America's Fiscal Constitution (15 page)

Jackson’s use of the presidential veto and attacks on the independence of the Bank of the United States accelerated the organization of political opposition. That opposition coalesced around state organizations comprised of Jackson’s adversaries. They began to call themselves “Whigs,” a name used by a party of the English gentry who had fought for limits on the power of the king, particularly limits on spending and taxes. Though Whig leaders Henry Clay and Daniel Webster tried to flesh out a political platform, the issues that motivated that anti-Jackson coalition were frequently grounded in the personality-based politics within each state.

Vice President Calhoun did not call himself a Whig, but he rallied South Carolina against the 1828 Tariff of Abominations by claiming that a state had the right to nullify, or disregard, federal laws it considered unconstitutional. Jackson considered this idea to be a form of treason. “Nowhere can it be found where the right to nullify a law, or to secede from this Union, has been retained by the state[s]. . . . This,” he affirmed in an 1832 letter, “is my creed.”
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The plainspoken president warned a congressman from South Carolina that if anyone blocked the enforcement of federal laws, Jackson would personally “hang the first man I can lay my hand on engaged in such treasonable conduct, upon the first tree I can reach.”
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Advocates of nullification in South Carolina backed down.

Vice President Calhoun also joined Senators Henry Clay and Daniel Webster in blocking confirmation of Van Buren’s appointment to the position of US ambassador to Great Britain. Van Buren exacted revenge by replacing Calhoun as the vice presidential nominee at his party’s first national nominating convention, held in 1832. By then people referred to members of the party of Jackson and Van Buren as Democrats. The Jackson–Van Buren ticket won the election of 1832 by a lopsided margin, though their Southern support had eroded.

The apogee of Jackson’s eight years in office occurred on January 8, 1835, in a festive gathering of more than two hundred national leaders at Brown’s Hotel in Washington. They celebrated both the anniversary of the Battle of New Orleans and the final payment on the national debt. Van Buren read a toast on behalf of the president: “The Payment of the Public Debt: Let us commemorate it as an event which gives us increased power as a nation.” Senator Thomas Hart Benton of Missouri—whose brother had shot Jackson twice in a brawl twenty-two years earlier—led off almost a hundred other toasts. “In the 58th year of the republic,” Benton pronounced, “Andrew Jackson being President, the national debt is paid and the apparition, so long unseen on earth, a great nation without a national debt!”
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Five days after the banquet, someone tried to shoot the president outside the US Capitol. The aging but frontier-hardened Jackson beat his assailant to the ground with a cane.

While Americans shared a common pride in the nation’s ability to pay off its debt, they argued about how to handle budget surpluses. From 1829 until the end of Jackson’s administration in 1836, the federal government collected $250 million—including extraordinary payments for the sale of public lands—and spent $153 million.
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The Treasury could not hoard gold and silver coins without depriving the nation of much of its currency.
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Senators Calhoun and Clay lined up a congressional majority in support of distributing tens of millions of surplus federal dollars to the states. Jackson vetoed that bill but ultimately allowed a new version of the popular concept to become law ahead of the 1836 election. This would be the first, but not the last, of several instances in American history—including in 1857 and 2001—when Congress made plans to spend a surplus just as it began to disappear.

Federal funds distributed to states in 1836 and early 1837 were invested by state governments in banks, canals, and railroads. Many state
governments supplemented those investments with state debt, principally obtained from foreign creditors.
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T
HE
P
ANIC OF
1837

Martin Van Buren tried to nurture a more populist image during the 1836 election campaign. Democrats used the slogan “Vote for OK,” based on the initials for Van Buren’s Old Kinderhook farm on the Hudson River. These initials would eventually become part of American English, signifying assent without enthusiasm.

Some Democrats sought to appeal to frontier voters by nominating a folksy vice presidential candidate, Richard M. Johnson of Kentucky. Johnson’s fame rested in part on his claim of having killed the Native American leader Tecumseh during the War of 1812. Johnson’s personal life itself reflected the frontier’s unique mixture of bigotry and individualism. He married a slave, Julia Chinn, and took responsibility for raising their two children. When she died, Vice President Johnson lived with another slave and worked as a bartender when he was not presiding over the Senate.

Van Buren prevailed in the election, though by a narrower margin than in Jackson’s two triumphs. The Whigs might have won had the contest occurred a year or so later. Van Buren, the first president born as an American citizen, was also the first president to take office at the onset of an economic depression.

Like the Great Recession of 2008, the multiyear downturn called the Panic of 1837 followed a real estate bubble fueled by easy credit. A land rush had started two years earlier, when federal and state-chartered banks lent vast amounts to purchasers of federal land, mostly in regions around the Mississippi River and Great Lakes. The bubble burst when the British central bank began accumulating gold and pushed Great Britain into recession with rising interest rates.
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As British demand for cotton fell, so did US farm income. Credit contracted when American banks failed. Many bank notes became worthless, and bank depositors often lost their savings. By 1840, the prices of thirty basic commodities had fallen 25 percent below levels in 1837. From 1837 to 1840 the amount of the principal currency—bank notes—dropped from $149 million to $106 million.
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Eight state governments defaulted on their debts to foreign creditors when property tax revenues declined during the Panic of 1837. Van Buren’s administration refused state requests for federal grants. During the
following decades the vast majority of state governments adopted constitutional limits on their ability to incur debt. Limitations on debt were routinely inserted in the constitutions of new states. All but a handful of states still retain these limits.

Van Buren and many Democrats blamed banks for the Panic of 1837, while Whigs blamed the policies of the Jackson administration, especially Jackson’s “war” on Nicholas Biddle’s Bank of the United States. However, modern economic historian Peter Temin persuasively attributes the 1837 downturn to international events like the British recession and a contraction in the US money supply that was precipitated by the diversion of Mexican silver exports. US banks had imported Mexican silver to enhance their reserves, but by the late 1830s China had absorbed Mexican silver to finance its imports. The nation’s first depression—preceded by a real estate bubble and prolonged by a European debt crisis and Chinese trade policy—provides valuable lessons forgotten by many political leaders after 2000.

The 1837 depression gutted federal revenues. Federal land sales had soared from $4.8 million in 1834 to $14.7 million in 1835 to a record $24.8 million in 1836. Land sales then dropped to $6.7 million in 1837 and even lower thereafter.
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Import tax revenues plummeted as well. When the value of cotton exports declined, the nation could afford fewer imports, and import tax collections fell from $23.4 million in 1836 to $11.1 million in 1837.
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As a result, in 1837 the federal government experienced an unprecedented peacetime deficit of $12.3 million, about one-third of federal spending.
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Cash balances from surpluses after Jackson’s debt repayment in 1835 might have been sufficient to cover this shortfall without borrowing, but Congress had already distributed $28 million to the states pursuant to legislation adopted in 1836. The Van Buren administration and Congress slashed spending, principally for the army. They cut federal outlays by a third between 1837 and 1840, which was still not by enough to offset the decline in revenue from import taxes and land sales.
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With the exception of a brief period in 1839, during which a European drought boosted demand for farm products, federal deficits continued until the end of 1843.

Van Buren resisted occasional calls for federal spending to stimulate the economy. In a September 4, 1837, message to Congress, he decried the fact that “all communities are apt to look to government for too much . . . especially at periods of sudden embarrassment and distress.”
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Financing the budget shortfall posed a challenge to a Democratic ideology so grounded in opposition to debt. The Van Buren administration refused to borrow from a banking system that it blamed for the downturn. Senator Calhoun, who had not spoken to Van Buren for years, made peace with the administration and came to its aid with an alternative to selling long-term bonds to banks. He proposed that the Treasury meet its obligations by issuing short-term notes, bearing little or no interest. To Calhoun, “the elements of a true and stable currency” consisted “partly of gold and silver, and of paper, resting not on the credit and authority of banks, but of the Government itself.”
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The notes with little or no interest issued in the Panic of 1837 had some characteristics of “paper money,” though they were not legal tender, that is, currency that law required creditors to accept at face value in payment of debt. The notes, however, could be used to satisfy federal tax obligations.
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Calhoun instinctively understood how monetary expansion might counter deflation. During a credit contraction, the United States could finance deficits with short-term notes and manage to avoid inflation, since the supply of these notes satisfied the need for circulating currency and liquid bank reserves.

The concept of expanding currency to cover deficits was nothing new. For thousands of years governments had generated income by taking the difference between the amount paid by an official mint for metal used in coins and the face value of coins in mints. This source of income—called seigniorage—could be abused whenever it significantly lowered the purchasing power of the coin. On occasion, monarchs had collected taxes by clipping off a portion of all outstanding coins. Modern seigniorage or monetization of debt occurs when the Federal Reserve buys Treasury debt for the long term in exchange for cash or Federal Reserve credit convertible to cash.

Throughout American history, federal leaders have used short-term debt with low interest rates to help minimize interest expense or the stigma associated with higher long-term debt. They did so at the beginning of the Civil War and during the first six years of the Vietnam War. When federal leaders began their borrowing binge in 2001, the Treasury lowered the interest cost in part by shortening maturities. In 2011 the Federal Reserve monetized debt in an amount offsetting all federal borrowing that year.

The issuance of short-term notes might have helped curb deflation, but the Van Buren administration neutralized that effect by hoarding coins it had
received for taxes and land sales. Van Buren ignored former Treasury Secretary Albert Gallatin’s warning that the Treasury’s accumulation of metal currency depleted bank reserves needed to support foreign trade. Van Buren tried to appease monetary conservatives in his party who insisted on conducting transactions using coins of gold and silver rather than commercial bank notes.

B
ORROWING FOR
R
ECESSION AND
W
AR AND
P
AYING
D
OWN
D
EBT

No American president—other than Monroe—has ever been reelected after annual national income fell below the level at which he took office. In 1840 Van Buren became the first casualty of this political reality. Before retiring to New York after losing the presidency, Van Buren—the architect of the first modern American political party—warned of the dangers inherent in borrowing with long-term bonds, which he said would have a tendency to “concentrate ultimately in the coffers of foreign stockholders.”
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Like modern opposition politicians who promise to bring prosperity when elected during a downturn, Whig leaders were ill prepared to deal with the economic crisis that continued after their election victory. The party itself was a heterogeneous association that included old New England federalists, like Daniel Webster; Southern advocates of states’ rights, like John Tyler; and advocates of higher import taxes being used to finance a national system of transportation, like Henry Clay.

William Henry Harrison, the Whig candidate for president in 1840, had served as governor of the Ohio territory during the Jefferson administration. At the time of his election to the White House, he was serving as a local court clerk. Whigs mounted a symbol-laden campaign that emphasized Harrison’s “log cabin” values and fondness for hard cider, the cheap drink of the frontier. They cast Van Buren as a pampered Eastern aristocrat, the same way Jackson supporters had depicted John Quincy Adams a dozen years earlier, and they blamed the depression on “Martin Van Ruin.”

The sixty-eight-year-old Harrison died of pneumonia a month after delivering the longest inaugural address in history during a bone-chilling snowstorm. Harrison’s vice president, John Tyler, inherited the budget crisis. Though Tyler disliked taxes, he abhorred deficits and reluctantly signed a bill preventing a scheduled reduction in import taxes.