Historians say that in Europe, the 20th century really began with the outbreak of World War I in August 1914, and that in many ways we still live in the shadow of that conflict. The centennials of various events leading to the war have been marked in recent months, and now battles, military campaigns and other milestones will have their 100th anniversaries in the next four years.
In the United States, the 20th century arguably began almost a year before, in October 1913, with a much less bloody event—when following the adoption of the 16th Amendment, Congress passed a law introducing permanent peacetime income tax. The tax centennial wasn’t widely celebrated. When it was mentioned at all, it was in order to complain of the depredations of the IRS. Nevertheless, the introduction of the income tax was when the American Century came into being, with vast global repercussions.
Funding Global Power
The income tax was introduced just in time to finance America’s entry into the European conflict in 1917, which helped decide its outcome. Later, it provided resources to fight World War II in Europe and on the Pacific. In the early postwar decades, the income tax helped repay the federal debt, which in 1945 stood at over 100% of GDP, and, more important, it funded the creation of the global economic system based on the dollar and American financial infrastructure, with the Federal Reserve serving as linchpin.
Washington also devised rules of international commerce, spearheading—and largely funding—a slew of institutions needed to expand it. It promoted free trade, free movement of people and ideas and various other aspects of economic integration. At the same time, it supplied the military muscle needed to keep peace. Even today, we see that few conflicts around the world are resolved without active U.S. involvement.
None of it would have been possible if the U.S. had not had the financial wherewithal to be the world leader.
The U.S.-dominated global system first encompassed Western Europe and Japan, which had to be rebuilt after the war. Gradually, over the years, it was joined by countries in the developing world and, after the collapse of the Berlin Wall, by former Communist nations and China. The system proved flexible, accommodating new entrants and bringing unprecedented prosperity to most of them.
Of course it was not done for altruistic motives. The U.S. and its multinationals have been the greatest beneficiaries of the global economic system. The dollar being the only reserve currency, this country is able to pay for its exports in domestic currency, and most commodities, including oil, are priced and traded in dollars. The U.S. can borrow in dollars and run up its current account and budget deficits seemingly without end, allowing Americans to consume much more than they produce, for decades. No other nation can do this with impunity, without running the risk of a massive default.
American companies have benefited from the international economic system by expanding around the globe. The vast majority of most valuable global brands are based in America. The U.S.-led international economic system also has fostered U.S. technological primacy, since most innovative projects around the world are tied to Silicon Valley and U.S.-based funds and markets.
Global economic integration also has been a source of soft power. Since Russia annexed Crimea and began stirring trouble in eastern Ukraine, Washington has been slowly tightening the noose around the Russian financial system with sanctions. Russia faces financial strangulation and economic collapse because it has taken on the U.S. in a Cold War-style confrontation. Meanwhile, China has refrained from acting on its territorial claims against its neighbors, notably Japan, in part because it fears being targeted by similar sanctions by Uncle Sam.