The Dread Federal Surplus

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In January, when the 101st Congress of the United States assembled to begin a third century of constitutional government, The New York Times noted: “The dominant issue in the months ahead ….will almost surely be how to reduce the Federal deficit, whether through taxes, budget cuts or some combination of the two.”

A hundred years earlier, in December 1889, the 51st Congress gathered to begin a second century under the Constitution. The Republican majority was under fierce pressure to resolve a vexatious problem that had occupied the country for nearly a decade. There was simply too much money in the Treasury. The only answer was to spend it.

Nothing could better illustrate the operation of what Shakespeare calls “the whirligig of time” than a brief trip to the fiscal Looking Glass Land of a hundred years ago, when politicians wrestled with the problem—quite unbelievable to us—of how to cut taxes and increase expenditures and not lose popularity in doing so. The surplus had been accumulating steadily throughout the 1880s. During that period the Treasury had taken in, on the average, $100 million more than it spent each year—which was in the neighborhood of $265 million.

The extra money was a surprising political headache. The reason was that the country was growing robustly in almost every economic category and needed a large volume of money in circulation to carry on its business—larger than the nation’s gold-standard monetary policy was then able to furnish. A shortage of circulating medium meant tight credit, low prices and wages, and a real threat to the pace of growth. So it made no economic sense for the federal government to collect millions of dollars in excess of its needs and lock them away in the vaults of what some called the Treasury Octopus. In 1887 the Democratic President, Grover Cleveland, angrily defined such a policy as “indefensible extortion and a culpable betrayal of American fairness and justice.”

 

The answer seemed obvious enough: Collect less. But unfortunately, the chief engine of that “indefensible extortion” was a stiff protective tariff. It alone accounted for some 50 to 60 percent of total federal revenue. And it was almost politically impossible to cut it.

True, there were plenty of free-trade advocates who pointed out the deficiencies in the tariff—chiefly that it raised the cost of living unconscionably. High duties increased the price of imports, which, in a rapidly expanding nation, were still needed in great volume. Moreover, tariffs gave domestic producers a sheltered market in which they could jack up the costs of basic necessities like clothing and canned goods for working families.

But free traders were in the minority. American laborers were largely convinced that without the tariff the country would drown in inexpensive goods produced by foreign “cheap labor,” to whose abysmal wage levels they would be reduced to stay competitive. Farmers in large numbers also believed that the tariff protected American living standards. And naturally each protected interest had a healthy cadre of lobbyists at work on the Hill.

So the tariff, the great generator of the surplus, was—somewhat like today’s Social Security trust fund—largely untouchable, at least in 1888, when Cleveland tried unsuccessfully to get it lowered and then lost in his bid for reelection. (Warned of the political risk, he had growled endearingly, “What is the use of being elected or reelected unless you stand for something?”)

The only other significant federal taxes were on whiskey and tobacco. To cut either of these levies on “sin” would offend important blocs of religious voters. The only viable alternative, therefore, was to spend the surplus away. But on what? One possibility was to speed the payoff of the remaining Civil War debt of more than a billion dollars. But to buy back wartime bonds from the banks and major investors who held them would mean paying premium prices. In effect it would transfer the surplus to the pockets of the rich, yet another impossible choice.

So the 51st Congress, after first complicating its task by raising the tariff, turned to some traditional logrolling and pork-barrel remedies. It arranged for heavy purchases of silver bullion to ease the currency shortage and to keep the silver-mining states happy. Next it voted many millions’ worth of improvements in rivers and harbors throughout the country. Channels were dredged, lighthouses installed, money spent on wages and materials, and home districts made happy.

Next came military expenditures, according to the undeveloped canons of the time. Coastal defenses were upgraded all along the Atlantic seaboard, though the only possible enemy was Great Britain, with whom we had been at peace for seventy-four years. Still more money went into the creation of a modern Navy of armored ships. This gladdened the hearts of steelmakers and paved the way for a burst of imperialism some ten years later. Expenditures on the Navy, which averaged around $15 million a year in the first half of the 1880s, grew to $26 million in 1891 and more than $30 million by 1893.