America's Fiscal Constitution (18 page)

Frémont’s spotty military record became a liability during the campaign, in which he seemed to have little interest. His 1856 Electoral College loss to a Democratic politician with decades of experience, James Buchanan, was less surprising than the fact that Frémont had managed to carry most Northern states.

Republicans hoped to prevail in the Electoral College in 1860 by keeping the votes of states won by Frémont and adding the votes of at least two other states that he had lost—Pennsylvania and either Illinois or Indiana. To demonstrate their capacity for national governance, Republicans also needed a better presidential candidate and a more complete economic platform.

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EPUBLICANS
U
PHOLD THE
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RADITION

In his 1857 inaugural address President Buchanan bragged that the federal government’s financial strength was “without a parallel in history. No
nation has ever before been embarrassed from too large a surplus in its treasury.”
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He called for a reduction in import taxes, the steady retirement of federal debt, and a larger navy. That surplus disappeared quickly after Buchanan spoke, as the United States entered a severe recession known as the Panic of 1857.

The downturn originated in part due to events in Europe, where central banks in Great Britain and France raised interest rates in order to replenish gold supplies exhausted during the costly Crimean War. Rising British interest rates interrupted the flow of the capital that had financed US railroad construction. Without capital inflows to offset the American balance-of-trade deficit, the value of US exports—still dominated by cotton—fell. The 1857 collapse of the New York branch of an Ohio financial firm prompted a cascading series of bank failures. Bank deposits in New York fell by one-third, and many banks suspended payment of deposits in gold or silver. The American credit contraction, in turn, accelerated a recession in the nation’s principal trading partner, Great Britain.

Treasury Secretary Howell Cobb warned of the need to borrow $20 million, which was almost 40 percent of the previous year’s spending.
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Federal expenses had grown almost as quickly as federal revenues in the prosperous prior decade. Growing subsidies supported postal service for citizens scattered all the way to the West Coast.
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For awhile the Treasury used accumulated cash balances and short-term notes to offset lost revenues.

In May 1858 Congressman Sherman demanded action to reduce the gap between spending and tax revenues. He condemned spending for the type of local projects known today as “earmarks” and faulted the House Ways and Means Committee for its unwillingness to raise taxes. His friend Justin Morrill was appointed to the House Ways and Means Committee in May 1858 and spent the balance of the year studying the historical tax and debt policies of the various governments.

A deep sectional split handicapped the ability of the Democratic Party to offer a coherent budget plan. The success of Republicans in Northern states had given Southern Democrats a congressional majority within their party. They used that new power to oppose higher import taxes. Yet, in a pattern that would become familiar a century and a half later, some anti-tax Southerners such as Mississippi senator Jefferson Davis also opposed a cut in a large category of federal spending, outlays for the salaries of military officers.

President Buchanan had always walked a fine line on the issue of import taxes. Import taxes opposed by his party’s Southern base were quite popular among the wool and iron industries in Buchanan’s Western Pennsylvania stronghold, a region that had been responsible for the swing margin of victory in many national elections since 1800. When Buchanan proposed to increase import tax revenues, Secretary of the Treasury Cobb, a Georgian, dismissed the president’s views as being inconsistent with the policy of “the Administration.”
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In a reverse mirror image of the brinksmanship over the debt ceiling in the summer of 2011, some Northern Democratic congressmen vowed to block any additional federal debt to fund ongoing expenses unless Congress also raised taxes. In March 1859 a thin congressional majority authorized $20 million in new debt in the last hour on the last day of the regular session.
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When a frustrated Sherman ran for Speaker of the House, Southern congressmen attacked him for endorsing an economics book that blamed slavery for the low wages of white Southern workers. Sherman fell one vote short in the Speaker’s race, but a new Republican-backed Speaker made Sherman the chairman of the Ways and Means Committee. Sherman, in turn, charged Morrill with the task of preparing the first Republican budget plan.

It was difficult for Republicans to craft fiscal policy, since the new party included both historic advocates and opponents of import taxes designed to limit foreign competition. In the words of one scholar, “the Panic of 1857, therefore, exposed the disorganization of the Republicans on issues other than slavery.”
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Yet the severity of the budget crisis did not give Sherman and Morrill the luxury of waiting for their party to devise its economic platform. They relied, instead, on the authority of that old pillar of the American Fiscal Tradition—“pay as you go”—to find common ground. In explaining his plan Morrill employed the same words—“pay as you go”—used by Joseph Jones, James Monroe’s uncle, when he explained his conception of the desired fiscal policy to James Madison.

Morrill proposed that the federal government finance the deficit with long-term loans or bonds rather than short-term notes, reduce spending (“retrace our steps of extravagance”), and increase import taxes.
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The earnest Morrill told his House members that their nation should not “‘go to bed without its supper’ every time the imports of the week fall short.”
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Drafting a comprehensive tax bill required at least some knowledge of trade in all types of imported goods. Months of study and years of business experience equipped Morrill for the task. His legislation set tax rates at levels designed to yield higher revenue rather than block entirely the import of some categories of goods. He gave the Republican Party a merchant’s perspective, similar to the one Gallatin had imparted to the early Democrats. The Morrill tax bill earned almost unanimous support from Republican members in the House, whose ranks included former Democrats, Whigs, and Know-Nothings. It passed the House, but a deadlocked Senate refused to bring it to the floor.

Early Republicans even wove their political philosophy of “free men, free soil” into the fabric of their new fiscal policy. They argued that “free men” with economic independence should support taxes that discouraged competition from goods produced by cheap foreign labor. Republicans would use that argument effectively with industrial workers and wool producers in Western Pennsylvania during the 1860 presidential election.

Many Republicans of the period also linked freedom to public education. Like Jefferson and Gallatin, Morrill believed that accessible education was vital to the nation’s future. The Vermont merchant, whose family had not been able to afford to send him to college, introduced a bill granting large tracts of federal land to each state for the purpose of financing public colleges. That bill was one of the few contested measures to pass both the House and the Senate during the legislative stalemate preceding the election of 1860. Morrill described to his colleagues how Prussia’s system of public universities had undergirded innovation in industry and agriculture, and he explained how universities could be crucial to achieving competitive advantages. Buchanan, citing the need for a more limited role for federal government, vetoed the bill. Several years later President Lincoln signed the Morrill Act, which boosted the development of state universities.

By 1860 gridlock over slavery and the federal budget prompted foreign lenders to withdraw credit from the United States. Sherman estimated that the Treasury’s cash balance would fall that summer to less than $2 million, a tenth of the reserves available at the beginning of the Buchanan administration.
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The Treasury could not even pay congressional salaries on time. When seeking to borrow $5 million at a competitive auction in late 1860, the Treasury received bids for only $1,831,000 at interest rates of up to 12 percent.
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The federal government accepted all offers, and a New York
bank funded the balance at 12 percent interest—by far the highest interest rate since the War of 1812. In January 1861 the Buchanan administration desperately and ineffectively pleaded with states to return the distributions of federal surpluses they had received in 1836.

The downturn associated with the Panic of 1857 paralyzed British politics in a manner that reverberated across the Atlantic. In 1859 a coalition of British politicians who favored more efficient public spending, a broader tax base, and public education formed a new Liberal Party. Like many Americans who became active in the movement against the extension of slavery, British Liberals tended to view public policy issues through the prism of Christian ethics.

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HE
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EPUBLICANS
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IND A
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ANDIDATE

The Republican Party had originated as an opposition movement, as had Jefferson’s coalition in the early 1790s. Republicans who worked to balance the budget in the late 1850s did not shy away from carrying the Jeffersonian torch of fiscal stewardship.

The new party searched for a presidential candidate who could compete effectively in Illinois and Indiana, states where Whigs had been slow to combine with Free Soil Democrats. Maine senator William Fessenden was typical of many party leaders in his hope for a presidential nominee who had “no particular following, and while a decided Republican, would not be obnoxious to any branch of the party—provided such a man can be found.”
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Republicans gambled by nominating Abraham Lincoln, an Illinois railroad lawyer who had lost his last two elections. They expected that Lincoln’s log cabin childhood and service in a frontier militia could appeal to Western voters. Lincoln was best known for his distinctive style of speaking, which combined humor, logic, and emotion, though no one had yet been elected to the presidency based on the power of his oratory.

Lincoln won a solid electoral majority in 1860, and days after his inauguration the Senate finally passed the Morrill Tariff. Rebel soldiers shelled Ft. Sumter in Charleston Bay two weeks later.

Stephen A. Douglas, a Northern Democratic leader, had prompted many Americans to abandon older party organizations when he put together a coalition to pass the Kansas-Nebraska Act seven years earlier. In March 1861 Senator Douglas now lectured his Republican colleagues, the
new majority, on the need to compromise with slave states. Douglas considered the secession of Southern states to be treason, yet he announced that Northerners would somehow have to find an alternative to war. He explained that higher import taxes simply could not produce more than $100 million a year, less than a third of the amount needed to pay for an army capable of suppressing the rebellious South.
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The first generation of Republicans rose to meet Douglas’s challenge.

6

B
ORROWING AND
T
AXING TO
R
ESTORE THE
U
NION

1861–1879: Years when deficits exceeded debt service = 5 (1861–1865, Civil War)

E
ARLY
D
ENIAL

In the Civil War’s first year, 1861, the United States of America and Confederate States of America both relied on bank loans and short-term notes. For the remainder of the war, the United States imposed much higher taxes and sold bonds to the general public and to a new banking system. The Confederacy lost the financial battle well before the last shot in the war was fired. High taxes and national banks violated the dominant ideology of Confederate states. The Confederate economy drowned in a flood of paper notes. Twenty-first-century politicians who advocate paying for war entirely with debt rather than with higher taxes have more in common with leaders of the Confederacy than Lincoln’s Republicans.

In early 1861 few people anticipated the length and ferocity of the Civil War. One who did was William T. “Cump” Sherman, whose brother had filled the Ohio Senate seat vacated after Salmon Chase resigned to serve as Lincoln’s secretary of the treasury. In March 1861 Senator Sherman arranged for Cump to brief the president on Southern military preparations. To the dismay of both Sherman brothers, Lincoln responded to
their alarm by making a wisecrack. Only later was the president’s casual demeanor under stress recognized as a source of strength.

Several months later Cump Sherman, who by then was a Union general, warned Secretary of War Simon Cameron that the North would need an army of two hundred thousand trained professionals to invade the South and end the war.
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Secretary Cameron could not imagine paying for an army of that size and remarked to a reporter that stress had driven the general “insane.”
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Sherman eventually received the resources he needed, invaded the South, and ended the war by cutting off supplies to Lee’s army. During his March to the Sea through Georgia, General Sherman passed by the plantation home of Buchanan’s former Treasury secretary, Howell Cobb, and remembered how Cobb had depleted the Treasury through deficit spending in the years preceding the war. General Sherman burned Cobb’s home to the ground.

Cobb also helped create a problem for Confederate finances. He had presided over the Confederate constitutional convention that had limited the ability of the new government to levy taxes. In the war’s first twelve months the Confederacy spent $347 million while receiving tax revenue of only $14 million and bank loans and bonds of $38 million.
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