America's Fiscal Constitution (13 page)

When Secretary Crawford and the bank’s new management belatedly tightened credit in 1819, state banks failed, and the prices of goods and services fell. Cotton production increased while demand declined as a result of a sharp downturn in the British economy. The price of cotton—the principal export of the United States—dropped sharply.

During the Panic of 1819, the nation’s first major recession, revenues from import taxes—the lifeblood of the federal budget—fell from $26
million in 1817 to $15 million in 1820.
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Crawford faced a difficult choice when Congress asked him for a report on monetary policy. Congressmen from frontier states with many insolvent debtors pressed him to issue paper money to counter deflation and fill the federal budget gap, while those from East Coast merchant centers adamantly opposed any policy that could risk future inflation. Crawford’s charm was not sufficient to finesse the dilemma faced by all central bankers during credit contractions. The Treasury’s report acknowledged that a limited circulation of paper money might curb deflation, but recommended against setting a precedent that might permit future federal leaders to unleash inflation with the federal printing press.

In 1820 former president Madison weighed in, asserting that “a paper currency rigidly limited in its quantity to purposes absolutely necessary, may be made equal and even superior in value to specie [i.e., gold or silver]. But experience does not favor a reliance on such experiments. Whenever the paper has not been convertible into specie, and its quantity has depended on the policy of the government, a depreciation [i.e., loss of purchasing power through inflation] has been produced by an undue increase, or an apprehension of it.”
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The 1820 debate over expanding the money supply to stimulate the economy during a severe credit contraction was the first of many in the nation’s next two centuries.

The modest borrowing to offset sharp drops in revenue during the Panic of 1819 also presaged a feature typical of federal borrowing during later downturns: federal revenues almost always drop more than anticipated. Exuberant markets and mistaken forecasts often precede severe downturns. Budget planning is difficult because economic cycles do not conform to federal fiscal years. And until the Great Depression, the federal government compiled little “real time” economic information, making projections more uncertain. In short, the American Fiscal Tradition’s final refinement—allowing federal borrowing during downturns—in part reflected the inevitable effect of any unanticipated drop in revenues.

Secretary Crawford belatedly informed President Monroe and Congress of the looming budget deficit. Congress authorized a $3 million bank loan in 1820 and an additional $5 million loan in 1821.
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The amount of approved debt turned out to be far greater than the federal deficits, which amounted to only $1.7 million, or 5 percent of the total federal spending during those two years.
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Moreover, in 1820 and 1821 the federal
government expended far more in debt service than the amount of its deficits, and it borrowed primarily to refinance some principal and interest due on war debt. The 1820–1821 policy of borrowing during recession bears little resemblance to the post-2000 practice of
adding
recession-related borrowing to large “normal” deficits.

Thomas Jefferson faulted Congress for the budget deficit in 1820. Even before the downturn, he wrote to his friend, publisher Thomas Ritchie, that Congress seemed “to be at a loss for objects whereon to throw away the supposed fathomless funds of the Treasury.” He further noted that “the people were themselves betrayed into the same frenzy” and expressed hope that “the deficit produced, and [the] heavy tax to supply it” would “bring both to their sober senses.”
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In 1820 James Monroe became the last president to be reelected without facing significant opposition and the only one ever reelected during a severe downturn that began after he took office. Monroe warned in his inaugural address of the need to raise taxes if federal revenues continued to fall short of spending. Following an acrimonious debate in 1821, Congress slashed spending for the army and fortifications along the nation’s borders. Critics of the cuts in military spending, such as Secretary of War John C. Calhoun, complained of the “economizers.”

The Panic of 1819 marked the first, but not the last, time that the federal government would incur debt to offset the loss of revenues during a downturn. Because only 6 percent of the population lived in cities, and farms of the era were largely self-sufficient, there was no perceived need for any kind of federal effort to prevent starvation.

The federal government did, however, provide a social safety net by blocking foreclosures. The Relief Act of 1821 reduced the debts of hundreds of thousands of citizens who had borrowed to buy federal land.
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Land was then the principal route to self-sufficiency and opportunity, in much the same way education and specialized skills would be later in the nation’s history. Since loan forgiveness did not require cash outlays, a review of budgets alone can understate the impact of this federal power in the nineteenth century.

In 1824 Congress raised import taxes, less to pay for new spending than to counter the competitive threat of Great Britain’s robust wool and iron industries. The tax bill passed over opposition from the cotton-growing South and with the support of wool-producing states—New
York, Pennsylvania, and Ohio—that could determine the outcome of a presidential vote in the Electoral College.

Monroe had become a symbol of the nation’s historical transformation by the time he left office in March 1825. The former Revolutionary War captain and friend of Washington evoked the traditions of an earlier era. He wore the outdated knee-length pants of the colonial period. He led the nation from the depths of a debt crisis at the Constitutional Convention to a point at which he could express, in his last annual message to Congress, “a well-founded hope” that the national debt could be paid off when the last outstanding bond matured in 1834. Without the burden of debt, he argued, the nation could use its tax revenue on “objects as may be most conducive to the public security and welfare.”
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Monroe was the last of three presidents from Virginia who guided the nation for the first quarter of the nineteenth century. For each of them, the danger of debt was not merely theoretical. After the Panic of 1819 Jefferson, Madison, and Monroe were each forced to consider selling their farms to pay off personal debts.

Since President Washington’s inauguration, the federal government had added debt only for four identified purposes. It did so to preserve the Union (1790), secure and extend the nation’s borders (1803), fight a war (1812–1815), and fund deficits during a recession (1820–1821). Americans clearly understood the reason for incurring each of these debts. After 1821 the federal government would not borrow again until the onset of the nation’s first full-scale depression, eighteen years later.

These and other precedents established during the Republic’s first decades soon evolved into traditions with the authority of an informal constitution. Other such traditions, apart from the use of debt, included a two-term limit for presidents, the use of presidential power to remove appointees, a standing army led by professional officers, and the committee organization of Congress.

Jefferson had once expressed to his friend Du Pont the importance of setting budget precedents: “I hope we shall be able by degrees to introduce sound principles and make them habitual. What is practicable must often controul what is pure theory; and the habits of the governed determine in a great degree what is practicable.”
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By 1824 the principle of limited debt had grown to rely on habitual budget practices—clear accounting, “pay as you go” budget planning, the use of trust funds to link new spending and
taxes, and congressional approval of the amount and purpose of any new debt. Those practices served as pillars of the American Fiscal Tradition of borrowing for limited purposes.

After the close of Monroe’s presidency in 1825, Americans began to develop another critical feature of the unwritten constitution. Their nation would soon embrace a more formal and organized system of political parties.

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A R
EVIVED
D
EMOCRATIC
P
ARTY
P
AYS
O
FF THE
D
EBT

1825–1853: Years when deficits exceeded debt service = 9 (1838–1843, Depression after the Panic of 1837; 1846–1848, Mexican War)

T
HE
C
RISIS OF
P
RESIDENTIAL
A
UTHORITY

President John Quincy Adams made an astonishing request in his annual message to Congress on December 6, 1825. He asked congressmen to enact his ambitious spending program without being “palsied by the will of their constituents.”
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Politically savvy senator Martin Van Buren found the president’s attitude hard to believe. Members of Congress should ignore the will of the voters? Van Buren, a disciple of Thomas Jefferson, noted that even Alexander Hamilton had respected the need for representatives “to conduct the government on the principles” of their constituency.
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Since Van Buren himself helped block the Adams spending plan, he recognized the source of the president’s frustration. Adams’s had outlined an ambitious agenda for the construction of roads, canals, lighthouses, universities, and even “lighthouses of the skies” (national astronomical observatories).
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Citizens easily grasped the usefulness of public works projects but loathed the cost of higher taxes. “Pay as you go” budget planning limited federal spending to no more than the amount voters were willing
to pay in taxes. That limit was a matter of high principle, not—as Adams suggested—a form of palsy or paralysis.

While prior presidents had tried to
persuade
the public of the desirability of a given program, they had never lectured Congress on the need to spend more money than could be generated by a publicly acceptable level of taxes. Few congressmen, if any, heard that their constituents were willing to be taxed at a higher rate to build “lighthouses of the skies.”

Van Buren felt that something had gone wrong with the American presidential selection system that had placed a person with Adams’s attitude in the White House. The veteran politician from New York had earned the nicknames “the Little Magician” and “the Red Fox” because of his skill in exploiting political opportunities before others did. After the election of 1824 he moved quickly to change the presidential selection process by building the nation’s first modern national political organization, a party with a platform grounded in traditional fiscal principles.

Adams had entered the White House in 1825 after winning 31 percent of the popular vote, less than the votes cast for retired General Andrew Jackson. Since none of the four major candidates—each of whom professed loyalty to the ideals of Jefferson—won a majority in the Electoral College, the House of Representatives had the constitutional responsibility for choosing the next president from among the top three candidates. Adams won the presidency only with help from the fourth-place candidate, powerful Speaker of the House Henry Clay. Jackson’s followers called their political alliance a “corrupt bargain” when Clay became Adams’s secretary of state.

Delegates at the Constitutional Convention in 1787 had found it difficult to devise a satisfactory means of presidential succession. It appeared at the time that no one besides George Washington and a handful of other leaders from the Revolution were famous enough to command an Electoral College majority in such a geographically dispersed nation. Toward the end of the convention, weary delegates voted to let the House of Representatives—with each state casting one vote—select the president if no candidate won a majority in the Electoral College. This means of selecting a new president could inevitably lead to compromise candidates who lacked the authority of a broad democratic mandate.

That adverse outcome was avoided for decades as a result of presidencies of a pantheon of Founding Fathers. They included a virtual dynasty of Virginia tobacco farmers—Washington, Jefferson, Madison, and Monroe—who led
the nation for all but four of its first thirty-six years. Along with John Adams, each of them could personally remember the collapse of the Confederation under the weight of crushing Revolutionary War debt.

Flaws in the process for choosing a new president were exposed during President Monroe’s second term, from 1821 to 1825, when the administration split into factions supporting rival candidates. Monroe, the last of the Founding Fathers available to serve as president, rejected even the informal party leadership role. In 1822 he wrote to Madison that “surely our government may go on and prosper without the existence of parties.”
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Yet, without a more established party system, the nation lacked a means for narrowing the field of presidential nominees.

Changes in the nation’s electorate made it more difficult for an elite to designate the nation’s chief executive. Propelled by extraordinary birth rates, the population of the United States had tripled since President Washington’s inauguration. Waves of settlers poured into new states that had extended the right to vote to all free, tax-paying white males regardless of whether they owned property.

This geographic expansion generated more intense competition for federal resources, especially for transportation improvements. Great Britain replaced its imports of raw cotton from India with cotton produced largely by slave labor in Southern states. In turn, thriving cotton farms and growing coastal cities became potential markets for corn, wheat, and pork produced in the country’s interior. Farmers sought more efficient ways to ship their products to distant markets. Many states envied the success of the Erie Canal, which had strengthened the role of New York City as the nation’s foremost commercial hub.