What Went Wrong circa 1920?

A thought occurred to me while reading through Bruce Bartlett’s opinion in the WSJ ($$$) today, where he makes a forceful argument that capital gains are not income in-fact. Bartlett cites a number of cases where the capital gains quâ income argument was challenged, including Gray v. Darlington, Lynch v. Turrish, Eisner v. Macomber, and Brewster v. Walsh, where the decision included this morsel: “The sale of capital results only in changing its form, and, like the mere issue of a stock dividend, makes the recipient no richer than before.”

The argument goes basically like this: Since the future income stream from a capital asset, such as a bond, is the very essence of its value, the two cannot effectively be separated. When you purchase a bond, you don’t acquire an income, you acquire an asset. (I’d say it’s an asset simply because you’ve exchanged value to obtain it.) The future income in the form of coupon payments merely represents the conversion of that asset back to cash, like ice melts into water. Of course, modern jurisprudence says otherwise:

Unfortunately, the Supreme Court eventually came around to the IRS view and reversed itself in Merchants Loan and Trust v. Smietanka (1921). Capital gains have been taxed by the federal government ever since.

…Which brings me roundabout to the thought that occurred to me – well, it’s more of a question, really. At least, to me it seems like everything was plugging along rather nicely (the first world war notwithstanding) right on up until about 1920, give or take a few years, when all of a sudden, the shit hit the fan, pretty much across the board: the creation of the Federal Reserve, landmark Anti-trust decisions, the imposition of the income tax, women’s suffrage, prohibition, &c.

What was particular to this era that caused such a shitstorm of policy?

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Previous post on John Edwards’ plan to destroy the middle class via capital gains taxation, here.