America's Fiscal Constitution (24 page)

The thirty-three-year-old Bryan’s powerful voice was a great asset in the era before microphones. He laced his speech with Christian and patriotic imagery. Responding to the argument that taxes on citizens with high incomes undermined the moral claim to civic participation by other Americans, Bryan replied, “Oh, sirs, is it not enough to betray the cause of the poor—must it be done with a kiss?” In response to a prominent business leader’s argument that the income tax might force wealthy citizens to move their residences abroad, Bryan bellowed: “If we have people who value free government so little that they prefer to live under monarchial institutions, even without an income tax, rather than live under the stars and stripes and pay a two percent tax, we can better afford to lose them and their fortunes than risk the contaminating influence of their presence.”
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The House gave Bryan a standing ovation and passed the new income tax by a lopsided margin.

The Supreme Court declared key features of the new tax unconstitutional with an opinion that modern scholars consider an expression of ideology rather than law. A Supreme Court justice who concurred with the majority labeled a personal income tax a form of “class legislation.”
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Secretary of the Treasury John Carlisle blamed the Supreme Court’s invalidation of the income tax for the budget deficit in fiscal year 1895.

With a depressed economy and divided party, Democrats suffered an election disaster in 1894 as severe as the Republican debacle two years
earlier. Democrats lost 130 House seats, one of the largest swings in the nation’s history.

T
HE
GOP B
UILDS A
N
EW
C
OALITION AND
F
UNDS A
W
AR

Mark Hanna had managed to make John Sherman the Republican front-runner in 1888 despite the candidate’s stern personality, which had led some to call him the “Ohio Icicle.” In 1893 Hanna found a more engaging candidate: William McKinley, a former congressman and Civil War veteran. To circumvent the control of state political machines, Hanna launched a grassroots presidential campaign that transformed national politics.

Hanna needed to polish McKinley’s résumé. Buried in the voluminous 1890 tariff bill produced by McKinley’s Ways and Means Committee was a prohibitively high tax on imported tin plates—a product not manufactured in the United States. McKinley guaranteed the debt of a startup manufacturer of tin plates, which later failed and could not pay its debts. To prevent McKinley from going bankrupt, Hanna quietly arranged for wealthy industrialists to pay off these debts and managed the Ohioan’s victorious campaign for governor in 1894. Hanna then organized a national presidential campaign with the efficiency of a modern business enterprise.

Hanna urged powerful state leaders to back a potential winner early and threatened to create state organizations to compete with anyone who resisted. Charles Dawes put together a McKinley slate that fought the existing party leaders in Illinois. As Hanna’s delegate count mounted, opposition began to fold.

Like Hanna, William Jennings Bryan ran an unconventional campaign that became a model for future campaigns of outsider candidates. Bryan bypassed traditional power brokers and directly courted delegates. He planned to pick a fight over the platform when he got to the nominating convention and correctly predicted to his wife that he would make a historic speech there. After an initial deadlock, delegates nominated the thirty-six-year-old Bryan for the presidency. The two-party system had become deeply embedded in the nation’s unwritten constitution, and the Democratic Party largely absorbed the Populist Party. Other strong third parties would either atrophy or be absorbed by one of the two major parties after strong showings in 1912, 1968, and 1992.

Bryan embraced traditional Democratic fiscal policies such as cutting wasteful spending, balancing the budget, and lowering import taxes. Hanna tailored McKinley’s campaign to a more industrialized nation. To voters struggling to recover from depression, he offered a clear and simple message: Republicans would restore prosperity. Though some historians treat the election as a referendum on Bryan’s advocacy of more silver-backed currency, McKinley largely sidestepped the issue by supporting greater use of silver only on terms unlikely to be set in an international monetary treaty. Bryan’s tributes to farmers and swipes at cities endeared him to rural voters but alienated many urban voters.

McKinley’s win in 1896 represented less a shift in ideology than a continuation of the historic pattern of change following the onset of a severe downturn. Almost on cue, the economy began an extended period of strong growth immediately following McKinley’s election. Gold supplies increased as a result of more efficient mining techniques and discoveries in the Yukon, Australia, and South Africa. With deflation checked, the movement to expand silver currency faded. Farm prices began a twenty-year rebound, sustained by increased demand for food among rapidly growing urban populations.

A massive wave of immigration that began in the mid-1880s boosted US population in 1900 to over seventy-six million, more than the combined population of Great Britain and France.
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By then federal debt had been paid down to about $1 billion, and the Treasury held a large balance of surplus cash.
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In 1900 the federal government paid only $40 million in interest on the debt, less than a third of the annual amount thirty years earlier.
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President McKinley reluctantly bowed to populist pressure to intervene in favor of rebels in Spain’s colony of Cuba. McKinley and most business leaders allied with Hanna, and Aldrich viewed the war fever—which was inflamed by some newspaper chains—as an expensive distraction. After the battleship
Maine
exploded and sank in Havana’s harbor on February 15, 1898, it appeared Congress would declare war with or without White House approval. Spain had met all the conditions demanded by US diplomats, and John Sherman was so dismayed by the declaration of war that he ended his public career by resigning as secretary of state.

Most Americans took pride in the nation’s easy victory in the brief Spanish-American War, which lasted only until August 1898. The United
States had a population almost four times than Spain’s and a somewhat larger navy. The nation easily financed the early war preparations with excess cash in the Treasury. An issue of bonds bearing a modest 3 percent interest rate was oversubscribed.
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The White House and Congress continued the traditional practice of raising taxes to limit war-related debt. Populist Democrats and reformers in each party resumed their call for taxes on incomes and estates rather than higher import taxes. Aldrich compromised with them by by agreeing to legislation that imposed new taxes on estates over $10,000 and a tax of 1 percent on the revenues of large oil and sugar refiners.
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Congress also raised taxes on tobacco, beer, whiskey, banks, brokers, bowling alleys, patent medicines, and toiletries. Revenues from these taxes facilitated rapid debt reduction after the war.

Budget issues played only a minor role in the 1900 presidential election, in which each party’s populists and reformers flexed their muscles. Most senior Democratic leaders believed that Bryan’s call for more silver-backed currency had lost its luster. Yet Bryan, who controlled a majority of delegates, insisted that the party platform endorse a dubious plan for the Treasury to coin silver dollars minted with only about 70 cents of silver in each coin.

Mark Hanna, who chaired the national Republican party, also lost some control of his convention’s delegates in 1900. Since it was a foregone conclusion that the convention would again nominate President McKinley, delegates focused on the nomination of the vice presidential candidate following the death of the incumbent. McKinley preferred Sherman’s old friend, Senator William Allison, but Allison had no interest in leaving his chairmanship of the Senate Appropriations Committee. New York party boss Senator Tom Platt, sensing an opportunity to rid himself of a troublesome rival in state politics, began lining up support for his state’s governor, Theodore Roosevelt Jr. Roosevelt’s command of the colorful Rough Riders in the Spanish-American War and reform credentials made him a national hero.

Roosevelt genuinely did not want the job, which suited Hanna just fine. Hanna tried to put an end to Platt’s plan by holding a press conference in which Hanna announced Roosevelt’s refusal to be considered for the vice presidency. The reaction of delegates startled both Hanna and Roosevelt. Western delegates seemed determined to nominate the Rough Rider, regardless of the views of McKinley, party leaders, or even Roosevelt himself.

Charles Dawes, who had become a close advisor to McKinley, asked the president to head off a split in the party over the issue. Roosevelt, Dawes said, would strengthen the ticket in populist Western states and give the delegates someone new to celebrate. After McKinley asked Hanna to invite Roosevelt to be on the ticket, Hanna grumbled that the president would have to serve out his term to protect their party from “that cowboy.”
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That cowboy would soon define the public’s expectations of the modern presidency and inaugurate a new and costly American role in international affairs.

PART III

PROGRESSIVE REFORMERS EMBRACE THE TRADITION: 1901–1940

8

R
EFORMERS
R
EDEFINE THE
P
ARTIES AND
G
OVERNMENT

1901–1915: Years when deficits exceeded debt service = 3 (1904 and 1909, Panama Canal; 1915, brief downturn caused by the Great War)

1902: T
HEODORE
R
OOSEVELT AND THE
R
OLE OF THE
F
EDERAL
G
OVERNMENT

Theodore Roosevelt Jr. entered the White House following the death of President McKinley in 1901. Though other vice presidents who had become president upon the death of their predecessor wielded little influence, no one expected Roosevelt to keep quiet; he never had.

The forty-two-year-old Roosevelt was a national celebrity with an unusual biography: political reformer, war hero, cowboy, and author. He was also a natural campaigner. Grover Cleveland remarked that Roosevelt was “the most perfectly equipped and the most effective politician thus far seen in the presidency.”
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Many wondered, however, how an unabashed reformer could effectively assume leadership of a Republican Party dominated by Mark Hanna and a congressional “old guard” led by Senator Nelson Aldrich and Speaker of the House Joe Cannon of Illinois.

In 1902, his first full year in office, Roosevelt answered that question decisively. Several of his actions that year—regarding the Panama Canal,
antitrust issues, labor relations, and foreign policy—fit the mood of early-twentieth-century America like custom-made boxing gloves.

Roosevelt helped Senator Hanna obtain congressional approval for American construction of a canal through Panama. Hanna grasped the significance of the canal to commerce, while Roosevelt appreciated its potential naval benefits. Hanna’s leadership of his national party and sponsorship of the popular McKinley conferred unique authority on the squat, cigar-smoking senator from Ohio. He generally let senatorial colleagues such as Aldrich and Allison take the lead in crafting legislation. So members of both parties paid attention when Hanna gave his first and only major Senate speech. That 1902 speech described the advantages of building a canal through the Colombian province of Panama and persuaded Congress to abandon its earlier preference for a Nicaraguan route. Congress passed the Spooner Act, which gave the president responsibility for managing the project. Roosevelt used the US Navy to embolden rebels in Colombia’s Panamanian territory, which the United States recognized as an independent government and paid to obtain rights to build a canal.

The Panama Canal facilitated trade between the East and West Coasts and the transit of American naval vessels. Congress authorized $375 million for the project. It was an enormous amount, more than half the annual spending in prior federal budgets. The Treasury used cash balances to finance the first large payment, totaling $50 million in fiscal year 1904. When the Panic of 1907 drained federal surpluses, the federal government issued bonds totaling $136.6 million for the specified purpose of completing the canal. That debt ultimately financed more than a third of the total cost of the largest public project yet undertaken.
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Debt used to finish the canal—like debt incurred for the Louisiana Purchase and Union Pacific rail line—helped connect and secure the nation’s borders.