America's Fiscal Constitution (21 page)

Some Americans promoted creative schemes for paying off the enormous debt. When Congressman Thaddeus Stevens called for confiscation of all large plantations owned by rebels in the former Confederate states, his constituent mail showed that “the most popular argument in favor of the confiscation was that the proceeds from the land sales could be used to reduce the public debt and thus to reduce taxes.”
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Other citizens hoped that gold discoveries would reduce the burden of national debt. In his first inaugural address, President Grant highlighted the fact that “Providence had bestowed upon us a strong box in the precious metals locked up in the sterile mountains of the far West.”
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Many of his countrymen headed for those mountains in search of gold. That group included Colonel George Custer, who abandoned his assigned post in Washington to lead the Seventh Cavalry into the Black Hills of South Dakota, a land considered sacred rather than sterile by the Northern Sioux. A newspaper headline in the Dakota Territory proclaimed: “The National
Debt to Be Repaid When Custer Returns.”
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Custer never returned, so Senator Sherman worked on a more conventional plan to repay the debt, while General Sherman sent forces to vanquish the Sioux.

Republican control over federal economic policy was threatened when voters, tired of recession and corruption, elected a Democratic House majority in 1874. After the election—but before the new Congress took office—the lame duck Congress passed Sherman’s Specie Resumption Act, which committed the federal government to make payments in gold on request beginning on January 1, 1879. Many farmers protested that a scarcity of gold might accelerate the decline in the prices of cotton and wheat.

The Specie Resumption Act gave the federal government four years in which to accumulate gold reserves. It conferred broad discretion on the secretary of the treasury to manage the transition to an open “gold window” at banks. The election of 1876 would determine who held that office.

On November 7, 1876, John Sherman somberly monitored election returns at the Ohio home of his friend, Rutherford Hayes. Sherman had helped Hayes, the pious governor of Ohio, obtain the Republican presidential nomination. Democrats had nominated Samuel Tilden, a successful businessman, reformer, public intellectual, and governor of New York. Hayes and Tilden differed little in their views on the need to reduce debt and return to the gold standard. Tilden blamed wasteful Republican spending for the delay in accomplishing those goals.

Telegrams arriving at the Hayes home that day brought news of a Tilden landslide. Eighty-eight percent of eligible voters cast ballots in the election of 1876, the highest percentage in American history. The Democrat from New York had received a quarter of a million more popular votes than Hayes and over seven hundred thousand more votes than any previous candidate. Hayes confided to his diary that he had lost the election.

All but one newspaper—the
New York Times
—proclaimed Tilden the winner. On the night of the election, the partisan Republican editor of the
Times
sent a telegram signed by Republican national chairman Zachariah Chandler to the party leaders in several states still occupied by federal reconstruction forces, including Louisiana, Florida, and South Carolina. Chandler’s telegrams and the next morning’s
Times
stated that the election was not yet over. South Carolina’s vote was close, and though Tilden won the reported popular vote in Louisiana and Florida by significant margins, Republican canvassing boards in those states had not yet certified the vote.
Tilden would have only 184 electoral votes out of the 185 needed for election if a recount reversed his popular vote victories in those three states.

John Sherman and Congressman James Garfield of Ohio left for Louisiana in an effort to find irregularities that might alter the count of that state’s popular vote. President Grant dispatched General William T. Sherman and federal troops to Florida. Chandler sent large amounts of cash to each disputed state. Republicans were not able to count the votes of African Americans who had been improperly disqualified from casting ballots, but they could disqualify votes that had actually been cast. For the first—but not the last—time in US election history, a recount of Florida’s votes pushed the Republican candidate over the top in the Electoral College tally. After an investigation by a commission that split along partisan lines, Tilden conceded with grace instead of creating another national crisis so soon after the Civil War.

Hayes quietly slipped into Washington to avoid protests and stayed at Sherman’s home before taking the oath of office in a private ceremony. He promptly appointed the Ohio senator as his secretary of the treasury.

Secretary Sherman worked long hours to prepare for the opening of the gold window in 1879. In the words of one leading nineteenth-century economic historian, Sherman “was unwavering in pursuit of the resumption goal; practical, resolute, and adroit in the means employed.”
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He issued new bonds in exchange for gold, stockpiled gold collected from import taxes, and played New York banks against foreign banks in order to refinance federal debt on better terms. The average interest rate on debt fell from 6.26 percent in 1874 to 5.74 percent in 1879, even with an extension of maturities.
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Sherman’s Department of the Treasury joined the New York Bank Clearing House Association, a private group organized to maintain liquidity among banks in the nation’s financial center. That membership gave the Treasury more immediate access to the reserves of the nation’s largest banks, and began a collaboration that laid the foundation of the future Federal Reserve Bank of New York.

Some members of Congress tried to derail Sherman’s economic plan. The House passed a bill—sponsored by Lincoln Republican turned Democrat Tom Ewing Jr., son of the Sherman brothers’ mentor—repealing the Specie Resumption Act. Secretary Sherman’s allies in the Senate blocked passage of the bill but could not prevent passage of legislation designed to increase the coinage of silver.

Silver coins from Mexico had once served as much of the nation’s circulating currency, but silver coins had largely disappeared before 1873. The amount of silver in a dollar tended to be worth more than a dollar in Europe.
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In 1873, however, Germany moved to a gold standard and began liquidating its silver reserves just as massive new silver deposits began to be mined in Nevada. When the value of the metal in a silver dollar dropped to less than the value of a gold dollar, members of Congress—including most from mining and farming states—demanded that the Treasury increase its purchase of silver. Miners welcomed a new outlet for their product, while farmers hoped that a devalued currency would raise agricultural prices. Congress overrode President Hayes’s veto of a bill, cosponsored by Senator William Allison, that required the government to purchase silver and issue more currency in the form of certificates backed by a dollar of silver at market value. Sherman was content to issue silver certificates so long as the Treasury could collect import taxes in gold and give federal creditors the option of being paid in gold.

1879: A T
URNING
P
OINT

William Tecumseh Sherman helped end the Civil War with a famous March to the Sea that cut off Lee’s supplies. His brother John’s fight to restore federal finances had taken longer. Since 1866 the federal government had paid more than $1 billion in interest but had not managed to pay down principal due on the debt. With the opening of the gold window only a year away, many doubted the viability of any plan to reduce the burden of debt without devaluing the currency.

By late 1878 Secretary Sherman had stockpiled gold worth $114 million in Treasury vaults, yet these reserves represented only a fraction of the outstanding paper money that potentially could be redeemed.
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Along with many other Americans, he was nervous about whether people would rush to exchange their greenbacks for gold.

The drama climaxed on January 2, 1879, when the federal government allowed the conversion of paper currency into gold. To the relief of the public and financial markets, only a few people showed up to exchange currency for gold. Surprisingly, the public deposited more gold that day than they received in exchange for greenbacks. Sherman later likened the date to the final day of a recovery from a long illness. Creditors no longer worried about receiving payment in the form of a devalued currency.

The opening of the gold window coincided with three years of spectacular American economic growth and the emergence of the United States as a global economic superpower. Industrial production increased by 52 percent in physical unit volume, a level three times larger than at the beginning of the Civil War.
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The population surpassed fifty million people, an increase of almost nineteen million since 1860. Immigration reached almost eight hundred thousand people in 1882.
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The nation also became a net exporter. For its first ninety years, America’s appetite for imported iron—along with consumer staples such as sugar, salt, and tea—had resulted in chronic trade deficits that made it difficult to stabilize international credit. When the trade balance turned positive in 1879, the nation’s exports were more diversified than in the preceding decades, when cotton had been king. Farmers exported large quantities of wheat and corn, while mills exported iron and steel. An extensive new rail system connected coastal ports to the interior, and the first oil pipeline reached the Atlantic.

In 1880 alone the United States paid down over $200 million in debt, four times more than the total federal budget before the Civil War and more than the total that Secretary Chase had been able to borrow from banks in 1861.
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Debt reduction, not debt-financed stimulus, lowered interest rates and freed savings for private investment.
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As the Treasury retired federal debt, credit expanded. The banking system became more efficient with the greater use of bank drafts, or checks, that replaced the unstable antebellum reliance on bank notes.
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In 1881 interest rates on US debt fell to the same level as British debt, which for much of the nineteenth century had commanded the lowest interest rates in the world.

Not all Americans experienced the benefit of this growth. Farm income suffered because soaring levels of production depressed farm prices. The struggles of farmers with personal debt, while reinforcing their antipathy toward public debt, fomented discontent. The nation’s industrial boom and pride in debt reduction did, however, help revive the fortunes of the Republican Party immediately ahead of the 1880 election. The unyielding commitment of Sherman and others to debt reduction had become embedded in the young party’s political DNA.

The reduction in Civil War debt was more than a partisan achievement. The Democratic candidate for president in 1876 had won a large majority of the popular vote after campaigning for a more rapid reduction in debt. To an academic theorist it may seem odd that large European nations ruled by monarchs serving for life had far more trouble paying down
debt than did a volatile democracy with no institutionalized process for long-term budget planning.

In fact, the attitude toward the reduction of debt after the Civil War showed the strength of a fiscal constitution that was grounded on fundamental and shared values. Hundreds of thousands of Americans had sacrificed their lives in service of a more perfect Union. Those who endured the war honored the dead on both sides by working to protect the nation’s future. A generation that had already borne the wounds of war made the sacrifices required to reduce their country’s debt. President Hayes himself had been shot four times. This moral commitment to the American Fiscal Tradition resembled the earlier commitment of the Founding Fathers, who considered paying down debt to be the culmination of the work of the American Revolution and War of 1812.

7

S
HRINKING
D
EBT AND
D
RIFTING
P
ARTIES

1880–1900: Years when deficits exceeded debt service = 3 (1894–1895, depression after Panic of 1893; 1899, Spanish-American War)

R
EPUBLICANS
S
PLINTER AND
D
EMOCRATS
U
NITE

Federal budget battles in the 1880s centered on large surpluses rather than deficits. Progressive reformers within each party condemned federal spending on padded payrolls. By 1912 that spirit of reform—which encompassed “efficient” spending and taxation based on the ability to pay—would dominate the American political mainstream.

The triumph of reform seemed like a distant dream in 1880. John Sherman occupied a lonely position between Republican reformers and the more powerful group of “Stalwarts” that included New York’s machine politician Roscoe Conkling. Treasury Secretary Sherman had backed President Hayes’s attempt to break Conkling’s hold on thousands of jobs at the New York Custom House, the largest single source of federal revenues. Conkling succeeded in blocking Hayes’s nomination of a reform-oriented businessman, Theodore Roosevelt Sr., to replace Chester Arthur, a Conkling man, for the post.

Conkling exacted his revenge at the 1880 Republican National Convention. President Hayes, humbled by his tainted election in 1876, declined to run and backed Sherman as his successor. House Appropriations chairman James Garfield of Ohio gave a memorable nomination speech
for Sherman. After describing Sherman’s successful fight to pay down war debt and restore the currency, Garfield urged delegates to cast votes on the basis of “the destiny of the Republic” rather than political calculation. When Conkling failed to secure the nomination for former President Grant after thirty deadlocked ballots, the exhausted delegates nominated Garfield for president and Chester Arthur for vice president. Garfield served only two hundred days in office before dying of gunshot wounds inflicted by an office-seeking assassin who proclaimed that his action had made the Stalwart, Chester Arthur, president.