Wilson had used the Sixteenth Amendment, and Congress had complied, to increase taxation massively. For the first time in the history of the United States - apart from an experimental income tax during the Civil War - the federal government began confiscating a portion of the wages of working people.
Income tax rates soared up to 77% by 1918 during Wilson’s “progressive” administration. The war was used as an excuse for such taxation.
When President Harding was elected in 1920, the voters were tired of paying excessive taxes, and such taxes threatened to destroy the nation’s economy. Harding began to cut taxes. When Calvin Coolidge became president in 1923, he continued the trend. Historian Robert Ferrell writes:
Of course, the subtleties involved in these reductions often made large differences in the savings of individual taxpayers. In 1921, the highest personal rate was for incomes beginning at $200,000, down from the previous beginning point of $1 million. In 1924, the beginning point was $500,000; in 1926, $100,000. These categories were so far removed from the incomes of most Americans that they meant little. More important was the exemption for married taxpayers, which the act of 1921 raised from $2,000 to $2,500 and the act of 1926 raised to $3,500. The latter raise exempted 40 percent of all individuals who had paid taxes in 1924, leaving only 2.5 million taxpayers. Between 1921 and 1929, the number of taxpayers declined by 1 million. By 1927, 98 percent of the population paid no income tax. Three-tenths of 1 percent paid 94 percent of income taxes. As Mellon explained that year, “The income tax has gradually become so restricted in its application that it is a class tax rather than a national tax.”
Money was central, not only to Coolidge’s domestic policies, but also to his foreign policies. Europe was still recovering from WWI. European nations owed money to American banks; they were having difficulties repaying those loans.
The Treaty of Versailles demanded that Germany pay billions in reparations. Germany likewise had difficulty making such payments.
In the meantime, brutal communists had gained control of Russia, which was now in grips of Soviet socialism. President Coolidge had to decide which stance the United States would take toward the Soviet Union.
The international diplomatic scene of the 1920s was complex. Coolidge appointed Charles Dawes and Frank Kellogg as his key foreign policy experts. Historian David Greenberg writes:
On the international front, Coolidge had to confront several important issues in his first year in office, including the question of whether to establish diplomatic relations with the Soviet Union and calls for various treaties and institutions to protect the peace. But the most urgent and knottiest issues were those surrounding foreign debt to the United States. During World War I, American banks had let the European allies more than $10 billion, and after the war these nations, their economies ailing, were struggling to meet their payments. Then crisis struck. In early 1923, Germany, groaning under the reparations imposed by the Versailles Treaty, defaulted on its payments to France. French and Belgian troops moved into the Ruhr Valley, home to the German coal and steel industries, raising the prospect of another war. Germany printed money to pay its debts, resulting in a legendary period of hyperinflation. By October 1923, one dollar bought 4.2 trillion marks.
Vice President Dawes saved Europe from collapse by means of the “Dawes Plan,” which restructured German reparation payments, reducing the burden on the German economy. The global economy had been so close to breaking down that Dawes earned the Nobel Peace Prize in 1925.