Perils Of The Surplus

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For the first time in more than 70 years, the United States is dealing with the politics of surplus. Between 1930 and 1997, the government ran surpluses in only 10 years, and they were small ones. Meanwhile, the national debt ballooned by a factor of no less than 340, from $16.1 billion to about $5.5 trillion. But now the government has taken in more money than it spent for the last four years, and it does not appear that will change in the near future.

What to do? Well, there are only three things a government can do with surpluses: It can spend them on new programs, use them to reduce the national debt, or cut taxes. All three approaches have their advocates in the body politic, and doubtless all three will get a piece of the surplus. The fight will be over exactly how to divide the pie. But while deciding what to do about billions of dollars of unneeded revenue might seem like political heaven, it can be tricky economically. Consider what happened in the 1830s.

Andrew Jackson hated debt with a passion that could have come only from experience. Like many people on the frontier, Jackson had been deeply engaged in land speculation as a young man. This was a fast, if risky, way to wealth. As James Parton, one of his earliest biographers wrote, “the secret of his prosperity was that he acquired large tracts when large tracts could be bought for a horse or a cow bell, and held them until the torrent of emigration made them valuable.”

Buying cheap and selling dear, of course, is a surefire formula for economic success. But things were not quite that simple on the frontier. Most of the new states had inadequate banking laws, and in good times new banks sprang up like mushrooms. These banks would often loan money, taking undeveloped real estate as collateral, and issue bank notes with little in the way of reserves to back them up. Many vanished in the first economic downturn. Half the banks founded between 1810 and 1820, for instance, were out of business by 1825.

Unfortunately for Jackson, he got involved in several complicated land deals that involved not only cowbells but credit. In 1795, when he was 28, he sold 68,000 acres to a man named David Allison, taking promissory notes in exchange. Jackson used the notes to finance the purchase of supplies for a trading post he was establishing. Then, in 1797, Allison went bankrupt and Jackson was left holding the bag for Allison’s now-worthless paper.

It would take Jackson 15 years to work his way out of this mess. By the time he did so, he had settled ideas about debt, paper money, and speculation: He hated them all. When he became President of the United States, he was determined to rid the nation of them.

The national debt had peaked in 1815, at the end of the War of 1812, when it reached $127 million (roughly six times the peacetime federal outlays of the period). By the time Jackson reached the White House, the debt had been reduced to a mere $58.4 million, thanks to persistent surpluses. These surpluses came about largely as a result of high tariffs, the tax that then provided most federal revenues.

The tariff couldn’t simply be done away with. Besides providing revenue, it protected nascent American industries, such as the textile mills that were transforming the economy of New England. By 1824 there were two million American workers engaged in manufacturing, 10 times the number of only five years earlier. The owners of the mills naturally wanted to avoid foreign competition, and they managed to get a tariff of 25 cents a yard, sufficient to exclude most British cloth from the American market. Their political influence made serious tax reduction a nonstarter.

With taxes off the table, the politicians of the day of course had no end of ideas about how to spend the revenue that poured in from the tariff. “Internal improvements,” to use the phrase of the Jacksonian era, were the pork-barrel projects of the 1820s and 1830s. Especially in the vast and undeveloped West, Jackson’s home turf, people favored projects to build roads and canals. But Jackson put debt reduction first, internal improvements second. “How gratifying,” he wrote in a message vetoing an internal improvements bill, “the effect of presenting to the world the sublime spectacle of a Republic of more than 12,000,000 happy people, in the fifty-fourth year of her existence … free from debt and with all [her] immense resources unfettered!”

JACKSON’S POLICIES BROUGHT A DEPRESSION, BUT BY THEN, WITH THE LUCK OF A GREAT POLITICIAN, HE WAS GONE.

By 1834 he was able to report to Congress in the State of the Union message that the nation would be debt-free and have a balance in the Treasury of $440,000 on January 1, 1835. This development met with near-universal acclaim. According to Chief Justice Roger B. Taney, it was the first time in history that a major country had completely eliminated its national debt. Taney was undoubtedly correct, and the achievement remains singular to this day. The Washington Globe , noting that January 1835 was the twentieth anniversary of the Battle of New Orleans, linked the two achievements of Andrew Jackson—“the first of which paid off our scores to our enemies , whilst the latter paid off the last cent to our friends .”