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The Business of America

Perils Of The Surplus

July 2022
6min read


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!”


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 .”

Once the debt was paid off, however, there was a serious problem as to what to do with the continuing surpluses. In 1835, while the government spent $17,573,000, it ran up a surplus of equal size, $17,857,000. The next year, despite a spending increase of fully 75 percent, to more than $30 million, it ran a surplus of $19,959,000.

Even where to park the money was a problem. While Jackson regarded all banks as no better than necessary evils, he had a particular hatred for the Second Bank of the United States, the nation’s central bank. A central bank’s job is to regulate the money supply, act as the government fiscal agent (accepting tax payments, selling government bonds, and paying out interest on them, for instance) and as the lender of last resort during economic crises. Being the only nationally chartered bank, the Second Bank of the United States was the nation’s largest as well as its most powerful, and its head, Nicholas Biddle, used that power to advance his own political ambitions. Tackson was determined to destroy the bank, and destroy it he did.

The bank’s 20-year charter, from 1816, was up for renewal in 1836, and a Jackson veto of any renewal was a foregone conclusion. But even before the charter expired, Jackson moved against the bank. In 1833 he decided to withdraw the government’s deposits and place them in various state banks. Since these deposits were very large, thanks to the increasing surplus, they allowed the state banks to issue more bank notes. But when the Second Bank of the United States ceased to be the nation’s central bank in 1836, it lost its ability to discipline the other banks by refusing to accept their notes in payment of taxes if it thought the issuance of such notes excessive. State banks began to issue more and more bank notes, often using them to create loans on undeveloped land.

The result was a considerable increase in the nation’s money supply, which fueled speculation in land and securities. Wall Street saw its first great bull market in 1836 (the year Wall Street entered the American lexicon as a synonym for the nation’s financial community). Meanwhile, land sales on the frontier soared. The federal government had taken in a total of $2.5 million from land sales in 1832, but its income from this source had reached $5 million a month by the summer of 1836. Indeed, this is the origin of the phrase doing a land-office business .

Jackson, horrified by the speculation and paper money (and doubtless not understanding how much they were the result of his own policies), acted to bring matters under control. Congress and the President had already decided that much of the surplus should be given to the states through the Deposit Act, signed into law on June 23, 1836. It called for all money in the Treasury in excess of five million dollars to be distributed quarterly to the states, according to population. Moreover, after Congress had adjourned for the year, in July, Jackson issued the Specie Circular. This required that all land sales by the federal government be paid for with gold and silver ( specie in economic terms), except for land up to 320 acres that was intended to be occupied by the purchaser.

These two measures certainly brought the speculation and excess paper-money creation to a screeching halt. Unfortunately, this in turn caused a cascade of disastrous economic consequences. The demand for specie by Western banks drained gold and silver out of the Eastern states, slowing the economy in those areas. Land prices fell sharply, resulting in defaults on loans collateralized by land, which caused badly managed banks to fail. As banks called in their loans so as to be able to meet the impending withdrawals by the federal government, the money supply contracted further, creating a vicious circle. With no central bank, there was no mechanism to save solvent banks that were temporarily short of cash. They closed by the hundreds.

Although the government distributed the surplus to the states in January of 1837, that was the only distribution. In April, Wall Street crashed, and the federal budget surplus disappeared, not to be seen again in large amounts for 30 years. Government revenues, which had been $50 million in 1836, were half that in 1837, and the great depression of 1837 to 1843 was under way.

But by that time, Andrew Jackson, with the luck of a great politician, was out of office. It was his hapless successor, Martin Van Buren, who would get most of the blame for the debacle.

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