framers of the Constitution thus built powerful oligarchic defences into the structure of democracy itself to impair the ability of the many poor to act democratically against the rich few. ‘Private wealth was now placed on a surer foundation than ever before in the youthful nation’s history’,8 as the Framers had ‘placed inequality at the centre of American constitutionalism’:

For the Framers, the protection of property meant the protection of unequal property and thus the insulation of both property and inequality from democratic transformation. Effective insulation, in their view, required wealth-based inequality of access to political power. It also meant that the illegitimacy of redistribution defined the legitimate scope of the state.9

But instead of explicitly saying that they were defending a rich minority against democratic redistribution—which might have sounded harsh and self-interested, given all the delegates were rich—the Framers reached for the moral high ground and cast the matter as a general defence of any minority against dangerous majorities. This concept would come back to haunt the body politic from the start of the twentieth century forward, which saw a new income tax on the rich, the New Deal and welfare and ‘entitlement’ programs created to cushion America’s underclass. 

Crises of wealth defence

Over the course of the nineteenth century wealth inequality in the US, already significant, widened dramatically. In the recession-hit early 1890s, popular forces led by William Jennings Bryan of the Democratic Party mobilised to impose a new federal income tax targeted exclusively on the wealthiest citizens—the first such tax to be imposed in peace time.10 The tax amounted to a political redistribution of America’s oligarchic wealth. After a cantankerous legislative debate, the bill passed both the House and the first line of wealth defence crafted by the Framers, the Senate. This left the last line of defence: the nine Justices of the Supreme Court. Within a year, the Court struck the tax down as unconstitutional by a vote of 5 to 4. Chief Justice Melville Fuller, writing for the majority, attacked the tax as a ‘communistic threat’. 

Over the next 18 years, the movement to outflank the wealth-defending Justices gained momentum, and in 1913 the Sixteenth Amendment was passed, followed immediately by the first permanent peacetime tax on the richest one-half of one percent of Americans. This victory—in the event, short lived11—marked the greatest democracy-driven setback American oligarchs had endured since the passage of paper money laws over 125 years earlier.

The next big crisis for wealth defence occurred in the wake of the Great Depression, when the government’s role in protecting ordinary and poor Americans expanded dramatically and an unprecedented level of wealth redistribution commenced. Many rich Americans, corporations, and associations championing the interests of both, bitterly opposed government intervention. But others recognised that the political-economic situation was fragile, and that failing to address the pains of poverty and dislocation could lead to far worse consequences.12 In this dangerous moment, wealth redistribution became vital not just to wealth defence, but to preempting radical ideologies and movements from challenging the foundational structure of the wealth edifice itself. 

The Second World War extended the sense of crisis still further. The New Deal and the rise of the American welfare state were responses to this particular historical moment. And yet those responses created institutional changes and material precedents that were at odds with the dominant ideology of the nation constructed during the Federal Convention. This contradiction has been at the heart of the conservative backlash against redistribution and the role of the state that gained momentum in the second half of the 20th century and continues with a vengeance into the 21st:

The modern welfare state does not fit easily within the Federalists’ conceptual framework. Property once provided the conceptual boundary to the legitimate scope of government. That boundary is now threatened by the changing meaning of property and the demands of equality which simultaneously challenge traditional rights of property and the traditional scope of the state. In many crucial respects, we have accepted the New Deal but rejected its conceptual underpinnings. As a country, we routinely engage in redistribution to ameliorate social ills, but we have not simply accepted property as a mere social construct to be redefined or redistributed without constraint. The status of property as boundary lingers despite its disintegration as a constitutional concept. We countenance redistribution as a means, but we have no consensus on a vision of the state that clearly defines redistribution as a legitimate goal.13

The glaring disconnect between the practice of democratic wealth redistribution and the principle of wealth defence, established decisively at the nation’s founding, has seethed below the surface of the national debate for decades. It meant that, when President Ronald Reagan announced in 1981 that ‘Government is not the solution to our problem; government is the problem’, he found wide resonance, even amongst the poor.

The Wealth Defence Industry

Reagan and his successors dedicated themselves not merely to wealth defence—to preventing democratic majorities from distributing wealth—but to actively rolling back an entire state apparatus of poverty relief and government investment in social opportunities that had grown up over half a century—programs which boosted the non-rich and stalled the decades of gains the wealthy had enjoyed. The story of what happened next is by now well known. Suffice to say, whereas the middle decades of the twentieth century had been tremendously beneficial for average Americans and stagnant for the ultra rich, the four decades of economic growth between 1970 and 2010 saw incomes of the top tenth and top hundredth of 1% of Americans soar even as real incomes for average Americans remained flat.14

One under-appreciated reason for this was the rise of a multi-billion dollar Wealth Defence Industry. Comprised of armies of expensive tax lawyers, accountants, lobbyists, wealth management professionals, and think-tank ideologists (who were networked and organised domestically and transnationally through firms and client networks), the Industry ensured that, even as the myriad processes associated with economic ‘globalisation’ undermined the wealth-threatening power of workers and unions, the wealth defence capacities of the richest Americans increased rapidly.15

In addition to winning gains on the shop floor and in offices, average Americans had for decades been winning major democratic battles of wealth redistribution. Nowhere was this more evident than in taxation; and nowhere was the power of the Wealth Defence Industry more effective. During the decades after WWII, marginal tax rates rose like a grand staircase up the income distribution of the country. From 1954 to 1963 there were 24 tax brackets, with a top rate of 91 percent for incomes over three million dollars. Between 1958 and 2009 they were compressed into six. Nineteen of those twenty-four had been higher than the highest 2009 tax bracket of 35 percent. Someone who made $1 million or $1 billion in 2009 would now be taxed at the same low rate as someone who made $100,000 in 1958. Shifting the tax burden downward to the mass affluent and the upper middle class had the political benefit of broadening the base of resentment against high taxes and welfare spending. For America’s millionaires and billionaires, the elimination of the upper brackets represented a massive cut in wealth redistribution. If the 1958 tax structure had still been in place in 2007, the wealthiest Americans would have paid an additional $100 billion in taxes. Wealth defence pays.

The Wealth Defence Industry, and especially its lobbying arm, helped deflect damage away from the ultra-rich in the wake of the 2008 financial crisis in the United States. Unlike in the Great Depression, which dealt a major blow in terms of new regulation and financial costs for oligarchs, wealthy Americans were bailed out in this most recent crisis while the middle class and the poor faced chronic unemployment, financial collapse, bankruptcies, and property foreclosures. This imbalance was augmented as the Supreme Court rendered a series of decisions equating the deployment of wealth in politics to speech protected by the Bill of Rights. These decisions have facilitated the conversion of wealth power into political influence, particularly during elections.16

As the concentration of wealth has changed over the centuries, and as crises large and small have triggered action and presented political opportunities, democracy has repeatedly posed threats to those holding great fortunes. And the rich have responded with vigorous wealth defence efforts. Responding to clear wealth-defence failures, the Framers of the US Constitution arrived at an elegant formula for achieving wealth defence for the richest Americans. The interests of the wealthiest Americans would be lumped together with all other vulnerable minorities whose individual rights deserved protection against potentially tyrannical majorities. This would be accomplished initially by addressing a range of ominous democratic malfunctions that arose during immediately after the revolution, and later through a strong, property-favouring judiciary that could use the Bill of Rights to frame wealth defence as a civil right of the rich, ultimately safeguarding their deployment of massive wealth power as a form of ‘speech’ throughout the democratic process.

The Wealth Defence Industry is purely an expression of wealth power—a material as opposed to a mobilisational power resource. The aggregate wealth power of the masses is vastly larger, but is unavailable in sufficient liquidity and concentration to be of political significance. This is not the case for the ultra-rich, whose wealth power is concentrated, available, and oriented in the same wealth defence direction without the need for organisation. So strong and unanimous is oligarchs’ political demand for wealth defence that an entire industry populated by non-oligarchs has arisen in their service (and, in many instance, their own disservice, insofar as one of the greatest successes of the ultra-rich has been to shift tax burdens downward to the mass affluent, populated by millions of educated professionals, many of whom are gainfully employed in the Wealth Defence Industry). Oligarchs, once forced to defend their wealth personally through force of arms, can now effectively do so through wealth itself.

This is an edited excerpt from a forthcoming article by Jeffrey Winters in a special issue of the journal NOMOS devoted to the topic of wealth. We are grateful to NOMOS for permission to publish.

Top image: Howard Chandler Christy, 'Scene at the Signing of the Constitution of the United States' (1940).

Jeffrey A. Winters is professor of politics and director of the Equality Development and Globalisation Studies (EDGS) program at Northwestern University. 

 


 

1 Benjamin I. Page, Larry M. Bartels, and Jason Seawright, ‘Democracy and the policy preferences of wealthy Americans’, Perspectives on Politics 11.1 (2013), pp. 51-73.

2 Edward J. Larson and Michael P. Winship, The Constitutional Convention: A Narrative History from the Notes of James Madison (New York: Random House, 2005).

3 Ibid.

4 Important sources on paper money (also called ‘bills of credit’) and the struggle over relief include Allan Nevins, The American States During and After the Revolution 1775-1789 (New York: Augustus M. Kelley, 1969 [1924]); Merrill M. Jensen, The New Nation: A History of the United States during the Confederation (New York: Vintage Books, 1950); James R. Morrill, The Practice and Politics of Fiat Finance: North Carolina in the Confederation, 1783-1789 (Chapel Hill: University of North Carolina Press, 1969); John P. Kaminski, Paper Politics: The Northern State Loan Offices during the Confederation, 1781-1790 (New York: Garland Publishing, 1989); Mary M. Schweitzer, ‘State-issued currency and the ratification of the US Constitution’, Journal of Economic History 49.2 (1989), pp. 311-22; Arthur P. Hall, ‘State-issued bills of credit and the United States Constitution: the political economy of paper money in Maryland, New York, Pennsylvania and South Carolina’, PhD. Dissertation (University of Georgia, 1991); and Clifford F. Thies, ‘Money and the adoption of the US Constitution’, Journal of Private Enterprise 20.2 (2005), pp. 147-64.

5 On these popular uprisings, see David P. Szatmary, Shay’s Rebellion: The Making of an Agrarian Insurrection (Amherst: University of Massachusetts Press, 1980); Schweitzer, ‘State-issued currency’; Leonard L. Richards, Shay’s Rebellion: The American Revolution’s Final Battle (Philadelphia: University of Philadelphia Press, 2002); and Woody Holton, Unruly Americans and the Origins of the Constitution (New York: Hill & Wang, 2007).

6 George Washington, ‘Letter from George Washington to Henry Lee (October 31, 1786)’, in John C. Fitzpatrick ed., The Writings of George Washington from the Original Manuscript Sources, 1745-1799 vol. 29 (1931-1944).

7 Thies, ‘Money’, pp. 157-60.

Edward Pessen, ‘Wealth in America before 1865’, in William D. Rubenstein ed., Wealth and the Wealthy in the Modern World (London: Croon Helm, 1980), p. 177.

9 Jennifer Nedelsky, Private Property and the Limits of American Constitutionalism: The Madisonian Framework and its Legacy (Chicago: University of Chicago Press, 1990), p. 2; emphasis in original.

10 This section draws liberally on Jeffrey A. Winters, Oligarchy (Cambridge: Cambridge UP, 2011), chap. 5, which extends the analysis of the income tax battle beyond the 1913 Constitutional amendment.

11 See Winters, Oligarchy, p. 228.

12 On the politics surrounding the New Deal see Theda Skocpol and Kenneth Finegold, ‘State capacity and economic intervention in the early New Deal’, Political Science Quarterly 97.2 (1982), pp. 255-78; Theda Skocpol and Edwin Amenta, ‘Did capitalists shape social security?’, American Political Science Review 50.4 (1985), pp. 572-75; Theda Skocpol, Kenneth Finegold and Michael Goldfield, ‘Explaining New Deal labour policy’, American Political Science Review 84.4 (1990), pp. 1297-1315; G. William Domhoff, ‘Class, Power, and Parties in the New Deal: A Critique of Skocpol’s State Autonomy Theory’, Berkeley Journal of Sociology 36 (1991), pp. 1-49; and Peter Swenson, ‘Arranged alliance: business interests in the New Deal’, Politics & Society 25.1 (1997), pp. 66-116.

13 Nedelsky, Private Property, p. 3.

14 For the data, see Jeffrey A. Winters, ‘Oligarchy and Democracy’, The American Interest 7.2, pp. 23-24; and income tables developed by Thomas Piketty and Emmanuel Saez (2012 updated).

15 If there is a founder of the Wealth Defence Industry, it is surely Burton W. Kanter of Chicago. The New York Times described Kanter as ‘one of the nation’s most prominent tax lawyers’. He made a career ‘pushing the limits of the tax laws. [...] He pioneered the use of foreign trusts to reduce taxes. He lectured for decades on his creative tax structures at the University of Chicago Law School and wrote a regular column in The Journal of Taxation’. Forbes noted that Kanter ‘crafted tax-saving strategies for Hollywood producers and mega-wealthy families’, and ‘counted the billionaire Pritzker family [owners of the Hyatt hotel chain] as clients and for years famously paid no federal income taxes of his own’. He claimed the IRS had audited him every year from 1961 forward. He died in 2001. Kanter began his tax specialisation in the late 1950s when tax rates on the rich were high and the demand for sophisticated tax avoidance and evasion instruments was increasing. In the early 1960s, he created some of the first “shelf companies” and offshore secrecy banks in the Bahamas and Cayman Islands. The most notorious of these was Castle Bank & Trust. Clients of the bank included ‘Chicago’s Pritzker family, Detroit land developer Arnold Arnoff, Playboy magazine publisher Hugh Hefner, Penthouse magazine owner Robert Guccione, actor Tony Curtis, the former rock group Credence Clearwater, and three men—Morris Dalitz, Morris Kleinman and Samuel A. Tucker—who have been described in Justice Department documents as organised crime figures’. IRS agents who investigated the bank and its clients in 1973 considered it ‘the single biggest tax-evasion strike in IRS history’. However, the case was shut down after the CIA intervened on ‘national security’ grounds because the bank was also a conduit for ‘the funding of clandestine operations against Cuba and other covert intelligence operations directed at countries in Latin America and the Far East’. Louise Story, ‘Secrecy is lifted in some tax court trials’, New York Times (12 July, 2005); William P. Barrett, ‘From the grave, tax lawyer to rich beats IRS again’, Forbes (15 December, 2009); Jim Drinkhall, ‘CIA helped quash major, star-studded tax evasion case’, Washington Post (24 April, 1980). For an extensive discussion of the Castle Bank case and Kanter’s involvement, see Alan A. Block, Masters of Paradise: Organised Crime and the Internal Revenue Services in The Bahamas (New Brunswick: Transaction Publishers, 1998).

16 The one significant price the rich may pay as a result of the crisis and rampant tax evasion is a major new effort to increase wealth legibility and reporting on a global basis. The Foreign Account Tax Compliance Act (FATCA) went into effect in July 2014. It requires financial institutions around the world, including in secrecy jurisdictions, to register with the IRS and report on all assets held by Americans. This is the first step toward building a global legibility infrastructure comparable to the US income tax withholding system built domestically almost a century ago. The problem with the initiative is that the Treasury estimates that it will recover just under $9 billion in evaded taxes over the coming decade. If Senate estimates of $100 billion in annual taxes lost due to offshore holdings are even remotely accurate, then FATCA will recover less than 1 percent of the loss over the coming ten years. For a detailed description of the new offshore reporting system, see US Government Accountability Office, ‘Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion’, Report to Congressional Requesters, GAO-13-318 (March 2013), esp. pp. 2-11; and William H. Byrnes, IV., ‘LexisNexis Guide to FATCA Compliance, 2d ed.’, Thomas Jefferson School of Law Research Paper No. 2457671 (July, 2014).

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