The Senate created a Select Committee on Finance in the 14th Congress (1815-17) to address two major issues—the Tariff Act of 1816 and the Bank Act—to eliminate some of the debt accumulated as a result of the War of 1812 and to stabilize the nation’s chaotic financial system. On December 10, 1816, the Committee on Finance was established as a standing committee and three days later, its first members were appointed with Senator George Campbell of Tennessee as the committee’s first chairman.
The Committee’s Early Years (1817–1861)
The Finance Committee initially shared jurisdiction over tariffs with the Committee on Commerce and Manufactures. By 1833, disputes over tariffs reached a crisis when South Carolina threatened to nullify all tariff acts. Senator Henry Clay offered a solution that would draw down tariffs over a 10-year period. Congress passed the bill, and President Jackson signed it into law. The new law calmed the sectional tensions and it also helped to solidify the Finance Committee’s jurisdiction over trade matters.
In the 1830s the committee clashed with President Andrew Jackson over the recharter of the Second Bank of the United States. Senator Daniel Webster led the defense of the bank with the support of Senator Clay. They successfully maneuvered a bank bill through Senate passage to an expected veto by President Jackson. After Jackson ordered the removal of all federal deposits from the bank and their distribution to state banks, Webster and Clay united to fight what they saw as Jackson’s unconstitutional acts. Webster took the Finance Committee chairmanship and issued a report finding that only Congress had the authority to remove federal deposits from the bank. Meanwhile, Clay introduced resolutions of censure against President Jackson and Treasury Secretary Roger Taney for their actions in removing the deposits.
The first 40 years of the Finance Committee’s existence coincided with the “Golden Age” of the U.S. Senate. It is not mere coincidence that three of the Senators who chaired the committee during that period—Daniel Webster, Henry Clay, and John C. Calhoun—comprised the “Great Triumvirate” who dominated national politics at the time. One hundred years later, in 1957, all three men were named by then-Senator John F. Kennedy on a special committee’s list of the Senate’s “Famous Five,” compiled in consultation with 150 scholars and participating Senators, in the hope (in Kennedy’s words) “that the considerable interest evoked by this project will be of value at a time when the democratic way of life is under pressure from without and the problems and conflicting pressures involved in the political profession are frequently misunderstood within our own country.” The other two Senators on this list—Robert LaFollette and Robert A. Taft—also served on the Finance Committee, and all five were honored with commemorative portraits that have decorated the Senate Reception Room since 1959.
The Civil War (1861–1865)
When the Civil War broke out, the Finance Committee had jurisdiction over appropriations, revenue, and the nation’s currency. As a result, the committee played a critical role during the war passing tariff bills, authorizing loans, and passing legislation to raise revenue. In 1862, the committee and the House Ways and Means Committee adopted a proposal to create the nation’s first non-interest-bearing paper currency that would be “lawful money and legal tender in payment of all debts, public and private, within the United States.” The Legal Tender Act of 1862 created the first national paper currency, called “greenbacks” because of their color.
The committee also introduced the nation’s first income tax. Under the new law, incomes from $600 to $10,000 were taxed at 3 percent, incomes from $10,000 to $50,000 at 5 percent, and incomes over $50,000 at 7.5 percent. By the end of the war, it was apparent that the Finance Committee’s work had become too much for a single committee. In March 1867, the Senate created a new Committee on Appropriations to relieve the Finance Committee of its responsibility for appropriation measures.
The Gilded Age (1866–1900)
After the war, Congress gradually reduced the income tax until it was repealed in 1872. The following year the committee reported the Coinage Act of 1873 that ended the free coinage of silver. Many in western states, where silver deposits lay, opposed the law, calling it the “Crime of ’73.” In 1877, western Members of Congress forced action on the silver issue, seeking a resumption of the free coinage of silver. The Finance Committee removed the free coinage provision, and required the Federal Government to buy $2 million to $4 million of silver each month, enacting. the Bland-Allison Act. In 1890, the Sherman Silver Purchase Act required the government to purchase $4.5 million of silver every month, an amount nearly equal to the amount mined in western states.
Three years later, Congress repealed the Sherman Silver Purchase Act in an effort to stabilize the nation’s currency. By the end of the decade, the nation adopted the gold standard, pegging the value of its currency to a fixed weight of gold. In addition to repealing the Sherman Silver Purchase Act, the new Democratic Congress reduced tariff rates with the Wilson-Gorman Tariff Act of 1894.
The Progressive Era (1900–1912)
By the end of the first decade of the 20th century, support for a revised income tax had grown in both political parties. Chairman Nelson Aldrich of Rhode Island worked out a compromise linking an increased tariff with a vote on a proposed constitutional amendment on income taxes. Once he nailed down this compromise, Chairman Aldrich secured passage of the tariff act. In all, 42 states ratified what would become the 16th amendment.
After the states ratified the16th Amendment, Congress promptly enacted an income tax. Passed as a part of the Underwood-Simmons Tariff Act of 1913, the first peacetime income tax affected only 2 percent of the workforce. The Democratic leadership also decided to take from the Finance Committee its banking and currency functions and to create a new Committee on Banking and Currency.
World War I Era (1913–1932)
Prior to World War I, tariffs and excise taxes had supplied more than 90 percent of federal revenues. After the war, income taxes generated 58 percent of revenues. The income taxes proved necessary, as federal expenditures during World War I exceeded those of any prior war. With World War I, annual federal spending increased 2,459 percent, from $742 million to $18.9 billion.
In 1917, the War Risk Insurance Act expanded the Finance Committee’s jurisdiction to include certain veterans’ legislation. Thereafter, most veterans’ legislation passed through the Finance Committee. The Finance Committee passed a “Bonus Bill” for World War I veterans who had not suffered disabilities during the war. The bill would compensate them for their service and loss of wages. Congress overrode President Calvin Coolidge’s veto to enact it into law.
The Roaring Twenties came to an abrupt end on October 24, 1929, with the stock market crash. Congress took months to respond, and when it did, it enacted (despite President Herbert Hoover’s initial, fierce opposition) the ill-fated Smoot-Hawley Tariff Act. Chairmen Willis Hawley of the Ways and Means Committee and Reed Smoot of the Finance Committee worked to completely revise all the tariff rates. The new law resulted in an extraordinary decrease in world trade.
The Great Depression (1932–1938)
During President Franklin Roosevelt’s first 100 days of the New Deal, the Finance Committee passed the Economy Bill, which granted the President the authority to slash Federal spending by 25 percent. The act cut the Federal workforce by 15 percent and reduced all veterans’ benefits. To raise revenue quickly, the Finance Committee reported the Cullen-Harrison Act that legalized and taxed beer with an alcohol content of less than 3.2 percent.
The following year, the Reciprocal Trade Agreements Act of 1934 marked the end of major congressionally-sponsored tariff bills. The act vested that responsibility with the executive branch. Congress limited the act to 3 years, partially to assuage those who feared giving the President too much power, and partially to see how the experiment in trade policy would work. The act also gave the committee jurisdiction over a broad range of trade policies that would arise from trade agreements.
The committee also played a key role in the Social Security Act of 1935. The act provided unemployment insurance, aid to dependent children, and benefits to the elderly who met certain qualifications. Social Security payroll taxes were also innovative. They affected both employers and employees, in an attempt to make caring for the elderly a national responsibility. The Finance Committee maintained its jurisdiction not only over the new payroll taxes that funded the program, but also over the welfare, old age insurance, unemployment insurance, and every new program in the Social Security Act.
America at War (1939–1945)
World War II brought a boom in the defense industry had helped bring the country out of the Great Depression. The Finance Committee had the responsibility to raise revenue to pay for the buildup. The result was some of the largest revenue measures in the nation’s history, affecting all Americans. By early 1942, the Federal Government was spending $150 million a day, or roughly $5 billion a month, with nearly half of this total going towards the war effort.
One of the novel revenue-generating measures that the Finance Committee introduced in the Revenue Act of 1942 was the “Victory Tax.” At 5 percent, the tax applied to every American, and came in addition to the normal taxes and surtaxes on all incomes over $624. The next year, the Roosevelt Administration asked for a tax increase to curb inflation. The House and Senate reluctantly agreed to a minor tax increase, which the President Roosevelt vetoed. An incensed Congress swiftly overrode the veto, making the Revenue Act of 1943 the first revenue act to become law over a President’s veto.
As the war came to an end, the Finance Committee turned its attention to the nation’s returning veterans and what would become the G.I. Bill of Rights. Senator Bennett “Champ” Clark secured the co-sponsorship of 81 senators. The G.I. Bill of Rights provided nearly 8 million veterans with additional educational or professional training after World War II. Another 4 million took advantage of the generous home loan guaranty benefits in the Act. The G.I. Bill of Rights was a resoundingly success and served as a forerunner of other benefits in subsequent years.
The Postwar Boom (1946–1959) and Entitlement and Tax Reform (1960–1969)
Soon after the conclusion of the war, Republicans gained control of Congress and tried to lower the high tax rates that had funded the war. In the first comprehensive examination of federal income taxes since their creation in 1913, Congress and the executive branch studied 50 major areas of tax legislation. The resulting legislation, the Internal Revenue Code of 1954, made a number of changes. Among the new provisions were deductions for child care expenses and exclusion from taxation of combat pay and employer contributions to health plans.
At the beginning of the 1960s President John F. Kennedy’s main efforts focused on welfare reform, a major revision of trade legislation, and an expansion of the nation’s health care system. The President’s welfare reform plan placed more of an emphasis on prevention and rehabilitation in an effort to help people rise on their own, rather than stay on the public rolls. The legislation thinned the numbers on welfare.
With welfare reform completed, the Finance Committee moved to reform the nation’s trade laws. The Trade Expansion Act allowed the President to slash tariffs by as much as 50 percent, and allowed across-the-board (instead of item-by-item) tariff rate cuts. President Lyndon Johnson used all of his formidable legislative skills to usher the Social Security Act of 1965 to passage, working with Chairman Harry Bryd and Senator Russell Long. The Social Security Act of 1965 created Medicare and Medicaid, providing medical care for elderly and low-income Americans.
Soon after passage of the Social Security Act of 1965, Senator Long assumed the Finance Committee chairmanship. Chairman Long, a firm believer in campaign finance reform, proposed a check-off system, where taxpayers could donate $1 dollar of their taxes to a Presidential campaign fund when they filled out their tax returns. Chairman Long was able to get the check-off passed by tacking it onto the Foreign Investors Tax Act of 1966.
By 1969, Congress saw the need for tax reform, resulting in the Tax Reform Act of 1969, which reduced tax liabilities by 70 percent for those earning under $3,000 a year, while increasing taxes by 7 percent for those with incomes of more than $100,000 a year.
The Modern Finance Committee (1970–Present)
The Legislative Reorganization Act of 1970 required published committee rules, television coverage of hearings, public committee roll-call votes, and limits on the use of proxies. The act also mandated that each standing committee create subcommittees. The Finance Committee was the only Senate committee without any subcommittees. By 1973, the committee had created eight subcommittees to comply with the new law. The committee also lost its jurisdiction over veterans’ affairs with the creation of the Senate Veterans’ Affairs Committee.
Around the same time, the Finance Committee addressed the thorny issue of welfare reform and an expansion of Social Security benefits. The Social Security Amendments of 1972 included two Finance Committee proposals. The first was a guaranteed monthly benefit for every person who worked for at least 30 years. The second — Supplemental Security Income, or SSI —provided a monthly stipend for needy aged, blind, and disabled persons.
During the waning days of the 1970s, Congress acted on the large profits that oil companies were recording. The result was a windfall profits tax, much like that instituted back during World War I, on oil company profits. In 1981, President Ronald Reagan came to office ready to fulfill his promise of tax cuts. The Economic Recovery Tax Act of 1981 reduced the marginal tax rate by 25 percent and indexed the tax code for inflation. Among the law’s innovations was allowing all taxpayers to create Individual Retirement Accounts, or IRAs.
President Reagan also called for removing special privileges and simplifying the complex tax code. Chairman Robert Packwood and Ways and Means Committee Chairman Dan Rostenkowski negotiated the final legislation. The Tax Reform Act of 1986 lowered individual tax rates, increased personal exemptions, took 6 million of the poorest Americans off of the tax rolls, and reduced the top corporate tax rate from 48 percent to 34 percent.
Since the start of the 21st century, the Finance Committee has continued its leadership on tax, trade, and health issues. Shortly after President George W. Bush took office, the committee passed the Economic Growth and Tax Reconciliation Act, a major tax cutting bill.
The following year, Congress passed the Trade Act of 2002, which renewed fast-track authority for the first time since 1994. In the years following, the committee approved a number of free trade agreements, including those with Chile, Singapore, Australia, Morocco, Central America and the Dominican Republic.
In 2003, the committee was instrumental in passage of additional tax cuts in the Jobs and Growth Tax Reconciliation Act. Also that year, the committee led the creation of a new benefit under Medicare providing for coverage of prescription drugs, the largest such increase in the program’s history.
And in 2009 and 2010, the committee devoted months of work to comprehensive health care reform. The result was enactment of the sweeping Patient Protection and Affordable Care Act in March of 2010.
As the committee approached its bicentennial (2016), its own sense of its storied past yielded a new tradition according to which the chairmen welcome each new member with a letter enumerating interesting historical facts about his or her states’ representation on the committee. An impressive compendium of service records also attests to members’ historical impact beyond the committee room: three members went on to serve as President (Martin Van Buren, John Tyler, and Lyndon B. Johnson); seven would serve as Vice President; twelve as Secretary of State; ten as Secretary of the Treasury; and twenty-three as other Cabinet members. Twenty four committee members served at various times as Presidents Pro Tem, including four who chaired the committee and presided over the Senate in the same session. Four Speakers of the House would serve on the Senate Finance Committee, while—in another interesting overlap with “the other body”—five chairmen of the Ways and Means Committee would go on to chair the Finance Committee as well.
With memory of the bicentennial still fresh, the Finance Committee demonstrated its abiding importance to the nation’s political agenda by its leadership in the consideration of such hallmark legislation as the Tax Cuts and Jobs Act of 2017, the most comprehensive overhaul of the tax code in over thirty years, and the Miscellaneous Tariff Bill Act of 2018. At the threshold of its third century, it is apparent that the Finance Committee continues to be a prime focus of many issues that affect the nation and one of the most influential committees in the United States Senate.
Condensed from “History of the Finance Committee” by Donald R. Kennon, with revisions by William diGiacomantonio, and contributions of historical data by Josh Levasseur.